At issue in the recent Ontario Superior Court of Justice decision in Federated Contractors Inc. v. Ontario Realty Corp. was the legal effect of monthly payment certificates issued by an architect or engineer pursuant to a stipulated sum contract.

The action arose out of a contract for the renovation and expansion of the St. Lawrence Valley Treatment Centre, a secure facility and treatment center located in Brockville, Ontario. The prime contract of over $41 million was between Ontario Realty Corp. as owner and PCL Constructors Canada Inc. (“PCL”) as general contractor. Lockerbie & Hole Contracting Ltd. (“Lockerbie”) was the mechanical subcontractor to PCL, and entered into a further subcontract for the sum of $1,679,400.00 (plus GST) for the provision of sheet metal work by the plaintiff, Federated Contractors Inc. (“Federated”).

Following concerns with Federated’s work and failure to provide sufficient labour in light of union action on site, Lockerbie terminated Federated’s contract. At the time, Federated had been paid $591,581.77 on account of issued payment certificates in the amount of $1,043,238.22. Federated’s action sought payment of the $451,656.45 remaining under the certificates, as well as several alleged extras. Lockerbie’s position was that Federated’s billings were severely “front-loaded”, but that this practice is common in construction contracts and is typically counterbalanced by a payment certifier’s ability to withhold substantial completion and final payment until all work is complete and deficiencies rectified at the end of the contract. In the interim, Lockerbie submitted, the use of monthly payment certificates is merely a mechanism and that these certificates are provisional and subject to reassessment as to true value. Lockerbie adduced the evidence of a quantity surveyor to show that Federated was actually paid for the approximate value of the work it provided to the project. Federated, on the other hand, took the position that monthly certificates are final and conclusive and cannot be reopened once issued.

At the beginning of trial, the Honourable Justice Colin McKinnon agreed to hear a motion with argument on the discrete issue of payment certificates and to make a ruling prior to any witnesses being called by the parties. Justice McKinnon ruled in favour of Federated in finding that, absent fraud, monthly payment certificates are final and conclusive. Following the decision on the issue of certificates, the parties reached a settlement as to the remaining issues in the case and the trial was discontinued.

The contact between Lockerbie and Federated was standard in its wording pertaining to payment certification by an owner’s payment certifier and stated that the certifier was the interpreter at first instance of “whether or not the quality or quantity of the work and/or any material supplied or proposed to be supplied by the Contractor meets the requirements of the Contract”. Under the contract, the certifier had ten days following the submission of a progress billing in which to amend the billing and/or advise why parts of it were not approved.

Finding in favour of Federated, Justice McKinnon followed a line of Canadian case law dating back to the nineteenth century which found payment certificates to be final. However, most of these decisions dealt with cases where the certificate at issue was a final certificate. Lockerbie relied on the extensive English case law discussing the issue of interim certificates prior to a final certificate, which holds that interim certificates are not final and can be readjusted if gross overpayment is discovered. Justice McKinnon found the two lines of case law not to be in opposition. Instead, His Honour differentiated the English case law by stating that these cases dealt with contracts in which monthly certificates were expressly provisional.

Justice McKinnon summarized his decision by quoting the British Columbia case of J.C.R. Construction Ltd. v. Colwood (City), in which Justice McDonald wrote, “The owner’s obligation is to pay what is certified. The time for discussion is before certification. It is not up to the owner to do the arithmetic and decide what to pay.” His Honour found that a subcontractor or subtrade in a fixed price contract should not be put to a “nuts and bolts” analysis that would be found in a “cost plus” contract.

In reality a payment certifier will rarely conduct such a “nuts and bolts” inquiry when approving monthly payment certificates. To do so would slow projects down to a crawl. However, Justice McKinnon’s decision now leaves the door open to an opportunistic subcontractor to draw down on payments well exceeding the actual value of work put into a project and then precipitate a termination of the contract. The subcontractor would then be immune to an owner or general contractor’s attempt to withhold monies already certified at the time of termination. This results regardless of whether the certified amounts were grossly in excess of the amount of work actually supplied.

Luckily, future projects need not result in a similar situation. Justice McKinnon found that there is a presumption in standard construction contracts that all monthly payment certificates are final and conclusive. This problem can be avoided by the insertion of an express clause in future agreements which explicitly states that all interim monthly certificates are not conclusive as to the value or quality of services provided and are subject to reopening and readjustment.