Legal: Not quite the last word

The finality of a final account will usually be an important consideration for parties to a construction contract. The paying party will want finality on the amount to be paid, without fear that a different amount will subsequently be demanded. The unpaid party will want finality with respect to an entitlement to be paid, without fear that it may later be told it is no longer entitled to payment. For these reasons, clauses that purport to make final account statements conclusive, subject to certain conditions, have long been a feature of standard form construction contracts. 

However, when the unpaid party receives a final account statement with which it disagrees, the issue is often how to prevent the operation of the finality provisions. Under the well-known wording of the JCT 2011 contracts, for example, a final certificate shall take effect as “conclusive evidence” with respect to adjustments to be made to the contract sum save where “adjudication, arbitration or other proceedings are commenced by either party” within 28 days after the final certificate has been issued.

The submission for the main contractor was that the subcontractor ‘had to say what [it] dissented from, and why’. The judge held that the clause contained no such requirement

In their standard form wording, the JCT 2011 contracts expressly provide for what might be called “partial finality”. Clause 1.9.3, for example, provides that where adjudication, arbitration, or other proceedings are commenced, the final certificate is still to take effect as conclusive evidence, “save only in respect of the matters to which those proceedings relate”. It would therefore be possible for a party to commence an adjudication with respect to the lawfulness of certain deductions made in the final certificate, while leaving other deductions – not the subject of challenge – to become final.

The courts have recently had to consider the issue of partial finality in Systems Pipework Ltd vs Rotary Building Services Ltd [2017] EWHC 3235 (TCC). The claimant was a specialist subcontractor engaged to supply and install (among other things) a chilled water system. The defendant was the main M&E contractor. The relevant payment terms included that, following the completion of the subcontract works, the main contractor was either to assess the proposed final account from the subcontractor or – in its absence – make its own assessment. 

In either case, the main contractor was to “notify” the subcontractor of the proper amount due for payment and “if such notification is not dissented from in writing by the subcontractor within 14 days, then the notified figure will be deemed to have been agreed and will be binding on the parties”. 

It appears the parties decided to divide the works into two phases, although this was not a distinction found in the contractual documents. The first phase was called DC1 and the second DC2. On 17 May 2016 the subcontractor submitted a “revised final account for DC1”, then on 22 May made an application for interim payment with respect to the DC2 works. On 2 September the main contractor provided the subcontractor with a statement purporting to be a final account assessment which engaged the notification provisions. That is, the main contractor alleged that the 2 September 2016 statement was relevant both to the DC1 and the DC2 works. This statement gave rise to two adjudications. 

The first was commenced by the subcontractor, seeking payment for the DC2 works; the adjudicator awarded the sums applied for. The second was commenced by the main contractor, seeking a declaration that the subcontractor was bound by the purported final account assessment of 2 September. The same adjudicator declared that – with the exception of the DC2 works, in respect of which he had made an award – the subcontractor was bound by the remainder of the statement of 2 September in accordance with the finality provisions.

The subcontractor issued Part 8 proceedings seeking various declarations, which gave rise  to two relevant issues. First, was the 2 September final account statement the required notification under the finality provisions? Second, if it was the required notification, was it validly “dissented from” within the saving clause of the finality provision? While the judge answered the first question in the negative, he nevertheless went on to consider the second. In his view, the issue was whether the adjudication commenced by the claimant “was sufficient to stop the notification under clause 28.6 from taking effect at all, or whether the dissent was partial only”.

The main contractor argued that – to the extent that the adjudication commenced by the subcontractor constituted a dissent – it was a “partial dissent”. That is, because the subcontractor’s adjudication was concerned with only one set of works, the contents of the final statement concerning the other set became binding in accordance with the finality provisions. The judge rejected this argument. In his view, on the plain words of the contract, all the clause required was a dissent. He accepted the subcontractor’s submission that dissent was “a binary question”. Either it had dissented, or it had not; if it had communicated a dissent, there was no room for the finality provisions to operate in part only.

The judge went on to reject the main contractor’s further argument that the mere fact of dissent was not enough. The submission for the main contractor was that the subcontractor “had to say what [it] dissented from, and why”. The judge held that the clause contained no such requirement. While he accepted that the commercial purpose of a finality provision such as the clause in question was “to ensure clarity and to avoid delay,” that purpose was not capable of overriding the clear words of the contract, which referred only to “dissent.” 

The case illustrates that parties and their advisers should give careful thought to the practical operation of finality provisions. To the extent that they desire “partial finality”, they should expressly provide for it. Otherwise, there is a risk that a party may find that it does not quite have the last word that it intended.