7 Certification

7.1 One of the most important duties of the contract administrator under IC16 is the issuing of certificates of payment. Failure to carry out this duty with a reasonable degree of care will put the employer at considerable risk. It is not unheard of for contractors to become insolvent during the course of a contract, and if the certificates have been overvalued the employer may suffer losses which could have been avoided.

7.2 On the other hand, the contractor has a right to be paid what the terms of the contract state is due, and the provisions introduced through the Housing Grants, Construction and Regeneration Act (HGCRA) 1996 were partly as a result of the common occurrence of employers withholding payment without due cause. The contract administrator must therefore administer the provisions fairly, and must not be influenced by any attempt on the part of the employer to delay certification or reduce the amounts shown to suit its own economic circumstances.

7.3 It is quite clear from the well-known case of Sutcliffe v Thackrah that failure to certify correctly could amount to a breach of duty to the employer. The position is less clear with respect to the contract administrator’s duty of care to the contractor. A certifier was found liable to a contractor in the case of Michael Salliss & Co. v Calil and W F Newman & Associates (1987) 13 Con LR 69. Although this appeared to be overtaken in Pacific Associates Inc. v Baxter (1988) 44 BLR 33 (CA), the latter involved non-standard clauses which, if they had not been present, may have had a significant effect on the outcome.

7.4 The payment provisions in IC16 comply with the Housing Grants, Construction and Regeneration Act (HGCRA) 1996 Part II, as amended by the Local Democracy, Economic Development and Construction Act (LDEDCA) 2009. The result is a rather complex set of payment provisions, perhaps in some respects out of proportion with what had previously been a relatively simple form. Nevertheless, the provisions of the 1996 Act are, of course, compulsory for all contracts to which the Act applies, and the remaining clauses should not be amended without taking expert advice. In summary, interim payment will normally follow the issue of an interim certificate, with provisions to ensure that the contractor is paid even if no certificate is issued. The contractor may submit its view as to what the certificate should cover by an interim application, but the valuation is a matter for the contract administrator. If no certificate is issued, and an application was made, then the amount stated in the application will become the amount due. Alternatively, if no certificate is issued, and no application was made, after the date for issue of the certificate has passed, the contractor may issue a payment notice. The amount shown in that notice will become the amount payable.

Advance payment

7.5 IC16 includes an optional provision for advance payment to the main contractor. An entry must be made in the contract particulars to show whether or not it is to apply (cl 4.7). If it is, the amount will be entered as either a fixed sum or as a percentage of the contract sum. The entry must also show when payment is to be made to the contractor, and when it is to be reimbursed to the employer. A bond may be required, in which case payment is not made until the contractor provides the bond (IC16 includes a form of advance payment bond as Part 1 of Schedule 3).

7.6 There is always a risk in making an advance payment with respect to a construction contract, even when backed by a bond, and the procedure will inevitably involve extra expense for the employer. The employer should be quite clear as to what compensatory benefits, such as a reduction in the contract sum, will result before agreeing to any arrangement of this sort. In the end, it is the employer’s decision, but the contract administrator may need to explain the provisions and give initial advice.

Interim certificates — timing

7.7 The due date for each interim payment is seven days from the relevant ‘Interim Valuation Date’ (cl 4.8.1). The contract particulars require the parties to enter the first interim valuation date and, if none is entered, this is one month after the date of possession. Subsequent interim valuation dates are on the same date each month, or the nearest day which is not a Saturday, Sunday or bank holiday. The contract administrator must issue an interim certificate within five days of each due date (cl 4.8.2) and payment must be made within 14 days of the due date (cl 4.12.1). The effect of this is that unless the certificate is actually issued on the due date, the employer will have a shorter period within which it must pay. Other time periods, discussed below, are also related to the due date, rather than the date of issue of the certificate. Certificates are issued to the employer and a duplicate sent to the contractor (cl 1.8).

Valuations and ascertainment of amounts due

7.8 The amount due to the contractor as interim payment is to be calculated as set out in clause 4.9. There are two methods by which it can be assessed: either through acceptance of the figure stated in a contractor’s application for payment, or through valuation by the quantity surveyor (see Figure 7.1). The latter has traditionally been the basis for assessing payments under JCT forms.

