JCT and ICE PAYMENT CERTIFICATES UNDER SCRUTINY

The Process

The Certification process in the construction industry has been in place for many a long year and is an integral part of both building and civil engineering. It involves client, consultant, main contractor and subcontractor alike. The very existence of large numbers of companies who make their living in the construction industry depend upon the certification process. On many standard forms of main contract the contractor is entitled to be paid the sum which is certified by the Architect, Engineer or Contract Administrator. Main contractors in an effort to ensure that they do not finish up paying out more than they receive link the payment under the subcontract to the amount certified under the main contract. The widely used standard forms of contract published by the JCT and ICE provide for the Architect, Contract Administrator or Engineer to issue a payment certificate at regular intervals normally monthly which under the terms of the contract is the sum which the Employer is required to pay. Where any form of advanced payment or payment on account is involved there is always a fear on the part of the paying party that there may be an overpayment followed closely by the insolvency of the party who has received payment. Where this occurs the paying party is usually left out of pocket. Architects and the Quantity Surveyors who provide the necessary financial advice, Contract Administrators and Engineers are only too well aware of the dangers of over certifying. Employers who find themselves in the position of having overpaid a main contractor who subsequently goes out of business are usually never slow to argue that the over payment has resulted from negligence on the part of one or more of its consultants and are quick to threaten legal action to recover the overpayment.

Unilateral Action

Often Employers take matters into their own hands having received a payment certificate and take unilateral action to reduce the amount certified before making payment. Employers who take the decision to reduce the amount certified often fail to realise that it is not just a simple matter of sending off a cheque in a reduced amount. The Housing Grants, Construction and Regeneration Act 1996 put a stop to that method. One of the objects of the Act is to assist cash flow in the construction industry and so includes a procedure intended to make it a little more difficult to avoid paying sums when they are due. Section 110(2) states that a party to a construction contract may not withhold payment unless an effective notice to withhold payment has been made. To be effective the notice must state the amount which the Employer intends to withhold and the reasons for it being withheld The contract must provide a timescale within which the notice must be served before payment is to be made.

Legal Scrutiny

The withholding by the Employer of sums certified came under review in the recent case of Rupert Morgan Building Services Ltd v David Jervis and Harriet Jervis (2003). Work was undertaken by the claimant on a cottage owned by the defendants, the conditions of contract used were those issued by the Architecture and Surveying Institute. These conditions provided for the defendant to pay the claimants sums which had been certified by the Architect who had been appointed by the defendants. A dispute arose out of the payment of the sum included in Certificate No 7. The Architect certified as due for payment a sum of £44,000 plus VAT of which the defendants disputed £27000. It was argued by the defendants that the amount certified included items for which payment had already been made. In time honoured fashioning the defendants merely sent off a cheque in the reduced amount. It is unlikely that they were familiar with the requirements of the 1996 Act and due to a lack of the necessary withholding notice the claimant applied to the court to enforce payment in full of the sum certified. The case finished up in the Court of Appeal who had the task of wading through a number of cases which involve reviewing the circumstances under which a withholding notice in accordance with the 1996 Act is required. It has to be said that the decisions handed down by the courts on this matter lack consistency. There is what is referred to as the narrow and alternatively the wider interpretation of the wording. The Act refers to the notice being required in respect of a sum which is due under the contract. It is often argued in accordance with the narrow interpretation that if some or all of the work for which payment is sought has not been carried out in accordance with the contract then payment cannot be due. This being the case the need for a withholding notice does not arise. The wider view is that payment properly applied for under the contract will have to be made in full unless a proper withholding notice has been served.

Court Explains

The Court of Appeal avoided deciding whether the narrow view or wider view was correct. The opinion however was expressed that if the narrow view is taken as being correct then there is a fuzzy line between claims for breach of contract such as delay which require withholding notice and abatement, which reduces the value of work carried out, which does not. To get round this difficulty the Court of Appeal decided that the sum due under the contract was the amount which has been certified by the Architect. This being the case the narrow view argument used by the defendants that the sum wasn’t paid because it wasn’t due could not apply.
It seems in view of what was said in the Court of Appeal concerning the narrow and wider interpretation of the circumstances when a withholding notice is required that commercial common sense needs to be in place at all times. It must always be good policy for the paying party to send a withholding notice as required by the contract if the intention is not to pay the full amount of sums certified or where an application for payment is made the intention is to pay a lesser sum.

Source: http://www.longworthconsulting.co.uk/news%20construction%20contract%207.htm