Keegan v Ballast Point Pty Ltd

[2022] NSWCA 179

Court of Appeal

Supreme Court

New South Wales

Medium Neutral Citation:

Keegan v Ballast Point Pty Ltd [2022] NSWCA 179

Hearing dates:

31 August 2022

Date of orders:

13 September 2022

Decision date:

13 September 2022

Before:

Meagher JA at [1];
Brereton JA at [57];
Kirk JA at [58]

Decision:

Appeal dismissed with costs.

Catchwords:

BUILDING AND CONSTRUCTION – residential building contract – where general conditions of contract provided for making by builder of monthly payment claims – where special conditions appointed architect to administer contract on owner’s behalf, including by assessing and certifying builder’s payment claims – whether owner’s obligation to pay and builder’s entitlement to payment only in respect of amounts certified as due and payable by architect

Cases Cited:

Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266

Costain Building and Civil Engineering Ltd v Scottish Rugby Union plc (1994) 69 BLR 80

Dixon v South Australian Railways Commissioner (1923) 34 CLR 71; [1923] HCA 45

Dunlop & Ranken Ltd v Hendall Steel Structures Ltd [1957] 1 WLR 1102

Glynn v Margetson & Co [1893] AC 351

Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850; [2005] EWCA Civ 814

Lubenham Fidelities and Investments Co Ltd v South Pembrokeshire District Council (1986) 33 BLR 39

Northern Regional Health Authority v Derek Crouch Construction Co Ltd [1984] QB 644

Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211

Robertson v French (1803) 4 East 130

V601 Developments Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2021] VSC 849

Walton v Illawarra [2011] NSWSC 1188

Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17

Texts Cited:

S Furst and V Ramsey, Keating on Construction Contracts (11th ed, 2021, Sweet & Maxwell)

Category:

Principal judgment

Parties:

Richard Keegan (Appellant)
Ballast Point Pty Ltd (Respondent)

Representation:

Counsel:

M Green SC with JC Rogers (Appellant)
G Campbell (Respondent)

Solicitors:

Addisons (Appellant)
D’Arcy Sloman Peacock Lawyers (Respondent)

File Number(s):

2022/118812

Publication restriction:

Nil

 Decision under appeal 

Court or tribunal:

District Court of New South Wales

Jurisdiction:

Civil

Date of Decision:

25 March 2022

Before:

S J Gibb DCJ

File Number(s):

2020/319941

HEADNOTE

[This headnote is not to be read as part of the judgment]

The appellant as Owner and respondent as Builder were parties to a cost plus residential building contract, which was in a standard form prepared by the Master Builders Association of New South Wales. After works had been completed, an issue arose as to whether moneys remained owing by the Owner to the Builder for the cost of works undertaken and a builder’s fee.

The general conditions of contract (clause 17) provided for the making by the Builder of monthly payment claims, which were to be paid within 10 days of the Builder submitting the relevant claim. The Special Conditions appointed an Architect to administer the contract on the Owner’s behalf. Special Condition 3 provided that the Architect was to assess and certify the Builder’s payment claims “pursuant to the provisions of the contract”.

In proceedings commenced by the Builder in the District Court, the Owner contended that no further amount was due and payable because under the contract he was only obliged to pay amounts as assessed and certified by the Architect, which he had done. The primary judge (S J Gibb DCJ) rejected this construction. Her Honour considered that, properly construed, the contract obliged the Owner to pay payment claims independently of whether they had been assessed and certified by the Architect. The primary judge entered judgment for the Builder in the sum of $219,531.65.

On appeal, the sole issue was whether Special Condition 3 was to be construed as having the effect that the Owner’s obligation to pay in response to a payment claim was only in respect of amounts assessed and certified by the Architect.

The Court (Meagher JA, Brereton and Kirk JJA agreeing) held, dismissing the appeal with costs:

1. The construction for which the Owner contended was not available. The language of Special Condition 3 did not expressly or impliedly make certification by the Architect a condition precedent to the Builder’s entitlement to payment. That proposed construction was inconsistent with the clear terms of the payment obligation in clause 17, and with the stated purpose of the Special Conditions being simply to enable administration of the general conditions: at [46]-[49] (Meagher JA); [57] (Brereton JA); [58] (Kirk JA).