7.9 Clause 4.11.1 gives the contractor the right to submit its own assessment of the value of an interim certificate. The ‘Payment Application’ must be made not later than the relevant valuation date and should be sent direct to the quantity surveyor (rather than via the contract administrator). It is then open to the quantity surveyor to agree or disagree with this valuation. The quantity surveyor is not required to identify where any differences arise or inform the contractor; however, in practice the quantity surveyor may respond to the application. The contract administrator should request that the quantity surveyor forwards copies of all correspondence and keeps the contract administrator informed regarding applications.

7.10 Whether or not an interim application is received, the quantity surveyor will normally carry out a valuation prior to the due date (a valuation is necessary to determine whether the contractor’s application is correct). The valuation should cover the amounts due at the interim valuation date (cl 4.9). Valuations by the quantity surveyor can be made ‘whenever the Architect/Contract Administrator considers them necessary’ (cl 4.8.3). The roles of the quantity surveyor and the contract administrator, however, are quite distinct, and it is ultimately for the contract administrator to decide the figure to be shown on the certificate.

Coverage of the certificate

7.11 Clause 4.8.2 requires that interim certificates state not only the sum that the contact administrator ‘considers to be or have been due to the Contractor at the due date’, but also ‘the basis on which that sum has been calculated’. It is unlikely that a great deal of detail will be required here; a short schedule will probably be sufficient. Similar provisions are included for the final certificate.

7.12 The basis for calculating the sum due is set out in clause 4.9. In essence this comprises a list of inclusions, spit into two sets under clauses 4.9.1 and 4.9.2, and a list of deductions, set out in clause 4.9.3. The inclusions set out in clause 4.9.1 can be summarised as a total of 95 per cent (or other proportion stated in the contract particulars) of the following:

• total value of work properly executed (cl 4.9.1.1);
• total value of materials and goods properly on site (cl 4.9.1.2);
• value of off-site materials, goods or items, provided they are ‘Listed Items’ (cl 4.9.1.3 and 4.10).

7.13 The above amounts are to be adjusted in accordance with any applicable fluctuations provisions (cl 4.9.1). The value of the work will be calculated using the rates shown in the bills or the priced document, whichever is appropriate. If a priced activity schedule is included, the amount included in any interim certificate in respect of any items listed in the activity schedule should be the total of the amounts reached by multiplying the percentage of the work properly executed by the price for that work as shown on the activity schedule (cl 4.9.1).

7.14 In addition to the above, the valuation should also include a total of 100 per cent of the following items, if applicable (cl 4.9.2):

• fees and charges (cl 2.3);
• inspections and tests (cl 3.14 and 3.15.3);
• contractor’s right of suspension – costs and expenses (cl 4.14);
• fluctuations – named sub-contractors (clause 4.4);
• fluctuations (other than under clause 4.9.1);
• loss and expense (cl 4.15);
• insurance premiums (cl 2.6, 6.5, 6.10, 6.11, 6.12.2 and 6.18);
• sums for restoration of damaged work (Insurance Option B or C, cl 6.13.5.3 and cl 6.13.4).

7.15 Before reaching the total, clause 4.9.3 requires some deductions to be made if applicable, namely any amounts deductible under:

• clause 2.9 (incorrect setting out);
• clause 2.30 (defects agreed not to be made good);
• clause 3.9 (costs incurred by the employer where instructions not complied with);
• clause 4.4 (fluctuations – named sub-contractors)
• clause 6.10.2 (terrorism cover);
• clause 6.12.2 (contractor’s insurance default) or clause 6.17.2 (Joint Fire Code) (cl 4.9.3.);
• amounts allowable by the contractor in respect of any applicable fluctuations that have not been adjusted under clause 4.9.1.

