Construction Law

THE ROLE OF PAYMENT CERTIFICATES IN CONSTRUCTION DISPUTES

Image MGAdvocate Adjudication, Arbitration, Construction Law, Don Mahon, Mining law , , ,

– By Don Mahon

“Justice delayed is justice denied.”
– William E. Gladstone

Payment certificates occupy a central position in construction law, serving as instruments designed to balance the contractor’s entitlement to remuneration for work performed and the employer’s interest in ensuring compliance with contractual obligations. Their issuance and enforcement, while seemingly straightforward, engage complex legal principles, including those of contract interpretation, provisional validity, and the interplay between financial security and dispute resolution. This article examines the legal framework governing payment certificates, drawing on established jurisprudence and recent developments to elucidate their provisional nature, evidentiary status, and broader implications.

Payment Certificates: A Conceptual Overview

Payment certificates are a quintessential feature of construction contracts, issued periodically by a certifier—often an engineer or project manager—to quantify the amount due to a contractor for work completed or materials supplied. These certificates aim to facilitate ongoing cash flow, thereby ensuring that contractors remain financially equipped to continue work on the project. However, their legal effect is far from absolute; payment certificates are typically provisional, subject to modification or correction in accordance with the contract’s terms.

The decision in Beaufort Developments v Gilbert-Ash [1999] AC 266 (HL) provides foundational insight into the provisional nature of interim payment certificates. Lord Lloyd of Berwick observed that interim certificates are designed to “maintain cash flow” without prejudicing the final rights of the parties, which are typically resolved at the conclusion of the project. This principle of provisionality underscores the temporary and adjustable status of payment certificates, distinguishing them from final certificates, which are often conclusive barring allegations of fraud or collusion.

The Legal Status of Payment Certificates: Liquid Documents and Provisional Instruments

Liquid Documents

South African jurisprudence has affirmed that payment certificates, under the appropriate contractual framework, constitute liquid documents. In Randcon (Natal) (Pty) Ltd v Florida Twin Estates (Pty) Ltd 1973 (4) SA 181 (D), the court characterised interim certificates as akin to acknowledgments of debt, creating a cause of action that can be enforced summarily. Similarly, the Supreme Court of Appeal in Joob Joob Investments (Pty) Ltd v Stocks Mavundla Zek Joint Venture 2009 (5) SA 1 (SCA) reinforced that payment certificates embody enforceable claims, provided that they comply with the formal and substantive requirements of the contract.

However, the liquid nature of these certificates does not immunise them from challenge. As noted in Thomas Construction (Pty) Ltd (in liquidation) v Grafton Furniture Manufacturers (Pty) Ltd 1988 (2) SA 546 (A), the recognition of a certificate as a liquid document does not imply that it is sacrosanct or immune to contractual defences. The enforceability of the certificate remains contingent upon its compliance with the contract and the absence of material irregularities.

Provisional Validity and the Certifier’s Role

The principle of provisional validity reflects the dynamic nature of construction contracts, wherein interim certificates provide a snapshot of the contractor’s entitlements at a given point in time. Clause 14.6 of the FIDIC Conditions of Contract epitomises this principle, allowing for certificates to be revised or corrected to address errors or omissions identified post-issuance. This contractual flexibility is critical for ensuring that certificates reflect the true state of the works, albeit subject to the certifier’s good faith and adherence to the contract.

The certifier’s role as an intermediary between the contractor and employer has been the subject of considerable judicial scrutiny. In Dawnays Ltd v FG Minter Ltd [1971] 2 All ER 1389 (CA), Lord Denning described interim certificates as “virtually cash,” emphasising their role in sustaining the contractor’s operations. However, subsequent jurisprudence, including the repudiation of Dawnays in Gilbert-Ash, has tempered this view, highlighting the certifier’s obligation to act within the confines of the contract and exercise reasonable judgment.

Defences and Challenges to Payment Certificates

Employer Defences

Employers are not precluded from raising valid defences to claims based on payment certificates. These defences may include procedural non-compliance, errors in the certification process, or counterclaims for breach of contract. In Esor Africa (Pty) Ltd / Franki Africa (Pty) Ltd Joint Venture v Bombela Civils Joint Venture (Pty) Ltd 2014 JDR 1824 (GJ), the court acknowledged the employer’s right to contest a certificate’s validity where it deviated from contractual requirements or was issued in error.

The decision in Ocean Diners (Pty) Ltd v Golden Hill Construction CC [1993] ZASCA 41 further clarified the parameters of such challenges, noting that interim certificates are binding unless vitiated by fraud, collusion, or non-compliance with the contract. Importantly, the burden of proof lies with the employer to substantiate these defences, preserving the prima facie enforceability of the certificate.

