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Is a progress certificate issued by the Superintendent (or Architect) a payment schedule for the purposes of security of payment?

It is trite that the “East Coast model” security of payment legislation provides that a respondent in receipt of a payment claim may provide a payment schedule in response[1].  If a respondent fails to provide a payment schedule within the relevant statutory timeframe, generally, the respondent becomes liable to pay the claimed amount[2].

What happens in a case where the contract is administered by a third party – e.g. a project manager, superintendent, architect or quantity surveyor – who provides a progress certificate to one or both parties?  E.g. the superintendent’s certificate under clause 37.2 of an AS4902-2000 or the architect’s certificate under clause N5.1 of the ABIC MW 2018?

Is this certification a payment schedule for the purposes of security of payment?

In our view, the answer will generally be yes.  Below is a summary of some case law in support of our view.

RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 (RHG Constructions)

In RHG Construction, the Queensland Court of Appeal considered an amended AS4902-2000 contract and whether or not the provision of a payment certificate by the superintendent was a payment schedule under the Building Industry Fairness (Security of Payment) Act 2017 (BIFA).

Clause 37.2 of that contract was in generally standard form terms, requiring the superintendent to receive payment claims and issue to the principal and contractor:

“a certificate evidencing the Superintendent’s assessment of retention moneys and moneys due from the Contractor to the Principal pursuant to the Contract.”

Clause 37.2 of the contract contained the following paragraphs included by way of amendment to the AS4902-2000 standard drafting (Deeming Clause):

“In so far as necessary to ensure compliance with the Security of Payment Act, the Superintendent is deemed to issue any payment schedule under clause 37.2 or final payment schedule under clause 37.4 as the agent of the Principal and each such schedule shall constitute a payment schedule for the purposes of the Security of Payment Act.

For the purposes of and where permitted by the Security of Payment Act, each of the dates for delivery of a payment claim in subclause 37.1 constitutes a reference date.”

The contractor issued a payment claim and the superintendent issued an assessment within the relevant statutory timeframe[3].  The assessment stated (relevantly):

“This Payment Schedule has been produced pursuant to the Works Contract for the residential flat being constructed at 98 River Terrace, Kangaroo Point, between the Principal ‘Kangaroo Point Developments MP Property Pty Ltd’ and the Contractor ‘RHG Contractors Pty Ltd’. This Payment Schedule confirms that the Superintendent has assessed, calculated and certified the proper value of Work Under the Contract.”[4]

A week later, the principal’s solicitors issued correspondence enclosing a further purported “payment schedule” to the contractor denying the validity of the payment claim and stressing that if it was incorrect on that point, the document under the correspondence was to be taken to be the principal’s payment schedule for the purposes of the BIFA[5].

The contractor proceeded to adjudication citing the superintendent’s assessment as the principal’s payment schedule under the BIFA and the adjudicator agreed[6].  The principal applied to court for an order declaring the adjudicator’s determination void.

At first instance, Dalton J agreed with the principal that (notwithstanding the Deeming Clause) the superintendent’s assessment was not a payment schedule and ordered the adjudicator’s determination void.  Her Honour considered that the assessment did not comply with s 69(b) of the BIFA because it was a recommendation only as to payment and the document failed to state “the amount of the payment, if any, the respondent proposes to make”, as required by the BIFA[7].

The Queensland appellate court (Sofronoff P, wth McMurdo and Mullins JJA agreeing) overturned the trial judge’s order.  Sofronoff P said the following as to the standard form clause 37.2:

“For many years now, those engaged in construction have employed the standard form contracts drafted by a committee of Standards Australia, a not-for-profit company which, among other things, prepares draft general conditions of contract for various kinds of commercial transactions… Clause 37, which deals with progress claims, as been in its current form since 2004 when the Act of that year was passed.  It has been the subject of much academic analysis and has doubtless been relied upon by commercial parties thousands of times since then.  The effectiveness of clause 37.2 to engage the adjudication provisions of the 2004 Act, and now the current Act, has never been called into question.[8] (emphasis added)

The effect of the issue of the certificate by the superintendent was the triggering of the principal’s obligation to pay.  Accordingly, the certificate does meet the requirement of s 69(b) of the BIFA[9].

The Deeming Clause was, therefore, “neither artificial nor contrived” [10].  The court considered it relevant that there was no other contractual mechanism whereby a payment schedule would be provided[11].  It would be commercially unworkable for the principal and the superintendent to each issue payment schedules (i.e. one for the purposes of statute and one for the purposes of the contract) because they may differ materially (e.g. provide a vastly differing scheduled amount) [12].

Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 (Bucklands)

We are not sure whether Sofronoff P’s comment that the effectiveness of clause 37.2 of the Australian Standard contract had never been called into question considered authorities from other east coast jurisdictions.

For example, in Bucklands, Hammerschlag J considered the effectiveness under the NSW statute of clause 37.2 of the AS4000-1997, which provides for the same mechanism of superintendent assessment as the AS4902-2000.

While His Honour considered that the question of jurisdiction should be determined by the adjudicator at first instance[13], His Honour[14], noted that a principal may clothe an agent with authority to provide a payment schedule on their behalf for the purposes of the Building and Construction Industry Security of Payment Act 1999 (NSW) (NSW Act).  The requirement for the superintendent to act honestly and impartially in performing certain functions under the contract, including assessing payment claims, is not the issue at hand[15].  The question:

“…is whether in the circumstances Simmat was exercising function under the contract. Whether it was or was not is a matter of fact. As a matter of law it does not seem to me that a person who is a Superintendent under a contract and who has certifying functions under it is incapable of being appointed as agent to respond to a payment claim under the Act.”[16]

The question was not answered in Bucklands as this was the job of the adjudicator.

However, His Honour’s comments suggest that the use of the standard-form contractual mechanism by the superintendent when progress certificates is likely to give rise to an implication that the superintendent had authority to issue a statutory payment schedule and that the payment certificate was indeed to be interpreted as such.  We consider it likely that the courts would continue to take positions on these issues which is facilitates the objects of the legislation, rather than unduly technical interpretations which themselves would prejudice a party.

Take away tips

As:

  1. the agent (e.g. superintendent, architect, quantity surveyor, etc) will usually act as agent of the respondent under the contract for the purposes of issuing progress certificates (even if they must assess payment claims honestly, reasonably, fairly or the like); and
  2. judicial interpretation of the interplay between widely-used standard form contractual mechanisms tends to favour and facilitate commercial workability,

we are of the view that additional drafting of the kind of the “Deeming Clause” in the RHG Constructions case may not necessarily be required to ensure compliance with the legislation and ensure that the respondent’s interests will not be prejudiced[17].  However, if it is omitted, ensuring that the agent’s payment certificate:

  1. states that it is a payment schedule under the relevant legislation; or
  2. annexes a further document provided by the respondent confirming that the superintendent’s assessment of the amount payable should be taken to be the scheduled amount under the legislation,

are prudent steps to take.  It would also be beneficial for the contract or terms of engagement between the agent and the respondent to expressly state that part of the agent’s engagement is to issue payment schedules under the legislation on behalf of the respondent, having regard to Bucklands and the classic agency case Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

What to do if you are the respondent party (e.g. the principal or owner) and you disagree with your agent’s assessment of the payment claim?  That will be the subject of one of our next articles!

[1] E.g. see s 14(1) of the NSW Act.

[2] E.g. see s 14(4) of the NSW Act (subject to s 17(2)).

[3] Kangaroo Point Developments MP Property Pty Ltd v RHG Construction Fitout and Maintenance Pty Ltd & Ors [2021] QSC 30 at [5].

[4] Ibid at [13].

[5] Ibid at [6].

[6] Ibid at [19].

[7] Ibid at [14].

[8] RHG Construction Fitout and Maintenance Pty Ltd v Kangaroo Point Developments MP Property Pty Ltd & Ors [2021] QCA 117 at [23].

[9] Ibid at [27].

[10] Ibid.

[11] Ibid at [28].

[12] Ibid.

[13] Bucklands Convalescent Hospital v Taylor Projects Group [2007] NSWSC 1514 at [26].

[14] At [33] referring to Baulderstone Hornibrook Pty Ltd v Queensland Investment Corporation [2007] NSWCA 9.

[15] Ibid at [34].

[16] Ibid at [35].

[17] Assuming the respondent agrees with the superintendent’s assessment.

See more! The superintendent and the principal

To those working at building sites, the term “superintendent” may seem as familiar and self-explanatory as “extension of time” or “practical completion”.

However, when disputes arise fine distinctions become important. Even experienced builders, just like experienced judges, have trouble working out what the superintendent is required to do in contentious times.

This is because the superintendent has multiple duties to different parties. They have the difficult job of navigating conflicting interests, and this becomes much harder when the relationship between the principal and contractor has deteriorated.

