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[2010] ZAGPJHC 75
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Basil Read (Proprietary) Limited v Regent Devco (Proprietary) Limited (41108/09) [2010] ZAGPJHC 75 (9 March 2010)
26
IN
THE SOUTH GAUTENG HIGH COURT
(JOHANNESBURG)
CASE NUMBER: 41108/09
DATE: 09/03/2010
REPORTABLE
In the
matter between:
BASIL
READ (PROPRIETARY) LIMITED Applicant
a
nd
REGENT
DEVCO (PROPRIETARY) LIMITED
Respondent
JUDGMENT
MOKGOATLHENG
J
The
applica
nt
(as the contractor) seeks an order against the respondent (as the
employer) for the payment of the sum of R 29 554
941.97.
The cause of action is predicated upon a payment certificate issued
by the respondent’s principal agent.
O
n
the 22 May 2007 the parties concluded a written contract in terms of
which the respondent undertook to build 99 luxury residential
apartments in one block with two basements and 19 floors at a site
at West Road South, Morningside, Sandton, for a contract sum
of
R 213 466 742.02.
The
material terms and
conditions embodied in the standard contract approved and
recommended by the
Joint Building
Contracts Committee (JBCC)
are set
out in full to obviate reference thereto in the body of this
judgment. These are:
Clause
s
5.1
and
5.3
provide
: “The respondent shall
appoint the principal agent with full authority to act on its behalf
bind it and issue instructions
in terms of the contract;”
Clause
31.1
:
“The principal agent shall issue an interim payment
certificate until the issue of the final payment certificate.
Should
the applicant take issue with this, it can refer a dispute in
respect thereof for adjudication as envisaged by
clause
40
of the contract;”
Clause 31.9
:
“The employer shall pay to the contractor the amount certified
in an interim payment certificate within seven (7) calendar
days of
the date for issue of the payment certificate…. ;”
Clause 40.3
and
Rules 1.1
and
7.1.4
of the
Adjudication
Rules
;
“The adjudicator’s decision
shall be binding on the parties who shall give effect to it without
delay unless and until
it is subsequently revised by an arbitrator
in terms of
clause 40.5
.”
Clause
s
40.1
and
40.2
;
“
Should any disagreement arise
between the employer or his principal agent or agents and the
contractor as to any matter arising
out of or concerning this
agreement either party may give notice to the other to resolve such
disagreement and if unresolved
shall submit such dispute to
adjudication in terms of the
JBCC
Rules of Adjudication
;”
FACTUAL MATRIX
On 25 August 2009 the principal agent issued
an
interim payment certificate certifying that the sum of R 29 554
941.97 was due and payable by the respondent to the applicant
by no
later than 1 September 2009. The respondent is contractually
obliged to pay this sum to the applicant, but has failed
to do so.
The applicant alleges that the principal agent on
issue of the payment certificate took into account the adjudicator’s
determination
that the applicant was entitled to an extension for
the date of practical completion and associated costs.
The
respondent denies
liability and alleges that the adjudicator’s determination
based on the payment certificate is unlawful,
unenforceable and void
for a number of reasons, consequently, the amount reflected in the
payment certificate is not due and
payable in terms of the contract.
The respondent alleges that o
n
18 August 2008 and thereafter, the applicant submitted claims for an
extension of working days and payment for expenses not
provided for
in terms of
clause 29.6.
The
principal agent dismissed the claims, whereafter the applicant
referred the dispute for adjudication in terms of
clause
40
.
In the adjudication the respondent contended that
the applicant was not entitled to an extension of time and payment
of expenses
incurred in respect of the two claims. The adjudicator
found in the favour of the applicant. The respondent alleges that
the
adjudicator did not give consideration to the evidence placed
before him by the principal agent, and wrongly accepted
misrepresentations
by the applicant which, influenced his
determination, consequently, his determination is unlawful,
unenforceable and void. Aggrieved
by the determination, the
respondent referred it to arbitration.
