Canada: Final Certificate Of Payment – Final No More

Last Updated: June 13 2014
Article by Roy Nieuwenburg, Michal Jaworski and Cheryl Kornder

BC Supreme Court declines to apply final payment certificate release to deny previously unstated claim for interest on late payments

BC Supreme Court decision in First Queensborough Shopping Centres Limited v Wales McLelland Construction Company (1988) Ltd.

Paying invoices late is common—so much so that paying 'on time' is a mark of an exceptional business relationship. Of course, that flies in the face of almost all construction contracts, because they normally require prompt payment and impose interest on late payments. So, to put it another way, it is normal (but not optimal) for those owed money to allow some leeway on the timing of bill payments. This is especially so when demanding prompt payment and charging interest on outstanding bills may put you on "the blacklist".

At some point, however, it's reasonable for a contractor or consultant to say "enough is enough", and demand not only prompt payment, but the interest that has accrued.

While such a demand made in the course of the performance of a contract is clearly contemplated (and therefore permitted) in most CCA and CCDC standard forms, what happens if a contractor waits until after the final payment is certified to make its claim for interest? Isn't the contractor supposed to prepare a final certificate of payment, and once it is certified, isn't that supposed to waive and release the Owner from all claims against the Owner?

In the recent First Queensborough v. Wales McLelland case, the BC Supreme Court heard and accepted the contractor's argument that, such an "end of project" cross release provision contained in the CCA–14 did not prevent the contractor from claiming interest that accrued during the performance of the contract – even though the contractor had not made a claim for such interest in any progress draw, nor the final certificate of payment.

Summary of the case

The Owner, First Queensborough Shopping Centres, hired Wales McLelland as Design Builder pursuant to a CCA–14 Design Build contract. The Owner consistently made progress payments late, and made the final payment late. The Contract provided for interest to be paid at prime + 1% on late payments.

The Contract said, when the Design Building considers that total performance of the work has been achieved, the Design Builder must submit an application for final payment to the payment certifier. Once that final certificate for payment is certified, the Contract said "the Design Builder expressly waives and releases the Owner from all claims against the Owner... except those made in writing prior to the Design Builders application for final payment and still unsettled".

The Design Builder did not claim interest at the time of making its application for final payment, and in fact, entered into 13 additional contracts with the Owner. A few years later, likely because of the Owner's continued practice of paying invoices late and quickly elapsing limitation periods, the Design Builder came back to claim the interest on this Contract (which will, presumably, settle the issue on the other 13).

The Owner relied on the release provision to settle the matter.

The matter was heard first in small claims court. There, the judge ruled that the release provision should not apply in the circumstances. The Owner appealed to the BC Supreme Court.

The BC Supreme Court's reasons

Three fundamental rules of contractual interpretation come into play in this case:

  • individual provisions cannot be considered in isolation (i.e. must be read in context);
  • commercial contracts must be interpreted in accordance with sound commercial principles and good business sense; and
  • the Court's goal is not to discover what the parties thought the Contract meant when they signed the Contract, but what, objectively, their intent was, given the words they chose.

The Owner took the position that the release clause spoke for itself – the release clause says, in effect, you, Design Builder, have the opportunity to make all your claims known to us while the contract is proceeding, but if you don't bother to do so, then the final certificate of payment extinguishes outstanding claims.

The Court's reasons are an interesting read, so here are the choice parts:

"[45] ... the respondent [Design Builder] argues that the appellant [Owner]'s interpretation of the release clause makes no commercial sense. The appellant [Owner]'s interpretation means that all of the appellant [Owner]'s obligations, including the monies due under the final payment certificate, would be extinguished at the date of that certificate. It would be impossible for interest to accrue if the payment was overdue as the release clause would extinguish any claims. Certainly, this consequence is not what the parties agreed to in their original Contract.

[46] The respondent [Design Builder] recognizes that the release clause was intended to ensure timely notice to the appellant [Owner] of any claims outstanding at the date of the final certificate.

