South African case clarifies whether payment certificate issued under government contract is debt or liquid document

In this case, the court had to decide whether a final payment certificate constituted a debt or a liquid document when Inyatsi Construction SA Limited, acting on behalf of a joint venture, sought to recover outstanding payments from the National Department of Public Works.

The court had to decide whether a final payment certificate constituted a liquid document or a debt under the terms dictated in The Institution of Legal Proceedings against Certain Organs of State Act 40 of 2002 (the “Act”) .

The two parties had recently concluded an agreement relating to upgrades to the Nelson Mandela Museum and a final payment certificate was issued upon completion of the contract.

The department did not pay the certified amount in the final payment certificate on time, resulting in Inyatsi Construction SA Limited bringing an application for payment of the outstanding amount.

The department argued that the claim constituted a debt and therefore the application was not properly before the court because Inyatsi Construction SA Limited had not issued the required notice in terms of the Act, prior to the launch of proceedings.

According to the court, the Act defines a debt as any debt arising from any cause of action which arises from delictual, contractual or any other liability for which the state is liable for payment of damages.

The court said that if a claim is for specific performance, then it does not constitute a debt because it stems from a contract entered into between the parties and not a claim for damages arising from breach of contract and that the final payment certificate is considered as an acknowledgment of debt, therefore making it a liquid document.

The department was subsequently ordered to fulfil its contractual obligations and pay the outstanding debt together with the interest accrued.

The state entity’s obligation to perform an obligation under the contractual terms was a distinguishing factor in the decision, in contrast to situations where a state entity is rendered liable for payment of damages.

In these circumstances, only the latter is considered a debt and must be brought before a court within the confines of the Act.

The court also added that the issue of a request for proposal for tender is an administrative action, however, the negotiations, tender documents and contracts entered into after that will be regulated by the rules of contract, effectively meaning that the contract determined how the issues between the two parties were to be regulated.

This case provides clarity to the definition of a ‘debt’ under the Act and certainty when pursuing contractual claims against state entities.

The court did, however, confirm that a final payment certificate constitutes a liquid document, allowing parties recourse to recover outstanding payments by way of provisional sentence summons instead of lengthy ordinary actions.

The case shows how this distinction guides a business or individual that is trying to recover outstanding payments from a state entity.

Co-written by Siyabonga Machava of Pinsent Masons.