Final account disputes - last but not least

Experienced employers and their advisers will know that a project that is all finished apart from the main contractor’s final account is not finished at all. Discussions on the final account can drag on for months or years. A snap adjudication instituted by the contractor may even then catch an employer out. The employer will have to revisit issues that may have gone cold, and with its key persons possibly no longer in place. 

This is a problem to which there is no failsafe solution. However, the most recent versions of NEC and FIDIC (NEC4 and FIDIC 2nd edition) have introduced changes designed to speed up the resolution of post-completion financial matters.

Adjudications should be a last resort, for both sides. Employers will see more benefit by focusing on drafting so as to minimise the risk of late final account claims

For the NEC, the idea of a “final account” is something of a break with its traditional philosophy. As the NEC’s guidance notes state, if the parties have been applying the contract properly, very little should need to be done to close the account. NEC4 now requires the project manager to make an assessment of the final amount due and to certify this within four weeks of expiry of the period for rectifying defects. Any delay by the project manager opens the door for the contractor to issue its own assessment of the final amount due.  

If matters cannot be agreed upon, the NEC4 contract provides a commendably fast-track procedure that drives the parties down a speedy “stepped” dispute resolution path. An assessment made by one party within the prescribed time limits will become conclusive and unchallengeable if the other party does not take the issue to the next step of dispute resolution. That path starts with senior representatives of the parties, and goes on to adjudication and then to litigation if necessary.

The latest NEC and FIDIC contracts have improved the situation. However, there is still scope for employers to make their position even more robust

The latest FIDIC suite, which came out in December 2017, makes relatively few changes to the clauses dealing with what is called the “contractor’s draft final statement”. One useful addition is that the contractor should not hold back the entire draft statement just because some of its claims can only be estimated. The contract encourages agreement of everything apart from those estimated elements.

However, the clauses dealing with the final statement under FIDIC need to be read together with the heavily revamped clause dealing with claims – which now covers employers’ claims as well. On the face of it, this aims to encourage finality by (as with the NEC) introducing a time bar for claims – in this case, 28 days from knowledge of the event, as against the NEC’s six weeks. However, the good work is then undone by two get-outs for the contractor. 

First, if the employer (or its representative, the engineer) receives a late claim from the contractor, it must notify the contractor within 14 days that the claim is indeed late. If it does not do so, the late claim is validated. Second, the contractor can argue that there were circumstances that justified the delay. That means there will inevitably be arguments about whether such circumstances exist, before the parties even get to the merits of the claim itself. That is not a happy position. There is much to be said for preferring the more straightforward approach in NEC4. 

Where agreement simply cannot be reached, employers should consider starting adjudications themselves, to get the issue resolved. It may seem counterintuitive to invite a fight. But it is often more dangerous to allow the contractor the freedom to choose when to adjudicate. 

A preemptive adjudication of this nature needs to be properly considered. The contractor will often argue that the employer has misrepresented its (the contractor’s) position and has therefore answered a case that was never put. The danger then is that the contractor’s “real” claim appears for the first time during the adjudication. 

For this reason, it helps an employer if the contractor has previously formulated its case in a specific document. This can then be put before the adjudicator as representing the contractor’s claim. Any substantial change to that document will then be awkward for a contractor to explain.

Adjudications should, however, be a last resort, for both sides. Employers will see more benefit by focusing on drafting so as to minimise the risk of late final account claims. The latest NEC and FIDIC contracts have arguably improved the situation, NEC perhaps more so. However, there is still scope for employers to make their position even more robust. In particular they should consider tightening up time bars and using other conditions precedent. 

Whatever approach is used, it is in no one’s interest for final account disputes to continue for years after the works have been completed.

Ian Yule is construction and engineering partner in Shoosmiths