7
Payment

7.1 One of the most important duties of the contract administrator under SBC16, and one to be carried out with care, is the issuing of certificates of payment. It is not unheard of for contractors to become insolvent during the course of a contract, and if the certificates have been overvalued the employer may suffer losses that could have been avoided. On the other hand, the contractor has a right to be paid what the terms of the contract state is due, and the contract administrator must not be influenced by any attempt on the part of the employer to delay certification or withhold amounts properly due.

7.2 Failure to certify correctly could amount to negligence. In the case of Sutcliffe v Thackrah the House of Lords reversed its own previous judgment, and disposed of the myth that in the role of certifier the contract administrator is operating in a ‘quasi judicial’ role and is immune from suit. The position is less clear with respect to the contract administrator’s duty of care to the contractor. A certifier was found liable to a contractor in the case of Michael Salliss & Co. v Calil and W F Newman & Associates. Although this appeared to be overtaken in Pacific Associates Inc. v Baxter, the latter involved non-standard clauses which, if they had not been present, might have resulted in a different outcome.

Sutcliffe v Thackrah (1974) 4 BLR 16 (CA)

A contract administrator issued certificates on a contract for the construction of a dwelling house. The contractor’s employment was determined for proper reasons, following which the contractor went bankrupt. It then became apparent that much of the work, which had been included in the interim certificates, was defective, and the contract administrator was found negligent. In the House of Lords, when reviewing the role of the contract administrator, Lord Reid stated (at page 21):

Michael Salliss & Co. Ltd v Calil and William F Newman & Associates (1987) 13 Con LR 69

Calil employed contractor Michael Salliss for some refurbishment works on JCT63. W F Newman acted as contract administrator and quantity surveyor under the contract. The contractor commenced proceedings against the employer and joined the contract administrator as second defendants, claiming that the contract administrator was in breach of its duty to use all professional skill and care in granting only a 12-week extension of time when a 29-week extension was due. There was a sub-trial as to whether the contractor could recover damages against the contract administrator. His Honour Judge Fox-Andrews held that under a JCT contract the contract administrator owed a duty to the contractor to act fairly between the employer and contractor in matters such as certification and extensions of time. He also noted that (at page 79):

Pacific Associates Inc. v Baxter (1988) 44 BLR 33 (CA)

Pacific Associates contracted on the FIDIC form of contract to carry out dredging and reclamation works for the Ruler of Dubai. The defendant was employed as engineer to administer the contract. Disputes arose between the employer and contractor which went to arbitration and were subsequently settled with a £10 million payment to the contractor, with both parties paying their own costs. The contractor then brought a claim against the engineer for negligent certification, claiming the unrecovered balance of the claim together with interest and arbitration costs. His Honour Judge John Davies dismissed the claim. The contract contained a particular condition which stated:

The judge stated that ‘the clear intention of (this clause) … was to relieve the engineer of all personal liability for his acts and obligations under the contract’ (13 Con LR 80, at page 93). He also stated that he felt the question of liability always depended on the particular terms of the contract in question, and that ‘the over-riding intention of the contract was to put the engineer beyond the reach of legal responsibility for his acts’ (at page 92). The contractor appealed but the appeal was dismissed. The Court of Appeal stated that the existence of the special clause meant that a duty of care could not in this case be imposed, but emphasised that otherwise such a duty might have existed.

7.3 Therefore, although not acting as adjudicator or in a quasi judicial role, the contract administrator must nevertheless act fairly and reach an independent decision. This obligation would normally be implied into SBC16, and failure to act in this way would be considered a breach of contract by the employer. Under-certification might seem an attractive option to the employer; however, at best it would offer only a short-term advantage. The contractor would be able to challenge the certificate in adjudication where, if successful, it would recover not only the shortfall, but also interest, and the employer would be required to pay the adjudicator’s fees.

7.4 The payment provisions in SBC16 have been drafted to ensure compliance with the Housing Grants, Construction and Regeneration Act (HGCRA) 1996 Part II, as amended by the Local Democracy, Economic Development and Construction Act (LDEDCA) 2009. In summary, interim payment will normally follow the issue of an interim certificate, with provisions to ensure that the contractor is paid even if no certificate is issued. The contractor may submit its view as to what an interim certificate should cover by an ‘Interim Application’, but the valuation is a matter for the contract administrator. If no certificate is issued and an application is made, the amount stated in the application will become the amount due. Alternatively, if no certificate is issued and no application is made, after the date for issue of the certificate has passed the contractor may issue a payment notice. The amount shown in that notice will become the amount payable.

Advance payment

7.5 SBC16 includes an optional provision for advance payment to the main contractor. An entry must be made in the contract particulars to show whether or not it is to apply (cl 4.7). If it is, the amount will be entered as either a fixed sum or as a percentage of the contract sum. The entry must also show when payment is to be made to the contractor, and when it is to be reimbursed to the employer. A bond may be required, in which case payment is not made until the contractor provides the bond (SBC16 includes a form of advance payment bond as Part 1 of Schedule 6).

7.6 There is always a risk in making an advance payment with respect to a construction contract, even when backed by a bond, and the procedure will inevitably involve extra expense to the employer. The employer should be quite clear as to what compensatory benefits, such as a reduction in the contract sum, will result before agreeing to any arrangement of this sort. In the end it is the employer’s decision, but the contract administrator may need to explain the provisions and give initial advice.

Interim certificates – timing

7.7 The due date for each interim payment is seven days from the ‘Interim Valuation Date’ (cl 4.8). The contract particulars require the parties to enter the first interim valuation date and, if none is entered, this is one month after the date of possession. Subsequent interim valuation dates are on the same date each month, or the nearest day which is not a Saturday, Sunday or bank holiday. The contract administrator must issue an interim certificate within five days of each due date (cl 4.9.1), and payment must be made within 14 days of the due date (cl 4.11.1). The effect of this is that unless the certificate is actually issued on the due date, the employer will have a shorter period within which it must pay.