The respondent alleges that t
he
applicant unlawfully seeks to place reliance on the misrepresented
facts, and the adjudicator’s determination in order
to obtain
payment of penalties in the sum of R16 030 00.00 and additional
preliminaries in the sum of R 9 288 399.12
respectively.
Firstly, t
he respondent
contends that the applicant cannot seek an order the consequence
whereof, is to give effect to an improperly obtained
determination
because this subverts the intention of the contracting parties as
recorded in
clause 29
of
the contract. Secondly, it was never the intention of the parties
that they would be bound by an improperly obtained determination.
The
respondent alleges
that the adjudicator exercised his contractually conferred
discretion inappropriately and unreasonably, consequently,
his
determination has no contractual force and is
susceptible
to review and ought for the reasons explained to be set aside.
THE APPLICANT’S SUBMISSIONS
C
ontrary to what is
alleged by the respondent, the certified sum of R 29 554
941.97 did not become due and payable upon
the handing down of the
adjudicator’s determination, but became due and payable upon
the issue of the payment certificate.
The fact that the respondent disputes the
adjudicator’s determination does not excuse it from complying
with its contractual
obligations, which include its obligation to
pay the amount certified in
the payment
certificate.
The contract and Adjudicator’s Rules
state
that the parties are bound to act in accordance with the
adjudicator’s determination until such time as it is set
aside
by an arbitrator. Declaring a dispute in relation thereto does not
relieve the respondent of its contractual obligations.
The applicant
denies
that the adjudicator’s determination is materially flawed, or
that he breached the terms of the contract in handing
down his
determination. The applicant further denies that the payment
certificate has no contractual force, or is unenforceable.
The respondent refuses to honour its contractual
obligation
because it does not accept or
agree with the adjudicator’s determination.
Clause
40.9
provides that such
disagreement is not a valid basis for the respondent’s refusal
to pay, nor does it relief it from due
and timeous performance of
its obligations.
The respondent is
bound
to give effect to the adjudicator’s determination unless and
until it is set aside by an arbitrator because an interim
payment
certificate creates an independent cause of action.
THE
RESPONDENT’S
SUBMISSIONS
It
is a material term
of the agreement that the parties would not be bound by an
adjudicator’s determination which is in fundamental
breach of
the adjudicator’s contractual obligations, where he does not
act with fairness and impartiality as envisaged
by
clause 40.9
.
On 18 August 2008
the
applicant submitted a claim for an extension of 12 working days in
terms of
clause 29.6.
The
principal agent dismissed the claim. The applicant referred the
dispute in terms of
clause 40
for adjudication.
T
he applicant was not
entitled to an extension of time and expenses incurred in respect of
the two claims. The respondent contends
that the adjudicator did
not consider evidence placed before him by the principal agent,
instead he wrongly accepted the misrepresentations
by the applicant,
and this rendered his determination unlawful and void.
The
applicant
misrepresented the facts to the adjudicator with the intention to
justify the extension of time sought by it. It is
apparent from the
adjudicator’s determination that he was in fact misled as to
what the true facts where, as a result his
determination is based on
these misrepresented facts.
The applicant
unlawfully
seeks to place reliance on misrepresented facts, and the
determination emanating therefrom, in order to obtain payment
of
penalties in the sum of R 16 030 00.00 and additional
preliminaries in the sum of R 9 288 399.12 respectively.
The applicant cannot seek an order the
consequence whereof, is to give effect to an improperly obtained
determination because
this subverts the intention of the contracting
parties as recorded in
clause 29
.
Secondly, because it was never the intention of the parties that
they would be bound by an improperly obtained determination,
it is
not contractually enforceable.
The adjudicator exercised
his
contractually conferred discretion inappropriately and unreasonably,
and did not apply his mind
vitrium boni
viri
consequently, the determination
has no contractual force, consequently, the applicant cannot seek to
give effect thereto. I
rrespective of
whether or not the determination has contractual force, it is
susceptible to review and ought for the reasons explained
be set
aside.
CONSIDERATION OF EVIDENCE
The applicant’s claim is predicated on a
payment certificate issued by the respondent’s principal a
gent
who has certified the amount reflected thereon as due and payable.
