Construction Law – Where employer fails and/or refuses to make payment of a certified amount to the contractor

The standard JBCC Principal Building Agreement (“the Agreement”), more specifically Clause 31.1, determines that the principal agent should issue an interim payment certificate each month until the issue of a final payment certificate.

The Agreement defines a “payment certificate” as a document issued by the principal agent on a monthly basis certifying the amount due and payable by the employer to the contractor or vice versa in terms of the JBCC Payment Certificate form.

In terms of Clause 31.9 of the Agreement the employer should pay the contractor the amount certified in a payment certificate (final or interim) within seven calendar days of the issued date of the payment certificate.  But what if the employer fails to make payment of the certified amount?

Where the contractor does not receive payment of the certified amount by the due date as determined in Clause 31.9, Clause 31.11 provides that the employer shall be liable for default interest on the certified amount, calculated from the due date for payment up to and including the date on which the contractor receives payment, without prejudice to any other rights the contractor may have.

Clause 31.15 determines that in the aforementioned instances, the contractor may give three working days’ notice to suspend the works to the employer.  The contractor should then also provide the principal agent with a copy of the said notice.

Clause 31.16 provides certain remedies on behalf of the contractor where the employer failed to make payment or only made partial payment of the certified amount.  In such instances, the contractor may:

“31.16.1 Issue a demand to the employer in terms of the payment guarantee where such is provided (3.1); or

31.16.2 Exercise his lien or right of continuing possession where this has not been waived in terms of the contract data and where practical completion has not been achieved; or

31.16.3 Give notice of suspension of the works (31.15).  Where the employer fails to act in relation to such notice the contractor may give notice of termination (38.1.4,6)”

In Joob Joob Investments (Pty) Ltd v Stocks Mavundla Zek Joint Venture 2009 (5) SA 1 (SCA) the Supreme Court of Appeal (“SCA”) provided clarity regarding one of the possible processes to enforce payment of certified amounts.  In this matter the respondent, Stocks Mavundla Zek Joint Venture (“the contractor”), concluded a written JBCC Agreement (“the Agreement”) to build a resort hotel for the appellant, Joob Joob Investments (Pty) Ltd (“the employer”).

The principal agent issued various certificates in respect of work completed.  The employer refused to make payment of the amounts certified in the aforesaid certificates.  The contractor cancelled the agreement and instituted action against the employer in the High Court in which it claimed payment of the certified amounts set out in the aforesaid certificates.  The contractor then applied for summary judgment after the employer entered appearance to defend the matter.

The employer opposed the application for summary judgment by raising the following defences:

1. Certificate 10 was not due and payable as the contractor had failed to deliver a tax invoice that complies with Clause 31.9 of the Agreement, as the date of valuation of the work done differed from the date of valuation that appeared in the tax invoice in question; and

2. Certificates 11 and 12 related to damages and the principal agent’s mandate did not extend to certification of damages, i.e. because the certificates were for the damages, they were illiquid.

In respect of the first defence, the court a quo found that there was no requirement in the agreement that a tax invoice had to include a date of valuation.  All that was required in terms of the Agreement was a tax invoice for the amount due.

In respect of the second defence, the Court a quo found that the employer had not shown that the certification of damages was not in accordance with the Agreement.

The Court a quo therefore dismissed the employer’s defences and granted summary judgment on all three certificates.

The employer appealed against the aforesaid decision of the Court a quo to the SCA.  On appeal, the following submissions were made on behalf of the employer:

1) After cancellation, the principal agent was limited to preparing a final account and final payment certificate and there was thus no room for an interim certificate such as certificate no. 11; and

2) Even in the absence of a bona fide defence, the High Court ought, in the exercise of its discretion, to have refuse summary judgment.

The SCA ruled that, in relation to certificate no. 10, the employer’s main contentions were without merit.  There is no requirement in terms of the Agreement that a tax invoice should follow any particular format.  The Agreement also did not prescribe what information the tax invoice had to contain and there was a direct correlation between certificate 10 and the tax invoice in question.  The SCA also stated that Clause 31.9 was complied with and the Court a quo could not be faulted in that conclusion.

In relation to certificate no. 11, the SCA held that the submission on behalf of the employer was wrong and that certificate no. 11 was issued in accordance with the Agreement.

The SCA also held, with relation to certificate no. 11 and 12, that the employer’s submission was without foundation and that on a proper construction of the agreement, it was clear that the principal agent was not only entitled, but was obliged, in appropriate circumstances, to certify damages.

Further, the SCA held that both final and interim payment certificates are liquid documents, because they were issued by the employer’s agent, with the consequence that the employer was in the same position it would have been if it had itself signed an acknowledgment of debt in favour of the contractor.  The certificate thus embodies an obligation on the employer to pay the certified amount.  The certificate gives rise to a new cause of action and is also regarded as the equivalent of cash.

The contractor therefore held three liquid documents which were the equivalent of acknowledgments of debt.

In conclusion, the SCA held that no sustainable defence had been put up by the employer and that the Court a quo’s judgment was fully justified.  The Appeal was consequently dismissed with costs.