When pay-when-certified goes wrong

At the bottom of the food chain is baby bear. At the top is great big daddy bear. And if baby bear is lucky he might get a smidgen of porridge in his bowl … it depends on all those between him and the fella at the top. The employer will pay the porridge to the main contractor when porridge is certified. That certificate is the trigger for the main contractor to pay the subcontractor. It is the same idea for the sub to pay his sub-subs. A little bit complicated getting porridge if you are baby bear, isn’t it?

At the bottom of the chain for installing new lifts at Goscote Hospital, Wallsall, was the electrical sub-subby, R & C Electrical. Next up was subcontractor Shaylor Construction. I will tell you about the adjudication between those two in a moment. Next up is Ashley House as main contractor, then at the top is Walsall Lift Accommodation Services.

Can you see how something is wrong with the machinery? You might see why the lawyers pounce on the theme that the contractual machinery is so absurd as to be in tatters

The adjudication at sub-sub contract level was not out of the ordinary until the tricky bit at the important end … getting the cash. The adjudicator dealt with the quarrel about time claims and final account. He said Shaylor owed its sub-sub R & C £196,963. He then ran into a “pay-when-certified clause”. It said, in short, the final payment shall be due to R & C after Shaylor has been issued with the final certificate under the contract with Ashley House. And, it is suspected that Ashley House had to wait until the contract with Walsall saw the magical final certificate materialise. These sort of clauses must come hard to your average subcontractor; he only wants to do a decent job, get paid, make a living.

The adjudicator bought the argument that the pay-when-certified clause worked. He said the money shall not be paid forthwith but only following the issue of the final certificate under the main contract. And then, according to the rigmarole saying when the “due date” is and when the “final date” for porridge is. He is quite entitled to decide that is the effect of pay-when-certified.

As soon as R & C’s lawyers received the decision, they wanted the £196,963 immediately. They began High Court proceedings to nullify the adjudicator’s clog on cash payment. They said the adjudicator was wrong because of a sophisticated agreement that the flow of final certificates down the chain had broken down. In short, the issue of the final certificate is said to be impossible.

That argument starts well. The procedure to get to that final certificate begins with the certificates of practical completion. So, look for the actual completion date. The awful wording in this contract says, “Actual completion means … the date of issue of the certificate by the client’s representative”. Pick up on the word “issue”.

The judge seemed to recognise that the clause was nonsense, and decided it was capable of cure. Once cured, it will work

Seemingly no one disagrees that all works were done by 7 March 2011. But the “issue” of the certificate was not until 23 February 2012! Can you see how something is wrong with the machinery? You might see how and why the lawyers pounce on the theme that the contractual machinery is so absurd as to be in tatters.

A certificate of practical completion is to be just that. It has to be accurate; not an arbitrary date on which someone decided to issue it. The judge of the High Court seemed to recognise that the clause was nonsense, and decided it was capable of cure. Once cured, it will work. Indeed the sub-subcontractor had not been at all prejudiced by the strict interpretation. Go further, it was to his advantage to make it apply from the proper date of March 2011. And once you make the machine work, the sub-sub has to wait for the final certificate; the adjudicator was correct to deny payment forthwith.

And then Shaylor told the sub-sub contractor that he was going to withhold money from the £196k awarded. Now then, in very ordinary adjudications, it will be almost impossible to take money out of an awarded sum. But here it is different. It is right to claim a set-off. That’s because the “due date” and “final date” for payment is still in the future, according to the adjudicator.

“Pay-when-certified” is about as popular as a fly in your porridge. Some say that the new revised, whiter than white Construction Act from 1 October last year torpedoes the device. Go on, see if you and Goldilocks can find it in the new Construction Act.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple