Payment Certificates – The Final Say?
Pentad Construction Inc. v. 2022988 Ontario Inc., a recent decision of the Ontario Superior Court of Justice, held that a third party engineer’s payment certification alone was conclusive and binding of the amount owing to a subcontractor, notwithstanding that a dispute existed between the subcontractor and the construction manager. The decision demonstrates the possible consequences of not including language within construction agreements that characterizes payment certification as non-binding or provisional.
An overview of the case
The decision concerns a motion under s. 44(5) of the former Construction Lien Act (CLA)1, for an order reducing the amount of the security posted to vacate a lien on the ground that there is no reasonable basis for the amount claimed.
Pentad, the plaintiff, was subcontracted by the defendant, Armor, to perform certain early works relating to a residential construction project in 2016. The subcontract contained the following provision relating to payment certifications:
4.1 [Pentad’s] work performed/provided under this Contract shall be inspected for quality and quantity and certified complete, received and approved by [Armor’s] authorized Engineer, prior to any sums becoming due hereunder.
Pentad began work on the project in January 2017 and then removed its resources in January 2018 due to non-payment of its invoices. Pentad alleged that it was last paid pursuant to a payment certificate issued in August 2017 for an earlier invoice. Pentad continued to work on the project every month between August 2017 and January 2018, and issued invoices to Armor in October 2017, November 2017, as well as in February 2018. These three invoices were not certified by the Engineer or paid by Armor.
Pentad registered a lien against the property on February 23, 2018 in the amount of $479,364.57, which was vacated from title upon Armor posting security in the amount of $529,364.57.
In March 2018, the Engineer issued a new payment certificate, which showed Pentad had been overpaid to date leaving a negative balance owing. As such, a dispute existed between the parties regarding the value of the work completed by Pentad and accordingly the amount of payment owing by Armor. Armor then brought a motion seeking an order reducing the security posted for Pentad’s lien.
The Court held that the March 2018 payment certificate was final and binding based on section 4.1 of the subcontract, and reduced the security posted for Pentad’s lien to $24,000. In particular, the Court held there was no indication the Engineer’s certifications were intended to be non-binding or provisional, and thus could only be invalidated if the Engineer acted in bad faith, fraudulently, failed to be impartial, or knowingly and wilfully disregarded its duty.2 The Court applied the same reasoning to claimed extras that were not approved in writing or certified for payment by the Engineer.3
While the Court afforded complete deference to the payment certifier in the decision, it is important to note that this conclusion was informed by the terms of the applicable contract. The Court specifically noted, “Contractual language that characterizes payment certifications as non-binding or ‘provisional’ will, of course, not have the same force and effect as provisions that make it clear that the payment certifications are intended to be final and binding.”4
Certain standard form construction contracts that contemplate payment certification by a third party, such as various CCDC forms, may provide recourse to parties who disagree with findings of the payment certifier. Such contracts could potentially circumvent the issue presented in the decision by establishing the payment certifier’s provisional authority, a dispute resolution mechanism, or reservation of rights provisions. These terms could be useful to avoid parties being finally bound by a third party’s payment certifications such that disputes with regard to the value of work performed may be addressed on their merits.
Parties to any construction contract should, therefore, understand and be mindful of the extent of a payment certifier’s authority, and include such considerations as part of their contractual risk assessment. In circumstances where a CCDC or other standard form contract is used, carefully drafted supplementary conditions may be necessary to address the issue. Similarly, where parties prefer to create a tailored contract, the same drafting considerations should be undertaken. In any case, owners, contractors, and subcontractors may be well served by considering the risks associated with the drafting of the payment certification process in order to address the finding in the decision.
Finally, as noted above, the decision concerns a motion under the former CLA. Whether the Court’s reasoning would apply under the current Construction Act5, has not yet been determined by a binding authority.
Andrew Punzo is a partner at BLG, practicing in the Construction Group, and Daniel Milton is an associate in BLG’s Disputes group.
Although care has been taken to ensure accuracy, this article should not be relied upon as legal advice.
1 Construction Lien Act, RSO 1990, c C30, s 44(5).
2 Pentad, at para 93.
3 Pentad, at para 123.
4 Pentad at para 94.
5 Construction Act, R.S.O. 1990, c. C.30