Out-Law / Your Daily Need-To-Know

The principal agent’s right to correct can be implied in a JBCC contract

Out-Law Analysis | 12 Apr 2021 | 1:09 pm | 7 min. read

There is a strong case to suggest that the principal agent, as the administrator of the JBCC contract, has the power to correct errors he makes in certifying interim payments due to the contractor.

However, the position is not certain because the principal agent’s right to correct is not explicitly provided for under the JBCC regime – something that could be clarified in future iterations of the JBCC forms.

The role of the principal agent

JBCC contracts are standard form construction contracts developed by South Africa's Joint Building Contracts Committee (JBCC).

The contracts provide for the appointment of a principal agent by the employer to administer and manage the contract.

The principal agent's title belies his true functions and nature. Whereas a typical agent is subject to the beck and call of his employer, the principal's agent's job is to administer the JBCC contract even-handedly. He is therefore, under the JBCC, placed at arms length from the employer and occupies a position in which his decisions have binding consequences for both parties – perhaps most significantly in determining and certifying payments due by one party to the other.

Principal agents do this by issuing payment certificates periodically as work progresses, as well as issue a final payment certificate upon completion of the works. In performing this function, the principal agent is required to act with reasonable and fair judgment and the employer is contractually prohibited from interfering with the principal agent's assessment or certification of amounts due to the contractor.

Construction works involve on-going expenditure required for equipment, materials, labour, subcontractors and preliminary and general costs. Interim payments assist the contractor cash flow during the execution of the works under the contract. They also provide for a contractual entitlement to these amounts which, once certified, are regarded as liquidated amounts due to the contractor and can even be enforced through provisional sentence proceedings.

So, the role played by principal agents in determining and certifying payments is an important one. There has been some uncertainty, however, about what happens if they make a mistake.

Pillay Bavesh July_2019

Bavesh Pillay

Senior Associate

An inability to correct errors in subsequent certificates would prevent the principal agent from exercising judgment and certifying fair value as required under the contract

Uncertainty in relation to the right to correct

There has been some uncertainty within South Africa’s construction sector as to whether each certification made by the principal agent can be corrected or revised in instances where the principal agent himself considers that it made an error in its assessment at the relevant time. The JBCC terms are silent on whether or not the principal agent has a discretion or ability to do so and so it is not clear whether errors can be corrected in subsequent payment certificates.

The latest edition of the JBCC contract contemplates that each payment certificate will include, amongst other things, a "fair estimate of the works executed" and a "fair estimate of the value of materials and goods".

It is also made clear that a payment certificate may be issued for a nil or negative amount and that an interim payment certificate does not constitute evidence that the works, materials and goods are in terms of the contract.

Under the JBCC contract, a principal agent can issue a recovery statement alongside a payment certificate. This details any additional amounts that may due by one party from the other for the identified categories contemplated in the contract, covering delay penalties, interest on late payment, recovery of expense and loss and damages, for example. The terms covering the recovery statement do not cover corrections on errors by the principal agent in previous certificates. This makes sense given that it is dealing with the entitlement of a party to an additional amount from the other and not with errors.

The process for issuing the final payment certificate is much more rigorous than the procedure for issuing interim payment certificates. The final payment certificate is only issued after a final account, setting out the final contract value, has been prepared. The final payment certificate is then either accepted or deemed accepted, where no objections have been lodged within the required time, by the contractor, or if duly objected to, determined through the dispute resolution procedures in the contract.

In this context, the question of the principal agent's ability to correct errors in the certification of amounts in previous interim payment certificates becomes acute.

On the one hand the JBCC contract is the document which sets out the scope of the principal agent's functions and powers, so it may be argued that if the contract is silent as to a particular function or power it should generally be taken to mean that the power does not exist. This would in turn mean that in respect of each interim payment certificate issued, the principal agent's function has been duly completed and that they cannot revisit the matter.

On the other hand the principal agent's obligation to certify “fair” amounts due and to generally act with fair and reasonable judgment to both parties could logically be said to require them to take incidental actions or steps to those functions that go beyond those expressly set out or identified in the contract but which are necessary to properly fulfil that role.

