Law Relating to

Payment

Lim Chern Yie

Liew Yong Sheng

Overview of Chapter

1. Introduction

2. Nature of Certificate

3. Certification Process

4. Operation of Interim Certificate

5. Operation of Final Certificate

6. Certifier’s Position

7. Challenge the Certificate

Introduction

Small contracts are normally paid in a single sum on completion of the works which is known as an entire contract

Bigger and complex contract, the common practice of payment is through interim payments according to progressively valuation of work completed or stage payment where payments are made at pre-determined stage of the progress of work.

In Hoenig v Isaacs (1952), Lord Denning stated the following position, 'Where a contract provides for a specified sum to be paid on completion of specified work, the Courts lean against a construction of contract which would deprive the contractor of any payment at all simply because there are some defects or omission'.

Nature of Certificate

Issued on a regular period, usually monthly

At the interim stage, it cannot always be a wholly exact exercise. It must be include an element of assessment and judgment.

Secretary of State for Transport v Brise-Farr Joint Venture (1993)

Generally, acceptable that the amount certified in an interim certificate is to treat them as estimates of the value of the work done up to the date shown on the certificate.

Beaufort Developments v Gilbert-Ash (1999)

Certification Process

PAM 2006 Clause 30.1 requires Contractor to submit a payment application at the Interim Claim Interval ....complete details and particulars as required by the Architect.

Under the same clause, the submission of a payment statement is a condition precedent to the issue of the certificate by the architect.

Therefore if the contractor does not submit his payment application, the architect is not obliged to issue any payment certificate and it is deemed that the contractor has waived his right to that particular payment certificate.

The effect of this is that the contractor may still retain his common law right to payment for work done and contractually he is not entitled to that particular payment.

Tuck Sin Engineering & Construction Sdn Bhd v Yee Heng Manufacturing (M) Sdn Bhd (2007).

Some contracts provide a minimum value of works

completed before the certifier is obliged to issue the first

Interim Certificate, e.g. JKR Design and Build form. The

intention of such a requirement is to encourage contractor

to mobilize and commence work expeditiously.

After receiving the payment application, the Quantity

Surveyor will carry out the valuation of works and materials

delivered to site jointly with the contractor's representative.

When the valuation is completed, the quantity surveyor will

issue a recommendation to the Architect for the sum to be

certified. Architect will then decide to follow the

recommendation or to depart if he wants to adjust for

defects or incomplete work.

Operation of Interim

Certificate Legally, a properly issued interim certificate creates a debt

which is enforceable like any other debt. A contractor can seek summary judgment for the amount certified subject to the employer's right of set-off.

Most construction contract provides that contractor's entitlement to payment is conditioned on the issuance of a condition precedent and the employer cannot refuse to pay an interim certificate of payment nor seek to reduce the amount to be paid by way of set-off not provided for in the contract. This is to protect the right to receive interim payments from allegation of defects and cross-claim by the employer.

In the case of Mae Engineering Ltd v Dragages Singapore Pte Ltd (2002), it was held that the presentation of an interim certificate crystallized an employer's obligation to pay and the employer cannot allege rights of set-offs for purpose of varying this contractual obligations.

The above decision is in line with Supreme Court's decision in Pembenaan Leow Tuck Chui & Sons SdnBhd v Dr Leela's Medical Centre Sdn Bhd (1995) where it is held that:

the employer was obliged to honour the certified sum in the interim certificate despite the employer's cross-claim for defective work;

the certificate conferred 'temporary finality' thereon;

therefore the contractor had a right to immediate payment in full in the absence of an express contractual provision permitting any deduction by the employer; and

notwithstanding the 'temporary finality' of the interim certificates, the employer's cross- claims against the contractor could still be litigated or arbitrated even after the payments of the interim certificates had been made.

Operation of Final

Certificate“Final certificate shall

state; Final account

less total sum certified

in previous payment

certificate ,whether

paid or unpaid, to the

contractor. The

difference, if any shall

be balance due to

contractor/employer.

Said balance shall be

payable by either

contractor/employer.”

-Paraphrased from

clause 30.15 of PAM

contract

Understanding Final

Certificate Certificate is intended to be a final statement that

which certifies the final amount due to the contractor

or vice versa on employer’s side for outstanding

matter under contract.

Also intended that the work would conform to the

requirement of the contract

In example…

Binding of Certificate

Clause 30.9 of JCT stipulates that the Final Certificate

shall have effect in any proceedings arising from the

contract as conclusive evidence ... that the particular

quality or standard of materials or goods ... was to the

reasonable satisfaction of the Architect

PAM Contract clause 30.16 rectifies the issue of

certificate being conclusive stating that it is only

conclusive in its final value of the works.

Retention Money

Retention money is to allow employer to hold the

money for setting off as express by the contract

(Clause 30.4 and Clause 30.5)

The intention of the retention money is to act as a

relationship of trust between the employer and

contractor. (Clause 30.6)

Employer have the fiduciary duty to that the employer

do not use that money. (Lee Kam Chun v Syarikat

Kukuh Maju Sdn Bhd)

Certifier’s Position

Certifier needs to take account to meet employer’s demand

while at the same time discharge his/her duty impartially

and fairly

Purpose that the certifier must be fair (Kuala Ibai

Development Sdn Bhd v Kumpulan Perunding) because

“even though he is usually appointed by the employer, the

object of the provisions for temporary finality could be

defeated. It would be no comfort to the contractor that he could

ventilate his dissatisfaction before an arbitrator, with all the

time, trouble and expense that this entails”

Says that one Singapore judge in Aoki Corp v Lippoland

(Singapore) Pte Ltd (1995)

Liability of Employer and

Certifier If employer is liable for duty of architect as an agent,

employer is liable under implied obligation to

contractor to ensure the architect exercise his duty

properly as a certifier

Employer are not liable for default of the architect and

state that it is settled law that an architect has to act

fairly. Contractor may sue architect if he act

negligently in certifying duty. (Hiap Hong & Co Pe Ltd

v Hong Huat Development Co & Pe Ltd 2001)

Challenging the

Certificate 1. When there is any doubt as to their rights and liabilities

due to ambiguity and uncertainty with respect to the subject matter being certified. See Token Construction v Charlton Estates (1973).