Procedure for ascertaining amounts due

7.8 The amount due to the contractor as interim payment is to be calculated as set out in clauses 4.14 and 4.15. There are two methods by which it can be assessed: either through acceptance of the figure stated in a contractor’s application for payment, or through valuation by the quantity surveyor (see Figure 7.1). The latter has traditionally been the basis for assessing payments under JCT forms.

7.9 Clause 4.10.1 gives the contractor the right to submit its own assessment of the value of an interim certificate. The ‘Payment Application’ must be made not later than the relevant interim valuation date and should be sent directly to the quantity surveyor. It is then open to the quantity surveyor to agree or disagree with this valuation. The quantity surveyor is not required to identify the matters where any differences arise or inform the contractor;

Figure 7.1 Interim payment procedure

Figure 7.1 Interim payment procedure

Credit: Rebecca Pike

  however, in practice the quantity surveyor may respond to the application. The contract administrator should request that the quantity surveyor forwards copies of all correspondence and keeps the contract administrator informed regarding all applications.

7.10 Whether or not an interim application is received, the quantity surveyor will normally carry out a valuation prior to the due date (a valuation would be needed to determine whether the contractor’s interim application is correct). The valuation should cover the amounts due at the interim valuation date (cl 4.14). The certificate is then issued ‘not later than 5 days after each due date’ (cl 4.9.1), which would allow it to be issued up to seven days before, on, or up to five days after the due date. Valuations by the quantity surveyor can be made ‘whenever the Architect/Contract Administrator considers them necessary’ (cl 4.9.2). The roles of the quantity surveyor and the contract administrator, however, are quite distinct, and it is ultimately for the contract administrator to decide the figure to be shown on the interim certificate.

Coverage of the certificate

7.11 Clause 4.9.1 requires that interim certificates state not only the sum that the contract administrator ‘considers to be or have been due on the due date’, but also ‘the basis on which that sum has been calculated’. It is unlikely that a great deal of detail will be required here; a short schedule will probably be sufficient. Similar provisions are included for the final certificate.

7.12 The basis for calculating the sum due is set out in clause 4.15. This comprises the gross valuation of the work minus a list of deductions (see paragraph 7.15). The key items to be included in the gross valuation are set out in clause 4.14 and can be summarised as a total of 97 per cent (or as entered in the contract particulars) of the value of the following (i.e. items subject to retention):

  • work properly executed, including variations, but excluding certain reinstatement work (cl 4.14.1.1);
  • site materials (i.e. materials and goods properly on site) (cl 4.14.1.2);
  • ‘listed items’ (cl 4.14.1.3).

7.13 The above amounts are to be adjusted in accordance with any fluctuations provisions and with any acceleration quotation that has been agreed (cl 4.14.1). The value of the work will be calculated using the rates shown in the bills or the priced document, whichever is appropriate. If a priced activity schedule is included, the amount included in any interim certificate in respect of any items listed in the activity schedule should be the total of the amounts reached by multiplying the percentage of the work properly executed by the price for that work as shown on the activity schedule (cl 4.14.1).

7.14 In addition to the above, the gross valuation should also include a total of 100 per cent of the following items, if applicable:

  • costs associated with clause 2.6.2 (additional insurance premiums), clause 2.22 (royalties), clause 2.23 (patent rights), clause 3.17 (opening up and tests), clause 6.5 (optional insurance), clauses 6.10.2, 6.10.3 and 6.11.3 (terrorism cover), clause 6.12.2 (employer’s insurance default) or clause 6.20 (Joint Fire Code) (cl 4.14.2.1);
  • amounts payable under clause 4.13.2 (costs and expense reasonably incurred following suspension) (cl 4.14.2.2);
  • loss and/or expense due under clause 4.20.1 or 5.3.3 (cl 4.14.2.3);
  • sums for reinstatement work due under Insurance Option B or C, or under Option A to the extent that it is to be treated as a variation (cl 4.14.2.4);
  • amounts payable under any applicable fluctuations provision that have not been adjusted under clause 4.14.1 (cl 4.14.2.5).

7.15 Before reaching the total gross valuation, the contract requires some deductions to be made if applicable:

  • any amounts deductible under clause 2.10 (incorrect setting out), 2.38 and 3.18.2 (defects agreed not to be made good), clause 3.11 (costs incurred by the employer where instructions not complied with), clause 6.12.2 (contractor’s insurance default) or clause 6.19.2 (Joint Fire Code) (cl 4.14.3.1);
  • amounts allowable by the contractor in respect of clause 6.10.2 (terrorism cover) or any applicable fluctuations that have not been adjusted under clause 4.14.1 (cl 4.14.3.2).

7.16 Clause 4.14 states that the above assessment of the gross valuation is ‘subject to any agreement between the Parties as to stage payments’. No other reference to stage payments is made in SBC16 (nor in the guide SBC/G). This is in contrast to DB16, where an alternative system using stage payments is set out in clause 4.12. Under a stage payment system, the contractor would not be paid anything for a stage until it is complete (unlike the ‘activity schedule’ system where the contractor would be paid a proportion even if the activity was not complete). If the parties would like to operate a stage payment system, they would need to agree in advance exactly how this would work, and include appropriate provisions in the contract – the procedure in DB16 could serve as a model.