7.16 Clause 4.9 states that the above assessment of the valuation is ‘subject to any agreement between the Parties as to stage payments’. No other reference to stage payments is made in IC16 (nor in the guide IC/G). This is in contrast to DB16, where an alternative system using stage payments is set out in clause 4.12. Under a stage payment system, the contractor would not be paid anything for a stage until it is complete (unlike the ‘activity schedule’ system where the contractor would be paid a proportion even if the activity was not complete). If the parties would like to operate a stage payment system, they would need to agree in advance exactly how this would work, and include appropriate provisions in the contract – the procedure in DB16 could serve as a model.

Value of work properly executed

7.17 The contract administrator should only certify after having carried out an inspection to a reasonably diligent standard. Contract administrators should not include any work that appears not to have been properly executed, whether or not it is about to be remedied or the retention is adequate to cover remedial work (Townsend v Stone Toms and Sutcliffe v Chippendale & Edmondson). Contract administrators should also note the case of Dhamija v Sunningdale Joineries Ltd, which stated that a quantity surveyor is not responsible for determining the quality of work executed. If in doubt, the contract administrator may carry out or request tests (cl 3.14). However, IC16 makes it clear that interim certificates are not conclusive evidence that work is in accordance with the contract (cl 1.10).

7.18 Where work which has been included in a certificate subsequently proves to be defective, the value can be omitted from the next certificate. However, the contract does not appear to allow for a ‘negative’ certificate, i.e. a repayment by the contractor. Unlike the final payment provisions (cl 4.21.2), clause 4.8 refers only to ‘payments by the Employer’ and 4.9.1 to the sum due to the contractor. In addition, clause 4.12.5 clearly assumes that it is only in relation to the final certificate that there might be a balance due to the employer. On balance, it seems unlikely that the contract will be interpreted to allow for negative payments. If such a situation arises, it may be sensible to seek legal advice, particularly if the amount is significant.

7.19 The value of the work will be calculated using the rates shown in the priced document, with any work resulting from variations valued as set out under the valuation rules. If a priced activity schedule is included, the amount included in any interim certificate in respect of any items listed in the activity schedule should be the total of the amounts reached by multiplying the percentage of the work properly executed by the price for that work as shown on the activity schedule. The fact that an activity schedule is used, however, does not lessen the contract administrator’s duty to determine that all work certified has been carried out in accordance with the contract.

Unfixed materials

7.20 The interim certificate should include materials which have been delivered to the site but are not yet incorporated in the works (cl 4.9.1.2). In spite of detailed provisions aimed at protecting the employer, there remains some risk in including these items. Once materials have been built in, under common law they would normally become the property of the owner of the land, irrespective of whether or not they have been paid for by the contractor. This would be the case even if there were a retention of title clause in the contract with the sub-contractor or supplier. A retention of title clause is one which stipulates that the goods sold do not become the property of the purchaser until they have been paid for, even if they are in the possession of the purchaser.

7.21 The employer could be at risk, however, where materials have not yet been built in, even where the materials have been certified and paid for. The contractor might not actually own the materials paid for because of a retention of title clause in the sale of materials contract. Under the Sale of Goods Act 1979, sections 16 to 19, property in goods normally passes when the purchaser has possession of them, but a retention of title clause will be effective between a supplier and a contractor even where the contractor has been paid for the goods, provided they have not yet been built in. It should be noted, however, that the employer may have some protection through the operation of section 25 of the Act, which in some circumstances allows the employer to treat the contractor as having authority to transfer the title in the goods, even though this may not in fact be the case (see Archivent v Strathclyde Regional Council).

7.22 Another risk relating to rightful ownership is where the contractor fails to pay a domestic sub-contractor that has purchased materials, and the sub-contractor claims ownership of the unfixed materials. Here the risk may be higher, as a work and materials contract is not governed by the Sale of Goods Act 1979. Therefore there can be no assumption that property would pass on possession.

7.23 IC16 attempts to deal with the issues surrounding ownership in several ways. First, unfixed materials and goods, which have been delivered to the site and are intended for the works, may not be removed without the written consent of the contract administrator (cl 2.17). Removal would be a breach of contract, therefore the employer could claim from the contractor for any losses suffered through unauthorised removal. This would apply even though the materials or goods may not yet have been included in any certificate. Second, unfixed materials and goods, either on or off site, which have been included in a certificate that has been paid, are to become the property of the employer (cl 2.17), and the contractor is thereby prevented from disputing ownership.