Interaction with Dispute Resolution Mechanisms

Payment certificates often intersect with the dispute resolution mechanisms prescribed by the contract, including adjudication and arbitration. These mechanisms serve to resolve disputes over certificates while maintaining the contractual balance between provisional entitlements and final determinations. In Framatome v Eskom Holdings SOC Ltd2022 (2) SA 395 (SCA), the court reiterated that adjudication awards—and by extension, certificates—are binding until set aside in subsequent proceedings.

This approach aligns with the decision in Radon Projects (Pty) Ltd v NV Properties (Pty) Ltd 2013 (6) SA 345 (SCA), where the court affirmed the necessity of dispute resolution clauses in preserving the contract’s integrity. Parties are expected to adhere to these mechanisms to resolve disputes efficiently and fairly, preventing unilateral repudiation of certificates.

Implications for Construction Law

Certainty and Financial Stability

The issuance of payment certificates reflects a critical balance between ensuring financial stability for contractors and preserving the employer’s right to contest disputed claims. This dual function underscores the importance of clear contractual provisions that delineate the rights and obligations of all parties involved.

Clarity in Contract Drafting

Contracts must articulate the certifier’s authority, the process for issuing certificates, and the grounds for challenging them with precision. Ambiguities in these provisions can lead to protracted disputes, undermining the intended efficiency of the certification process.

Role of Dispute Resolution

Adjudication and arbitration are integral to resolving disputes over payment certificates. These processes ensure that claims are adjudicated within the framework of the contract, preserving both the provisional nature of certificates and the parties’ substantive rights. Courts have consistently emphasised the importance of engaging with these mechanisms in good faith, as demonstrated in the aforementioned authorities.

Conclusion

Payment certificates are indispensable to the operation of construction contracts, providing a mechanism for interim payments that balance financial stability with contractual flexibility. However, their enforceability is intricately tied to the contract’s terms, the certifier’s conduct, and the availability of dispute resolution mechanisms. The principles articulated in cases such as Randcon, Beaufort Developments, and Framatome provide a robust framework for understanding the legal status of payment certificates and their role in facilitating efficient project delivery.

For practitioners and stakeholders in the construction industry, these principles underscore the necessity of meticulous contractual drafting, proactive dispute management, and adherence to the certifier’s professional obligations. By aligning practice with these jurisprudential insights, parties can minimise disputes and enhance the efficacy of construction contracts.

ADVANCING “GLOBAL CLAIMS” UNDER CONSTRUCTION CONTRACTS IN ADJUDICATION HEARINGS – by Don Mahon

MGAdvocate Adjudication, Arbitration, Construction Law, FIDIC, JBCC, NEC , , , , , , , , , ,

The shortest distance between two points is under construction – Noelie Altito

It has become common internationally, and in some countries by legislation, for disputes to be resolved provisionally by adjudication.  In Macob Civil Engineering Ltd v Morrison Construction Ltd  [1999] B.L.R. 93 at 97, cited in Keating on Building Contracts 9th Ed. para 18-018, adjudication was described as:

“A speedy mechanism for settling disputes under construction contracts on a provisional interim basis, and requiring the decision of adjudicators to be enforced pending the final determination of disputes by arbitration, litigation or agreement. … But Parliament has not abolished arbitration and litigation of construction disputes. It has merely introduced an intervening provisional stage in the dispute resolution process.”

Hudson’s Building & Engineering Contracts 12th Ed. at 968, para 6-080, relying on Holland Construction & Engineering (Pty) Ltd v Kvaerner RJ Brown (Pty) Ltd (1996) 82 B.L.R 83 at 89 and 91 observes that under New Zealand construction legislation, adjudication “is regarded as essentially a cash flow measure implementing what has been colloquially described as a “quick and dirty” exercise to avoid delays in payment pending definitive determination of litigation”.

It is apparent, therefore, that the primary aim of the adjudication procedure is to provide a cash flow measure in order to avoid delays in payment pending definitive determination of litigation.

However, it is not merely an exercise in determining how much a contractor requires to be paid in order to continue with the project.  The adjudicator must attempt to resolve the dispute between the parties insofar as it might be possible to do so.

The standard of proof in dispute board hearings is a balance of probabilities and the established principles that assist judges and arbitrators to arrive at a conclusion are equally applicable to dispute adjudication boards (See Chern on Dispute Boards, p196).

These principles dictate, inter alia, that:

a)     a person who makes an allegation has the burden of proving that allegation on the basis of the balance of probabilities.  If he fails to satisfy the adjudicator, then the adjudicator will find against him;

b)    a statement made by one party, which is not denied by the other party, is accepted as being correct;

c)     inferences may be drawn from the conduct of the parties, for instance, if one party refuses to bring a staff member conversant with the contract to a hearing, a board member can ask him or herself why the request was rejected.