Value of work properly executed

7.17 The contract administrator should only certify after having carried out an inspection to a reasonably diligent standard. Contract administrators should not include any work that appears not to have been properly executed, whether or not it is about to be remedied or the retention is adequate to cover remedial work (Townsend v Stone Toms, Sutcliffe v Chippendale & Edmondson). If an activity schedule is used, rather than a bill of quantities, this would not lessen the contract administrator’s duty to determine that all work certified has been carried out in accordance with the contract. Contract administrators should also note the case of Dhamija v Sunningdale Joineries Ltd, which stated that a quantity surveyor is not responsible for determining the quality of work executed. If in doubt, the contract administrator may require ‘reasonable proof’ from the contractor that materials and goods comply (cl 2.3.4) and may carry out or request tests (cl 3.17). However, SBC16 makes it clear that interim certificates are not conclusive evidence that work is in accordance with the contract (cl 1.10).

7.18 Where work which has been included in a certificate subsequently proves to be defective, the value can be omitted from the next certificate. However, the contract does not appear to allow for a negative interim certificate. Clause 4.9.1 refers to the ‘sum … due to the Contractor’ and does not include the provisions for payment to the employer that are set out for the final certificate (cl 4.26.2). Clause 4.12.2 also states that the amount ‘may be zero’ but does not refer to negative amounts. This clause derives from the LDEDCA 2009, and on balance it seems unlikely that the contract will be interpreted to allow for negative payments. If such a situation arises, and the employer does not wish to wait until the amount is recovered in subsequent certificates, it may be sensible to seek legal advice, particularly if the amount is significant.

Townsend v Stone Toms & Partners (1984) 27 BLR 26 (CA)

Mr Townsend engaged architect Stone Toms in connection with the renovation of a farmhouse in Somerset. John Laing Construction Ltd was employed to carry out the work on a JCT67 Fixed Fee Form of Prime Cost contract. Following the end of the defects liability period the architect issued an interim certificate that included the value of work which it had already included in its schedule of defects, and which it knew had not yet been put right. Mr Townsend brought proceedings against both Stone Toms and Laing. Laing made a payment into court of £30,000, which was accepted by Townsend in full and final settlement. Townsend then continued with the proceedings against the architect, claiming that he was entitled to recover any excess that he might have obtained from Laing had he continued with those proceedings. The Official Referee assessed the total value of the claims against Laing as only £25,000, therefore no excess was recoverable. The Deputy Official Referee also found that the architect was not negligent in issuing the interim certificate. Mr Townsend appealed and the Court of Appeal, although approving the lower court’s decision on the effect of the payment into court, held that the architect had been negligent. Oliver LJ stated (at page 46):

Sutcliffe v Chippendale & Edmondson (1971) 18 BLR 149

(Note: this case is the first instance decision which was appealed to the Court of Appeal sub nom. Sutcliffe v Thackrah, discussed in paragraph 7.2 above.)

Mr Sutcliffe engaged the architect Chippendale & Edmondson in relation to a project to build a new house. No terms of engagement were agreed, but the architect proceeded to design the house, invite tenders and arrange for the appointment of a contractor on JCT63. Work progressed slowly and towards the end of the work it became obvious that much of the work was defective. The architect had issued ten interim certificates before Mr Sutcliffe entirely lost confidence, dismissed the architect and threw the contractor off the site. He then had the work completed by another contractor and other consultants, which cost around £7,000, in addition to which he was obliged, as a result of the original contractor having obtained judgment against him, to pay all ten certificates in full. As this contractor was subsequently declared bankrupt, Mr Sutcliffe brought a claim against the architect. The architect contended, among other things, that its duty of supervision did not extend to informing the quantity surveyor of defective work that should be excluded from the valuation. His Honour Judge Stabb QC found for Mr Sutcliffe, stating ‘I do not expect that the words “work properly executed” can include work not then properly executed but which it is expected, however confidently, the Contractor will remedy in due course’ (at page 166).

Dhamija v Sunningdale Joineries Ltd and others [2010] EWHC 2396 (TCC)

The claimants brought an action against the building contractor, the architect and the quantity surveyor (McBains) arising out of alleged defects in the design and construction of their home. There had been no written or oral contract with the quantity surveyor, but the claimants argued that there was an implied term that the quantity surveyor would only value work that had been properly executed by the contractor and was not obviously defective. The court held that a quantity surveyor’s terms of engagement would include an implied term that the quantity surveyor act with the reasonable skill and care of a quantity surveyor of ordinary competence and experience when valuing the works properly executed for the purposes of interim certificates. However, the judge held that the quantity surveyor would not owe an implied duty to exclude the value of defective works from valuations, however obvious the defects. This was the exclusive responsibility of the architect appointed under the contract. Further, the quantity surveyor owed no implied duty to report the existence of defects to the architect.

Unfixed materials

7.19 Under the SBC16 provisions the contract administrator is obliged to include in the interim certificate materials which have been delivered to the site but are not yet incorporated in the works (cl 4.14.1.2), even though a limited risk to the employer remains (see paragraph 5.59). Clause 4.14.1.2, however, states that the obligation does not extend to materials that are prematurely delivered or not properly protected. Contract administrators should pay careful attention to the exact wording of this clause.

‘Listed Items’

7.20 Interim certificates might include amounts in respect of off-site ‘Listed Items’ (cl 4.14.1.3). These may be ‘materials, goods and/or items prefabricated for inclusion in the Works’ and the items must be listed by the employer, and the list attached to the bills of quantities (or specification/schedules of work) and supplied to the contractor at tender stage (cl 1.1). The value of a listed item may be included in an interim certificate prior to its delivery on site provided certain preconditions are fulfilled:

  • the listed item is in accordance with the contract (cl 4.16.1);
  • the contractor has provided reasonable proof that the property is vested in it (cl 4.16.2.1);
  • the contractor provides proof that the item is insured and will remain insured against specified perils until delivery on site (cl 4.16.2.2);
  • the listed item is clearly identified as under order for the employer, and for the works, by being ‘set apart’ or clearly marked (cl 4.16.3);
  • if the item is ‘uniquely identified’, a bond has been provided if required in the contract particulars (cl 4.16.4 and Schedule 6, Part 2);
  • if the item is ‘not uniquely identified’, a bond has been provided (cl 4.16.5 and Schedule 6, Part 2).

