The Binding Effect of Final Certificates
Four years ago, the effect of Final Payment Notices being conclusive was a hot topic in the construction industry, following a significant case on the issue.
This is an important area with substantial and potentially onerous implications for contractors and subcontractors. Following a recent adjudication in which ALA acted, where the issue was argued as a ‘complete defence’, it is a topic worth being reminded of.
The concept of some form of final document being conclusive is not a new one, and many contracts include some wording to this effect. It is understandable that parties want to draw a line under a completed project and not face the uncertainty that a claim may be coming at some point in the future.
Contractors need to be aware of these provisions and the commercial implications of failing to comply.
The JCT suite is one set of standard form documents which utilises conclusive final document provisions in most of its contracts.
For example, the JCT Design and Build Contract anticipates that the ‘Final Statement’ will be prepared by the Contractor; if it fails to do so, the Employer has a right to issue one instead.
Clause 1.8.1 of the JCT Design and Build Contract states that the Final Statement will be conclusive evidence regarding all entitlement to time and money under the Contract.
If the Contractor wants to dispute any matter in the Final Statement, it must initiate proceedings within 28 days of the due date; if it fails to do so, the Final statement is binding.
To be clear, this means adjudication, arbitration or other proceedings; simply submitting a claim or raising an objection to the account is not sufficient.
Is this Enforceable?
Many people are aware that the Construction Act 1996 gives parties the right to adjudicate “at any time”, so the idea that this could be limited might be surprising to some. However, the courts have upheld this principle in the case of Marc Gilbard v OD Developments.[i]
In that case, the parties began court proceedings within the 28-day period as required by the JCT standard wording. Frustrated with the slow progress of proceedings, the defendant attempted to refer the dispute to adjudication.
The court held that the Defendant could not do this. It did not matter that it had preserved the issues in dispute, it had not begun the adjudication within 28 days and therefore had lost the right to adjudicate.
The court also held that the clause did not prevent the Contractor from adjudicating “at any time”. The clause does not prevent either party from commencing proceedings, it simply confirms the evidential value of the document. In other words, you can bring an adjudication if you want, but both parties have accepted a contractual term which says they agree, so there is no dispute.
In reaching this conclusion, the court found that the right to adjudicate at any time “did not provide an unfettered right to adjudicate regardless of other contractual terms”.
The court’s position supported the clear language of the contract and the commercial certainty offered by drawing a line in the sand.
The submitting party is in control of the final statement / submission and should be aware of any contentious matters contained therein, giving it the opportunity to begin proceedings within the timeframe if necessary. Where it fails to do so and the Employer issues the final statement, the Contractor needs to be alert to contractual provisions regarding deemed acceptance.
As an aside, in researching this article, I enjoyed reading David Weare of Fladgate LLP’s comment piece on Marc Gilbard v OD Developments from May 2015, which can be read here. In this piece, David argues that the implications of this case could cause further complexity arguing that it may not reflect common sense. What if an adjudication is launched within the 28 days but there is some flaw with the result (e.g. the adjudicator reaches the decision out of time)? The proceedings will then have ended but without resolution. Have both parties lost the right to pursue the case further?
Note also the case of University of Brighton v Dovehouse Interiors Ltd[ii], which gave guidance on the meaning of the word ‘commenced’ in relation to proceedings. That case found that although a Notice of Adjudication had not been compliant with the contractual terms (leading to the adjudicator resigning) it was sufficient to satisfy the intent of the clause and preserve the referring party’s right to adjudicate the issues in dispute. This reinforces the point that if the referring party had not been found to have ‘commenced’ its proceedings within the time limit, it would have had no right to do so afterwards.
Misusing the Principle
ALA recently dealt with a case on behalf of a Subcontractor where the Main Contractor tried to rely on similar ‘deemed acceptance’ principles to offer a complete defence to a disputed final account.
The particular provisions of that Contract were complex, but in short, provided a convoluted version that had similar effect to the JCT provisions.
In our case, the Main Contractor attempted to mis-characterise one of our client’s payment applications as a final account statement and then claimed that its response to that application was a binding Final Payment Notice. The Main Contractor argued that this was a complete defence, our client had signed up to the contractual provisions, did not refer the matter to adjudication within the specified timeframe and now there could be no dispute.
ALA successfully argued that such a defence did not exist. In particular, the Main Contractor either tried to hide its intent with issuing its apparently binding document, or only decided later that it had such effect. In dealing with whether the Main Contractor was allowed to rely on such tactics, the judgment of Coulson J in Systems Pipework v Rotary Building Services[iii] was particularly relevant.
This case deals with a party losing its rights for deemed agreement, and held at paragraph 35 that:
“…if X is supposed to be notifying Y that a sum is due, under a clause that provides for a deemed agreement that bind the parties unequivocally, then it is a prerequisite of the arrangement that the sum due and the clause are clearly set out in the relevant notice.”
The judgment goes on to state:
“…so this is a case where the claimant is attempting to bypass the arguments on the merits by taking advantage of the provisions of clause 28.6. They might well have been able to do so, if they had gone about it in the right way, and with proper transparency. In my view, they did not do either.”
In our case of deemed acceptance, the adjudicator similarly found that the Main Contractor was trying to bypass the merits of the arguments through a ‘contrived procedure’.
In our deemed acceptance case, our client was helped by the cynical approach of the Main Contractor who tried to disguise the nature of their document and the effect it had. However, if the Main Contractor had played a straight bat, referring to both the clause and the binding effect in its document, the result could have been very different.
The advice to main contractors and subcontractors is clear: remain vigilant, be aware of deemed acceptance provisions and be ready to adjudicate or otherwise bring proceedings within the stated timescales, otherwise you will lose the right to do so.
Similarly, for Employers and Main Contractors looking to take advantage of any deemed acceptance provisions, remember the requirements of Systems Pipework and be sure to do so transparently and with express reference to the clause relied upon. Any attempt at ‘sharp practice’ is unlikely to be successful.
[i] The Trustees of the Marc Gilbard 2009 Settlement Trust v OD Developments and Projects Ltd  EWHC 70 (TCC).
[ii] University of Brighton v Dovehouse Interiors Ltd  EWHC 940 (TCC).
[iii] Systems Pipework v Rotary Building Services  EWHC 3235 (TCC).
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