Payment Certificates

A recent Ontario Superior Court of Justice decision is of great interest to consulting engineers who issue monthly payment certificates related to stipulated sum contracts for construction projects.

The decision in the case means that contractors will be watching to ensure that payment certificates to subcontractors are issued in pace with the work the companies have actually provided and are not being issued too far in advance.

The decision in Federated Contractors Inc. v. Ontario Realty Corp. of February this year arose out of a contract for the renovation and expansion of the St. Lawrence Valley Treatment Centre, a secure facility located in Brockville, Ontario.

The prime contract of over $41 million was between Ontario Realty Corp. as the owner and PCL Constructors Canada as general contractor. PCL’s mechanical subcontractor was Lockerbie & Hole Contracting. Lockerbie & Hole entered into a further subcontract for the sum of almost $1.7 million for the provision of sheet metal work by Federated Contractors. Federated Contractors was the plaintiff in the case.

Following concerns with Federated Contractor’s work and its failure to provide sufficient labour in light of union action on site, Lockerbie & Hole had terminated the sheet metal company’s contract. Lockerbie & Hole claimed that approximately only one third of the work had been completed.

At the time its contract was terminated, Federated Contractors had been paid $591,580 on account of payment certificates issued by the engineer in the amount of $1,043,238.

Federated Contractors decided to go to court to seek payment of the $451,656 that remained outstanding under the certificates. They were also seeking payment for alleged extras.

Lockerbie & Hole’s position was that the sheet metal subcontractor’s billings had been severely “front-loaded,” but that this practice is common in construction contracts. Lockerbie & Hole argued that this practice of front-loading payment is typically counterbalanced by a payment certifier’s ability to withhold payment for substantial completion and final payment until all the work is complete and deficiencies have been rectified at the end of the contract.

In the interim, Lockerbie & Hole submitted, the use of monthly payment certificates is merely a mechanism; these certificates are provisional and subject to reassessment as to true value. The company had evidence from a quantity surveyor to show that Federated Contractors had been paid for the approximate value of the work it had actually provided on the project.

Federated Contractors, on the other hand, took the position that monthly certificates are final and conclusive and cannot be reopened once issued.

At the beginning of the trial, the Honourable Justice Colin McKinnon agreed to hear a motion with arguments on the discrete issue of payment certificates. He also agreed to make a ruling prior to any witnesses being called by the parties.

Justice McKinnon ruled in favour of the sheet metal subcontractor, finding that, absent fraud, monthly payment certificates are final and conclusive. Following this decision on the issue of payment certificates, the parties reached a settlement on other issues and the trial was discontinued.

The contract Lockerbie & Hole had with Federated Contractors was standard in its wording on payment certification by an owner’s payment certifier. The contract stated that the certifier was the interpreter at first instance of “whether or not the quality or quantity of the work and/or any material supplied or proposed to be supplied by the Contractor meets the requirements of the Contract.” Under the contract, the certifier had 10 days following the submission of a progress billing in which to amend the billing and/or advise why parts of it were not approved.

Finding in favour of the sheet metal subcontractor, Justice McKinnon followed a line of Canadian case law dating back to the 19th century that found payment certificates to be final. However, most of these decisions dealt with cases where the certificate at issue was a final certificate.

Lockerbie & Hole, on the other hand, relied on the extensive English case law covering the issue of interim certificates prior to a final certificate. This body of case law holds that interim certificates are not final and can be readjusted if gross overpayment is discovered.

Justice McKinnon found the two lines of case law not to be in opposition. Instead, His Honour differentiated the English case law on the grounds that these cases dealt with contracts in which monthly certificates were expressly provisional.

Justice McKinnon summarized his decision by quoting the 1991 British Columbia case of J.C.R. Construction Ltd. v. Colwood (City). In that case, Justice McDonald wrote: “The owner’s obligation is to pay what is certified. The time for discussion is before certification. It is not up to the owner to do the arithmetic and decide what to pay.” His Honour found that a subcontractor or subtrade in a fixed price contract should not be put to a “nuts and bolts” analysis that would be found in a “cost plus” contract.

In reality, a payment certifier will rarely conduct such a “nuts and bolts” inquiry when approving monthly payment certificates. To do so would slow projects down to a crawl.

However, Justice McKinnon’s decision means that consultants and contractors need to be careful not to allow payment certificates to far exceed the value of work provided by a subcontractor since the subcontractor is immune should an owner or general contractor later attempt to readjust these amounts. The overpayment could also result in serious problems with any bonds on which a contractor may be relying.

Luckily, however, future projects need not result in a similar situation. Justice McKinnon found that there is a presumption in standard construction contracts that all monthly payment certificates are final and conclusive. But any problems with this position can be avoided by inserting a clause in future agreements that explicitly states that all interim monthly certificates are not conclusive as to the value or quality of services provided, and that payment certificate are subject to reopening and readjustment.

Patrick Greco is an associate specializing in commercial litigation and construction law at Miller Thomson, LLP in Toronto.