7.21 It appears that the contract administrator has no discretionary power to certify any off-site items, other than those that have been listed. This makes the position for both parties clear, in that only ‘listed’ off-site materials are to be certified. Once certified, these items become the property of the employer, even though they are off-site (cl 2.25). The contract administrator should therefore be careful not to include any unlisted off-site materials in any certificate, as only listed items are covered by these protection mechanisms.

Costs and expenses due to suspension

7.22 Clause 4.13.2 states that ‘Where the Contractor exercises his right of suspension under clause 4.13.1, he shall be entitled to a reasonable amount in respect of costs and expenses reasonably incurred by him as a result of exercising the right’. This amount is also to be included in interim valuations (cl 4.14.2.2). The phrase ‘costs and expenses’ is taken from the LDEDCA 2009, and suggests something more limited than the range of losses that could be claimed under a clause 4.20 loss and/or expense claim; for example, that it is limited to direct and ascertainable costs. However, a valid suspension would be due to a breach of contract by the employer, for which the contractor would be able to claim damages at common law, so it may be sensible for contract administrators not to interpret this too strictly.

Sum due

7.23 Clause 4.15 sets out the calculation that must be followed to reach the sum that is to be shown as due on each interim certificate. After calculation of the gross valuation, the following items are subtracted:

  • any retention amounts that may be deducted;
  • the total of any advance payments that are to be reimbursed;
  • the sums stated as due in previous interim certificates;
  • any amount paid in respect of a payment notice issued since the last certificate (this might occur if a previous certificate was not issued, and the contractor issued a payment notice in default, see paragraph 7.32).

Retention

7.24 Some of the items that must be included in the gross valuation are subject to retention (cl 4.14.1), of which half is released upon practical completion. As an alternative, the contractor may be required to provide a retention bond (cl 4.18). If this is to be used, the contract particulars must state that clause 4.18 is to apply, and the details must be set out at tender stage. SBC16 includes a form of retention bond as Part 3 of Schedule 6 (see paragraph 7.27). If a retention bond is not used, retention is deducted from the amounts set out in clause 4.14.1 (work properly executed, site materials and ‘Listed Items’).

7.25 The retention percentage is the amount inserted in the contract particulars, or if no amount is inserted is 3 per cent. The employer is trustee for the beneficiaries of the retention, i.e. the contractor (cl 4.17.1), and, except where the employer is a local or public authority, may be required under clause 4.17.3 to place the retention in a separate bank account. The contract administrator must issue a statement of the amount withheld with each interim certificate (cl 4.17.2), and the employer must certify that the amount has been placed in a separate account (cl 4.17.3). Clause 4.17.3 allows the employer the benefit of any interest which accrues. The employer has the right to deduct from the retention any sums due from the contractor (cl 4.12.3).

7.26 Retention has frequently been a point of controversy in the past. A series of cases established that the employer is obliged to place the money in a separate account, even if the contract contains no express provision, provided that it requires the employer to hold the money as a trustee (see Wates Construction v Franthom Property and Finnegan v Ford Sellar Morris). However, the court will not make an order to place money in a separate account following the insolvency of the employer (see Mac-Jordan Construction v Brookmount Erostin). The contractor would have no special claim beyond that of an unsecured creditor. To be safe the contractor must insist, while the employer is solvent, that the money is placed in a separate account.

Wates Construction (London) Ltd v Franthom Property Ltd (1991) 53 BLR 23 (CA)

Wates entered into a contract with Franthom on JCT80 to construct a hotel in Kent. Clause 30.5.3 (requiring Franthom to place retention in a separate account) had been deleted, but otherwise the retention clauses were in all material respects the same as those in SBC16. Although requested to do so by Wates, Franthom refused to place the accrued retention of around £84,000 in a separate account. Wates then commenced legal proceedings. Judge Newey ordered Franthom to place the money in an account, and Franthom then appealed. The court dismissed the appeal stating that ‘clear express provisions are needed if a separate bank account is not to be set up’. The fact that the clause had been deleted did not of itself indicate what the parties’ intentions were; the effect was the same as if the words had never been there at all.

J F Finnegan Ltd v Ford Sellar Morris Developments Ltd (1991) 53 BLR 38

Finnegan was the contractor on a JCT81 contract for works at Ashford. After the works reached practical completion the employer claimed liquidated damages of around £60,000 against a sum admitted as due to the contractor of around £20,000. Under clause 30.4.2.2 the employer was obliged to place retention monies deducted in a separate account if requested by the contractor. Finnegan commenced action to recover the sum due. The employer counterclaimed for the liquidated damages and Finnegan then requested that the retention be placed in a separate account. The employer refused and Finnegan applied for an injunction. The judge granted the injunction, despite the fact that this was long after practical completion. The contract did not require that a request was made each time retention was deducted nor at the time it was deducted.

Mac-Jordan Construction Ltd v Brookmount Erostin Ltd (1991) 56 BLR 1 (CA)

A developer held over £100,000 for the contractor in retention money but was also heavily indebted to the bank (floating loan granted by a charge). The developer went into insolvency and the bank appointed administrative receivers. The contractor then sought a court injunction to establish a separate retention fund, but the Court of Appeal refused on grounds that this would give an unsecured creditor (the contractor) preference over any other unsecured creditors of an insolvent debtor. The contractor’s right to the retention was stated to be no more than an ‘unsatisfied and unsecured contractual right for the payment of money’ (Scott LJ at page 15).