2. Conversely, the construction for which the Builder contended was sensible. The purpose of the Architect’s assessment and certification functions was to enable the Owner to respond to the Builder’s payment claim, by providing some evidence using which the Owner might decide to pay less than the amount claimed or engage the contract’s dispute resolution provisions: at [50]-[53] (Meagher JA); [57] (Brereton JA); [58] (Kirk JA).

3. In cases where certification by a third party has been construed as a condition precedent to a principal’s obligation to pay a contractor, limiting that obligation to the amounts certified, the contract has contained clear and express language to that effect. Nothing in this contract provided that the Builder was conclusively or otherwise bound by the Architect’s certificate: at [32]-[43], [48] (Meagher JA); [57] (Brereton JA); [58] (Kirk JA).

Dixon v South Australian Railways Commissioner (1923) 34 CLR 71; [1923] HCA 45; Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850; [2005] EWCA Civ 814; Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266; Dunlop & Ranken Ltd v Hendall Steel Structures Ltd [1957] 1 WLR 1102; Lubenham Fidelities and Investments Co Ltd v South Pembrokeshire District Council (1986) 33 BLR 39; Costain Building and Civil Engineering Ltd v Scottish Rugby Union plc (1994) 69 BLR 80, considered.

4. Further support for the Builder’s proposed construction arose from the fact that the Owner was entitled to terminate the Architect’s services at any time; and from the Architect’s signed acknowledgement below the Special Conditions that he would carry out his role “in good faith and reasonably”. If the Architect’s role was not limited to acting as the Owner’s agent, and included the provision of binding or conclusive certificates for payment, his duty in doing so might have been described in different terms, such as that he act “honestly and fairly” or “independently and honestly”: at [24]-[25] (Meagher JA), [57] (Brereton JA), [58] (Kirk JA).

Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211; V601 Developments Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2021] VSC 849; Walton v Illawarra [2011] NSWSC 1188, considered.

Judgment

1. MEAGHER JA: The appellant (Mr Keegan) as Owner and the respondent (Ballast Point Pty Ltd) as Builder were parties to a Cost Plus (Residential) building contract dated 23 June 2017 for the undertaking of alterations and additions to a residential property in Sydney. That work was completed by 29 March 2018. There remained an issue as to whether there were moneys owing by the Owner to the Builder for the cost of works undertaken and a builder’s fee.

Overview

2. The contract provided for the making by the Builder of monthly payment claims. It required that the Owner should pay the Builder the Cost of Works (a defined term) within 10 days of the Builder submitting the claim. Special Conditions of the contract “to be used by the parties to enable the contract to be administered on behalf of the Owner” provided for the appointment of Mr Giles as Architect to do so “on behalf of the Owner”. Special Condition 3 provided that “the Architect is to assess and certify claims by the Builder pursuant to the provisions of the contract”.

3. The Owner’s position before the primary judge (S J Gibb DCJ) was that there was no amount due and payable. He had paid all of the amounts assessed and certified by the Architect. The Builder’s position was that the Owner’s obligation was to pay the cost of the relevant works and its fee. That obligation was not to pay such amounts as were certified by the Architect and the Builder was not bound by any assessment and certification of the Architect. The primary judge rejected the Owner’s case, entering judgment for the Builder for $219,531.65. That judgment included interest calculated at the contract rate of 15% (Ballast Point Pty Ltd v Richard Keegan, District Court (NSW), S J Gibb DCJ, 25 March 2022, unrep). Her Honour’s judgment as delivered does not include paragraph numbers. The parties have provided the Court with a copy of the judgment which includes paragraph numbers. Those numbers were useful and are referred to in these reasons, for ease of reference.

4. Her Honour concluded that clause 17 of the contract described the Builder’s entitlement to payment in response to a claim, and that the Architect’s certification “plays no relevant contractual role” in determining that entitlement (J[29]). Accordingly, whether the Architect had issued a certificate in respect of any payment claim was not relevant to the Owner’s payment obligation under clause 17 (J[15]).

The grounds of appeal

5. There are four grounds of appeal. Ground 3 is not pressed and ground 4, relating to costs, only arises if the appeal is otherwise allowed.

6. Ground 1 is that the primary judge erred in not construing the contract as providing that no amount was due and payable in response to a payment claim unless and until the Architect had assessed and certified an amount as payable. In that event the amount due and payable was the amount certified. If a claim was not assessed and certified no amount could be due and payable in respect of that claim.