7.24 Clause 2.17 of the main contract, however, is only binding between the parties, and does not place obligations on any sub-contractor. The risk facing the employer is that, if the contractor becomes insolvent, a sub-contractor or supplier may still have a rightful claim to ownership of the unfixed goods, even though they have been paid for by the employer (see Dawber Williamson Roofing v Humberside County Council). The main contract therefore requires that all sub-contracts include similar clauses to 2.17 regarding non-removal from site and ownership passing upon payment (cl 3.6.2.1). Sub-contracts must include a clause stating that once materials and goods have been certified and paid for under the main contract they become the property of the employer and that the sub-contractor ‘shall not deny’ this (cl 3.6.2.1.1, with equivalent provisions included in ICSub/NAM/C at cl 2.11). This would operate even where the main contractor has become insolvent. Even this might not protect the employer in some circumstances, because if the sub-contractor does not have ‘good title’ it cannot pass it on. Thus, for example, it might not prevent a sub-subcontractor claiming ownership.

7.25 Under the IC16 provisions, the contract administrator is obliged to include the unfixed materials in an interim certificate, even though this limited risk to the employer remains, provided that the materials are not prematurely delivered and are properly protected. Contract administrators should pay careful attention to the exact wording of this condition (cl 4.9.1.2).

'Listed Items'

7.26 Interim certificates might include amounts in respect of any ‘Listed Item’ (cl 4.9.1.3). If this provision is to apply, then the list must be attached to the bills of quantities (or specification/ schedules of work) to which the contractor has tendered. The value of any item listed must be included in an interim certificate prior to its delivery on site, provided certain preconditions are fulfilled:

• the listed item is in accordance with the contract (cl 4.10.1);
• the contractor has provided reasonable proof that the property is vested in it (cl 4.10.2.1);
• the contractor provides proof that the item is insured against specified perils until delivery on site (cl 4.10.2.2);
• the listed item is ‘set apart’ or clearly marked and identified (cl 4.10.3);
• if the item is not ‘uniquely identified’, or if required in the contract particulars, the contractor has provided a bond (cl 4.10.4, cl 4.10.5 and Part 2 of Schedule 3).

7.27 The contract administrator has no discretionary power to certify any off-site items, other than those that have been listed. This makes the position for both parties clear, in that only ‘listed’ off-site materials are to be certified. Once certified, these items become the property of the employer, even though they are off-site (cl 2.18). The contract administrator should therefore be careful not to include any unlisted off-site materials in any certificate, as only listed items are covered by the clause 2.18 safeguards to the employer regarding ownership and responsibility for loss or damage.

Costs and expenses due to suspension

7.28 Clause 4.14.2 states that ‘Where the Contractor exercises his right of suspension under clause 4.14.1, he shall be entitled to a reasonable amount in respect of costs and expenses reasonably incurred by him as a result of exercising the right’. These amounts are also to be included in interim valuations. The phrase ‘costs and expenses’ is taken from the LDEDCA 2009, and suggests something more limited than the range of losses that could be claimed under a clause 4.15 loss and/or expense claim, for example that it is limited to ‘direct and ascertainable costs’. However, a valid suspension would be due to a breach of contract by the employer, for which the contractor would be able to claim damages at common law, so it may be sensible for contract administrators not to interpret this clause too strictly.

Sum due

7.29 Once the total of the items in clause 4.9.1 plus those in clause 4.9.2, minus those in clause 4.9.3, has been reached, some further adjustments are needed before reaching the sum due, namely the subtraction of any advance payment amounts due for reimbursement, and any previous amounts certified (cl 4.9). The result of this calculation is the amount shown as the sum due on the interim payment certificate.

Retention

7.30 Some of the items that must be included in the gross valuation are subject to a reduction of 5 per cent (cl 4.9.1). If an alternative to 5 per cent is required then it should be entered in the contract particulars. Half of the withheld amount is released upon practical completion and the remaining half with the final certificate. The amount is commonly referred to as ‘retention’ although IC16 does not use this term. Unlike SBC16 this contract does not include the option of using a bond provided by the contractor in place of the retention as an alternative security for the employer. If this option is preferred, then this would need to be made clear at tender stage and amendments made to the contract.

