Practical Law

Nearly 20 years after the Construction Act 1996 was introduced to stamp out bad payment practices, you would be forgiven for thinking there must be a voluminous pile of case law in relation to the all-important final account. But you would be disappointed. While there is plenty of guidance from the TCC on interim payments, the courts have not had much to say about final accounts, particularly post 2011.

This is why Systems Pipework Ltd v Rotary Building Services Ltd is so welcome. Coulson J draws together the authorities on interim and final account payments and concludes (in a characteristically clear and to the point judgment) that the same rules apply to both.

A brief recap of the facts

Rotary, the contractor, engaged SPL, the sub-contractor, to supply and install cooling systems. The contract was “loosely based” on a standard form sub-contract.

The parties split the works into “DC1 works” (to be carried out up to 31 January) and “DC2 works” (to be carried out after that date). However, the contract did not reflect this split.

The contract provided:

• Submission of final account: SPL was to submit the final account to Rotary within four weeks of completion, together with the relevant information to enable Rotary to assess it (clause 28.5).
• Assessing the final account: Rotary was to assess the proper amount due for payment within 13 weeks of submission of the final account, based on the submitted information, and notify SPL of this amount. If SPL did not “dissent in writing” within 14 days, the notified figure would be binding (clause 28.6).
• Failure to submit the final account: if SPL failed to submit the final account, Rotary could value the proper amount due on a fair and reasonable basis and notify SPL of this amount. Again, if SPL did not “dissent in writing” within 14 days, the notified figure would be deemed agreed and would be binding (clause 28.6).
• Payment of amount due: payment would not become due until it had been agreed and confirmed in accordance with clause 28.7. Within 14 days of agreement, Rotary was to submit a Final Account Statement to SPL confirming that the figure was in full and final settlement of all payments due to SPL under the sub-contract. SPL was to sign and return the Final Account Statement to Rotary and the amount due would be this sum, less retention and the total of previous interim payments.

SPL carried out both sets of works, but problems arose at the final account stage. Although the contract was clear, what happened in reality bore little relationship to this process.

In mid May, SPL sent Rotary a “revised final account for DC1” and asked for “review and comment”. On 22 May, SPL made an interim application in respect of the DC2 works, which was not paid.

On 2 September, Rotary provided SPL with a nameless document that was described as “our final account assessment for the works carried out on the above project by your company”. This lengthy document compared what each party said was due and concluded with Rotary’s and SPL’s alternative figures.

Within 14 days (the timeframe for dissension), SPL referred to adjudication its entitlement to payment for the DC2 works, referencing various unpaid interim payment applications (but not the 2 September document). SPL made it clear that the DC1 works were excluded from the referral. The adjudicator ruled in favour of SPL and Rotary paid up.

Four days later (so four days outside the dissension time-frame) Rotary commenced an adjudication before the same adjudicator, seeking a declaration that (pursuant to clause 28.6) SPL was bound by what it termed “the 2 September final account assessment”.

The adjudicator ruled that SPL was not bound by the total of the 2 September assessment (insofar as it had already arrived at a different, higher figure for the DC2 works), but was bound by the remainder of the assessment.

SPL issued court proceedings seeking a declaration on the following issues:

• What notification was Rotary obliged to give under clause 28.6, in order for that notification to be binding?
• Was the 2 September assessment binding on SPL?
• If so, did SPL “validly” dissent under clause 28.6?

Decision

Coulson J held in favour of SPL, ruling that what had to be notified was “the proper amount due for payment in respect of the Final Account”. The 2 September assessment was not a notification of the amount due, in form or fact or substance. Neither the letter nor the attachment identified the specific sum that was said to be due. It was a purported assessment of the value of work carried out and “therefore one half of the necessary exercise only”.

The draconian effect of payment notices under the Construction Act 1996 required that, for a document to be a notification of the sum due, as a minimum it must identify that sum and expressly refer to clause 28.6. Even on Rotary’s own case, the 2 September assessment required the parties to do a calculation by reference to other figures and documents (some of which were dated later than 2 September), so it could not be a notification of the sum due.

In case he was wrong, Coulson J considered whether SPL had sufficiently dissented to the notification within 14 days. He held that it had (even though that dissension was only in relation to the DC2 works) so that deemed agreement could not occur. Because of the harsh consequences flowing from the service of payment notices, the contract had to be strictly interpreted, and there was no scope to argue that it provided for partial dissent.

Final thoughts

This case is useful as it confirms what many already thought, that the same common sense principles (clear notices, free from ambiguity, properly labelled to ensure the payer is aware that the payment period has been triggered), which apply to interim payments also apply to final account claims. This is important because:

“an interim application… might be capable of subsequent adjustment… [unlike] a final account entitlement which, on the defendant’s case, would be lost to the claimant for all time if there has been a valid notification and no dissent…”

Arguably, another lesson emerges from this case. It demonstrates the need for further amendment to the Construction Act 1996, as it still doesn’t iron out problems in payment practice, even after 20 years and one set of amendments (in 2011). Therefore, it is very topical that there is another consultation on the Construction Act 1996, which is due to close next month.

However, I wonder whether further tinkering with the Act or the introduction of yet more legislation will end these payment disputes. Perhaps this dispute arose not because of bad payment practice, but because the parties put their contract (which seemed to contain a workable final account regime) in the drawer. If they had followed the contractual payment regime, they may not have ended up in court.

In short, no amount of amendments to the Construction Act 1996 will prevent payment disputes if the parties don’t comply with their contract.