In all the circumstances, the adjudicator is required to adopt a pragmatic approach in light of the fact that a full hearing with cross-examination is generally not available to him or her.  However, the adjudicator, where certain facts can simply be proved by the provision of available evidence, will require such evidence before considering such allegation to be proved.  Axiomatically, the adjudicator is enjoined to draw negative inferences from a party where evidence which is available to it, is not presented.

Bearing these principles in mind, the question arises as to how an adjudicator (as opposed to an arbitrator or a judge) should approach a global claim.

A global claim or total cost claim has been defined as a claim where “the causal connection between the matters complained of and their consequences, whether in terms of time or money, are not fully spelled out” (See Hudson, supra).

A global or total cost claim is simply, as its name implies, one in which the cost of the work incurred by the contractor in its execution is compared with a tender or contract allowance for that work to arrive at the claimed amount.

The adjudicator is then invited to infer that the entirety of the cost overrun is the result of the breaches by the employer or events for which it is responsible.

Hudson points out that there are three obvious objections to such a claim, namely:

a)     It will only be appropriate for the tribunal to make such an inference where it can be satisfied that there are no other reasons apart from the employer’s breach for the cost overrun;

b)    the approach assumes in the contractor’s favour that the tender allowance was adequate, that the contractor proceeded with an appropriate degree of expedition and efficiency in the circumstances in which it found itself and that there were no other matters affecting progress than those for which the employer was responsible;

c)     the total cost approach tends to subvert the basis on which the contract was awarded.  It converts a lump sum or re-measurement contract into a cost reimbursable one.

According to Hudson:

“Given the difficulties of proof, it is rare for a true total cost claim to be advanced.”

Thus, in the past, the approach adopted has been to dismiss such claims for want of evidence in substantiation thereof sufficient to discharge the claimant’s burden of proof, save in those cases where, for whatever reason, the requisite documentation was unavailable to the claimant.

This approach appears, however, to have been altered by virtue of the decision of Walter Lilly & Co Ltd v Giles Patrick Mackay [2012] EWHC 1773 (TCC) in which Mr Justice Akenhead attempts to provide comprehensive guidance on the approach to global claims.

According to Justice Akenhead, the appropriate approach is as follows:

a)     Subject to any express contractual requirements, the claims by contractors for loss and expense must be proved as a matter of fact (Para 486 (a));

b)    the contractor must establish that:

i)      events occurred which entitled it to loss and expense;

ii)    those events resulted in delay and/or disruption; and

iii)   such delay and/or disruption caused it to incur loss and expense;

c)     the contractor can prove the three requirements by whatever evidence will discharge the burden of proof.  A claim “may be supported or even established by admission evidence or by detailed factual evidence which precisely links reimbursable events with individual days or weeks of delay or with individual instances of disruption and which then demonstrates with precision to the nearest penny what that delay or disruption actually cost” (Para 486 (c));

d)    although global claims faced evidential difficulties, there is nothing in principle to make them impermissible.  A contractor will generally have to establish that its loss would not have been incurred in any event (Para 486 (d)). This will involve showing that its tender was adequately priced so that it would have made a net return.  Although the burden of proof does not shift to the party defending the clam, that party may seek to show that the accepted tender was so low that the loss would have occurred in any event or that other events at the contractor’s risk caused some or all of the loss (Para 486 (d));

e)     if events other than those relied upon by the contractor, or which are at the contractor’s risk, caused or contributed to the total loss, the contractor’s claim does not necessarily fail except to the extent that those other events caused the loss.   Mr Justice Akenhead gave the example of a ₤1 million global claim where it could be proved that, except for an unpriced item of ₤50 000 in the accepted tender, the contractor would probably have made a net return. In those circumstances, the global claim would not fail in its entirety.  The global loss would simply be reduced by ₤50 000 (Para 486 (e));

f)     the tribunal may treat a global claim with more scepticism if the more conventional approach of proving a direct linkage is available but has not been adopted. This does not, however, mean that the global approach should automatically be rejected (Para 486(f)).

Applying these principles, a claimant in a construction dispute would be well advised to do whatever is necessary in order to:

a)     link any reimbursable events with individual days or weeks of delay or with individual instances of disruption;

b)    establish that its loss would not have occurred in any event;

c)     establish that individual items of delay, disruption or loss are attributable to the defendant.

If a claimant fails to do so, its claim should be treated with circumspection and, applying the relevant and appropriate approach to adjudication proceedings, should be dismissed, save to the extent that it has been shown that any individual items of delay, disruption or loss are attributable to the defendant’s conduct.