It is trite that a payment certificate gives rise to
a new cause of
action subject to the terms of the contract.
See:
Joob
Joob Investments (Pty) Ltd v Stocks Mavundla Zek Joint; Venture
2009
(5) SA 1
(SCA); Ocean Diners (Pty) Ltd v Golden Hill Construction CC
[1993] ZASCA 41
;
1993 (3) SA 331
(A) and 304 E
,
where it was held
:
“
A
final payment certificate had to be treated as a liquid document
because it was issued by the employer's agent, with the consequence
that the employer was in the same position it would have been in if
it had itself signed an acknowledgment of debt in favour of
the
contractor. Relying further on the
Randcon
case (at 186G 188G),
the
learned judge held that similar reasoning applied to interim
certificates. The certificate thus embodies an obligation on the
part
of the employer to pay the amount contained therein and gives rise to
a new cause of action subject to the terms of the contract.
It is
regarded as the equivalent of cash. The certificates in question all
fall within this ambit.”
In the case of
Thomas
Construction (Pty) Ltd (In Liquidation) v Grafton Furniture
Manufacturers (Pty) Ltd
1986 (4) SA 510
(N) at 514 – 515
it was held:
“An interim payment
certificate issued by an engineer or an architect (as in this case)
creates a debt due and as such a
distinct cause of action. That much
is plain...
Simmons NO v
Bantoesake J Administrasieraad (Vaaldriehoekgebied)
1979 (1) SA 940
(T) at 946F.)
The certificate
is ostensibly self-sufficient and a plaintiff does not have to
travel beyond its terms in order to establish
a right of action. The
building contract, in particular, does not form part of the
plaintiff's cause of action...”
McEwan J
in the case of
Smith v Mouton*
1977 (3) SA 9
(W),
held:
“2.
The employer should be bound by the act of his agent in issuing a
certificate. The position is the same as if the employer
himself had
signed an acknowledgment of debt…. The exceptions are those
that apply generally in the law of agency. For
example, the
employer will not be bound if there has been fraud or the architect
has acted in collusion with the contractor to
the detriment of the
employer… The employer will also not be bound if the agent
has exceeded his mandate….
3. The employer is not entitled to dispute the
validity of a final certificate vis-à-vis the contractor
merely because he
alleges that the certificate was given negligently
or that the architect exercised his discretion wrongly.
…
Subject to what is said below, the same principle would appear to
apply in case of an interim or progress certificate.
4. In the absence of any of the factors
referred to in para. 2, the employer
is
bound to pay the sum certified….”
The
respondent is
entitled to raise any contractual defence beyond those delineated in
Smith v Mouton (supra)
because the essence of the applicant’s claim, is predicated on
a payment certificate which originates from a contract,
not as incorrectly submitted by
the respondent, in the adjudicator’s determination.
The respondent does not contend that the
principal agent
colluded with the
applicant, nor does he allege that the principal agent exceeded its
mandate in issuing the payment certificate
or that fraud was
committed in the issuing of the payment certificate.
The
respondent
erroneously misconstrues the legal consequences of a payment
certificate by opining that the applicant intends placing
reliance
on misrepresented facts and the adjudicator’s unlawful
determination in order to obtain payment from an improperly
obtained
determination. This with respect is a mirage, which deflects
respondent’s response from addressing the essence
of
applicant’s claim.
The respondent’s contention that the
applicant seeks an order the consequences whereof, is to give effect
to an improperly
obtained determination, which order would subvert
the parties’ intention not to be bound by such an improperly
obtained
determination, is with respect, a misconstruction of the
applicant’s cause of action.
The respondent conflates two distinct
and separate concepts in its response to the application. Firstly,
the respondent labours under an erroneous notion that
payment
became due and payable upon the issue by the adjudicator of a
determination and not on the issuing of the payment certificate
buy
the principal agent.
T
he respondent
misconceives the legal consequences of a payment certificate
pertinently the effect of its issue. In the aphoristic
language of
Smalburger J in
Ocean Diners (Pty)
Ltd v Golden Hill Construction CC
[1993] ZASCA 41
;
1993 (3) SA 331
(A)
held:
“
It constituted (in the absence
of a valid defence) conclusive evidence of the value of the works
and the amount due to the respondent.
