Common mistakes in... agreeing final accounts

Major construction projects are complex, risky and prone to disputes. A clear focus on legal issues and problem-solving can help the parties to minimise risks, reduce their impact and amicably resolve any differences. In this series we will look at smart moves and common mistakes.

We start by looking at the end of the project when all that is left is to agree the final account. The concept is straightforward: it is a financial tallying-up to address any outstanding issues. However, the process can be made difficult and time-consuming by the need to agree the impact of variations, loss and expense, provisional sums and other additions or deductions from the contract sum. Here are some rules to help the process run as smoothly as possible.

Follow the contract

Failure to follow the contractual provisions will invariably drag out the final account process. Although most standard forms set out a mechanism for agreeing the final account, not all do. The NEC contract does not, anticipating that the parties will deal with compensation events as they arise. If they choose not to do so, things can quickly spiral out of control.

Active management throughout the project, ensuring that each party is doing as it should at the appropriate time, will reduce the pain of the final account discussion and maximise the chances of a satisfactory outcome.

Keep records

One of the most common stumbling blocks is the parties’ failure to provide substantiation of their claims, often because they have not gathered or retained information. A bit of extra effort in record-keeping during the project will save much time and energy in settling the final account.

Don’t leave it all to the end

It is tempting to leave dealing with the impact of variations and instructions until the final account, but raising issues for the first time at the end of the project will upset the other party. If they feel ambushed, it will make discussions even more difficult and if the list of issues is too long it may simply be unmanageable. Addressing things as they arise will allow many points to be considered and disposed of before completion.

Do get your papers in order

When faced with a “kitchen sink” final account, it is important to get on top of the issues quickly to identify where the money is. You will need to dig out the papers, speak to the people at the coal face and get legal or expert advice so you can form a commercial view of which claim items to focus on. This means you won’t waste time and money on points that turn out to have little financial impact.

Don’t forget to consider whether you need a settlement agreement If you are wrapping up a number of complicated issues in your final account settlement, consider whether you should be entering into a short settlement agreement. This should give both parties confidence that the issues are properly tied up and will not be reopened later (see below).

Don’t be too quick to make a ‘full and final’ settlement

Take care when considering what it is you are settling. YJL London vs Roswin Estates, a recent decision of the Technology and Construction Court, highlighted the importance of precise drafting. In that case, the final account agreement stated that it was a “full and final” settlement of all events arising before the date of the agreement and for matters “that arise or could arise in the future”.

Roswin’s attempt to resist payment on the basis that some of YJL’s work was defective failed. The judge concluded the agreement effected a full and final settlement of all claims and cross-claims, thereby relieving YJL of liability for all defects that were identified or reasonably capable of being identified at the time it was made.

The issue of latent defects did not fall for determination, but the judge noted that the agreement expressly encompassed events “that arise or could arise in the future”, so arguably it covered latent defects as well.

In this case the right to claim for patent defects was lost, and the right to claim for latent defects may also have been lost. If the employer wishes to preserve its rights in relation to latent defects, the agreement should expressly say so.

Catherine Barstow is a senior associate at Berwin Leighton Paisner LLP

This article was printed under the headline ’The day of judgment’