Construction contracts usually provide for payments to be made in stages, with the amount payable being based on the amount of work certified as complete at the appropriate time. Where project milestones are not met, the contract will normally provide that extensions of time can be given, which can affect the amount of the payment to be made under an interim certificate of work done.
In a recent case, a contractor’s work was behind schedule and the architect supervising the project issued a certificate of non-completion. A notice of intention to withhold payment was issued by the contractor’s employereight days before the relevant stage payment was due and three days later the reduced payment was made. The sum deducted was £61,000 and the payment made was £126,000. Three days after the payment was made (i.e. two days before the final date for payment of the stage payment) the architect issued a retrospective notice of extension, which would have made the appropriate deduction only £12,000. The contractor carrying out the work argued that the stage payment should be increased by £49,000 as a result. The contractor’s employer paid the further £49,000, but only after the contractor had issued a default notice. The contractor considered this action to have brought the contract to an end as the employer had failed to pay the full sum, certified under the interim certificate of work done, by the due date.
The House of Lords was faced with the question of whether or not the retrospectively issued interim certificate had affected the employer’s right to rely on the previously issued certificate of non-completion.
The Lords ruled that a distinction must be made between the factual basis for the payment and the legal basis. The fact that a subsequent event had changed the factual basis under which the deduction was made did not change the legal basis under which the employer made the payment. Unless the contract specifically stated otherwise, the employer was not required to make the further payment of £49,000 immediately once the architect had granted an extension of time. The contract anticipated that shortfalls would be picked up in later certificates. To decide otherwise would make both parties to the contract subject to an unacceptable amount of uncertainty since neither would be able to rely on a notice as a conclusive statement of the position.
Says <<CONTACT NAME>>, “Construction contracts can present numerous and sometimes formidable issues as they progress. Both the contractor and employer need as much certainty as possible. We can assist in the negotiation of any construction contract and in the drafting of any special contractual terms which may be required.”