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17 August 2018

Is a final certificate under a building contract really final?

Although a final certificate is intended to mark a point of finality under a construction contract, a final certificate may not be as ‘final’ as you might think.


What is the purpose of a final certificate?

The purpose of a final certificate is to bring an end to all outstanding matters between the principal and the contractor, once the works are complete and all known defects have been rectified.

A final certificate is issued by the superintendent after the defects liability period has expired, and:

  • serves as evidence that the contract works are complete and the contractor has otherwise discharged its obligations;
  • identifies the moneys finally due and payable between the parties, mainly to ensure there can be no more claims by the contractor against the principal;
  • triggers an obligation for the principal to release the balance of any security provided by the contractor (assuming there is no money owed to the principal); and
  • brings an end to the role of the superintendent. 

What is the effect of a final certificate?

The effect of a final certificate will depend on the terms of the contract.

It will also depend on what is contained in the certificate, and whether the certificate is validly issued.

Just because a document purports to be a final certificate does not necessarily mean that it will have the effect of a final certificate. (You can read a Victorian case about this here.)

Clause 37.4 of AS 4000 (unamended) states 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’.

In other words, a validly issued final certificate will amount to ‘conclusive evidence’ that each party has performed all of their obligations under the contract.

There are however four express exceptions under AS 4000:

  • fraud or dishonesty;
  • defects or omissions in the works which were 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;
  • any accidental errors in computation; and
  • 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. 

Can a contractor be liable for defects after the final certificate?

Under most contracts (including AS 4000), the answer is ‘yes’. (Read our introduction to AS 4000 here.)

It will be difficult for a principal to pursue a contractor for a claim for a defect that was known to the principal at the time of the final certificate. In practice however, this situation rarely arises because superintendents and principals will usually require the rectification of all known defects prior to the final certificate being issued and the balance of the contractor’s security being released.

The more common scenario is where the principal only becomes aware of the defect after the final certificate was issued. In this scenario, the principal will typically be able to find a remedy.

Under AS 4000 (and many other contracts), the final certificate cannot be relied upon as a defence to claims in relation to defects which were not apparent, and which would not have been disclosed upon a reasonable inspection, at the time of the final certificate. A final certificate will not affect a principal’s right to bring a claim for a latent defect.

Similarly, there may be statutory remedies available to a principal in respect of any defects discovered after final completion. These may include warranties implied under home building legislation (such as the Home Building Act 1989 in NSW) or breaches of the consumer guarantees or misleading and deceptive conduct provisions contained in the Australian Consumer Law.

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Will a final certificate override a security of payment adjudication determination?

The answer to this question is probably ‘no’, at least where the contractor issues a notice of dispute within the time required by the contract. However, the position may turn on the individual facts of the case.

This question arises where the contractor obtains an adjudication determination in its favour under the security of payment legislation and, around the same time, the superintendent issues a final certificate certifying an amount in favour of the principal. That is, there are two competing certificates: one in favour of the contractor (under the security of payment legislation), and one in favour of the principal (under the contract). Read more about security of payment here.

As a matter of first principle, it would be easy to assume that a final certificate would prevail over an adjudication determination. This is because final certificates are intended to relate to the final position under the contract, whereas adjudication determinations are of an interim nature only.  See, for example, the legislative provisions in NSW, Victoria and Queensland.

However, the Queensland Court of Appeal has determined that an adjudication determination will prevail, at least where the final certificate is disputed by the contractor within the time required by the contract. 

Although the principal in Martinek sought to appeal this decision to the High Court, its application for special leave was refused. Consequently, it seems likely that the position reached by the Queensland Court of Appeal is likely to apply throughout the country.

Can a principal rely on a final certificate to support a claim against the contractor?

If the contractor does not issue a notice of dispute within the time required by the contract, and absent fraud or any other consideration that would render the certificate invalid, the answer to this question is ‘yes’.

However, if the contractor has issued a notice of dispute, the answer is probably ‘no’, although the position will depend on the wording of the contract.

The scenario that typically arises is this: the final certificate identifies an amount payable by the contractor to the principal (for example, for liquidated damages), which is then disputed through a notice of dispute by the contractor. However, the principal then attempts to claim the amount from the contractor.  If the principal holds security, the principal may also seek to call on that security in reliance on the final certificate.

This question has been considered by various courts. 

In several instances, and based on wording that was identical or substantially similar to the wording of clause 37.4 of AS 4000, the courts have found that a valid notice of dispute issued by the contractor within the required timeframe will be sufficient to prevent a principal from recovering the amount of the final certificate, at least until the final dispute is determined.  (You can find cases on this point here, herehere and here.)

Critically, in those cases, the terms of the contract provided that a notice of dispute issued within the required time frame would mean that the final certificate could not be taken as ‘conclusive evidence’ of the amounts payable between the parties.

However the cases also show that even minor differences in contract wording can result in a different outcome. 

For example, in Skilled Group v CSR Viridian, the Victorian Supreme Court found that a final certificate could be enforced even though the contractor had issued a notice of dispute.  In CMC, the Queensland Supreme Court reached the opposite conclusion.  In doing so, the court noted that the wording of the contracts in Skilled and CMC were different, and it was that difference in wording that resulted in the difference in outcomes.

Key takeaways for principals

For principals, the key takeaways are:

  • If you become aware of a defect during the defects liability period, act on it immediately and ensure the superintendent directs the contractor to rectify it.
  • If the superintendent issues a final certificate that fails to take into account a defect, issue a notice of dispute immediately and within any time required by the contract. Under AS 4000, the period is 7 days.
  • At the time of entering the contract, consider incorporating amendments or special conditions to (1) ensure your right to claim for defects is not affected by the final certificate, and (2) ensure you can rely on the final certificate to claim money from the contractor (and call on the contractor’s security), even if the contractor disputes the final certificate within the time required by the contract.
  • If the contractor applies for an adjudication under the security of payment legislation, you may need specialist advice to determine whether you will be able to rely on a final certificate to avoid having to pay the amount of any adjudication determination made against you.
  • Be aware that, if a defect arises after the final certificate has been issued, you are likely to still be able to claim against the contractor. (Read more about that here.)

Key takeaways for contractors

For contractors, the key takeaways are:

  • If you disagree with a final certificate, make sure you issue a valid notice of dispute within the time required by the contract. Under AS 4000, the time period is 7 days.
  • If the principal is withholding payment from you by reason of the final certificate, be aware that the security of payment legislation may provide a way to recover the amount relatively quickly, and before the dispute over the final amount payable has been determined.
  • Be aware that you can be held liable for defects after the final certificate has been issued. (You can read more about that here.)

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About the Author

Morgan McIntosh | Associate

Morgan is a commercial lawyer whose practice is mainly focused on transactional matters in the construction space.


morgan.mcintosh@turtons.com | (02) 9229 2901

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Morgan McIntosh | Associate

Author

Morgan McIntosh | Associate

morgan.mcintosh@turtons.com

Morgan is a commercial lawyer whose practice is mainly focused on transactional matters in the construction space.


morgan.mcintosh@turtons.com | (02) 9229 2901

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