2. Where the certificate has not been issued in accordance with the terms of contract. See Trade Indemnity Co v Workington Harbour and Dock Board (1937).

3. Where a certificate process has been tainted by elements of fraud, collusion or dishonesty. See Hickman v Roberts (1913).

4. Where the certifier has an interest in the matter certified. See Kimberly v Dick (1871).

5. Where the employer or his agents prevents the certifier from issuing a certificate. (Roberts v Bury Commissioners 1870)

Remedies of Wrongful

Certification Hiap Hong & Co Pte Ltd v Hong Huat Development

Co (Pte) (2001), an architect refused to issue a

certificate with the knowledge of the owner.

The Court of Appeal took the view that the recourse

for the aggrieved contractor is to invoke the arbitration

clause or to proceed to court against the employer

The Contractor’s contractual remedy in such

situations is by way of reference to arbitration, as

provided for under Clause 34.0 of the PAM 2006

Form.

. Recourse outside the

Terms of Contract If the architect’s failure to issue the certificate is due to the

architect’s own incapacity and it’s not due to employer, an action in arbitration against the employer will only injures the relationship and goodwill between the employer and contractor.

RSP Architect Planners and Engineers v Ocean Front Pte Ltd (1996) is that an architect in a building contract owes a duty of care to the contractor not to cause the contractor economic loss

Sutcliff v Thackrah (1974) AC 727 deemed that the Architect is liable in damages if he causes loss to his Employer by failure to take due care or to exercise reasonable professional skill in carrying out his duties

Question

Q1. Can the employer refuse to pay after the certifier

had signed and delivered the interim certificate to the

contractor?

Answer

Answer: Cannot, this is because employer has to

honour certified amount despite employer’s ‘cross-

claim’ for defective works. Contractor has right to full

payme in absence of provision for deductable and the

certificate conferred 'temporary finality' thereon.

Question

Q2. What can the contractor do if the employer refuse

to pay?

Answer

Answer: The contractor can sue the employer to

recover his debt or charge interest until the debt is

settled.

Contractor can also stop work

At worst case scenario determine his employment

Question

When should the architect release the final certificate?

Answer

1. If there is a penultimate certificate issued under

clause 30.13, then the final certificate shall be issued

within 21 days after the period of honouring certificate

of payment for the penultimate certificate.

2. If there is no penultimate certificate issued under

clause 30.13, then the final certificate shall be issued

within 28 days after the CMGD has been issued under

clause 15.6

Question

What are the disputes referable to arbitration?

34.5a) any matter of whatsoever nature arising or in connection with the Contract

34.5b) any matter left by the contract ot the discretion of the Architect

34.5c) withholding by the Architect of any certificate to which the Contractor may be entitled to

34.5d) the rights and liabilities of the parties under Clause 25.0, 26.0, 31.0 or 32.0

Unreasonable withholding of consent or agreement by the Employer or the Contractor.

Feel free to ask any

questions~!

Wilson Translator: Please don’t

Appendix

Token Construction Co Ltd v Charlton Estates Ltd. In this case, the contractors entered into a contract with the building owners on a modified prime cost contract for the erection of four blocks of flats in Regents’ Park Road.

However, the contractor was in delay and the employer deducted liquidates damages, and refuse to pay the interim certificate issued by the architect which amounts to £ 16,347. Eventually the employer contended that the liquidated damage was larger than the amount in the interim certificate.

Eventually, Lawson J held that: 'If there is a provision in the contract which on its proper construction entitles a building owner to deduct damages for delay from amounts shown to be due on certificates, there is nothing in the authorities which would preclude such a deduction being made from an interim certificate'.

TRADE INDEMNITY CO LTD V WORKINGTON HARBOUR AND DOCK BOARD (NO 2): HL 1938

The plaintiffs’ action was derived from a bond given by the defendants guaranteeing a contractor’s performance in building a dock for the plaintiffs.

The bond provided that a certificate which complied with certain criteria would prove the amount due. In the action on the bond the plaintiffs relied upon a certificate which they said complied with the criteria and was thus conclusive evidence of the defendants’ liability under the bond.

The action failed because the certificate did not specify a relevant act or default as required by the bond. The plaintiffs brought a second action relying, not upon the certificate, but upon the underlying facts, which they said amounted to breaches of the contract and thus triggered liability under the bond.

Hickman & Co. v Roberts (1913) AC 229The contract provided that the decision of the architect as to payment due to the contractor was to be final and that payment was to be made to the contractor on the basis of the architect’s certificates.

The contractor claimed that he was owed certain sums but the architect had failed to issue a certificate in his favour.

When challenged by the contractor the architect’s reply was that his clients, the owners, would not allow it: "in the face of their instructions to me I cannot issue a certificate whatever my own private opinion in the matter".

The House of Lords held that he had improperly allowed the owners to influence him: the owners could not rely on the absence of a certificate as a reason not to pay the contractor

Kimberly v Dick (1871)

where the architect who issued the final certificate had

promised the employer that the works would not

exceed a certain figure and allowed this promise to

influence his certification.