Bond in lieu of retention

7.27 This dilemma over retention and the effectiveness of trustee status has raised the question of bonds and guarantee bonds from both employer and contractor, respectively, as an alternative, and SBC16 makes provision for the use of a bond in lieu of retention (cl 4.18). If a bond is to be required, then the contract particulars must indicate that clause 4.18 is to apply and specify the maximum aggregate sum to be secured. The form of bond to be used is included in Schedule 6, Part 3, and must be provided by the contractor prior to the date of possession.

7.28 Where clause 4.18 applies, retention is not deducted from amounts on certificates. Instead, a statement of the retention that would have been deducted is prepared prior to each interim certificate. If at any time this statement exceeds the maximum aggregate sum stated in the bond, either the contractor arranges for the bond to be adjusted or the employer deducts retention for the unsecured amount. If the contractor fails to provide the bond at all, the employer may deduct retention as described above.

Advance payments and bonds

7.29 The advance payment indicated in the contract particulars is paid to the contractor before the first certificate of payment is due for issue, but only after the contractor has provided the bond required (cl 4.7). Payment is made directly from the employer to the contractor, and the contract administrator should ensure that it receives copies of any correspondence regarding this. Details of when the reimbursements are to take place will also be set out in the contract particulars and could, for example, be in stages throughout the project. The reimbursement is deducted from the gross valuation under the relevant certificate (cl 4.15.2). It is not clear why reimbursement of advance payments is to be shown on certificates, as the original payment would not appear.

VAT

7.30 The contract sum is exclusive of any VAT (cl 4.5.1), and there is no requirement to indicate the VAT applicable to any certified amount. VAT is not a matter of contract but of statute and is normally paid by the employer on submission of a VAT invoice by the contractor following each interim certificate.

Payment procedure

7.31 The final date for payment of each interim certificate is 14 days from the due date (cl 4.11.1) (see Figure 7.1). If the employer intends to withhold any amount from the sum certified, then the contractor must be given written notice of this no later than five days before the final date for payment, in the form of a ‘Pay Less Notice’ (cl 4.11.5). The pay less notice should be issued by the employer, unless the employer has notified the contractor that the contract administrator, quantity surveyor or other person is authorised to issue the notice on its behalf (cl 4.12.1.1). The notice should set the sum that the employer considers is due to the contractor at the date the notice is given and ‘the basis on which that sum has been calculated’ (cl 4.12.1). If a pay less notice is issued, the employer must pay the contractor at least the sum set out in that notice by the final date for payment (cl 4.11.5).

Payment when no certificate is issued

7.32 The contract has a remedy in the event that the date for issue has passed and no certificate has been provided. If the contractor has not already submitted a payment application, it can at any time after the issue date has passed send a payment notice to the quantity surveyor (cl 4.10.2.2). The notice should state ‘the sum that the Contractor considers to have been due to him under clauses 4.14 and 4.15 or clause 4.26.2 at the relevant due date and the basis on which that sum has been calculated’. The sum shown on the notice will become the amount due. If the contractor has already submitted a payment application, it need take no further action, as that application will be considered a payment notice (cl 4.10.2.1). Where payment notice is given, clause 4.11.4 states that ‘the final date for payment of the sum specified in it shall for all purposes be regarded as postponed by the same number of days as the number of days after the last date for issue of the Payment Certificate that the Payment Notice is given’. This is best understood by way of example; if the payment notice was issued six days after the final date for issue of the certificate (i.e. 11 days in total after the due date), the final date for payment would be 20 days after the due date (i.e. 14 plus six days). If the employer disagrees with the amount shown on the payment notice, then it must issue a pay less notice as described above (which in this example would be within four days of the notice). It should be noted that where no certificate is issued, the employer may not issue a pay less notice until after the contractor has submitted a payment notice (cl 4.13.1.1; i.e. it cannot use the pay less notice as a substitute for the missing certificate).

Deductions

7.33 As noted above, the contract administrator is required to make certain deductions before reaching the gross valuation. These are listed in clause 4.14.3, and include amounts relating to the acceptance of contractor errors (cl 2.10, 2.38 and 3.18.2), costs due to failure to comply with instructions (cl 3.11), and some insurance costs (cl 6.12.2) and fluctuation sums. In addition, in calculating the ‘sum due’ on a certificate, the contract administrator must make further deductions as listed in clause 4.15 (see paragraph 7.23). The employer then has the right to issue a pay less notice, which may state a different sum due. The pay less notice could, for example, make any of these deductions, if not already accounted for, or correct some arithmetical error in the certificate. In addition, the employer may make a deduction of liquidated damages (cl 2.32.2, see paragraph 4.62).

7.34 In addition, the employer in some circumstances would have the right to make deductions for defective work. Prior to the HGCRA 1996, it was clear that if the employer had an arguable case that the certificate may have included work which was defective, and therefore had been overvalued, then the employer need not have paid the full amount, but could have raised the losses due to the defects either as a counterclaim in any action brought by the contractor or as a defence to the claim. The latter process is often termed ‘abatement’ by lawyers.

7.35 It is now generally agreed that in cases where such a right may exist, it can only be exercised through the use of the ‘Pay Less Notice’ procedure, as discussed above. The employer would therefore be unable to withhold amounts to cover any defective work included in a certificate, unless the deduction is covered by a notice (Rupert Morgan Building Services v Jervis). In fact the courts have consistently upheld the contractor’s right to be paid the full amount certified (or notified) in the absence of a valid pay less notice, despite numerous and often ingenious attempts by employers to avoid payment (see for example Kersfield Developments v Bray and Slaughter).