It embodied a binding
obligation on the part of the appellant to pay that amount. It gave
rise to a new cause of action subject
to the terms of the contract.
The appellant's failure to pay within the time stipulated entitled
the respondent to sue on the
certificate.”
The learned Judge further held: “
A
final certificate is not open to attack because it was based on
erroneous reports of the agent of an employer or the negligence
of
his architect. The failure of the employer’s quantity
surveyor properly to scrutinise the claims put forward by the
contractor and to rectify any errors, and the possible negligence of
the architect in failing to satisfy himself as to the correctness
of
the claims and valuations before issuing the certificate, will
accordingly not provide a defence to an action on the certificate.”
I fully align myself with the learned
Judges’ sentiments even if they relate to a final certificate,
because, by parity
of reasoning the same should obtain to an interim
payment certificate.
The respondent’s
principal agent issued an interim payment certificate at the time
when the principal agent knew that the respondent disputed
the
adjudicator’s decision. In acting thus, the principal agent
certified that the respondent is indebted to the applicant
in the
amount reflected in the interim payment certificate.
The respondent concedes that the principal agent
was contractually obliged to include the terms of the adjudicator’s
decision
in the interim payment certificate
,
consequently, the respondent is bound by the conduct of its
principal agent and in terms of the contract, and is obliged to
pay
the amount in the interim payment certificate.
In terms of
clause
31.1
the principal agent is
obliged to issue an interim payment certificate based on an
evaluation prepared within seven (7) calendar
days before the stated
date in the schedule every month until the issue of the final
payment certificate.
In terms of
clause
31.2
the applicant, “
shall
cooperate with and assist the principal agent in the preparation of
the payment claim by providing information to the principal
agent
and all relevant documents and assessment of quantified amounts of
work completed....
The
principal agent shall not be relieved of his responsibility
to issue an interim payment certificate in terms of
clause
31.1
whether or not such
information is provided by the applicant.”
(my emphasis)
The
respondent was
aware of the alleged irregularities contained in the adjudicator’s
decision, but having instructed the principal
agent to notify the
adjudicator of its dissatisfaction with his decision, did not
prevent the latter from taking that decision
into account when
issuing the interim payment certificate.
The alleged irregularities in the adjudicator’s
determination do not absolve the respondent from honouring it
s
obligations in terms of the contract. The respondent does not
contend that the principal agent proceeded to issue the interim
payment certificate contrary to its authority, scope or mandate.
The respondent did not invoke the defence that
the principal agent exceeded its mandate when it certified payment
to the applicant
on the basis of an adjudicator’s decision
purportedly predicated on a nullity. The respondent cannot claim
that the principal
agent exceeded his mandate because it at all
material times the latter deferred to it before issuing the payment
certificate.
The respondent
concedes
that its principal agent was contractually obliged to take the
adjudicator’s decision into account when issuing
the interim
payment certificate, consequently, the provisions of the contract
were triggered. The respondent cannot approbate
and reprobate the
provisions of the contract.
THE PAYMENT CERTIFICATE AS
A
DISTINCT AND INDEPENDENT DOCUMENT
It is patent that the payment certificate is a
distinct
, separate and independent entity
from the adjudicator’s determination. The applicant was
within its contractual right
to advice the principal agent to
reflect the adjudicator’s decision in the payment certificate
and to include all relevant
amounts due and payable. Whether such
amounts coincidentally accrued as a result of the adjudicator’s
determination is
of no moment and cannot have a bearing on the
independent distinct character of the payment certificate and its
legal consequences.
The independent nature of the payment
certificate, dictates that for allegations of fraud to assist the
respondent at all, it
would have been necessary for the fraud to
have been committed in the issuing of the principal agent’s
payment certificate
and not in its purported influencing of the
adjudicator’s determination. The respondent does not claim
any fraudulent
misrepresentation neither does it raise a defence of
fraud to the applicant’s claim.
