When a final account certificate is far from final

The Scottish judge Lord Woolman gave a pithy statement: “Construction contracts contain three important regimes. One – interim certificates – cash flow during the course of the contract. The second – the final certificate – facilitates the early and conclusive resolution of all outstanding claims. The third – adjudication – avoids the lengthy construction disputes of yore.” He added: “Each regime has its own cordon sanitaire. Sometimes however, the regimes mesh. Rarely they clash. That has happened in this case. It throws a question into sharp relief: how final is a final certificate?”

“Yore” – what a lovely word. My favourite stories are about gallant knights and fair maidens in the days of yore. As for “cordon sanitaire” – it’s what we did in lockdown.

So, what’s what in this recent case from Scotland’s appeal court, the Inner House? D McLaughlin & Sons Ltd was the contractor for an extension to Hurlford Primary School, Kilmarnock, at a price slightly over £2m. East Ayrshire Council is the employer using a JCT contract. The works got under way in 2016.

In August 2017 the contractor issued an interim account for £3,802,614 gross. The employer said nothing in reply, so a net sum ought to have turned up for £949,556. It didn’t. Well, some did but not all. In July 2019, two years later, a final certificate turned up. It said gross £3,343,223. The JCT rules as to final certificates ask you to blow a whistle if the amount is thought a tad low. In this JCT bumf as amended, there was a 60-day time limit. McLaughlin blew the whistle, wanting another £368,018 on the final certificate (making the gross final account around £3.7m). Thus there was a crystallised dispute about the true value of the final account and McLaughlin began litigation to that effect. So far so good.

Then McLaughlin rummaged in its files and recalled that its interim account two-and-a-half years earlier had not been fully paid and was a real candidate for adjudication. There was no payment certificate at that time by the employer, no pay less notice either, so the contractor rubbed its hands and fathomed it could claim the £949,556 less the amount paid meanwhile; it came to £427,000 plus interest of £100,00.

You might baulk at the two-and-a-half-year delay between interim application for payment and the notice of adjudication. You might baulk too because special rules prevail in JCT for raising a dispute once the final certificate is issued. The adjudication went ahead because the Construction Act allows an adjudication “at any time”.

Key is to pay interim accounts smack bang on time. Bull’s-eye accuracy of the amount to be paid is not, repeat not, a priority. It is a rough-and-ready cash flow process

The adjudicator issued his decision. He decided that East Ayrshire Council had to pay the £427,000 plus interest. The reason is that the adjudication was a simple payment notice dispute. I call it “pipe up or pay up”; others call it “smash and grab”. East Ayrshire Council failed to follow the payment notice regime and must pay up. It is a regime in the cordon sanitaire. The council didn’t pay. And so McLaughlin came to court to enforce.

East Ayrshire said the final account certificate was much lower than McLaughlin would have had in its pocket if the adjudicator’s decision were enforced. But that is part of a different regime and carried no weight. An adjudicator’s decision regime is to be obeyed save for gross unfairness or want of authority to decide what was decided (jurisdiction arguments).

East Ayrshire tried to argue the adjudicator was simply wrong when he announced the sums due. But right or wrong, it make no odds: there is no appeal in adjudication. Instead the whole case must be tried out as though no adjudication was done at all. The issue was the true value of the final account. It was to be a full-blown trial: East Ayrshire Council said £3.3m, McLaughlin said £3.7m.

>>Also read: Settle now or later? Why the final account stage needs more attention

>>Also read: Practical impacts of the Building Safety Act

Meanwhile the cash from the adjudication must flow. It might well turn out McLaughlin was overpaid, and the order then would be repayment – but that idea makes people shudder. McLaughlin and East Ayrshire Council have had a long, hard slog in their litigation about this modest-sized school contract, and it’s still not over. I expect they have spent a fortune so far: there have been two trials in the Scottish High Court all about technicalities in JCT, then they came to the appeal court – and not forgetting the costs in the adjudication.

The policy of construction contracts is to avoid the old game of cash starvation and bullying. Key is to pay interim accounts smack bang on time – if not, then an adjudicator will do his or her stuff. Bull’s-eye accuracy of the amount to be paid is not, repeat not, a priority. It is a rough-and-ready cash flow process.

The technicalities in JCT are well known to adjudicators, so don’t try pulling the wool over their eyes. True, the technicalities are very hard to fathom. I urge you to read the three judgments in the case as a training course. Then watch out for the final round later this year. The final account dispute is well suited to an experienced lawyer and sole arbitrator steeped in construction, sitting with a quantity surveyor expert. They would knock out the result in short order.

Tony Bingham is a barrister and arbitrator at 3 Paper Buildings, Temple