7. Ground 2 applies that construction to the payment claims as made. The relevant claims were numbered 6, 7, 8 and 9. It is said that claims 6, 7 and 8 were jointly assessed and certified by the Architect on about 6 July 2018; and that the amount so certified ($219,512.95) has been paid. As to claim 9 it is said that it has not been assessed by the Architect, and accordingly not certified. The primary judge held that the amount due and unpaid following the making of claims 6, 8 and 9 (claim 7 having been withdrawn by the Builder) was $140,127.77 excluding interest (J[194]).

8. Accordingly, the appeal raises a question as to the construction of the parties’ contract, which was in a standard form made available by the Master Builders Association of New South Wales, being the version of its Cost Plus (Residential) contract current as at March 2015. The written contract included as Attachment ‘A’ special conditions also in a form provided by that Association, which were headed “Special Conditions to Enable Architect Administration of Cost Plus Contract”.

9. That question may be formulated in different ways. In essence it is whether those Special Conditions, and in particular Special Condition 3, had the effect that the Owner’s payment obligation in respect of the cost of works and fee payable was only to pay, in respect of any claim of the Builder, the amount assessed and certified by the Architect.

The terms of the contract, including the Special Conditions

10. It is necessary first to consider the terms of the contract which was to be administered by the Architect on behalf of the Owner and in accordance with the Special Conditions.

11. The written contract is in the form of a booklet which, as described by its index, consists of the following:

The Agreement and Particulars of Contract

Owner’s Checklist and Questions under the Home Building Act 1989

Schedule 1 – Cost of Works, Builder’s Fees & GST

Schedule 2 – Contract details to be completed by parties

Schedule 3 – Contract work details

Schedule 4 – Special Conditions

[Clauses 1 to 31 of the Conditions of Contract]

The Special Conditions were marked as Attachment ‘A’ and there were no further special conditions forming part of Schedule 4.

12. The instructions at the commencement of the booklet, intended to be read before the signing of the document, include under the heading “Third Party Contract Administration”:

If the Owner wishes to appoint an independent person or entity to administer the contract, then the contract should be amended to include specific terms and the assignment of specific duties to this third party. A special condition is available from the Master Builders Association of NSW for this situation.

13. The Agreement and Particulars of Contract include three clauses, clauses 1 and 2 of which describe the principal obligations of the Builder and Owner:

(1) The Builder will subject to the contract terms and conditions, for the cost of the works (see Schedule 1, Part A) plus the fees payable under the contract (see Schedule 1, Part B), properly treated for GST complete the works shown upon the Drawings and described in the Specification. The works may be adjusted under the contract.

(2) The Owner will pay to the Builder the cost of the works plus the fee payable under the contract and the GST consequences of the work, at the times and in the manner required by the contract.

Clause 3 contains acknowledgements by the Owner with respect to the financial and other consequences of a contract which provides for payment on a cost plus, rather than fixed price, basis.

14. There follow Schedules 1, 2 and 3, the Conditions of Contract and Attachment ‘A’. Schedule 1 Part A contains a description of the costs within the expression “Cost of Works” which in turn is defined in clause 31 of the Conditions of Contract as having the “meaning arising from the terms of Schedule 1” and described as “to be administered as required by Clause 17 and Clause 18”. Clause 17 is headed “Payment” and Clause 18 “GST – Its Impact on Work, Goods and Services”. Relevantly, the Cost of Works payable by the Owner, as provided by para (h) in Part A, does not include the cost of “correcting, modifying or changing work already completed” which is “defective… due to materials provided by the Builder or the workmanship of the Builder”. Schedule 1 Part B describes the lump sum fee payable to the Builder which was $3,000 plus GST per week for the original construction period of 30 weeks.

15. Clause 17 provides by subclauses (a) and (b) that the Owner must pay the Builder the Cost of Works as set out in Schedule 1 Part A and the fee set out in Schedule 1 Part B in accordance with the timetable set out in Schedule 1 Part B. That timetable permits the Builder to make monthly payment claims on the fifteenth day of each month from 15 July 2017 and provides that the claim must be paid by the Owner within 10 days of its having been submitted. By clause 17(c) the claim for payment must identify the “period during which work was carried out and the work for which payment is required”. It must also identify the fees payable under Schedule 1 Part B and the GST payable. Clause 17(d) requires that the Builder provide evidence supporting the Cost of Works claimed.

