Little Wiggle Room: The Power of Payment Certificates in Construction Contracts

The High Court of South Africa, Gauteng Division, Pretoria, was recently called upon to decide on a claim based on interim payment certificates from a building contract between the applicant, a construction company, and the respondent, a shopping centre.

Under the building contract, the applicant was contracted to build a shopping centre in Montana, Pretoria. The terms of the contract were embodied in a standard Joint Building Contracts Committee (JBCC) contract, stating that only the principal agent could bind the respondent. However, the contract allowed the principal agent to delegate the authority to prepare and issue payment certificates to the quantity surveyor, which the respondent was required to pay within seven calendar days of their issuance.

The respondent subsequently failed and/or refused to pay certain interim payment certificates, despite the certificates being issued and signed by the quantity surveyor and certified and approved by the principal agent. This prompted the applicant to institute the application to recover payment based on the interim payment certificates.

Randcon (Natal) (Pty) Ltd v Florida Twin Estates Ltd sets out the legal position concerning payment certificates as follows:

• A payment certificate is a liquid document that creates liability for the employer as if it had been signed by the employer themselves.
• The payment certificate creates a distinct cause of action separate from the underlying contract.
• The employer is bound by the payment certificate in terms of the law of agency.
• The payment certificate can be regarded as the equivalent of a cash cheque.

The respondent disputed liability to the applicant, contending instead that it had paid the applicant in excess of the contract price.

The contract contained an arbitration clause, requiring any dispute not resolved within ten working days to be referred to arbitration. The respondent therefore contended that the application had to be stayed pending the referral of the matter to arbitration. The court found the respondent’s contention misguided for two reasons. First, the contract required that any referral for arbitration be preceded by a notice to resolve a disagreement, which did not occur. Secondly, a dispute was only deemed to have occurred under the terms of the contract if such a disagreement was not resolved within ten days of the notice.

Additionally, the court found that the respondent was entitled to dispute the validity, veracity, or correctness of the payment certificates on very limited grounds, such as fraud. The respondent’s remedy was not to refuse payment of the certificates but to sue its principal agent or quantity surveyor for damages.

Consequently, the respondent was ordered to pay the applicant the outstanding sum of R7,022,177.72 for the payment certificates, along with interest and costs.