Disputing a Final Certificate: What you need to know

Contract Administration

In the usual lifecycle of a project, the final certificate is issued at the end of the defects liability period, which is usually at least 12 months after practical completion of the works. 

It is critical for contractors to be aware of the implications of the final certificate being issued and if there are disputes as to the content of the final certificate, to immediately take steps to protect their position.  This includes to preserve entitlement to payment, to resist recovery of payments by the Principal and to protect security and retention money from recourse.

Final payment claims and certificates

When the Contractor considers that it has completed all work and obligations under the Contract, it will need to issue a final payment claim in the manner and timeframe prescribed by the Contract.

Following this, the Superintendent will issue a final certificate which evidences the final amounts due and payable under the Contract between you and the Principal.

For example, clause 37.4 of the AS 4000-1997 prescribes that

The final certificate shall be conclusive evidence of accord and satisfaction, and in discharge of each party’s obligations in connection with the subject matter of the Contract except for:

a)         fraud or dishonesty relating to WUC or any part thereof or to any matter dealt with in the final certificate;

b)         any defect or omission in the Works or any part thereof which was not apparent at the end of the last defects liability period, or which would not have been disclosed upon reasonable inspection at the time of the issue of the final certificate;

c)          any accidental or erroneous inclusion or exclusion of any work or figures in any computation or an arithmetical error in any computation; and

d)         unresolved issues the subject of any notice of dispute pursuant to clause 42, served before the 7th day after the issue of the final certificate.

Therefore, in a contract containing a clause in the above terms, the final certificate will be taken as conclusive record of all monies owing unless one of the exceptions apply.

Contractors should carefully review their contracts to identify the effect of the final certificate and the extent of the application of any exceptions.

If you disagree, issue a notice of dispute

Given the effect of clauses like clause 37.4 in the AS 4000-1997, if you disagree with the final certificate, you should immediately serve a notice of dispute in accordance with the formalities and timeframe stipulated under the Contract. Under the AS 4000-1997, this timeframe is 7 days (clause 37.4).

The intention of issuing this notice of dispute is to deny that the final certificate is “conclusive evidence of accord and satisfaction” among the parties of the final amounts due and payable under the Contract.

However, whether or not a notice of dispute will in fact have this effect depends heavily on the wording of the relevant contractual clause.

Notice of dispute “qualified” the final certificate

In Martinek Holdings Pty Ltd v Reed Construction (Qld) Pty Ltd [2009], the Contractor successfully challenged the final certificate, with the effect that the Contractor did not have to immediately pay the amount certified as payable to the Principal.

Considering clauses 37.4 and 42.1 of the unamended AS 4000-1997, the court held that the issue of a valid notice of dispute “qualifies” a final certificate. If the final certificate is qualified in this way, no right to payment under the final certificate arises by way of clause 37.4 until the dispute is resolved.

An adjudication decision was made in favour of the Contractor and the decision had been converted into an adjudication certificate and judgment of the Supreme Court pursuant to sections 30 and 31 of the Building and Construction Industry Payments Act 2004 (Qld). Under the adjudication decision, the Principal was obliged to pay the Contractor approximately $920,000 in respect of a progress claim.

However, following this decision, the Superintendent issued a final certificate in respect of the same progress claim that asserted that the Contractor was liable to pay around $72,000 to the Principal. The Contractor issued a notice of dispute in relation to the Superintendent’s final certificate and the Principal commenced proceedings in the Supreme Court arguing that the Superintendent’s final certificate operated to supersede the adjudication decision.

The court found that the notice of dispute issued by the Contractor in relation to the final certificate “qualified” the effect of the final certificate. Therefore, the Contractor’s obligation to pay the amount certified in the final certificate was delayed, and the adjudication decision remained in force until the dispute was resolved between the parties.

Notice of dispute did not impact the final certificate

This result may be slightly harder to achieve under a contract based on the AS2124-1992. For example, in Skilled Group Ltd v CSR Viridian Ltd [2012] VSC 290(‘CSR’)the court, interpreting an amended AS 2124-1992, rejected the argument that issuing a notice of dispute was enough to neutralise the obligation to pay under a final certificate.

Instead, the court stated that in the circumstances of the specific Contract at hand, the obligation to make the payments certified under the final certificate would subsist unless or until the certificate was successfully impugned in arbitration or litigation or otherwise resolved with a binding settlement.  

Thus, the only effect of the notice of dispute in CSR was to deprive the final certificate issued by the Superintendent of its “special evidentiary status”. This did not, however, disrupt the obligation to pay. In Vickery J’s opinion, this interpretation was supported by clause 47.1 which stated,

Notwithstanding the existence of a dispute, the Principal and the Contractor shall continue to perform the Contract and the Contractor shall continue with the work under the Contract.

Notice of dispute disrupted obligation to pay

In contrast, the court in Civil Mining & Construction Pty Ltd v Wiggins Island Coal Export Terminal Pty Ltd [2017] QSC 85 (‘CMC’), also interpreting an amended AS 2124-1992, reached the opposite conclusion. Specifically, much emphasis was placed on the phrase “subject to the provisions of the Contract” which appeared in clause 42.1 of the CMC contract but not in clause 42.1 of the CSR contract. 

In CMC, this phrase was enough to recognise that the obligation to pay under a final certificate was not simply an unqualified obligation, therefore, a valid notice of dispute was enough to disrupt the obligation to pay under the final certificate until the dispute was resolved.

Overall, the effect of issuing a notice of dispute in response to a final certificate varies according to the specific makeup of the Contract at hand. But in any event, the key takeaway for Contractors should be that it is always better to issue a notice of dispute, even if its only effect is to deprive the final certificate of its “special evidentiary effect”.

Preventing recourse to security

The notice of dispute may have a similar effect in depriving the Principal of its ability to have recourse to a contractor’s security.

For example, in Tomkins Commercial & Industrial Builders Pty Ltd v Majella Towers One Pty Ltd & Anor [2017] the Queensland Supreme Court agreed that the effect of issuing a valid notice of dispute was to prevent the amount certified in the final certificate becoming due and payable. Therefore, considering the unamended clause 5.2 from the AS 4000-1997, the Principal had no right to call on the Contractor’s security as such a right only arises in respect of monies presently due and payable under the Contract.

In the AS 2124-1997, the right to have recourse to security also only arises when a party has a right to payment under the Contract (clause 5.5). Therefore, if it is a case like CMC, where a notice of dispute is effective to stall the obligation of the Contractor to pay in respect of a final certificate, the Principal will also likely have no recourse to the Contractor’s security in the interim while the dispute is being resolved.

Key Takeaways

The notice of dispute can be an extremely valuable tool especially at the end of a project. So, to ensure that you do not have to accept less than you deserve or pay more than you need to, it is important to be across the following:

  • the length of the defects liability period under the Contract;
  • the time for issuing your final payment claim;
  • the amounts listed in the final certificate when the Superintendent issues it;
  • the timeframe under the Contract for disputing the final certificate; and
  • the notice of dispute procedures under the Contract.

And remember, it is always better to err on the side of caution, so if you do not agree with the amounts stipulated in the final certificate, issue a notice of dispute.

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