16. Thus the obligation of the Owner in respect of the relevant period and work which is the subject of a payment claim is to pay the actual Cost of Works performed in the period as well as part of the lump sum fee. That obligation is not to pay the claimed amount or that or any lesser amount as certified by the Architect.

17. Interest is payable by the Owner on any payment which is not made by the due date (clause 17(f)). In addition, upon such a default the Builder may suspend the works forthwith by written notice under clause 19(b). Under clause 27(a)(iv), the Builder may also terminate the contract if a payment default under clause 17 continues for 10 days after a written notice has been given specifying that default and stating the Builder’s intention to terminate if it is not remedied.

18. The general conditions also include a provision for dispute resolution which by clause 24(b) permits either party to give a written notice of any dispute or difference concerning the contract. Within 10 days of the giving of such a notice the parties must confer to resolve the dispute or to agree on a method of resolving it (specifically mediation, expert review or determination, or arbitration). In the absence of such a meeting neither party is entitled to terminate the agreement pursuant to either of clause 26 (termination by the Owner) or clause 27 (termination by the Builder).

19. The introductory words to the Special Conditions describe the purpose for which they are to be used:

The following provisions are to be used by the parties to enable the contract to be administered on behalf of the Owner by a person referred to for the purposes of the contract as the Architect.

20. There follow eight Special Conditions. Those which are relevant to the question before the Court are set out below. The effect of each remaining condition is briefly summarised:

1.    (a) for the purpose of this contract the Architect will be the disclosed agent of the Owner.

(b) the Owner, in recognition of the above, will not interfere with or impede the Architect carrying out his duties as an Architect for the purpose of this contract.

2.    The Architect is authorised to and required to:-

(a) issue instructions to the Builder, concerning the works to be carried out, amended or corrected.

(b) supply to the Builder all relevant documents to enable the works to be carried out including any documents relevant to setting out the works.

Any instruction or direction given by the Architect to the Builder will equal an instruction or direction by the Owner.

3.    In order to determine the amount of money, if any, payable to the Builder by the Owner, the Architect is to assess and certify claims by the Builder pursuant to the provisions of the contract. The Architect must follow the terms of the contract in this regard.

4.    [Instructions given by the Architect to be in writing]

5.    [Builder to comply with all reasonable instructions from the Architect]

6.    [Parties to do what is necessary to reduce periods of notice where to do otherwise could adversely affect completion of works]

7.    (a) In circumstances where the Architect is replaced by the Owner for the purposes of administering the contract then the Owner must as soon as practicable advise the Builder in writing of the termination of the Architect's services.

(b) However the Owner will be and is bound by and cannot disregard any decision, expression of reasonable satisfaction as to work of the Builder, consent or instruction given by the Architect up to the time of notification to the Builder pursuant to (a) above.

(c) If the Owner intends to replace the Architect the Builder will have the right to object to any replacement Architect provided the basis for the objection is reasonable.

8.    The Owner is liable for the payment of the Architect's fees and expenses. The engagement of the Architect by the Owner will not form a cost of the works and no offset for the Architect's fees and expenses will be available to the Owner with regard to monies payable to the Builder pursuant to the contract.

21. At the foot of Attachment ‘A’ there is a form of acknowledgement by the Architect as to “the special conditions enabling me to act in this matter. I agree to carry out my role as Architect pursuant to these terms and will do so in good faith and reasonably”.

22. Neither party contended that this acknowledgement constituted or evidenced an agreement between the Builder, Owner and Architect. Rather, the parties to the building contract agreed that the Owner would appoint an agent “for the purposes of administering [their] contract” (Special Condition 7(a)). That administration was being undertaken by the Architect “on behalf of the Owner” (the introductory words). As was the position in Walton v Illawarra [2011] NSWSC 1188, the Architect “was not a party to the contract, but someone appointed under it” (at [39] per McDougall J).

21. The Special Conditions identified the matters with respect to which the Architect was “authorised to and required to” act and the procedure between the Builder and Architect to enable his doing so (Special Conditions 2, 4 and 5). Because those matters were addressing the administration of the parties’ contract, they are not to be construed as permitting the Architect to require something to be done which could not be called for by the Owner in the Builder’s performance of the contract (cf Special Condition 2(a)).