============

[49] The respondent argues that it did not expressly or by conduct represent that it would not enforce its contractual rights. That it delayed suing for its interest claim is not conduct that demonstrates it intended to change their legal relationship. The respondent was subject to the Limitations Act, and within the legislated timeframe, it could sue for debts owing to it. The equitable estoppel defence is not a defence to a claim delayed for good reason.

[50] Moreover, the respondent asserts it did not pursue the interest because the appellant would have blacklisted the respondent or refused to enter into further contracts with the respondent if it knew the respondent would insist on its contractual right to interest on all unpaid accounts.

[51] The respondent argues that the trial judge found the appellant's actions deeply troubling and recognized the preceding point. The appellant claimed relief from its interest obligations because the respondent did not pursue its interest claims before entering into 13 other contracts with the appellant and related companies. The trial judge concluded that if the respondent had insisted on its right to interest, no further work would have been made available to it.

============

[85] Rather, looking at the Contract objectively, the parties intended that interest would have continued to accrue until the full balance was paid.

[86] Just as the Contract language cannot be interpreted in a commercially reasonable sense to deprive the Design Builder of the balance of its final account after the certifier issued the payment certificate, no commercial or sound reason justifies construing the Contract to deny the respondent [Design Builder] interest on amounts the owner had not paid at the date of the payment certificate.

[87] This appellant [Owner]'s literal interpretation of the clause is completely against rational commercial principles and good business sense and, when considered in light of the entire Contract, the meaning contended by the appellant [Owner] does not, objectively reflect the parties' intention. The Contract required the appellant [Owner] to pay the full contract price at the end of the Contract; this amount should rationally include the accrued interest and any amounts that became due after the final payment certificate was issued.

[88] The parties cannot have intended that triggering the appellant [Owner]'s obligation to pay the Contract price simultaneously extinguishes the obligation to pay the full Contract price.

[89] Whether it is lack of clarity or ambiguity in the Contract, the trial judge was correct in her conclusion that the release and release clause did not apply to any part of the Contract price that is payable to the respondent [Design Builder] upon issuing the payment certificate.

[90] In this case, the release clause did not extinguish claims for interest that had accrued up to issuing the payment certificate or after. Those charges were payments on the Contract price that the appellant [Owner] had to pay the respondent [Design Builder].

Don't underestimate the influence of the Court's general sense of fairness

The Court's reasoning makes good sense when it comes to the Owner's continuing obligation to pay the final installment of the contract price (and any interest for late payment of that final installment). It is obvious that a certificate of payment cannot simultaneously serve notice for the owner to pay, and release the Owner from the obligation to pay.

However, to extend that reasoning to claims for interest that arose well before the final payment and that the Design Builder did not previously assert is evidence, in our view, of the one core principle that underlies most legal principles, including the three we listed above: the Court will strive (and in some cases strain mightily) to arrive at an outcome the Court considers palatable, whatever language might appear in a contract.

What's good for the goose is good for the gander

This case is unhelpful to owners in regard to a contractor's claim for interest (or, for that matter, any other claim that a contractor might choose to advance after application for final payment).

On the other hand, the reasoning would be helpful to an owner in a case where the owner had a claim for certain construction deficiencies, such as where it appeared that the contractor failed to comply with the contract specifications. For example, if a commercial building or structure collapsed or had structural deficiencies because the contractor skimped on the specified amount of reinforcing steel or the mix or quantities to be used for the concrete, this case could be helpful for an owner to argue that the release language should likewise not apply – i.e. the owner would argue:

"... understood, the release provision would apply if the contractor complied with the specifications, but if the contractor played "fast and loose" in regard to complying with the specs, then similarly 'the Contract language cannot be interpreted in a commercially reasonable sense to deprive' the owner of its remedy ..."

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Authors
Roy Nieuwenburg
Cheryl Kornder
 
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