Construction companies should remember the importance of contractual language when it comes to payment contingent on third-party certificates. In Pentad Construction Inc. v. 2022988 Ontario Inc., the Ontario Superior Court of Justice offers important considerations for companies involved in the construction pyramid.
Background
This case deals with a dispute between a sub-contractor and the project manager of a residential development. A dispute arose during the contract regarding the outstanding payments and value of work completed by the sub-contractor. The contract between the parties stipulated "work performed/provided under [the] Contract shall be inspected for quality and quantity and certified complete, received and approved by authorized Engineer, prior to any sums becoming due hereunder."
The project manager failed to certify claims for payments and indicated that the sub-contractor has been overpaid during the course of the contract. This resulted in the sub-contractor halting work and registering a construction lien. In turn, the project manager brought a motion to reduce the amount of security posted to zero.
The law holds that "where payments are dependent on certification, the determination of the payment certifier is final and binding, absent fraud or bad faith, or a knowing and wilful disregard of duty." In contract law, the "cardinal presumption is that parties meant what they said." As a result, the terms of an agreement will govern the parties. The Court held, that the parties agreed to a payment certification provision and are bound by the decisions of the third-party certifier.
Why is this important?
It is necessary to be attentive to this type of contractual language and whether there is a clear and binding process for certifiers' decisions. When you are in a contractual dispute, here are some key considerations to remember. First, contractual interpretation is "grounded in the text and read in light of the entire contract." Second, courts presume that parties are meant to be bound by what they agree to. Finally, absent fraud or bad faith, when made in the context of a contractual provision, the decision of a third-party payment certifier is binding.
Originally published October 14, 2021
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