22. It is not necessary to determine whether the Architect’s acknowledgement formed part of any contract by which the Owner retained the Architect, although Special Condition 8 contemplates an “engagement of the Architect by the Owner”. What is more significant is that, as between the Builder and Owner, the latter was entitled to terminate the Architect’s services in relation to the administration of the contract at any time (Special Condition 7(a)). In that event Special Condition 7(c) acknowledges that the Owner may or may not “replace the Architect”. The fact that the Owner is not required to do so is inconsistent with the purpose of Special Condition 3 being to impose a different payment regime during the period of the contract; namely, one which modifies the Owner’s payment obligation under clause 17 so that he is only liable to pay claims of the Builder which have been assessed and certified by “a person referred to for the purposes of the contract as the Architect”, and not otherwise.

23. A final matter to be noted at this point is that the Architect acknowledges that he is to carry out his role of administering the contract on behalf of the Owner “in good faith and reasonably”. If the Architect’s role was not limited to acting as the Owner’s agent, and included the provision of binding or conclusive certificates for payment, his duty in doing so might have been described differently and as including that the Architect act honestly and fairly, or independently and honestly, or impartially and fairly; as to which see the discussion in S Furst and V Ramsey, Keating on Construction Contracts (11th ed, 2021, Sweet & Maxwell) at [5-062]; and the clauses concerning the exercise of a superintendent’s certifying function in Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211 at [8] and Walton v Illawarra at [12], each of which imposes an obligation to act “honestly and fairly”. In addition, in Peninsula Balmain at [50], Hodgson JA (Mason P and Stein JA agreeing) described as the “better view” that when exercising certifying functions in respect of which the superintendent must act “honestly and impartially”, the superintendent is not acting as the owner’s agent in the strict legal sense. Finally, in V601 Developments Pty Ltd v Probuild Constructions (Aust) Pty Ltd [2021] VSC 849 at [231]-[232], the express terms of the contract drew a distinction between the Project Manager’s “agent” and “independent” functions, and in respect of the latter required that the Project Manager act “independently” as well as “reasonably”.

Relevant principles

26. The principles by reference to which the Court’s task of construction must be approached are not controversial. The objective theory of contract requires that the meaning of the contractual language be ascertained by reference to what a reasonable person in the position of the parties would have understood it to convey, taking into account the commercial purpose and object of the contract. Whilst the immediate controversy between the parties here concerns the meaning of Special Condition 3, in resolving that question regard must be had to the provisions of the contract as a whole, and not merely to that provision or the other Special Conditions. As the plurality (Gleeson CJ, McHugh, Gummow and Kirby JJ) in Wilkie v Gordian Runoff Ltd (2005) 221 CLR 522; [2005] HCA 17 emphasised at [16], in construing a contract preference is to be given to a construction supplying a “congruent operation to the various components of the whole”.

27. There is no reason why that principle should not apply in the present case, notwithstanding that the parties have adopted special conditions in addition to the general conditions of contract forming part of the standard form. That standard form contemplates the adoption of a specific form of special conditions, providing for third party contract administration, which also has been drafted by the Master Builders Association for that purpose.

28. This is not a case where the parties have added their own language to a printed form contract in common usage. Of that being the position, Lord Ellenborough CJ said in Robertson v French (1803) 4 East 130 at 135 (in the passage quoted by Lord Halsbury LC in Glynn v Margetson & Co [1893] AC 351 at 357-358):

Words superadded in writing… are entitled nevertheless, if there should be any reasonable doubt upon the sense and meaning of the whole, to have a greater effect attributed to them than to the printed words, inasmuch as the written words are the immediate language and terms selected by the parties themselves for the expression of their meaning, and the printed words are a general formality adapted equally to their case and to that of all other contracting parties upon similar occasions and subjects.

Disposition of grounds 1 and 2

29. The construction of Special Condition 3 for which the Owner contends is summarised in its written submissions as follows:

… Special Condition 3 gave the Architect the exclusive role of determining the amount of money (if any) payable to Ballast Point by Mr Keegan. Further, unless and until that independent evaluative process took place, on the proper construction of the contract, as modified by the special conditions, there was no relevant claim for the purpose of clause 17 of the Contract.

30. This submission may be put in different ways, which reveal the matters with which the language of the contract would have to engage to produce the outcome contended for. First, the clause is said to make the Owner’s obligation to pay in response to a Builder’s claim for payment subject to a condition precedent and qualification. The condition precedent is that the claim has been assessed and certified by the Architect; and the qualification is that in the event there is a certification the Owner’s obligation is only to pay the amount certified. Secondly, the consequence of Special Condition 3 is said to be that the Owner’s obligation to pay, and the Builder’s entitlement to payment, is only in respect of an amount certified as due and payable by the Architect following submission of a Builder’s payment claim.