Rupert Morgan Building Services (LLC) Ltd v David Jervis and Harriet Jervis [2004] BLR 18 (CA)

A couple engaged a builder to carry out work on their cottage, by means of a contract on the standard form published by the Architecture and Surveying Institute (ASI). The seventh interim certificate was for a sum of around £44,000 plus VAT. The clients accepted that part of that amount was payable but disputed the balance, amounting to some £27,000. The builder sought summary judgment for the balance. The clients did not give ‘a notice of intention to withhold payment’ before ‘the prescribed period before the final date for payment’. The builder contended that it followed, by virtue of HGCRA 1996 section 111(1), that the clients ‘may not withhold payment’. The clients maintained that it was open to them, by way of defence, to prove that the items of work which go to make up the unpaid balance were not done at all, or were duplications of items already paid or were charged as extras when they were within the original contract, or represented ‘snagging’ for works already done and paid for. The Court of Appeal determined that, in the absence of an effective withholding notice, the employer has no right of set-off against a contract administrator’s certificate.

Kersfield Developments (Bridge Road) Ltd v Bray and Slaughter Ltd [2017] EWHC 15 (TCC)

Contractor Bray and Slaughter entered into a contract with Kersfield to refurbish a mansion house. The contract was on JCT DB11, and in the sum of £5 million. After Kersfield failed to pay Bray’s payment application number 19, Bray obtained an adjudication decision in its favour for £1.2 million based on Kersfield’s failure to serve a payment or pay less notice within the contractual time limits. Kersfield commenced TCC proceedings. It asked the court for a declaration that it was entitled to commence a further adjudication to determine the correct value of Bray’s payment application, which it was now disputing. Kersfield relied on paragraph 20 of the Scheme adjudication rules, which states that an adjudicator may ‘open up, revise and review any decision taken or any certificate given by any person referred to in the contract unless the contract states that the decision or certificate is final and conclusive’. The court rejected this argument, finding that payment and pay less notices did not qualify as ‘decisions’ or ‘certificates’ under paragraph 20 of the Scheme. In doing so, it followed the principles set out in earlier cases, such as ISG Construction Ltd v Seevic College [2014] EWHC 4007 (TCC) and Galliford Try Building Ltd v Estura Ltd [2015] EWHC 412 (TCC).

Contractor’s position if the certificate is not paid

7.36 SBC16 includes several provisions which protect the contractor if the employer fails to pay the contractor amounts due. Clause 4.11.6 makes provision for simple interest to accrue on any unpaid amount. The defined ‘Interest Rate’ is set at 5 per cent above the official bank rate of the Bank of England, unless the contract particulars state some other rate, and the interest accrues from the final date for payment until the amount is paid. Similar provisions are included for the final certificate and for amounts due under sub-contracts. If the employer makes a valid deduction by means of a pay less notice, it is suggested that interest would not be due on this amount. The clause does not refer to the amount stated on the certificate but to ‘a sum, or any part of it’ due to the contractor under the conditions, which would take into account valid deductions.

7.37 The contractor is also given a ‘right of suspension’ under clause 4.13. This right is required by the HGCRA 1996 Part II. If the employer fails to pay the contractor by the final date for payment, the contractor has a right to suspend performance of all its obligations under the contract, which would include not only the carrying out of the work, but could also, for example, extend to any insurance obligations. This non-payment is stated to be of ‘the sum payable in accordance with clause 4.11’; therefore, the contractor may not suspend work if a pay less notice has been issued by the employer. The contractor must have given the employer written notice of its intention to suspend work and stated the grounds for the suspension, and the default must have continued for a further seven days. The contractor must resume work when the payment is made. Under these circumstances the suspension would not give the employer the right to terminate the contractor’s employment. Any delay caused by the suspension is a relevant event (cl 2.29.6) and any reasonable costs and expenses incurred are claimable under clause 4.13.2 (see paragraph 7.22).

7.38 The contractor has the right to terminate its employment under the contract if the employer does not pay amounts due (cl 8.9.1.1). The contractor must give notice of this intention, which specifies the default as required by the contract.

Contractor’s position if it disagrees with amount certified

7.39 As a result of the introduction of the payment notice provisions, it is no longer the case that the issue of a certificate is a condition precedent to the right of the contractor to be paid. However, where a certificate has been issued, the contractor is only entitled to the amount shown, even if the certificate is undervalued and irrespective of what the contractor may have put forward in its interim application. This case of Lubenham v South Pembrokeshire District Council states that the contractor is only entitled to the sum stated in the certificate, even if the certificate contains an error, for example because it includes a wrongful deduction. The contractor’s remedy is to request that the error is corrected in the next certificate, or to bring proceedings, for example adjudication, to have the certificate adjusted. (There are exceptions to this rule, for example where the employer has interfered with the issue of the certificate, in which case the contractor may be entitled to summary judgment for the correct amount.) This appears to be the case even where the interim certificate shows a negative amount, i.e. an amount payable by the contractor to the employer, which may occur if the contract administrator decides that work was overvalued or there was some other error in an earlier certificate. Unlike the final certificate, the clauses relating to interim payments do not give the contractor the right to issue a pay less notice.

Lubenham Fidelities and Investments Co. Ltd v South Pembrokeshire District Council (1986) 33 BLR 39 (CA)

Lubenham Fidelities was a bondsman which elected to complete two building contracts based on JCT63. The architect, Wigley Fox Partnership, issued several interim certificates which stated the total value of work carried out, but also made deductions for liquidated damages and defective work from the face of the certificate. Lubenham protested that the certificates had not been correctly calculated, withdrew its contractors from the site and issued notices to determine the contract. Shortly afterwards, the Council gave notice of determination of the contract. Lubenham brought a claim against the Council on the grounds that its notices were valid and effective, and against Wigley Fox on the basis that the architect’s negligence had caused it losses. It was held that the Council was not obliged to pay more than the amount on the certificate and that, whatever the cause of the undervaluation, the correct procedure was not to withdraw labour but to request that the error was corrected in the next certificate, or to pursue the matter in arbitration. Lubenham’s claim against Wigley Fox failed because it had been the suspension of the works rather than the certificates that had caused the losses, and because the architect had not acted with the intention of interfering with the performance of the contract.

