EMPLOYERS’ RESPONSIBILITY FOR ARCHITECTS’ CERTIFICATIONS: THE IMPLIED TERM THAT NEVER WAS HONG HUAT AND BEYOND
| Citation | (2002) 14 SAcLJ 275 |
| Date | 01 December 2002 |
| Published date | 01 December 2002 |
| Author | LAWRENCE TEH and PHILIP CHAN |
1 In March 2001, the Singapore Court of Appeal handed down its decision in the case of Hiap Hong & Company Pte Ltd v Hong Huat Development Co (Pte) Ltd[2001] 2 SLR 458 (“the Hong Huat Case”) as the final word in a building case that spanned 15 years.
2 The central issue that was decided by the Court of Appeal, which is of importance to the construction industry in Singapore, was whether an owner who entered into a building contract with a contractor incorporating the 1970 edition of the Singapore Institute of Architect’s Articles and Conditions of Contract1 (“the SIA70”) owed an implied contractual obligation to the contractor to ensure the proper discharge by the architect of his certifying function.
3 Until the Court of Appeal’s decision in the Hong Huat Case, arguments were occasionally advanced on behalf of contractors in building disputes that if an architect was late in issuing payment certificates, the contractor could recover damages from the owner for loss of use of moneys based on an alleged breach of this implied term. Now, a legal principle has been established by the Hong Huat Case that owners in building contracts, incorporating the SIA70 or its successors, do not owe such an implied term to contractors.2
4 This article first sets the Hong Huat Case in the commercial context of building contracts. It then concentrates on the judgment of the High Court3 (“the High Court Judgment”) in the owner’s substantive appeal
against the arbitration award4 and the Court of Appeal’s judgment on the contractor’s appeal against the High Court decision. The legal effect and implications arising out of the Hong Huat Case in relation to owners, contractors and architects will also be examined in the course of this article.
5 In virtually every building project involving an owner,5 an architect and a contractor, the contractor is a commercial entity dependent on a constant flow of cash to sustain itself as a going concern.6 Due to the need for cash flow, building contracts are designed to provide the contractor with interim or progress payments that are made during the course of the building project.7
6 Under this commercial arrangement, the contractor may proceed with work in the general expectation that each month8 the architect will inspect the building works and issue an interim certificate certifying payment for the work done by the contractor.9 The interim certificate would entitle the contractor to a progress payment from the owner and a flow of cash to the contractor is established. This commercial arrangement is also satisfactory for the owner because the owner is assured that each month the architect will inspect the building works and certify payment to the
contractor only in respect of work properly executed. Under this commercial arrangement, both the owner and the contractor rely on the skill, opinion and judgment of the architect to issue proper certificates of payment.10
7 This commercial arrangement of progress payments against interim certificates is based on one important premise — the architect being timely with the issuance of his interim certificates. But what if the architect, for some reason, does not issue the interim certificates on time? Obviously, the contractor’s cash flow is disrupted; cash flow that the contractor may have planned to use to pay his own costs and expenses, eg his overall operating overheads, the cost of his own domestic sub-contractors, and indeed payments relating to other matters outside of the immediate building project. The fact that the interim certificate in question is eventually issued and moneys received by the contractor under the corresponding progress payment may only be of limited comfort to the contractor. The contractor may have had, in the meantime, to expend extraordinary efforts to overcome the disruption to his cash flow and may have suffered financial hardship and loss in the process.
8 In a situation where a contractor does not receive his progress payment on time, the contractor would, naturally, feel that he has been kept out of money that should have been certified as due to him. The contractor would feel that he had lost the use of the progress payment moneys during the time that the interim certificate and, thereby, the progress payment was delayed. If the contractor feels that his loss is particularly substantial (because of the lengthy period of time between the time an interim certificate was supposed to be issued and the time when it was actually issued) the contractor would want to recover his loss.
9 Until recently, it was thought by some quarters of the construction industry that a contractor could use a particular legal argument to recover compensation for the loss of use of progress payment moneys from the owner. The legal argument that was used was the argument that it was an implied term of the building contract that the owner would ensure the proper discharge by the architect of his certifying functions. It would be argued that an architect was at all times and in all respects an agent or representative
of the owner, and that if the architect had failed to discharge his certifying duties properly, then the owner, as principal, would be liable to compensate the contractor for any loss of use of moneys.
10 Following the decision of the Court of Appeal in March this year in the Hong Huat Case, it is now clear that with respect to building contracts incorporating the SIA Conditions, there is no basis for such a legal argument.11
11 The facts12 leading to the Court of Appeal decision in the Hong Huat case are as interesting as the Court of Appeal’s decision.
12 In 1979, a building contract was signed between the owner and the contractor, using the SIA70. In 1986, the contractor commenced arbitration proceedings against the owner claiming damages, inter alia, for loss of use of progress payment moneys that were received late because the architect had not issued the relevant interim payment certificates on time. The contractor argued that it was an implied term of the building contract that the owner would ensure the proper discharge by the architect of his certifying functions. All the evidence was heard and legal arguments submitted in the arbitral proceedings by 1988. Although a quantity surveyor was appointed in the early nineties to assist in valuations for the adjudication of the project final account,13 it was not until 1998, ten years later, that the arbitrator issued his arbitral award. In his award, the arbitrator awarded the contractor compensation at commercial interest rates for the loss of use of moneys during the period the interim payment certificates were delayed, and further interest on the sums awarded for the entire 12-year period of the arbitration.
13 As was required by the Arbitration Act14 and the corresponding rules of court,15 the owner applied to the Singapore High Court for leave to appeal the arbitral award on a question of law — whether owners in building contracts owed such an implied term to contractors. Leave to appeal was refused by the High Court.16 The owner appealed to the Court of Appeal against the High Court’s refusal to grant leave and succeeded in obtaining leave.17 The owner’s substantive appeal was remitted to the High Court for hearing. After hearing arguments and considering a large number of cases, the High Court decided that it would not imply a term into the building contract that the owner was under an obligation to the contractor to ensure the proper discharge by the architect of his certifying functions. The High Court Judgment was affirmed by the Court of Appeal in the Hong Huat Case.18
14 Central to the issue of the implied term was the concept of certification by an architect.
15 Certification by architects is usually understood by the industry and, indeed, by lawyers, in terms of its effect. In the case of payment certificates, certification is understood as the satisfaction of a condition precedent19 entitling the contractor to payment from the owner. In the case of certificates other than payment certificates, certification is understood as the confirmation of a certain state of affairs, which in turn affects the fate of the contractor in a particular manner.20 However, such an understanding begs the question of the nature and essence of a certificate and it is important to the understanding of what was decided in the Hong Huat Case that the nature and essence of a certificate and the act of certification be appreciated.
16 Where a building contract provides for certification by an architect as a means of regulating the duties, rights and liabilities of the owner and the contractor, it is reasonable to assume that the agreement is made in a commercial context where both the owner and the contractor agree to rely
upon and to abide (at least temporarily) by the decisions of the architect. Reference to the commercial context of the transaction is a legitimate approach to interpreting contracts. The modern approach to interpreting contracts appears to be a move away from a strict syntactical analysis in favour of a purposive reading of the written contract.21
17 It must also follow that an architect must use his professional knowledge, expertise and skill to form an opinion on the manner in which works are being carried out and to judge whether the works have been executed in accordance with his design (on the owner’s behalf) and the standards required by the building contract. Consider the commentary in Emden’s Construction Law:22
“Employers do not usually have expertise in building design, construction techniques, and costings. They therefore tend to rely on professional advisers not only to design the project but also to manage and oversee (to a greater or lesser extent) the execution of the works. In some cases...
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