31. Before turning to the construction of Special Condition 3, it is instructive to consider the language which has been used in standard forms of contract to achieve the outcome for which the Owner contends.

32. At least two examples were referred to in argument. In each, express and clear language was used to carefully define the respect in which the Architect’s certificate was binding on the parties and conclusive of any issues between them. In Dixon v South Australian Railways Commissioner (1923) 34 CLR 71; [1923] HCA 45, the contract between the parties for the construction of a reinforced concrete railway bridge provided that no money claim should be brought against the Commissioner “unless and until the contractor shall have obtained a certificate or award from the Chief Engineer of the amount sued for” (at 110). The Superintendent in Walton v Illawarra was required to issue “to the Principal and the Contractor a payment certificate stating the amount of the payment which, in the opinion of the Superintendent, is to be made by the Principal to the Contractor or by the Contractor to the Principal” (excerpted at [22]). Those amounts were then made payable within 14 days of issue of the certificate either by the Principal or the Contractor.

33. More relevantly for present purposes, the question whether a builder’s contractual right to receive payments arose upon the work being done or only upon the issue of a certificate was put in issue in Henry Boot Construction Ltd v Alstom Combined Cycles Ltd [2005] 1 WLR 3850; [2005] EWCA Civ 814 (Henry Boot). The contract in question incorporated the Institution of Civil Engineers (ICE) standard form (6^th ed). Clause 60(1) required the contractor to submit at monthly intervals a statement which included the estimated amounts which it considered itself entitled to receive. In response to the contractor’s monthly statement, the nominated engineer was required by clause 60(2) to “certify and the employer shall pay to the contractor” the amount so certified (at [18]).

34. It was submitted on behalf of Henry Boot that its cause of action accrued on the doing of the work and that the relevant certificates were “no more than evidence of the engineer’s opinion of what is due to Boot” (at [19]). That question was addressed by Dyson LJ (Sir Andrew Morritt V-C and Thomas LJ agreeing). In doing so his Lordship first addressed the question of construction without reference to previous authority, and then considered a number of intermediate appellate court decisions in England and Scotland which had considered the same or a similar question.

35. At [23], Dyson LJ concluded:

… on the true construction of this contract, certificates are a condition precedent to Boot's entitlement to payment under clause 60(2)(4), and they are not merely evidence of the engineer's opinion. By “condition precedent” I mean that the right to payment arises when a certificate is issued or ought to be issued, and not earlier.

36. Dyson LJ then turned to the question whether it followed from the fact that a certificate is a condition precedent that the absence of a certificate is a bar to the right to payment. His Lordship concluded that it was not unless the parties had “clearly so provided” and continued:

If the engineer's decision is not binding, it can be reviewed by an arbitrator (if there is an arbitration clause which permits such a review) or by the court. If the arbitrator or the court decides that the engineer ought to have issued a certificate which he refused to issue, or to have included a larger sum in a certificate which he did issue, they can, and ordinarily will, hold that the contractor is entitled to payment as if such certificate had been issued and award or give judgment for the appropriate sum.

37. The significance of these observations in the present context is that there is no provision in the Conditions of Contract or the Special Conditions which states that the Builder is conclusively or otherwise bound by the Architect’s decision in relation to certification.

38. In Beaufort Developments (NI) Ltd v Gilbert-Ash NI Ltd [1999] 1 AC 266 the question for the House of Lords was whether an arbitrator appointed to decide a dispute arising under a building contract had a power to review decisions and certificates of the architect which was not available to the Court. The determination of that question raised for consideration the correctness of the decision of the Court of Appeal in Northern Regional Health Authority v Derek Crouch Construction Co Ltd [1984] QB 644. The building contract in Beaufort Developments made the final certificate issued by the architect conclusive evidence as to various matters. However there were no other express provisions which said that any other certificate or expression of opinion of the architect was to be binding on the parties in the same way as the determination of an expert.

