Enforcing interim payment certificates after termination (contract cancelled?)

Can a Contractor who has been forced to cancel his contract with the Employer as a result of the Employer’s default still sue the Employer under the contract in respect of an interim certificate duly issued but not paid by the Employer within the prescribed time?

This interesting question came before the Appellate Division (now the Supreme Court of Appeal, SCA) during 1995 arising out of a building contract using the older 1981/1988 “white form” of Building Contract which has been superseded by the JBCC Series. In this article I will consider whether the principles established in this case would still apply under the JBCC forms of contract and also under the new Civil Engineering Contract GCC 2010.

The judgment is reported as Shelagatha Property Investments cc v Kellywood Homes (Pty) Ltd 1995 (3) SA 187 (A).

The facts of Shelagatha were as follows:
Interim certificates were issued in terms of the relevant clause of the “without quantities” contract by the Principal Agent, the Architect. Under the “white form” contract it is clear, clause 25, that an interim certificate issued by the Architect to the Contractor during the progress of the works cannot be regarded as conclusive evidence as to the sufficiency of the work and/or materials or of the correctness of the value of work as reflected within the certificate. An interim certificate, duly issued, which is not paid by the Employer within the stated time limit does however create a debt due and as such, gives rise to a distinct cause of action which would normally enable a Contractor to sue immediately without going beyond the certificate on the basis that the interim certificate creates, in itself, a liquid debt. In the court application, Kellywood sought judgment against Shelagatha for payment of a total amount of R1.8 million based upon the amounts certified as due in terms of two interim certificates issued by the Architect under the building contract arising out of the construction of certain works at an industrial park development at Midrand for a contract sum of approximately R37 million.

Following the failure by the Employer to make payment against the two interim certificates, and for a variety of other reasons also, the Contractor cancelled its contract. Various cessions were thereafter executed which resulted in different parties being involved in the subsequent court actions, but which are not relevant to this article. Accordingly we have treated Shelagatha as Employer and Kellywood as the Contractor for the purpose of the article.

Counsel for the Employer, having conceded the validity of the cancellation by the Contractor, argued that on the basis of the decision in Thomas Construction , pursuant to a cancellation, in the case of the Thomas Construction case by virtue of the liquidation of the Contractor, the interim certificate was not enforceable. Patently however the Thomas Construction judgment was based upon a different set of facts where the Contractor had liquidated and the liquidators attempted to recover payment on previously issued interim certificates. In the Shelagatha matter, the Contractor had legitimately cancelled the contract, which was conceded by Counsel for the Employer, and had in its possession two unsatisfied interim certificates. The court, in the Shelagatha matter applied the principle, affirmed by the Appellate Division in Crest Enterprises in which case the court found that a claim arising out of the contract may survive cancellation of the contract if, prior to the cancellation, it was accrued, due and enforceable as a cause of action independent of any executory part of the contract. In Shelagatha the judgment pointed out that there was no general rule that after cancellation of the building contract, regardless of the terms of the contract and who the defaulting party is, interim certificates previously issued in terms of the contract can no longer be enforced. The court distinguished between the Thomas Construction case where the claim against the prior issued interim certificate by the Contractor, whose breach had caused the cancellation of the contract and Shelagatha where the Contractor was willing and able to complete the work but due to default by the Employer the Contractor had elected to cancel the contract. The court therefore found that in the event of a contract being cancelled due to the Employer’s breach there was, in general, no reason why the prior interim certificate should not be enforced. The court therefore found that the Contractor’s right to payment under the interim certificates was independent of the executory part of the contract and that it accordingly survived the cancellation of the contract and should be paid.

Would the same situation have prevailed under the JBCC 2000 series and/or under the GCC 2010 SAICE General Conditions of Contract?
In the July 2007 edition of the JBCC 2000 series, interim certificates are dealt with in clause 31.0 and clause 31.16 makes it clear that where the Employer fails to make payment, the Contractor may thereafter give notice of termination. Clause 38.5.7 makes it clear that the Principal Agent is required to continue to certify after termination the value of the work executed and the value of materials and goods for payment by the Employer. Implicit in this obligation is the obligation of the Employer to make payment against certificates issued, in terms of clause 38.5.7, after the cancellation. There would therefore appear to be no reason for the Employer to resist payment and it is submitted that a court would order payment of interim certificates issued prior to cancellation by the Contractor where the Contractor is the innocent party and has cancelled due to breach by the Employer.
The situation under JBCC 2000 is accordingly no different from that under the “white form” of contract as pronounced upon by the Appellate Division in the Shelagatha case.
In GCC 2010 interim payment certificates are regulated by clause 6.10. These certificates, include the estimated value of the Permanent Works carried out in terms of the contract. (Clause 6.10.1.1). Termination by the Contractor is governed by clause 9.3 and in particular includes the right to terminate due to failure to pay the Contractor the amount certified within the time provided (clause 9.3.1.1.2). Importantly clause 9.3.2 provides that upon termination:
“9.3.2.1 – All the provisions of the Contract including this Clause shall continue to apply ….”.

It would appear therefore that the principles established in Shelagatha are also of application to GCC 2010 and that a Contractor faced with the necessity to terminate due to Employer’s default, could rely upon interim certificates issued prior to termination notwithstanding that the interim certificates are not required to be precise valuations of the work neither are they conclusive as to the quality or quantity of such work.

In recessionary times there are unfortunately an increasing number of occasions when Contractors may feel the need to rely upon termination of the contract due to default by the Employer. In these circumstances it is encouraging to note that courts will support the interim certification process and of course the Contractor would also be entitled to sue for any damages it can establish as a result of the termination.
Chris D Binnington Pr Eng
Managing Director
Binnington Copeland and Associates (Pty) Ltd