Ontario Court reminds contractors: Third-party payment certificates will be binding if agreed to, absent fraud, bad faith, willful disregard of duty

A recent decision from the Ontario Superior Court of Justice serves as a useful reminder to construction companies on the importance of contractual language — especially when it comes to payment contingent on third-party certificates.

Background

Pentad Construction Inc. v. 2022988 Ontario Inc.^[1] centred on an invoice dispute between a sub-contractor ("Pentad") and the project manager of a residential development ("Armor"). The former was retained by the latter for site preparation, importing clean fill, grading, stormwater management, underground services, and primary, boundary and secondary roadways.

During the course of the contract, a dispute arose with regard to outstanding payments and the value of work completed by Pentad.  

Importantly, the contract between Pentad and Armor stipulated that "[Pentad's] work performed/provided under [the] Contract shall be inspected for quality and quantity and certified complete, received and approved by [Armor's] authorized Engineer, prior to any sums becoming due hereunder."^[2]

Pentad grew frustrated with the failure of Armor's authorized Engineer to certify claims for payment. The authorized Engineer's certificates, in fact, indicated that Pentad had been overpaid during the course of the contract.^[3]

As a consequence of opposing views, Pentad halted work and registered a lien in under the Construction Act (Ontario) (the "Act") for the amount of $479,364.57.

Armor, in turn, brought a motion asking the court to reduce the amount of security it posted to bond off Pentad's lien to zero. It relied on s. 44(5) of the Act, which provides:

(5) Where an amount has been paid into court or security has been posted with the court under this section, the court, upon notice to such persons as it may require, may order where it is appropriate to do so,

(a) The reduction of the amount paid into court, and the payment of any part of the amount paid into court to the person entitled; or

(b) The reduction of the amount of security posted with the court, and the delivery up of the security posted with the court for cancellation or substitution, as the case may be.^[4]

Pentad argued that s. 44(5) of the Act is meant for simple matters and not complex factual disputes, which are best resolved at trial. Indeed, Pentad suggested that it and Armor were in disagreement over key facts, including (1) the identity of the authorized Engineer and (2) whether or not they carried out their responsibilities as payment certifier in good faith and in compliance with the terms of the contract. Thus, it sought the dismissal of Armor's motion.

On the other hand, Armor stressed the simplicity of the motion's key issue: were the decisions of the authorized Engineer binding? If so, the basis for Pentad's claim was lost.

In support of that position, Armor argued that (1) it and Pentad agreed, pursuant to the aforementioned clause, that payment would be made only after Pentad's work was certified by the authorized Engineer, whose decision would be final and binding absent demonstrated fraud or bad faith; (2) it was clear at all times that the parties knew who was the authorized Engineer; (3) the amounts claimed by Pentad were not certified by the authorized Engineer; and (4) Pentad had not advanced an assertion or evidence of bad faith, fraud or willful disregard of duty on the part of the authorized Engineer.

The decision

Justice Boswell found merit in Pentad's position that the Act is not intended for time-consuming interlocutory motions, but he was ultimately satisfied that the issue at the core of the motion — "the determination of whether Pentad is bound by the decisions of the payment certifier" — could be determined in a summary way.^[5]

In his analysis, Justice Boswell relied on Federated Contractors Inc.^[6], in which Justice McKinnon canvassed 150 years of jurisprudence supporting the thrust of Armor's position: Armor and Pentad agreed to a payment certification provision and are bound by the decisions of the third-party certifier. That is, 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."^[7] Justin McKinnon noted this principle is the case because, as summarized by Justice Boswell:

1. In the case of a fixed price contract, it would be manifestly unfair to adjudicate a claim on a nuts and bolts basis, likely years after the fact, when such an accounting was never contemplated by the contract.  In such a case, the parties, who have subjected themselves to the expertise of a payment certifier, may not have kept the detailed records that would be necessary to litigate on a nuts and bolts basis;
2. From a policy point of view, the court's already strained resources would be subject to a "severe drain" if the court were in effect required to "recertify" whenever one of the parties was dissatisfied with the results of a certification. Moreover, permitting parties to second guess a payment certifier would "encourage litigation of a very harassing kind"; and
3. If certifications were not given legal effect, parties could not confidently proceed with executing their work.^[8]

Justice Boswell also turned to leading case law on contractual interpretation, citing Sattva Capital Corp. and Ventas, Inc., and noted that the interpretation of a commercial contracts are to be "grounded in the text and read in light of the entire contract" and that the "cardinal presumption is that the parties meant what they said."^[9] Thus, the terms of an agreement govern — and to that end, courts will enforce a binding provision that parties have agreed to "as long as the payment certifier acts fairly, honestly and impartially and provided there is no collusion between the owner and the certifier."^[10] Contractual terms stipulating that payment certifications are non-binding or "provisional" will not be enforced.^[11]

It was clear, according to Justice Boswell, that Armor and Pentad intended, as per the agreement, to be bound by the determination of the authorized Engineer, and such would be enforced absent the third-party's fraud or bad faith, or their knowing and willful disregard of duty.

Key takeaways

Pentad Construction Inc. v. 2022988 Ontario Inc. offers important considerations for companies involved in the construction pyramid.

First, contractual interpretation continues to be "grounded in the text and read in light of the entire contract." Second, courts presume that parties have meant to be bound by their bargain — and so, what parties agree to is key. Finally, the decisions of third-party payment certifiers, made in the context of a contractual provision stipulating that such decisions are binding, will be enforced absent fraud or bad faith, or a knowing and wilful disregard of duty. Companies must be attentive to such contractual language and whether there is a transparent and clear process for certifier decisions or room to challenge such decisions.

Should you have any specific questions about this article or would like to discuss it further, you can contact the authors or a member of our Infrastructure and Construction Group.