7.31 The employer, if not a local or public authority, is trustee of the withheld retention for the contractor (cl 4.13.3), but is not obliged to invest it for the contractor, and would have the benefit of any interest which accrues. The employer has the right to deduct from the retention any sums due from the contractor, including sums due by right of set-off.

7.32 Although IC16 contains no provision requiring the employer to place the withheld percentage in a separate banking account, a series of cases have established that such an obligation would be implied in any contract that requires the employer to hold the money as a trustee (see Rayack v Lampeter, Wates Construction v Franthom Property and Finnegan v Ford Sellar Morris). However, the court will not make an order to place money in a separate account following the insolvency of the employer (see Mac-Jordan Construction v Brookmount Erostin). The contractor would have no special claim beyond that of an unsecured creditor. To be safe, the contractor must insist, while the employer is solvent, that the money is placed in a separate account. This dilemma over retention and the effectiveness of trustee status has raised the question of bonds and guarantee bonds from both employer and contractor, respectively, as an alternative.

Advance payments and bonds

7.33 If the parties have elected to use the advance payment provisions, the payment indicated in the contract particulars is paid to the contractor before the first certificate of payment is due for issue, but only after the contractor has provided the bond required (cl 4.7). Payment is made direct from the employer to the contractor and the contract administrator should ensure that it receives copies of any correspondence regarding this. Details of when the reimbursements are to take place will also be set out in the contract particulars and could, for example, be in stages throughout the project, and the reimbursement is deducted from the valuation under the relevant certificate. It should be noted that the amount to be deducted each month should be a cumulative total of the reimbursements, with the final deduction equalling the original advance payment, and that final deduction should appear on all subsequent certificates including the final certificate.

VAT

7.34 The contract sum is exclusive of any VAT (cl 4.5.1), and the employer is obliged to pay the contractor any VAT properly chargeable. If any supply to the employer becomes exempt after the base date, then the employer may need to reimburse the contractor for amounts of input tax which it has paid but is unable to recover (cl 4.5.2). As in IC11, the form does not contain detailed provisions regarding VAT, so if particular arrangements are required, then a separate agreement would need to be drawn up.

Payment procedure

7.35 The final date for payment of each interim certificate is 14 days from its due date (cl 4.12.1). As time runs from the due date, and not the date of the certificate, if the certificate is issued later than the due date, the time period before payment is required will be reduced (see Figure 7.1). The payment should reach the contractor by the final date for payment, so allowance should be made for posting.

7.36 If the employer intends to withhold any amount from the sum certified, then the contractor must be given written notice of this no later than five days before the final date for payment, in the form of a ‘Pay Less Notice’ (cl 4.12.5). The pay less notice should be issued by the employer, unless the employer has notified the contractor that the contract administrator, quantity surveyor or other person is authorised to issue the notice on its behalf (cl 4.13.1.1). The pay less notice should set the sum that the employer considers to be due to the contractor at the date on which the notice is given and ‘the basis on which that sum has been calculated’ (cl 4.13.1). If a pay less notice is issued, the employer must pay the contractor at least the sum set out in that notice by the final date for payment cl 4.12.5).

Payment when no certificate is issued

7.37 The contract contains a remedy in the event that the date for issue should pass without the interim certificate being provided. If the contractor has not already submitted an payment application it can, at any time after the issue date has passed, send a payment notice to the quantity surveyor (cl 4.11.2.2). The notice should state the sum that the

Figure 7.1 Interim payment procedure

contractor ‘considers to be due to him at the relevant due date, as fixed in accordance with clause 4.8 or 4.21.3, and the basis on which that sum has been calculated’ (cl 4.11.2.2). The sum shown on the notice will become the amount due. In the case where the contractor has already submitted an application for payment, it need take no further action, as the application will be considered a payment notice (cl 4.11.2.1). It should be noted that where no interim certificate is issued, the employer may not issue a pay less notice until after the contractor has submitted a payment notice (cl 4.13.1.1; i.e. it cannot use the pay less notice as a substitute for the missing certificate).