39. Focussing on the question of construction in that appeal, Lord Hoffmann observed of provisions making an architect’s certificate “conclusive” that they “could easily cause injustice” (at 276). He continued:

Furthermore, the architect is the agent of the employer. He is a professional man but can hardly be called independent. One would not readily assume that the contractor would submit himself to be bound by his decisions, subject only to a challenge on the grounds of bad faith or excess of power. It must be said that there are instances in the 19th century and the early part of this one in which contracts were construed as doing precisely this… But the notion of what amounted to a conflict of interest was not then as well understood as it is now…. At all events, I think that today one should require very clear words before construing a contract as giving an architect such powers.

40. Returning to the question of construction addressed by Dyson LJ in Henry Boot, his Lordship went on to consider other appellate court decisions which had been cited “on standard forms of construction contracts which deal with the question whether a certificate is a condition precedent to the contractor’s right to payment” (at [30]).

41. In Dunlop & Ranken Ltd v Hendall Steel Structures Ltd [1957] 1 WLR 1102, the Court of Appeal (Lord Goddard CJ, Donovan and Havers JJ agreeing) held that a subcontractor’s right to receive payment which was described as not being due “until receipt by the contractor of the architect’s certificate under clause 24 of these conditions which includes the value of such work” did not arise until there was “a certificate certifying the amount which is to be paid” (at 1107).

42. The relevant standard form contract in Lubenham Fidelities and Investments Co Ltd v South Pembrokeshire District Council (1986) 33 BLR 39 provided in relation to the amounts due in an interim certificate that the “Architect shall from time to time issue Interim Certificates stating the amount due to the Contractor from the Employer, and the Contractor shall be entitled to payment therefor within 14 days from the issue of that Certificate” (at 50). Unsurprisingly, the Court (May, Slade and Neill LJJ) held that the contractor was not entitled to receive and the employer not obliged to pay more than the amount stated on the face of the certificate. Accordingly, in the language of the Court (at 55): “… [U]nder this form of contract the issue of a certificate is always a condition precedent to the right of the contractor to be paid.”

43. The remaining decision is that of the Court of Session, Inner House in Costain Building and Civil Engineering Ltd v Scottish Rugby Union plc (1994) 69 BLR 80. The contract incorporated the ICE conditions of contract (5^th ed). There was an issue in relation to the contractor’s entitlement to amounts due in respect of variations. Clause 52(1)(iv)(f) made provision for payment to be made to the contractor of amounts due in respect of variations if such an amount was “included in any interim payment certified by the Engineer pursuant to clause 60”. Having concluded that the contractor’s entitlement depended on a payment certified by the Engineer, Lord Hope continued (at 93):

The views which I have just expressed are, I believe, consistent with the authorities, apart from one or two cases which can be distinguished. The question whether the certificate, satisfaction or approval of the architect or engineer is a condition precedent to the builder’s right to sue is discussed in Hudson’s Building and Engineering Contracts (10th edn 1970) pages 420-425. The conclusion which is reached here, after a review of the cases, is that a certificate or approval is usually a condition precedent to the builder’s right to recover, but in the First Supplement (1979) it is pointed out, under reference to pages 424-425, that the wording needs to be carefully examined in each case and that the exact relationship of the provision to the remainder of the contract needs to be analysed.

44. Turning then to the construction of Special Condition 3, the introductory words to the Special Conditions announce that they are “to be used by the parties to enable the contract to be administered on behalf of the Owner”. That language does not foreshadow or suggest that the following provisions vary or modify in any respect the rights and obligations of the parties as to payments to be made under clause 17. On the contrary, the announced purpose of the Special Conditions is much narrower, and is to manage the implementation and working out of that contract on behalf of the Owner.

45. One of the matters to be administered or managed is the Owner’s payment obligations under clause 17, as clause 31 states in its definition of “Cost of Works” (see [14] above). Clause 2 of the parties’ agreement includes that the Owner pay the cost of the works plus the fee payable “at the times and in the manner required by the contract”.

46. In the Owner’s argument, the critical words are the introductory words to Special Condition 3: “In order to determine the amount of money, if any, payable to the Builder by the Owner…”. Those words state the purpose for which “the Architect [acting on behalf of the Owner] is to assess and certify [payment] claims by the Builder”. The Owner contends that the Architect’s certification can only achieve and satisfy that purpose if the amount so certified is the amount to which the Builder is entitled and which the Owner is liable to pay in respect of the payment claim.