The respondent’s debt arises from
the
payment certificate and not from the adjudicator’s
determination. The respondent’s erroneous notion that there
is a nexus between the adjudicator’s decision and the payment
of monies due and payable pursuant to the issuing of the
payment
certificate is ill conceived and legally untenable.
The
respondent’s
attorneys pertinently adviced the applicant:
“should you seek to enforce the award in terms of the
adjudication rules, our client will on an urgent basis bring an
application to the High Court
seeking
an interim interdict pending the review of the adjudication award.”
Further:
“
our
instructions are to bring
an application to set aside the award and if necessary ..... an
urgent application to stay its interim
effect pending the
finalisation of such an application to set aside
”
.
(
my emphasis
)
It is patent that the thrust
of
and reason for the respondent’s refusal to pay the applicant
pursuant the issue of the payment certificate is not primarily
predicated on its validity as such but is essentially, wholly
premised on the purported unlawfulness of the adjudicator’s
determination.
T
he misconception the
respondent labours under is that the purported unlawfulness of the
adjudicator’s determination, vitiates
the unlawfulness of the
payment certificate rendering it contractually unenforceable. Of
course, this erroneous notion is a
serious misconception regarding
the crux of this matter.
A CONSIDERATION OF THE RESPONDENT’S CONTRACTUAL
DEFENCES
The respondent can avail itself to recognise
d
contractual defences like:
(a)
fraud which can be
raised to resist a claim for payment based on a payment certificate;
(b)
its principal agent
exceeded the bounds of its authority;
(c)
a claim for damages
arising from defective work or delay in achieving completion of the
works; or
(d) any other competent defence.
The respondent
argues
that the adjudicator’s decision is a nullity because of
certain misrepresentations. For this defence to be sustainable,
the
misrepresentations have to be fraudulent and ought to have been made
to the principal agent on the issuing of the payment
certificate.
The respondent does not impute fraudulent misrepresentation of any
fact by the applicant to the principal agent,
or indeed the
adjudicator.
T
he defence
encapsulating an action for damages does not arise and is not
available to the respondent because the damages it claims
to have
suffered by virtue of the delay in the completion of the works or
payment of preliminaries or penalties were extinguished
by the
adjudicator’s determination. The respondent only has a right
to dispute the adjudicator’s determination and
attempt to set
it aside in the arbitration proceedings.
The respondent contends that it was a tacit or
implied term of the agreement “
the
parties would not be bound by any determination by the adjudicator
in fundamental breach of the adjudicator’s contractual
obligations
”. The tacit or
implied term sought to be inferred by the respondent is wholly
inconsistent with
clause 40.3
and
rules 1.1
and
7.1.4
, in terms whereof the
parties not only agreed to be bound by the adjudicator’s
decision, but also agreed to give effect
thereto without delay
unless and until it was subsequently set aside by an arbitrator. It
is impermissible to infer a tacit
or implied term which is
inconsistent with a valid and express term of a contract.
The respondent rel
ying
on the decision in
Transman (Pty)
Ltd v Dick and Another
2009 (4) SA 22
(SCA)
,
contends that the parties intended
to incorporate the rules of natural justice into their contract, and
argues that the adjudicator’s
breach thereof, entitles it to
refuse to honour its contractual obligations.
Even if
, one were to
assume the cogency of this submission,
Jafta
JA in
Transam Pty (Ltd) (supra)
which pertained to an employment
contract, clearly stated that an aggrieved party in alleging a
breach of such contract only has
recourse to ordinary contractual
remedies. It does not mean that when the rules of natural justice
are incorporated into a contract
and are allegedly breached, that
renders such contract a nullity.
The
fact is, the
respondent’s right purportedly incorporated in the contract
not to be bound by an improperly obtained determination,
does not,
derogate from nor encumber the unfettered, distinct independent
existence of the payment certificate vis-à-vis
the
adjudicator’s determination.