7.38 Where a payment notice is given, clause 4.12.4 states that ‘the final date for payment of the sum specified in it shall for all purposes be regarded as postponed by the same number of days after the last date for issue of the Payment Certificate that the Payment Notice is given’. This is best understood by way of example: if the payment notice was issued six days after the final date for issue of the certificate (i.e. 11 days in total after the due date), the final date for payment would be 20 days after the due date (i.e. 14 plus 6 days). If the employer disagrees with the amount shown on the payment notice, then it must issue a pay less notice as described above (which, in this example, would be within four days of the notice).

Deductions using a pay less notice

7.39 The most common use of a pay less notice is to effect a deduction of liquidated damages (cl 2.23.2). However, it might be used in other situations, for example to correct an arithmetical error or in relation to clause 4.9 deductions, but only if these have not already been accounted for as required under the certificate.

7.40 In addition, in some circumstances the employer may have the right to make a deduction for defective work. Prior to the HGCRA 1996, it was clear that if the employer had an arguable case that the certificate may have included work which was defective, and therefore had been overvalued, then the employer need not have paid the full amount, but could have raised the losses due to the defects either as a counterclaim in any action brought by the contractor, or as a defence to the claim. The latter process is often termed ‘abatement’ by lawyers.

7.41 It is now generally agreed that, in cases where such a right may exist, it can only be exercised through the use of the ‘Pay Less Notice’ procedure as discussed above. The employer would therefore be unable to withhold amounts to cover any defective work included in a certificate, unless the deduction is covered by a notice (Rupert Morgan Building Services (LLC) Ltd v David Jervis and Harriet Jervis). In fact, the courts have consistently upheld the contractor’s right to be paid the full amount certified (or notified) in the absence of a valid pay less notice, despite numerous and often ingenious attempts by employers to avoid payment (see, for example, Kersfield Developments v Bray and Slaughter).

Contractor's position if the certificate is not paid

7.42 IC16 includes several provisions which protect the contractor if the employer fails to pay the amounts due to the contractor. Clause 4.12.6 makes provision for simple interest to accrue on any unpaid amount. The defined ‘Interest Rate’ is set at 5 per cent over the base rate of the Bank of England and the interest accrues from the final date for payment until the amount is paid. Similar provisions are included for the final certificate. (It should be noted that if the provision were deleted the contractor would normally have a statutory right to interest under the Late Payment of Commercial Debts (Interest) Act 1998.) If the employer makes a valid deduction following a pay less notice, it is suggested that interest would not be due on this amount. The clause does not refer to the amount stated on the certificate but to ‘a sum due to the Contractor under these Conditions’, which would take into account valid deductions.

7.43 The contractor is also given a ‘right of suspension’ under clause 4.14. This right is required by the HGCRA 1996, Part II. If the employer fails to pay the contractor by the final date for payment, the contractor has a right to suspend performance of all its obligations under the contract, which would include not only the carrying out of the work but, for example, could also extend to any insurance obligations. This non-payment is stated to be of a ‘sum payable in accordance with clause 4.12’, therefore the contractor may not suspend work if a pay less notice has been issued by the employer. The contractor must have given the employer written notice of its intention to suspend work and stated the grounds for the suspension, and the default must have continued for a further seven days. The contractor must resume work when the payment is made. Under these circumstances the suspension would not give the employer the right to terminate the contractor’s employment. Any delay caused by the suspension could be a relevant event (cl 2.20.5) and any reasonable costs and expenses incurred are claimable under clause 4.14.3 (see paragraph 7.28).

7.44 The contractor also has the right to terminate its employment if the employer does not pay amounts due (cl 8.9.1.1). The contractor must give notice of this intention, which specifies the default as required by the contract (see paragraph 9.27).

