200 The contractor is running over time. The architect has over-certified. Are there any problems if the employer wishes to terminate?
An architect who certifies more than the amount properly due to the contractor is negligent and in breach of the contractual obligations to the employer by which the architect undertook to administer the contract. All the standard forms of contract permit the architect to certify only those amounts properly due. Because payment certificates are cumulative, the architect should be able to retrieve the situation in the next certificate. Obviously, that would not be the case if the employer terminated, the contractor went into liquidation, or the certificate in which the over-certification took place was the one issued after practical completion. Interim certificates are not intended to be precisely accurate. It has been well said that they are essentially a means by which the contractor is assured of some cash flow that roughly approximates to the work carried out.1
It is doubtful whether the employer would have grounds to terminate the contractor’s employment simply because the contractor was running over time. Under JCT contracts, the architect would have to be satisfied that the contractor was failing to proceed regularly and diligently. However, for the sake of this question let us suppose that there are adequate grounds to terminate. The architect will be obliged to confirm that to the employer. Then the architect has no option but to inform the employer that there has been some over-certification and that it would be better to wait until the work on site has caught up with the amount certified. How long that will be will depend on the degree of over-certification and the rate at which the contractor is currently working.
Of course, the employer can always go through the termination procedure and then reclaim the over-certified amount, together with any other balance due, after the Works have been completed by others. In doing so, however, the employer would have to challenge the architect’s certificate, probably in adjudication. This would be an additional cost which, if the adjudicator found in favour of the employer, the employer would assuredly try to recover from the architect.
In practice, instances of over-certification tend to be unusual and concern relatively small amounts, usually as a result of the valuation of defective work. It is the architect’s responsibility to notify the quantity surveyor of all defects so that they will not be valued. In any event, certification is entirely the province and responsibility of the architect.2 That is why architects should not simply accept valuations from quantity surveyors and blindly transfer the valuation figures to the certificate; they should ask for a simple breakdown of the valuation. It is not the architect’s job to do the valuation again, but the architect should have enough information to be satisfied that the valuation looks about right.
201 Termination took place under SBC due to the contractor’s insolvency. Can the liquidator insist that full payment of any balance plus retention is immediately payable?
Termination due to the contractor’s insolvency is covered by clause 8.5 of SBC. The employer may terminate at any time by written notice. The interesting point is that under clause 184.108.40.206, the provisions of the contract that require any further payment or release of retention cease to apply as soon as the contractor becomes insolvent, even if no written notice has been given by the employer.
That means that although the employer may be slow in taking action to terminate the contractor’s employment, the employer’s duty to pay is at an end except as set out in clauses 8.7.4, 8.7.5 and 8.8. It should be noted, however, that there is no longer any provision for automatic termination.
These clauses stipulate that an account must be drawn up of whatever balance may be due from employer to contractor, or vice versa as the case may be, after taking into account all the costs of finishing off, including any direct loss or damage caused to the employer by the termination. This must be done within a reasonable time after completion of the Works by another contractor and the making good of defects. If the employer decides not to complete the Works using another contractor, a statement of account must be drawn up and sent to the original contractor after the expiry of six months from termination.
It is not unknown for liquidators to threaten employers with proceedings, either directly or more usually through the services of specialist insolvency surveyors, if payment of all money is not made immediately. This contract now makes clear that the normal payment provisions are at an end. Therefore, if a certificate has already been issued, the employer no longer has any obligation to pay the sum certified. If a certificate is due, the architect no longer has a duty to certify. The employer or the architect should respond to the liquidator or the surveyor, referring to the contract clause as the reason why no further payment will be made until the final statement of account is prepared.
In these circumstances, the employer will often have delayed payment of a certificate because it is suspected that the contractor is about to become insolvent. Indeed, the employer’s failure to pay and the failure of others may be the very reason why the contractor eventually becomes insolvent. Therefore, at the date of insolvency, not only is a certified amount outstanding, but it may have been outstanding for a considerable time. Is the employer bound to pay such a sum on the basis that the employer cannot take advantage of its own breach of contract (failing to pay a certified amount on time)? The answer to the question seems to be that the employer is bound to pay monies that were outstanding at the date of the insolvency. The use of the words ‘which require further payment’ appears to support that view, because a payment that is overdue is not a ‘further payment’, but rather a payment that ought to have been made already. The point is not beyond doubt, and in practice the courts may be reluctant to order such payment when there is no realistic chance of it being recovered later because the cost of completion of the Works may prove to be more than the cash still retained by the employer.
It is commonly assumed that it is necessary to invite three tenders and to accept the lowest tenderer when having work carried out in cases where the cost will be reclaimed. In the best of all possible worlds, that is indeed sound practice. However, circumstances do alter that assumption. It must not be forgotten that where an employer has terminated the contractor’s engagement, the reason why the employer is in the position of having to get the work done by another contractor is because the first contractor was in default or perhaps became insolvent. That consideration will always be a factor for a court.
There are many instances where the kind of work to be remedied requires a particular kind of specialist or is so fragmented and of so many varied trades that it is impractical to seek tenders and it is more important to ensure that the work is competently carried out. In the case of West v Ian Finlay & Associates,3 the issue was remedial work, but since the cost of the work was part of the damages which the Wests claimed from the architect, the principle is the same. Three of the contractors on the original list declined to tender for the remedial work. Two of the original contractors agreed to tender, and another contractor was added to the list. Following tendering, two contractors were about £100,000 lower than the third contractor. Then one of the two lowest withdrew its tender, leaving just two contractors. Various aspects of the lowest tenderer caused concern and investigations were carried out. As a result, it was decided that the higher of the tenderers should be accepted. This decision was questioned by the architect, who argued that it was the lowest tender which should be considered when damages were awarded.
The court went through the facts surrounding the acceptance of the tender and concluded that the Wests had done everything reasonable to obtain the best tender in a difficult tendering climate. In this case, several firms would not touch the job, and the Wests were faced with engaging a contractor and proceeding as quickly as possible or engaging in a very protracted negotiation and possibly re-tendering.
Architects are often in the position of having to engage others to complete work or defects on behalf of the employer, and they should not unduly agonise about competitive tendering if it is not really practicable in all the circumstances.