The award of interest where the Engineer under-certifies

Introduction

This article considers whether a Contractor should be awarded interest on sums which the Engineer has under-certified or failed to certify, where those sums are later held payable by a Dispute Board, Dispute Avoidance/Adjudication Board or arbitral tribunal. The question arises regularly on infrastructure and hydropower contracts in Nepal procured on the FIDIC Conditions of Contract for Construction, 1999, including the MDB Harmonised Edition, and increasingly on the 2017 Second Edition. Large sums often turn on it, and neither edition answers it expressly.

The analysis builds on the article by Ellis Baker and Anthony Lavers, which examined the English authorities largely under the ICE Conditions of Contract. This revision applies that analysis to the FIDIC payment provisions and to the Nepalese statutory framework: the Public Procurement Act, 2063, the Public Procurement Regulation, 2064, the National Civil Code, 2074 and the Arbitration Act, 2055.

How the situation arises

Sheridan identifies three situations: the Engineer fails to certify at all; the Engineer certifies and the Employer pays late; or the Engineer certifies, the Employer pays the certified amount on time, and a tribunal later revises the certificate to a higher figure.

The reasons for the shortfall matter. The Engineer may omit a sum through neglect or misapplication of the Contract, because the Contractor has not provided sufficient particulars, or because the necessary information was not then available. A tribunal with power to open up, review and revise certificates need not find that the Engineer erred; it may simply take a different view on the material before it. The Contractor will seek interest from the date on which the sum should have been certified, compounded where possible. The Employer will answer that it paid what was certified and that nothing was wrongfully withheld.

Under FIDIC, the first two situations are largely covered by Sub-Clause 14.8. The third is where the real dispute lies.

The FIDIC payment framework

FIDIC 1999

The Contractor submits a monthly Statement under Sub-Clause 14.3. Within 28 days of receiving it, the Engineer issues an Interim Payment Certificate under Sub-Clause 14.6 stating the amount which the Engineer fairly determines to be due. The Engineer may, in any Payment Certificate, correct or modify a previous certificate, and a Payment Certificate does not indicate the Engineer's acceptance or approval. Under Sub-Clause 14.7, the Employer pays the amount certified in each IPC within 56 days after the Engineer receives the Statement and supporting documents.

Under Sub-Clause 14.8, if the Contractor does not receive payment in accordance with Sub-Clause 14.7, it is entitled to financing charges compounded monthly on the amount unpaid during the period of delay, at three percentage points above the discount rate of the central bank in the country of the currency of payment. The entitlement arises without formal notice or certification and without prejudice to any other right or remedy. The period of delay runs from the date for payment under Sub-Clause 14.7, irrespective of the date on which the IPC is issued.

Three further provisions bear on the question. The final paragraph of Sub-Clause 20.1 requires each Payment Certificate to include such amounts for any claim as have been reasonably substantiated as due. Sub-Clause 20.6 gives the arbitral tribunal full power to open up, review and revise any certificate, determination, instruction, opinion or valuation of the Engineer. Sub-Clause 3.1 provides that the Engineer, in carrying out duties under the Contract, is deemed to act for the Employer.

FIDIC 2017

The 2017 edition keeps the 28-day and 56-day periods and the substance of Sub-Clause 14.8, including monthly compounding and the running of the period irrespective of the date of issue of the IPC. The default rate is three percentage points above the average bank short-term lending rate to prime borrowers for the currency of payment at the place of payment, unless the Contract Data states otherwise.

The significant changes are procedural. Under Sub-Clause 14.6.3, where the Contractor considers that an IPC omits amounts to which it is entitled, it must identify them in the next Statement and, if they are still not certified, may by Notice refer the matter to the Engineer for agreement or determination under Sub-Clause 3.7. When agreeing or determining under Sub-Clause 3.7, the Engineer acts neutrally and is not deemed to act for the Employer. Sub-Clause 20.2.7 carries forward the requirement to include reasonably substantiated claim amounts in each Payment Certificate. Sub-Clause 21.6 preserves the tribunal's power to open up, review and revise certificates, save for a determination that has become final and binding.

The competing lines of English authority

The Contractor's case rests on Morgan Grenfell v Sunderland BC. Under an ICE 5th Edition contract, the Engineer had not certified sums for drilling, blasting and ripping. The arbitrator awarded those sums with compound interest. Judge Newey upheld the award, holding that where an arbitrator revises a certificate upwards it follows that the Engineer failed to certify the right amount, and that the Engineer's good faith is irrelevant.