Although the precise duties of a superintendent will always depend on the terms of the contract, we will describe in general terms some obligations that participants in a building project must be aware of. We will also take a real-life case study to illustrate some of these points.

The role

Sometimes called “contract administrator” or “architect”, the superintendent’s precise role will vary as it is largely determined by the terms of the contract between the principal and the contractor. The parties may agree by contract to restrict or widen the superintendent’s functions, and courts will generally allow this.

However, there are a number of general commonalities to this role across different projects. In most cases, the superintendent has a dual role or function:

  1. On the one hand, the superintendent will often be the agent of the principal, and will perform functions on behalf of the principal such as issuing directions to the contractor, varying the scope, of works, making approvals, or receiving notices;
  2. On the other hand, the superintendent will often be responsible for certifying, assessing and valuing items under the contract, including progress claims, extension of time claims, liquidated damages, and practical completion.

The principal is required to ensure that for the second set of functions above, the superintendent act “honestly and fairly” (or otherwise, “reasonably and in good faith”).

Often this is an obligation to exercise impartial and independent judgment, and to reach a decision without taking improper considerations into account. They should afford procedural fairness to both parties, giving notice of the issues it is considering and allowing both parties to communicate to them their submissions.

In general, for these second set of functions, the interests of not only the Principal, but also those of the Contractor, must be considered. All too often, superintendents fail to understand their obligations of independence and this triggers court proceedings.

In practice, this dual role can be complicated. Superintendents are generally appointed by the principal. They are very often either a part of a firm consulting to the principal, or they are an employee of the principal. Even if there is no pressure exerted by the principal, they are paid by the principal. Exercising their judgment impartially in this context can be very challenging.

A superintendent is not a party to the contract. It is unlikely that they will themselves be the subject of court proceedings. However, their decisions may give rise to disputes as between the principal and contractor.

Case Study

The New South Wales Court of Appeal has given some guidance for what is considered appropriate action by a superintendent under a construction contract, in the case Peninsula Balmain Pty Ltd v Abigroup Contractors Pty Ltd [2002] NSWCA 211.

Peninsula and Abigroup entered into an AS2124 building contract. Abigroup sought payment of a progress claim. The following month, Peninsula issued a notice to Abigroup requiring Abigroup to show cause that a contractual right to terminate should not be exercised, and cross-claimed for liquidated damages under the contract.

In response, Abigroup moved to terminate the contract, claiming that Peninsula had breached the then Trade Practices Act (which has since integrated into the broader Australian Consumer Law), for failing to disclose an agency agreement for design and construction projects between Peninsula and the superintendent.

The Court considered the whether Peninsula contravened the Trade Practices Act for failing to disclose to Abigroup the agency agreement with the superintendent?

On appeal, Hodgson JA held:

“the superintendent is the owner’s agent in all matters only in a very loose sense, and 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.”

The Court concluded that the superintendent is to exercise their power in the interests of both parties and, is to act honestly and impartially and not as an agent of the owner in undertaking certifying functions such as assessments of variations, delays and progress claims.

There was also an argument that the superintendent should have but failed to exercise its power to award an extension of time. It was common ground that Peninsula Balmain had caused delay, but that Abigroup had not applied for the extension of time or followed the proper procedure. However, the extension of time clause included a paragraph that read: “Notwithstanding that the Contractor is not entitled to an extension of time the Superintendent may at any time and from time to time before the issue of the Final Certificate by notice in writing to the Contractor extend the time for Practical Completion for any reason.”

Hodgson JA found that, even though Abigroup had not applied for the extension of time, “this power is one capable of being exercised in the interests both of the owner and the builder, and in my opinion the Superintendent is obliged to act honestly and impartially in deciding whether to exercise this power”. In the facts of the case, the finding was that if the superintendent had acted fairly and impartially, they would have awarded the extension of time. The date for practical completion was extended, and liquidated damages were reduced.

This ruling was dependent on the particular extension of time clause of the case, and the facts of the dispute. However, it powerfully reinforces the point that even though the superintendent is the agent of the principal, they are obliged to act honestly and fairly in discharging certain functions, unless the contract says otherwise.

Conclusion:

In conclusion, the role of a superintendent is very demanding and requires a high level of understanding of contract law, the responsibilities, the specifics of the project, and a high skill of identifying and managing conflicts. If you have any queries about your obligations under a construction contract, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au