The respondent’s remedy lies in
clauses
40.4
and
40.5
which
respectively
stipulate should either party be
dissatisfied with the decision given by the adjudicator, such party
shall give notice of its
dissatisfaction to the other party, and the
dispute will then be resolved by arbitration.
The
respondent has
clearly exercised its contractual right by referring the dispute to
arbitration, consequently, the respondent is
locked within the
purview of
clause 40.3
,
which prescribes that the respondent
shall be bound by the decision of the adjudicator and shall give
effect thereto without delay
unless and until the adjudicator’s
decision is set aside by an arbitrator.
The respondent cannot set aside a payment
certificate validly issued by the principal agent “
in
the absence of a contractual provision to the contrary or on the
basis of an agreement or waiver”,
where
the principal agent has acted within the authority and the scope
conferred to it by the respondent.
It is not against public policy to enforce a
disputed interim payment certificate
because amongst other reasons, is not a final payment certificate.
The respondent has a remedy in the form of an action for
damages if
the principal agent was negligent in that it failed to act in the
respondent’s best interests.
The
raison d’être
of an interim payment certificate is that “
it
is intended to facilitate the applicant’s cash flow and
ultimately, its ability to complete the works.”
The fact that
the
respondent perceives the payment certificate to have been improperly
issued because of purported misrepresentations by the
applicant to
the adjudicator, “
is not a
situation inherently fraught with unfairness or injustice
”
which is irreversible.
The respondent has a remedy. Should the
respondent be successful in setting aside the adjudicator’s
determination at the
arbitration, whatever financial prejudice it
may have suffered can be set off or adjusted in the following
payment certificate
issued in terms of the contract.
The
vexed issues
relating to the perceived misrepresentations by the applicant to the
adjudicator, irregularities, bias, unfairness,
partiality,
irrationality and the purported flawed adjudicator’s
determination, are issues which the respondent will have
sufficient
opportunity to fully ventilate at the arbitration.
To adumbrate, when the principal agent issues the
payment certificate he postulates and certifies at that instance
that there
are no legal impediments preventing its issue.
A claim predicated on a payment certificate can be pursued
independently of the existence of the adjudicator’s
determination,
because it is not a
sine
qua non
of the latter.
THE COUNTER-CLAIM
The conditional counter-application is
ill-conceived and fatally
flawed for the
following reasons:
The counter-application is stated to be conditional on this Court
finding that the adjudicator’s decision is contractually
unenforceable. The applicant’s claim, however, arises from
the interim payment certificate. The payment certificate
creates
an independent cause of action. The applicant’s claim is
not based on the adjudicator’s decision.
The counter-application is cast in the form of
a review of the adjudicator’s decision. The adjudicator’s
decision
can, however, only be reviewed and set aside by an
arbitrator in accordance with
clause
40.3
. The adjudicator’s
determination is still a subject of review by an arbitrator in
terms of
clause 40.3
.
The adjudicator’s determination can also
not be reviewed in terms of
section
33
of the
Arbitration Act No 3 of 1965
,
because it is common cause that the adjudicator was appointed as
an expert, and not as an arbitrator, consequently the
counter claim must fail.
In the premises the following order is made:
The respondent is ordered to pay
to
the applicant the sum of R29 554 941.97 plus VAT
The respondent is ordered to
pay
interest on the sum R29 554 941.97 at the rate of 15.5%
calculated from 3 September 2009 to date of payment.
The respondent is ordered to pay
applicant’s
legal costs including the costs consequent upon the applicant’s
employment of two counsels.
S
igned at Johannesburg
on this the
10
th
of March 2010.
________________
_____
MOKGOATLHENG J
JUDGE OF THE HIGH COURT
DATE OF HEARING
:
17 November 2009
DATE OF JUDGMENT
:
09 March 2010
COUNSEL FOR THE APPLICANT
:
C.J. McAslin
INSTRUCTED BY
:
Bowman Gilfillan Inc
TELEPHONE NUMBER
:
(011) 669 - 9000
COUNSEL FOR THE RESPONDENT
: W.
La Grange
INSTRUCTED BY
:
Markram Incorporated
TELEPHONE NUMBER
:
(012) 346 - 1278