CAN A CONTRACTOR CLAIM PAYMENT OF AN INTERIM CERTIFICATE AFTER THE BUILDING CONTRACT HAS BEEN TERMINATED?
The question has been answered by the Appellate Division in two judgements reported as:
1. Thomas Construction (Pty) Limited (In Liquidation) vs Grafton Furniture 1998 (2) SA 546 (A); and
2. Shelagatha Property Investments CC vs Kellywood Homes (Pty) Limited, Shelferie Property Holdings CC vs Midrand Shopping Centre (Pty) Limited 1995 (3) SA 187 (A).
In the Thomas Construction case interim payment certificates were issued on 29 October and 4 November 1985. These certificates fell due for payment on 12 and 18 November respectively. On 8 November the Employer issued a written notice calling upon Thomas Construction to proceed with the works with due diligence. Failure to comply with that notice within a period of fourteen days would result in the termination of the builder's employment under the building contract.
On 12 November a provisional winding up order was granted. On 26 November the Employer terminated the contract.
The liquidators of Thomas Construction did not contest the termination of the building contract. They instituted proceedings for payment of the amounts certified in the interim certificates.
The matter eventually went to the Appellate Division which decided that the Employer was not obliged to pay the amounts certified.
The appeals in the Shelagatha Property Investments CC and Shelfaerie Property Holdings CC cases were heard together because the facts were similar. In both cases the Employer defaulted in the payment of an interim certificate and this default resulted in the builders terminating their employment under the building contracts.
Relying on the decision in Thomas Construction the Employers in both cases contended that the builders were not entitled to enforce payment under the interim certificates after the contracts had been cancelled.
The Appeal Court decided that the interim certificates survived the cancellation of the contracts and that the builders were entitled to enforce payment of the amounts certified.
It follows from these decisions of the Appellate Division that a builder is not entitled to enforce payment of an interim certificate after the building contract has been validly terminated by the Employer. If, on the other hand, the building contract is validly terminated by the builder, an interim certificate may be enforced against the Employer notwithstanding the termination of the contract.
The reason for the two decisions may be summarised as follows:
1. A claim based on contract survives the cancellation of the contract if, prior to the cancellation, the claim was accrued, due and enforceable as a cause of action independent of any executory part of the contract, that is independent of any part of the contract which has still to be performed.
2. An interim certificate does not represent compensation for a completed segment of work. It is a medium for making progress payments, which payments represent an approximate and proportional value of the work done and materials on site at a specified date. The purpose of the progress payment is to supply the builder with working capital as an advance on the contract sum.
3. Payments made in respect of interim certificates are conditional upon the builder's willingness and ability to complete the rest of the work.
4. If the builder had demonstrated his unwillingness to complete the work with the result that the contract is cancelled, then the condition upon which the interim payment certificate was issued will not have been fulfilled. The Employer is
entitled to withhold payment until completion of the works by another contractor. The amount, if any, which will be payable to the builder is dependent upon the cost of completing the works.
5. If, on the other hand, the contract is terminated by the builder, the builder is released from any obligation which he would otherwise have had to complete the work. In these circumstances the interim certificate becomes unconditional because it is not related to the completion of the contract, the builder being released from any obligations which he might have had in that regard. In these circumstances the builder can enforce payment of the interim certificate notwithstanding the termination of the contract. Payment of the interim certificate, however, does not remove the requirement for a final accounting. On the settlement of the final account it may be shown that either more or less than the amount certified is owed to the builder. If there has been an overpayment the Employer will be entitled to a refund. That consideration, however, does not entitle the Employer to withhold payment of the amount certified in the interim certificate in circumstances in which the contract has been validly terminated by the builder
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