The weight of authority went the other way. In Nash Dredging Ltd v Kestrel Marine Ltd, Lord Ross held that there is no failure to certify merely because the sum certified is less than the sum later found due, provided the certificate reflected the Engineer's honest opinion. In Hall & Tawse v Strathclyde Regional Council, the Court of Session held that a certificate revised because of better or more complete information does not indicate a failure by the Engineer, whereas a deduction not authorised by the Contract is a failure to certify. In Department of Transport v Birse-Farr Joint Venture, Hobhouse J disagreed with Judge Newey and treated the relevant question as whether the Engineer had acted in accordance with the Contract. In Royal Borough of Kingston Upon Thames v AMEC Civil Engineering, Judge Havery held that there is often no single right amount, and that where the certified sum represents the Engineer's reasonable opinion reached in accordance with the Contract, there is no failure to certify even if an arbitrator later revises it upwards. In BP Chemicals Ltd v Kingdom Engineering (Fife) Ltd, interest was held payable only where the principal had been wrongfully withheld.

The ICE responded in its 7th Edition with Clause 60(7), which deems an arbitrator's finding that a sum should have been certified by a particular date to be a failure to certify for the purpose of interest. Neither FIDIC edition contains an equivalent deeming provision.

Application to FIDIC contracts

Late certification and late payment

The first two situations are largely resolved by the text of Sub-Clause 14.8. Because the period of delay runs from the date for payment under Sub-Clause 14.7 irrespective of when the IPC is issued, the Employer cannot rely on the Engineer's late certification to shorten the period. Financing charges therefore run on late-certified and late-paid sums from the contractual due date.

Under-certification later revised

The third situation is not expressly covered. Sub-Clause 14.8 is triggered where the Contractor does not receive payment “in accordance with Sub-Clause 14.7”, and Sub-Clause 14.7 refers to the amount certified. On a literal reading, where the certified amount was paid on time there has been no delayed payment, and the reasoning in Nash Dredging, Hall & Tawse and Kingston v AMEC supports the Employer. That reading is reinforced by the “fairly determines” standard in Sub-Clause 14.6 and by the “reasonably substantiated” test for interim inclusion of claims, both of which accept that the Engineer certifies on the information available at the time.

The Contractor has three answers. First, Sub-Clause 14.6 requires the Engineer to certify what is due under the Contract; a certificate which omits a sum through misapplication of the Contract, such as an unauthorised deduction or a wrong valuation rule, is not a certificate issued in accordance with the Contract, and on the Hall & Tawse test it is a failure to certify. Second, under FIDIC 1999 the Engineer is deemed to act for the Employer, so that improper certification may be treated as the Employer's breach, for which damages remain available because Sub-Clause 14.8 is without prejudice to any other right or remedy. Third, when a tribunal revises a certificate under Sub-Clause 20.6 or 21.6, the revised amount takes effect as the amount that should have been certified, so that the date for payment under Sub-Clause 14.7 is the date on which the original certificate fell due.

The 2017 edition alters the balance in two ways. The neutrality of the Engineer under Sub-Clause 3.7 makes it harder to attribute an Engineer's determination to the Employer as a breach, although ordinary certification under Sub-Clause 14.6 is not itself a determination. The procedure under Sub-Clause 14.6.3 works in both directions: a Contractor which did not identify the omitted amount in its next Statement faces the argument that the Engineer could not have certified it, while a Contractor which followed the procedure and was still refused is well placed to show a failure to certify in accordance with the Contract.

On balance, Sub-Clause 14.8 does not of itself attract financing charges on a bona fide under-certification later revised on fuller information. It does so where the tribunal finds that the Engineer failed to certify in accordance with the Contract.

Parties wanting a different result should include an ICE-style deeming provision in the Particular Conditions.

The position in Nepal

The contract governs

A Nepalese tribunal will begin with the Contract. Under Section 515 of the National Civil Code, 2074, a contract is interpreted according to the common intention of the parties, in the light of the entire contract, and so as to give effect to all its terms. The procurement legislation defers to the Contract on payment and interest. Section 57 of the Public Procurement Act, 2063 requires the Public Entity to pay bills subject to the procurement contract, as prescribed. Rule 123(3) of the Public Procurement Regulation, 2064 requires the concerned authority to approve a running bill within 30 days and the Public Entity to pay within that period as per the contract; Rule 123(7) provides that if payment is not made within the contractual period, interest is payable as per the procurement contract. Rule 123(6)(a) allows the contract to permit correction of erroneous amounts in subsequent bills, which is consistent with the correction power in Sub-Clause 14.6.

