Final account process in contracts: A final reckoning

Contracts are supposed to give certainty. Yes, they give rise to disputes, often based on uncertainty or differing interpretations, but, give or take, the vast majority of contracts do their job of regulating the relationship between two or more parties.

One aspect of that certainty is knowing at the end of the contract what the position is, finally. This seems to be a big issue in these difficult times. Businesses want to know what their exposure is and to plan around that. I suspect most advisers have seen compromises or settlements in recent years that may not reflect what the outcome ultimately should have been under the contract, but instead reflect the interest of one or more parties in reaching a conclusion.

Historically, construction contracts have often contained a final account or final statement type process - a broad wrap up of all that has gone on over the term of the contract. Often much is agreed or is water under the bridge and the parties can concentrate on resolving relatively few defined issues between them. Negotiation, mediation, adjudication or the courts can then all play their part in bringing the rights and liabilities under the contract to a final conclusion.

While NEC seeks to apply time limits for notifying compensation events, it does not put a time limit in place for parties to resolve a compensation event

Slightly oddly, the NEC contract contains many processes designed to iron out and avoid or resolve disputes as the works proceed but does not have a final account or final statement type process. Perhaps the intention was that each payment cycle would come and go, differences would be resolved at each stage, and at the end of the works the last application/valuation would occur and that would be that. Or it could be argued that NEC approaches this issue on the basis that the valuation is done by the project manager and is not dependant on an application by the contractor. The contractor has the option to apply and then the project manager needs to take that into account. But the application does not trigger the process; if the project manager does an assessment at the completion of the whole of the works then that stands, unless challenged.

But it rarely seems to work like that. For instance, while NEC seeks to apply time limits for notifying compensation events, it does not put time limits in place for parties to resolve a compensation event. Notification is one thing, final valuation and determination another. This leaves potential for there to be issues between parties unresolved after the works have been completed. For instance, the employer knows that the contractor says X is a compensation event but the employer does not agree. Or both parties agree X is a compensation event but do not agree the consequences in terms of time or money. Have a few of these issues and quite a lot can quickly be up in the air.

It may also be difficult to push a contracting party to put up or shut up. They may have claims that they need to work on or support with documents or expert evidence. So the risk is that a claim may come in after the completion of the works.

The position is then complicated by the rights under the Construction Act as amended. The amended processes under the act carry the extra risk that an application not responded to can become the sum which has to be paid in default of an appropriate response notice. The project manager might argue that his obligation to value comes to an end at completion, but taking that approach is taking a risk and a safer course is to then value. When everyone is actively involved in the project and while the works are ongoing, doing a valuation might be straightforward. But potentially months or even years later, it may be impractical and/or the application can slip through the net. The scope for missing the period to file a notice is considerable. If everything is resolved in a final statement process that risk goes away.

In other respects, NEC works valiantly to provide certainty, such as obligations to raise risk and compensation events in prescribed time limits or lose rights. It also provides a time limit to serve a notice objecting to an adjudicator’s decision (although nothing is said about how long after such a notice that party has to get on and take the dispute to the next level).

In this context, the absence of something final about valuation at the end of the works is perhaps surprising. Given that the limitation period for bringing claims might be six or even 12 years, not putting limits around applications and drawing the account to a close is a significant exposure.

James Bessey is a partner in the construction, infrastructure and projects department at DWF