Contractor's position if it disagrees with amount certified

7.45 As a result of the introduction of the payment notice provision, it is no longer the case that the issue of a certificate is a condition precedent to the right of the contractor to be paid. However, where a certificate has been issued, the contractor is only entitled to the amount shown, even if it is undervalued and irrespective of what it may have put forward in its interim payment applications (Lubenham v South Pembrokeshire District Council). This case states that the contractor is only entitled to the sum stated in the certificate, even if the certificate contains an error, for example because it includes a wrongful deduction. The contractor’s remedy is to request that the error is corrected in the next certificate, or to bring proceedings (such as adjudication) to have the certificate adjusted. (There are exceptions to this rule where, for example, the employer has interfered with the issue of the certificate, in which case the contractor may be entitled to summary judgment for the correct amount). This appears to be the case even where the interim certificate shows a negative amount, i.e. an amount payable by the contractor to the employer, which may occur if the contract administrator decides that work was overvalued, or there was some other error, in an earlier certificate. Unlike the final certificate, the clauses relating to interim payments do not give the contractor the right to issue a pay less notice.

Interim payment following practical completion

7.46 Following practical completion, certificates continue at monthly intervals (cl 4.8). Although no further work should be carried out during this period (except instructed remedial work), amounts may nevertheless become due; for example, when a claim for loss and/or expense has not been resolved prior to practical completion. The employer retains the right to deduct retention from the appropriate amounts due under these certificates, but this is likely to be at a lower rate. (The rate to be applied during the rectification period requires a separate entry in the contract particulars; if no rate is inserted it is 97.5 per cent.)

Final certificate

7.47 To summarise, by final certificate stage the following certificates should have been issued:

• interim certificates at monthly intervals, with the stated retention percentage applied (cl 4.8.1 and 4.9.1);
• practical completion certificate (cl 2.21);
• interim certificates during the rectification period at monthly intervals, with the stated (probably lower) retention percentage applied (cl 4.8.1 and 4.9.1);
• certificate of making good (cl 2.31).

7.48 The final certificate must be issued within the specific time periods set out in the contract (see Figure 7.2). In practice, the latest date for issue tends to be determined by the process of calculating the adjusted contract sum. The onus is on the contractor to send all necessary information to the contract administrator or the quantity surveyor not later than six months after practical completion of the works (cl 4.20.1). No later than three months after receiving this information, the contract administrator, or the quantity surveyor if asked to do so, makes a final assessment of the amount due, including any amount of loss and expense (cl 4.20.2.1), and the quantity surveyor prepares a statement of final adjustment of the contract sum (cl 4.20.2.2) which must be sent to the contractor within that three-month period (cl 4.20.2).

7.49 The final certificate is then issued within 28 days of this statement (or within 28 days of the issue of the certificate of making good or the expiry of the last rectification period, whichever is the latest) (cl 4.21.1). It is worth noting that it has been held that the final certificate can be issued at the same time as the statement, although it would be good practice to allow the contractor time to consider the document (Penwith District Council v V P Developments). It is also worth noting that a document does not necessarily have to be headed ‘Final Certificate’ or be in any particular format to comply with clause 4.21: whether it constitutes a final certificate will depend on the facts in each case (Cantrell v Wright and Fuller).

Penwith District Council v V P Developments Ltd [1999] EWHC Technology 231

Penwith employed VP for maintenance works to 91 houses at Hayle. The contract was on JCT80. Practical completion took place on 21 September 1990 and the certificate of making good was issued on 30 October 1991. VP submitted a draft final account on 14 January 1991. Three interim certificates were issued following practical completion, the last one on 10 July 1992. The final

Figure 7.2 Final payment procedure

certificate was issued on 8 April 1993, and enclosed a document summarising how the figure on the final certificate had been calculated. VP gave notice of arbitration some three years later. It argued that it was not barred by the clause 30.9 conclusiveness provisions as the final certificate had not been valid. The arbitrator found for VP, stating that the intention of the contract was that the contractor should have at least three months to consider the ascertainment of final account referred to in clause 30.6.1. Penwith appealed and His Honour Judge Humphrey Lloyd found that the contract terms required that no minimum period should have elapsed; all the time limits referred to were maxima. He also found that no such term could be implied, ‘the 1980 JCT form is a long and complex document and was plainly intended to provide for most conceivable circumstances and to block the many attempts to find gaps in its structures, despite repeated assaults’.

