UK: Has The Payment Pendulum Swung Too Far? Clarity And Compliance Are Just As Important In Final Accounts As In Interim Payment Applications

Last Updated: 26 January 2018
Article by David Arnott and Laura McCorquodale

The Court's views on the "draconian effects" of payment notices under the Construction Act have been made clear in a number of cases relating to interim payments, but there has, up till now, been limited authority on applying those principles to final account disputes.

Coulson J's decision in Systems Pipework Ltd v Rotary Building Services Ltd provides helpful guidance by drawing together the authorities on interim payments and how the principles apply to final account claims.

The claimant carried out sub-contract works between December 2014 and the end of May 2016. Works were done in two stages and referred to as "DC1" and "DC2" works.

Problems then arose at the final account stage. On 2 September 2016, the defendant provided the claimant with a lengthy document, bearing the description "our final account assessment for the works carried out on the above project by your company". Under the contract there was a deeming provision and the claimant had 14 days to disagree with a final account application, otherwise it was binding.

On 16 September, the claimant referred the non-payment of DC2 to adjudication and expressly excluded the DC1 works from the referral. The adjudicator found the defendant liable for the sums due for the DC2 works, which they then paid.

On 20 September, the defendant commenced an adjudication before the same adjudicator, seeking a declaration that their letter of 2 September was their final account assessment and that the claimant was bound by it in terms of the contract.

The adjudicator decided that the claimant was bound by the 2 September assessment, excluding the (already adjudicated and determined) DC2 payment. The claimant thereafter referred the matter to the Court.

Decision

Coulson J identified the key authorities which have considered the process for payment notices under the Construction Act. Coulson J noted that, although those authorities dealt with disputes in respect of interim applications, the principles of those authorities should be applied to disputes concerning final account assessments. Coulson J noted that, in the circumstances here, the contract required that the assessment/valuation of the final account by the defendant would state the proper amount due, rather than simply an assessment of what might be due.

It then followed that the 2 September 2016 assessment was not a notification of the amount due in terms of the contract because (1) it described itself as an assessment; (2) it failed to specify the sum that was said to be due; and (3) failed to refer to the relevant clause in the contract.

Coulson J observed that "if a notice under a certain clause has a draconian effect pursuant to the contract, the notice should make it clear that it has been issued under that clause....the fact that the claimant might have been able to work out or otherwise calculate what the sum might be is [irrelevant], because calculation of that kind is the very thing which [the contract] seeks to obviate".

Comments

One of the benefits of the Construction Act is the introduction of structured mechanisms for payment; however, there was a concern that applying those provisions to final accounts could mean that "the pendulum has swung too far the other way". 

This case provides helpful guidance that the same principles of clarity and compliance with requirements for clear notice, which apply to interim payments, are just as relevant to applications in respect of the final account.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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