Interim payment on practical completion

7.40 The effect of clause 4.19.2 is to release to the contractor half of the retention that has been deducted in the first interim certificate following practical completion of the works, or in the case of a section, half the proportion that relates to that section. Following practical completion, certificates continue at monthly intervals (cl 4.8), and the employer retains the right to deduct half the retention percentage from the amounts due under these certificates. Although no further work should be carried out during this period (except instructed remedial work), amounts may nevertheless become due; for example, when a claim for loss and/or expense has not been resolved prior to practical completion.

Final certificate

7.41 To summarise, by final certificate stage the following certificates should have been issued:

  • interim certificates at monthly intervals, with the full retention percentage applied (cl 4.8, cl 4.19.1);
  • practical completion certificate (cl 2.30);
  • certificates at monthly intervals during the rectification period, with half the retention percentage applied (cl 4.8, cl 4.19.2);
  • certificate of making good (cl 2.39).

7.42 The final certificate must be issued within the specific time periods set out in the contract (cl 4.26.1) (see Figure 7.2). In practice, the latest date for issue tends to be determined by the process of calculating the adjusted contract sum. The onus is on the contractor to send all necessary information to the contract administrator or, if instructed to do so, to the quantity surveyor, not later than six months after practical completion of the works (cl 4.25.1). No later than three months after receiving this information, the contract administrator, or the quantity surveyor if asked to do so, makes a final assessment of the amount of loss and/or expense due (cl 4.25.2.1), and the quantity surveyor prepares a statement of all adjustments to be made to the contract sum (cl 4.25.2.2). This must be sent to the contractor ‘within that 3 month period’ (cl 4.25.2).

7.43 If the contractor fails to supply the necessary information within six months of practical completion, then the contract administrator may give a one-month notice requiring its supply (cl 4.25.2.3). If the contractor does not comply with the notice, the contract administrator and quantity surveyor may proceed on the basis of the information that they already have. Note that there is no requirement to issue a notice or proceed with the assessments, this is merely a right, so matters could come to a standstill if the contractor does not act. In some cases, however, the employer may prefer to finalise matters, despite the lack of action by the contractor.

7.44 The final certificate is then issued within two months of the statement (or, within two months of the issue of the last certificate of making good, or the expiry of the last rectification period, whichever is the latest) (cl 4.26.1). It is worth noting that it has been held that the final certificate can be issued at the same time as the statement, although it would be good practice to allow the contractor time to consider the documents (Penwith District Council v V P Developments). It is also worth noting that a document does not necessarily have to be headed ‘Final Certificate’ or be in any particular format to comply

Figure 7.2 Final payment procedure

Figure 7.2 Final payment procedure

Credit: Rebecca Pike

  with clause 4.26: whether it constitutes a final certificate will depend on the facts in each case (Cantrell v Wright and Fuller).

Penwith District Council v V P Developments Ltd [1999] EWHC Technology 231

Penwith District Council employed VP for maintenance works to 91 houses at Hayle. The contract was on JCT80. Practical completion took place on 21 September 1990, and the certificate of making good defects was issued on 30 October 1991. VP submitted a draft final account on 14 January 1991. Three interim certificates were issued following practical completion, the last one on 10 July 1992. The final certificate was issued on 8 April 1993, and enclosed a document summarising how the figure on the final certificate had been arrived at. VP gave notice of arbitration some three years later. It argued that it was not barred by the clause 30.9 conclusiveness provisions as the final certificate had not been valid. The arbitrator found for VP, stating that the intention of the contract was that the contractor should have at least three months to consider the ascertainment of final account referred to in clause 30.6.1. The Council appealed and His Honour Judge Humphrey Lloyd found that the contract terms required that no minimum period should have elapsed, all the time limits referred to were maxima. He also found that no such term could be implied: ‘the 1980 JCT form is a long and complex document and was plainly intended to provide for most conceivable circumstances and to block the many attempts to find gaps in its structures, despite repeated assaults’.

B R Cantrell (2) E P Cantrell v Wright and Fuller Ltd [2003] BLR 412

Cantrell engaged Wright on a JCT80 form to construct an extension to a nursing home in Woodbridge, Suffolk. The work achieved practical completion on 23 February 1998. Following practical completion the contract administrator did not issue an extension of time, nor had it issued a certificate of non-completion. Following meetings between quantity surveyors, a document entitled ‘final account’ was agreed. On 12 March 1999 the contract administrator sent the claimant the final account plus an interim certificate in the sum of around £25,000. On 29 March 1999 the contract administrator issued a further certificate, which referred to a ‘final payment’, and was accompanied by a letter which referred to it as a ‘final certificate’. The employer’s solicitors immediately challenged the adjustments to the contract sum, and the contractor’s solicitors demanded payment. In May 2002 a notice of arbitration was served and an arbitrator appointed. The parties were in dispute as to whether the March 1999 document was a final certificate complying with clause 30.8. If it was, then its conclusive effect would defeat some of the matters claimed. The arbitrator decided that the certificate was a final certificate.

7.45 The final certificate must state the contract sum as adjusted under clause 4.3, which sets out all the deductions and additions to the contract sum (cl 4.26.2.1). The final date for payment of the final certificate is 14 days from the due date, which is the date of issue of the final certificate, or the last date of the period in which it should have been issued, whichever is the earlier (cl 4.11.1 and cl 4.26.3). The contract acknowledges that the final certificate can be for a negative amount – in other words, it can certify that payment is due from the contractor to the employer (cl 4.26.2). The final certificate is subject to pay less notice provisions, as described above in relation to interim certificates, except that in this case the contractor is also given the right to issue a pay less notice (cl 4.11.5.2).