How a right to correct can be implied

It is clear from the express terms that interim payment certificates, are required to reflect a fair value of the works executed at the relevant time but not intended to evidence that any works, materials and goods are contractually compliant. In other words it leaves open the possibility that the works were erroneously valued in an interim certification.

Pillay Bavesh July_2019

Bavesh Pillay

Senior Associate

In our view, the three requirements of South African law for a tacit term to be introduced into a contract would be met in the case of the principal agent’s right to correct

Judgments of the principal agent made in error are neither fair nor reasonable to either party. These could range from clerical or arithmetic errors, to substantive errors in assessing the value of work at the relevant time. An inability to correct such errors in subsequent certificates would therefore prevent the principal agent from exercising judgment and certifying fair value as required under the contract.

There is support for this interpretation given that only the final payment certificate is intended to certify the final value of the works. By extension, interim payment certificates should be open to correction.

In South African law, a tacit term can only be introduced into a contract if it satisfies three conditions:

  • it does not conflict with the express terms of the contract;
  • it can be reasonably assumed that if the parties had been asked to apply their mind to the question both parties would have agreed the tacit term – this is sometimes known as the "reasonable by-stander test" – and;
  • the tacit term is necessary for business efficacy in the contract.

Under a reading of the express terms of the contract, it might be considered that the obligation to include the amount previously certified in each subsequent interim payment certificate indicates that the previously certified amount is then not subject to alteration. However, this is merely an accounting exercise in which the previous amount is brought forward in the next payment certificate. This would not preclude adjustments being made for errors in that amount. Instead it merely requires that the payment certificate record what the original amount certified was before any adjustments are made.

Another factor that could be considered to indicate that the power to correct was not intended is that the JBCC form of payment certificate does not make provision for corrections. However, the JBCC form is merely a guidance document. There is no contractual requirement to rigidly adhere to it. Even if the form were taken as indicative of the intention of the drafters of the JBCC, it is the intention of the contracting parties that must be determined and not the drafters of the standard form documents not forming part of the contract. On this basis, there is no express contradictory term to the right to correct being implied.

Were an officious by-stander to ask the parties whether the principal agent ought to have a power to correct an error it made in a certificate, it can reasonably be assumed that they would have agreed that the principal agent would have the power to correct its own errors so as to exercise reasonable and fair judgment in certifications.

The tacit term can also be considered necessary for business efficacy. Without this power being afforded to the principal agent, the only option to correct errors in certifications – no matter how glaring or substantive – would be through an addendum or dispute resolution procedure, a process that unduly hampers the very efficiencies and purposes of having a principal agent in the first place.

Additional points of uncertainty

In our view, the three requirements of South African law for a tacit term to be introduced into a contract would be met in the case of the principal agent’s right to correct. However, the precise scope of the power of the principal agent to correct may be open to further debate.

Corrections to errors that are typographical, arithmetical or clerical, for example, may be more readily imported as a tacit term required for business efficacy than more nuanced or less detectable errors within the measurement of works. It may also be argued that the exercise of reasonable and fair judgment applies at the time of certification of the relevant certificate based on information known at the time and that it does not extend to revising those amounts thereafter when further information comes to light.

In our view the requirement of fair and reasonable judgment is a continuing one and the power to correct should accordingly be widely construed to allow the principal agent to properly fulfil its certification functions.

Another factor worth considering is whether the defects regime has an impact on the scope of any right to correct.

For instance, it could be argued in cases where works previously certified and paid for are subsequently found to be defective that the remedy lies not in correcting the previously certified amount but by invoking the obligations of the contractor to remedy the defect through a contract instruction. Where this instruction is not complied with by the contractor, the employer can then recover the loss and expense incurred in appointing another or others to attend to this. However, there is nothing to suggest that this remedy would be mutually exclusive to such correction if in the principal agent's view the coming to light of the defect rendered his earlier certification of the value of the works, materials or goods erroneous and unfair.

Amending the JBCC terms

The absence of an express term providing for a principal agent’s right to correct means it is open to debate whether such a right exists. The JBCC terms should ideally be amended to expressly provide for the right to correct. However, in our view there would be a tacit term allowing for the principal agent in exercising fair and reasonable judgment to effect corrections to previous interim payment certificates.

Co-written by Themba Chauke of Pinsent Masons.