7.50 The final certificate must state the contract sum as adjusted under clause 4.3, which sets out all the deductions and additions to the contract sum (cl 4.21.2.1). The contract acknowledges that the final certificate can be for a negative amount – in other words it can certify that payment is due from the contractor to the employer (cl 4.21.2). The final date for payment of the final certificate is 14 days from the due date, which is the date of issue of the final certificate, or the last date of the period in which it should have been issued, whichever is the earlier (cl 4.12.1 and 4.21.3). The final certificate is subject to pay less notice provisions as described above in relation to interim certificates, except that in this case the contractor is also given the right to issue a pay less notice (cl 4.12.5.2).

Payment when no final certificate is issued

7.51 If no final certificate is issued within the required 28-day period then, as with interim payments, the contractor may then send a final payment notice to the employer (cl 4.11.2), in which case the final date for payment would be postponed (see paragraph 7.38). The notice should state the sum that the contractor considers to be due and the basis on which that sum has been calculated (cl 4.11.1). If the employer disagrees with the amount shown on the notice then it may issue a pay less notice under clause 4.12.5. The employer is then only obliged to pay the amount shown in the pay less notice. 7.52 In the unlikely event that neither a final certificate nor a payment notice is issued, the contract nevertheless provides that there is a date by which a final payment is due. Clause 4.21.3 states that ‘The due date for the final payment shall be the date of issue of the Final Certificate or, if that certificate is not issued within the 28 day period referred to in clause 4.21.1, the last day of that period’. This provides protection to the contractor in that, even if it does not issue a payment notice, in any subsequent proceedings there will be a reference point from which interest may be calculated, based on the sum which it is later determined should have been paid at that time.

Conclusive effect of final certificate

7.53 The final certificate is conclusive evidence that proper adjustment has been made to the contract sum (cl 1.9.1.2), and the contractor is prevented from seeking to raise any further claims for extensions of time (cl 1.9.1.3), or for reimbursement of direct loss and/or expense (cl 1.9.1.4). It is also conclusive evidence that, where matters have been expressly stated to be for the approval of the contract administrator, they have been approved (cl 1.9.1.1) but, apart from those matters, it does not provide conclusive evidence that any other materials, workmanship, etc. are in accordance with the contract.

7.54 If dispute resolution proceedings are commenced before the issue of the final certificate, or within 28 days of the date of its issue, the conclusive effect is ‘suspended’ (the certificate does not become conclusive) in relation to the matters the subject of dispute until the proceedings are concluded (cl 1.9.2). Proceedings are concluded when a decision, award or judgment is issued, or if either party takes no further action for a period of 12 months (cl 1.9.3). In cases where a dispute has been raised in adjudication and the adjudicator’s decision is reached after the final certificate, if either party wishes to challenge that decision then it must initiate proceedings within 28 days of the date of the decision (cl 1.9.2.2). The bar on raising matters after the 28-day period cannot be extended by the court, as the bar is an evidential bar and not a bar to bringing proceedings. In other words, an arbitration could be commenced, but no evidence can be brought forward.

7.55 The conclusive effect of the final certificate has been the subject of much heated debate over recent years, following the decisions in Colbart Ltd v H Kumar and Crown Estates Commissioners v John Mowlem. The JCT has amended the relevant clauses in its contracts, so that it should be possible for the employer to bring a claim regarding work or materials which were not in accordance with the contract following the 28-day cut-off period, provided that they had not been stated to be ‘to approval’ of the contract administrator somewhere within the contract documents. Despite this, the author occasionally comes across practices which, although working with the new forms, are still implementing a policy of never issuing final certificates, or issuing them with alterations or declarations on their face, all measures adopted in the difficult period immediately following the cases. There is no longer any justification for taking such steps, and indeed they would constitute a breach of contract on the part of the employer, therefore putting the employer at considerable risk. Provided that the contract administrator has taken all steps required by the contract, and has made a competent inspection of the works at the right stage, the certificate must be issued as the contract requires.