47. There are at least five fundamental difficulties with this construction. The first is that the language of Special Condition 3 does not expressly describe or necessarily imply such an agreement. It does not purport to amend in any way the provisions of clause 17 by providing that certification by the Architect is a condition precedent to the Builder’s entitlements to receive and Owner’s obligations to pay dealt with by that clause. To that extent, the proposed construction is wholly inconsistent with the clear terms of clause 17; and with the exercise of the rights to suspend or terminate the contract, which are triggered by events including a default in satisfaction of the obligations in clause 17.

48. The second fundamental difficulty is related to the first. None of the Special Conditions provides that the certificates of the Architect are to be binding on the Builder and to have conclusive or some more limited effect. As Lord Hoffmann ventured in Beaufort Developments, “one should require very clear words before construing a contract as giving an architect” powers to issue certificates as to the value or cost of works for which the contractor is from time to time entitled to payment (at 275-276). That is more obviously so where the Special Conditions do identify the respects in which the Owner is to be bound by any instruction or direction or consent or decision of the Architect made in administering the contract on his behalf (Special Conditions 2 and 7(b)).

49. The third such difficulty is that to give the plainly insufficient words in Special Condition 3 that construction is inconsistent with the introductory words to the Special Conditions, which state their purpose as being to enable the administration of the contract to which the Special Conditions are attached.

50. The fourth is that there is an alternative construction of Special Condition 3 which is sensible and assists in administration of the Owner’s payment obligations in clause 17. Finally, there are the two matters referred to at [24]-[25], namely the fact that the Owner may terminate the Architect’s appointment at any time, and that the Architect is only described as acting on behalf of the Owner without having any independent role. Each of these matters is inconsistent with the position being as contended for by the Owner. The former matter demonstrates that what Special Condition 3 does is no more than transfer to the Architect during the period of the contract, unless the Owner decides otherwise, the function the Owner would have to perform for himself in receiving and assessing payment claims.

51. The construction for which the Builder contends is that the introductory words to Special Condition 3 are satisfied by an assessment and certificate which determines on behalf of the Owner the Architect’s opinion as to the amount to be paid by the Owner to the Builder. Whilst contesting that construction, the Owner rightly concedes that the Special Conditions should be construed conformably with the Conditions of Contract so far as is possible.

44. The Owner’s obligation under clause 17(b) is not to pay the amount claimed, but rather to pay the Cost of Works for the period for which payment is required, as well as the pro rata fee for that period. That amount may be more or less than that claimed in the Builder’s payment claim. To enable the Owner to assess for himself whether the amount claimed is the amount required to be paid, the Builder is to provide supporting evidence such as copies of invoices, receipts and account documents justifying any amount claimed (clause 17(d)).

45. Clause 17(b) and Schedule 1 Part B(c) then give the Owner a period of 10 days in which to undertake that assessment, or to have the Architect undertake it on his behalf. The introductory words to Special Condition 3 describe the purpose for the Architect’s doing so. The outcome described – to determine the amount of money (if any) payable to the Builder – informs and thereby enables the Owner to respond to the Builder’s claim. It does so in part by providing the Owner with evidence supporting his position in the event that the Owner proposes to pay less than the amount claimed. (For as Dyson LJ observed in Henry Boot at [23], the Architect’s certificate is some evidence of his opinion.) The certificate and the Architect’s knowledge, having completed the assessment process, is also likely to provide the Owner with an informed and sound basis for considering whether to engage the dispute resolution process in clause 24 in response to a particular payment claim.

46. It is unnecessary to decide whether the issue of a certificate by the Architect is also a “decision” within Special Condition 7(b), and accordingly one that the Owner is “bound by and cannot disregard” in deciding the amount that he will pay in satisfaction of the Builder’s payment claim. There is utility in the Owner having the benefit of the Architect’s opinion as to the amount due and payable. In deciding whether or not to pay the amount claimed or the amount as certified by the Architect or some other amount, the Owner ought be in a position to make an informed decision. That may not be the case in relation to a residential building contract where the Owner is administering the contract without the benefit of the Architect’s formal certificate.

47. For these reasons, the Owner’s construction of Special Condition 3 is simply not available having regard to the language which the parties have used, the nature of their cost plus contract under which monthly payment claims may be made, and the remaining provisions of that contract considered as a whole. Grounds 1 and 2 must be rejected.

48. Accordingly, the Owner’s appeal should be dismissed with costs.

49. BRERETON JA: I agree with Meagher JA.

50. KIRK JA: I agree with Meagher JA.

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Decision last updated: 13 September 2022