Legal Blog

Certification

The battle over the certificates of payment certifiers (e.g. architects, engineers etc.) continues (see November 2006 newsletter). Can a party to a construction contract argue that a certification is incorrect or is the party bound by it, regardless of its accuracy? The latest decision deals with a dispute between a sub and a subsub and is set out in Federated Contractors Inc. v. Ontario Realty Corp., a 2007 decision of the Ontario Superior Court of Justice.

Contract 

This was no run-of-the-mill project. There was a $41 million general contract and its mechanical portion was $30 million. The subsub’s contract was $1.7 million.

It is not readily apparent from the reasons, but we gather that the sub and subsub disagreed about the percentage of work that was completed and the subsub abandoned the job. The subsub wanted to be paid exactly the amount that the payment certifier for the prime contract had certified. The sub took the position that the amount certified was front-end loaded and that the subsub had completed a lesser proportion of its work. Accordingly, even though the general had paid the sub $1,040,000 for the subsub’s portion of the work, the sub only paid the subsub $592,000.

Which Contract

The parties agreed that the prime contract bound them because the general contract had the usual provision that “every sub-contract entered into by the contractor shall adopt all of the terms and conditions of the Contract as far as applicable…” Further, it stated that the “Contractor shall require the Sub-Contractors to perform their work in accordance with the terms and conditions of the Contract Documents.”

No doubt the terms of a prime contract can be incorporated by reference into a subcontract and again into a sub-subcontract. However, just because the prime contract states that the general ought to bind the subs and, by implication, the subs ought to bind the subsubs to it, that does not mean that their subcontracts did so. If the subcontracts did not do so, we see no reason why the provisions in the prime contract would govern the relationships between the general and the subs and the subs and the subsubs.

We will assume that the subcontracts and the sub-subcontracts actually did incorporate the terms of the prime contract and that the judge simply omitted that fact from his reasons.

Prime

Although the judge had some general words of wisdom to impart, his decision depended almost entirely on his interpretation of the payment certification provisions of the prime contract.

Reproduced loosely, the prime contract stated:

a)   The certifier is, in the first instance, the interpreter of the contract and the judge of its performance.

b)   The certifier will decide, before the issuance of the certificate, whether the quality or quantity of the work meets the requirements of the contract.

c)   The general will submit an application for progress payment; the certifier will review it. If the certifier is cutting it back, it will explain why.

d)   The owner will make payments as certified.

The judge interpreted these provisions to mean that the payment certificates were not provisional; rather, they were binding on all of the parties who were subject to them.

Rationale

The judge felt that this interpretation made sense because:

1.   It would be unfair to test a claimant “after the fact” by an accounting that was never contemplated, particularly if detailed records were never made. The parties subjected themselves to a payment certifier, who would make broad-brush estimates of work done; they did not subject themselves to a nuts-and-bolts accounting.

2.   It would constitute a severe drain on court resources if it were required to re-certify whenever a payor or payee was dissatisfied with the certification results.

3.   Without giving certification legal effect, no one would be able to proceed with confidence in executing the works that were in progress.

4.   To defy or ignore certifications would encourage harassing litigation.

Result

The sub had to pay the subsub everything that it owed under the payment certificate.