Payment when no final certificate is issued

7.46 If no final certificate is issued within the required two-month period then, as with interim payments, the contractor may then send a final payment notice to the employer (cl 4.10.2), in which case the final date for payment would be postponed (see paragraph 7.32). The notice should state the sum that the contractor considers to be due and the basis on which that sum has been calculated (cl 4.10.1). If the employer disagrees with the amount shown on the notice then it may issue a pay less notice under clause 4.11.5. The employer is then only obliged to pay the amount shown in the pay less notice.

7.47 In the unlikely event that neither a final certificate nor a final payment notice is issued, the contract nevertheless provides that there is a date by which a final payment should be made. Clause 4.26.3 states that ‘The due date for the final payment shall be the date of issue of the Final Certificate or, if that certificate is not issued within the 2 month period referred to in clause 4.26.1, the last day of that period’. This provides protection to the contractor, in that even if it does not issue a final payment notice, the contract establishes a date by which final payment must be made, i.e. 14 days from the due date. The employer would therefore be wise to make a payment, regardless of the lack of certificate or payment notice. Interest will start to run from that date, as set out in clause 4.11.6, based on the sum which is later determined should have been paid at that time. This would be the case even if neither the contract administrator nor the contractor have finalised their calculations regarding the final sums due.

Conclusive effect of final certificate

7.48 The final certificate is conclusive evidence that proper adjustment has been made to the contract sum (cl 1.9.1.2), and the contractor is prevented from seeking to raise any further claims for extensions of time (cl 1.9.1.3) or for reimbursement of direct loss and/or expense (cl 1.9.1.4). It is also conclusive evidence that where matters have been expressly stated to be for the approval of the contract administrator they have been approved (cl 1.9.1.1), but apart from those matters it is not conclusive that any other materials, workmanship, etc. are in accordance with the contract.

7.49 If dispute resolution proceedings are commenced before the issue of the final certificate, or within 28 days of the date of its issue, the conclusive effect is ‘suspended’ (the certificate does not become conclusive) in relation to the matters the subject of dispute until the proceedings are concluded (cl 1.9.2). Proceedings are concluded when a decision, award or judgment is issued, or if either party takes no further action for a period of 12 months (cl 1.9.3). In cases where a dispute has been raised in adjudication and the adjudicator’s decision is reached after the final certificate, if either party wishes to challenge that decision then it must initiate proceedings within 28 days of the date of the decision (cl 1.9.2.2). The bar on raising matters after the 28-day period cannot be extended by the court, as the bar is an evidential bar and not a bar to bringing proceedings. In other words, an arbitration could be commenced, but no evidence can be brought forward.

7.50 The conclusive effect of the final certificate was the subject of much heated debate following the decisions in Colbart Ltd v H Kumar (1992) 59 BLR 89 and Crown Estate Commissioners v John Mowlem, cases which would still apply to older versions of JCT forms (see London Borough of Barking & Dagenham v Terrapin). Following the cases, the JCT amended the relevant clauses in its contracts. It appears unlikely, under the current wording, that an employer would be unable to effectively raise a claim regarding work or materials which were not in accordance with the contract following the 28-day cut-off period, provided that it had not been stated to be ‘to approval’ of the contract administrator somewhere within the contract documents.

Crown Estate Commissioners v John Mowlem & Co. Ltd (1994) 70 BLR 1 (CA)

Crown Estates employed Mowlem to construct a commercial development on the site of the former Kensington Palace Barracks. A final certificate was issued on 2 December 1992, and on 6 April 1993, Crown Estates gave notice of arbitration. It then issued a summons under section 27 of the Arbitration Act 1979 for an order extending the time within which to commence arbitration, in order to validate its notice. In addition to the summons the judge at first instance was also asked to consider the question of what, if anything, the final certificate was conclusive evidence of, as this would affect what could be raised in the arbitration. The judge issued the order extending time and held that the final certificate was only conclusive as to matters that were expressly stated to be for the satisfaction of the contract administrator. Mowlem appealed and the appeal was allowed. The Court of Appeal stated that clauses 30.9.1.1 and 30.9.3 did not limit the time within which arbitration proceedings could be brought, therefore the court had no powers under the Arbitration Act 1979 that could defeat the effect of the certificate. It also held that as all standards and quality of work and materials were inherently matters for the opinion of the contract administrator, the final certificate was conclusive evidence of all such matters.

London Borough of Barking & Dagenham v Terrapin Construction Ltd [2000] BLR 479

The Borough employed Terrapin Construction to design and build new and refurbishment work at a school in Dagenham. No document entitled ‘Employer’s Requirements’ had been issued to the contractor at tender stage, but the contractor had been given a ‘brief’, which set out in general terms the nature of works which the Borough wanted to have designed, and the court decided that requirements were ‘represented by the contract as a whole’. The contract was to be on WCD81. Once a tender figure had been negotiated, the Borough sent the contractor an order for the work, which set out the agreed contract figure, incorporated the terms of WCD81 and also stated: ‘In consideration of this Agreement hereinafter contained on the part of the employer the Contractor shall and will execute complete and maintain the Works in all respects to the satisfaction of the Controller of Development and Technical Services’. The court decided that in this context the final statement was conclusive evidence that all work had been carried out to the satisfaction of the employer.

7.51 In cases where work has been stated to be ‘to approval’, the contract administrator should take particular care and should not issue the certificate unless and until the work is satisfactory. Where unsatisfactory work has been accepted, the contract administrator should, together with the employer, weigh the advantages of issuing the final certificate (the element of finality it brings to matters such as the final account) against the disadvantages (not being able to claim with respect to the unsatisfactory work) before deciding whether to proceed.

..................Content has been hidden....................

You can't read the all page of ebook, please click here login for view all page.
Reset