Sub-Clause 14.8, as amended by the Particular Conditions, is therefore the primary source of contractual interest. The 30-day period in Rule 123(3) differs from the 56-day period in Sub-Clause 14.7; the Particular Conditions of the relevant contract should be checked for how this is reconciled and whether Sub-Clause 14.8 has been amended as to rate, compounding or cap.

The Arbitration Act, 2055

Section 33 provides that, except where otherwise provided in the agreement, where an award requires payment of an amount by one party to another, interest is payable at a rate prescribed by the arbitrator, having regard to the nature of the business concerned, and not higher than the rate currently charged by commercial banks on similar transactions. The proviso states that no interest is chargeable from the commencement of the arbitrator appointment process until the period within which the award must be implemented. Section 31 requires the award to be implemented within 45 days of receipt of a copy. Section 27(e) requires the award to state the interest payable up to the day before commencement of the appointment process and the additional rate applicable after expiry of the implementation period; the available English text of this clause is incomplete and should be checked against the official Nepali text.

Three consequences follow. First, where a sum falls within Sub-Clause 14.8, the words “except where otherwise provided in the agreement” support the application of the contractual rate and compounding in place of the statutory rate. Whether the contractual provision also displaces the proviso, so that financing charges continue to run during the arbitration, is uncertain and should be tested before it is pleaded. Second, where an under-certified sum falls outside Sub-Clause 14.8, Section 33 gives the tribunal a discretionary basis to award interest, but it is narrower than Section 49 of the English Arbitration Act 1996: it is capped at the commercial bank rate, contains no express power to compound, and excludes the period of the arbitration. Third, because the interest cut-off is linked to the commencement of the appointment process, and disputes on construction contracts pass first through an adjudicator or dispute resolution committee under Section 58(4) of the Act, the date on which the appointment process commences should be clearly recorded.

Compensation under the National Civil Code, 2074

Where the Contractor shows that the Employer failed to perform or delayed performance of its payment obligation, compensation is available under Part 5. Section 500(1) makes a person who fails or delays to fulfil an obligation liable for the actual loss caused. Under Section 535(1), failure to fulfil a contractual obligation is a breach, and under Section 537(1) the aggrieved party may recover actual loss, or loss the parties knew at the time of contracting to be a likely result of the breach; Section 537(3) excludes indirect or remote loss. Financing cost is recoverable on this basis only if proved as actual loss, for example through overdraft or borrowing records; this is a weaker route than contractual financing charges.

Section 543 directs the court, in assessing compensation for breach, to consider whether the breach was intentional or reckless. Although framed for a court, a tribunal may treat it as guidance. It echoes the distinction drawn in the English cases between an under-certification made in good faith in accordance with the Contract and one that was not.

Monthly compounding under Sub-Clause 14.8 has not been tested here against a public entity, and its enforceability in Nepal in light of the statutory restrictions on compound interest should be checked before it is claimed.

Conclusions

FIDIC 1999 and 2017 resolve late certification and late payment but, like the earlier ICE forms, are silent on interest where a certificate paid on time is later revised upwards. On their text, and in line with the balance of English authority, financing charges under Sub-Clause 14.8 are likely to follow only where the Engineer failed to certify in accordance with the Contract, not where a bona fide certificate is later revised on fuller information.

In Nepal, the Contract governs first, with the Public Procurement Regulation expressly deferring to it on interest for late payment. Where the Contract does not reach the under-certified sum, the tribunal may award interest under Section 33 of the Arbitration Act, 2055, subject to the commercial bank rate cap and the exclusion of the arbitration period, and the Contractor may alternatively claim proven financing loss as compensation under Sections 500 and 537 of the National Civil Code, 2074.

In practice, a Contractor should identify disputed amounts in each subsequent Statement, follow Sub-Clause 14.6.3 under the 2017 edition, record why the omitted sums were due under the Contract at the time, and plead interest in the alternative under Sub-Clause 14.8, Section 33 and as compensation. An Employer should ensure that the Engineer records the contractual basis and information relied on for each certificate. Both parties should address the point in the Particular Conditions at tender stage.

All insights