Final Statements

We have known for a while the implications of the Final Statement under a traditional form of building contract. In Crown Estates Commissioners v John Mowlem (1994) the Court of Appeal held that, subject to arbitration proceedings being commenced within the stated timescale, the Final Certificate under JCT 80 could be taken as conclusive evidence of the architect's reasonable satisfaction that the standards of workmanship and the quality of all materials were in compliance with the contract. The effect was that, prior to amendment 15 of JCT 80, the issue of a Final Statement meant that the contractor would be free from liability for defects in materials and workmanship.

However, with so much work in the industry being conducted using design and build forms, the application of Mowlem was unclear. We now have a decision dealing with the "conclusive evidence" defence under the JCT With Contractor's Design (1981 Edition) which applies the reasoning of the Mowlem decision to design and build contracts.

In London Borough of Barking and Dagenham v Terrapin Construction Limited (2000) the Employer Council employed Terrapin under a JCT 81 Form of Contract, without amendments, for refurbishment and building works at a school. The Conditions included a Final Account and Final Statement clause (clause 30.8.1). This provided that upon agreement or conclusion of the Final Account and Final Statement, the same were to be effective "as conclusive evidence that where it is stated in the Employer's Requirements that the quality of materials or the standard of workmanship is to be to the reasonable satisfaction of the Employer the same are to such satisfaction…".

The Employer issued proceedings seeking damages for breach of contract, negligence and breach of statutory duty. Terrapin relied on clause 30.8.2, the conclusive evidence clause. Judge Newman at first instance held that all claims were subject to the conclusive evidence clause other than those based on failure to comply with any statutory requirements. Both parties appealed against the decision. Four issues arise in the Court of Appeal's decision which have important implications for claims for defects under JCT 81.

First, the Court's view was that, as regards the conclusiveness of the Final Statement, there was not a fundamental distinction between the provisions of the 1980 Form of Contract and the 1981 Form. Although under JCT 81 the Employer had divested itself of design responsibilities, the works still had to be to its satisfaction. This necessarily encompassed the quality of materials and the standard of workmanship.

Secondly, the Court agreed that the conclusive Final Statement defence did not extend to defects in design of the work. The Employer relied on clause 2.5.1 (the express design warranty), the absence of an architect against whom they would have recourse, and the absence of the word "design" in clause 30.8.1 itself. The Court accepted this interpretation of the clause, remarking that the 1981 Form contains a clear distinction between design and workmanship responsibilities.

Thirdly, the Court disagreed with the argument that clause 30.8.1 did not provide a defence to claims for latent defects in the Works. The Employer argued that if the defect was not reasonably discoverable by the Employer, then the Employer could not have been satisfied with this aspect of materials and workmanship. The Court held that clause 30.8.1 makes no distinction between patent and latent defects. Had the Employer wished to exclude latent defects from the conclusiveness effected by clause 30.8.1.1, it could have done so by express provision. Furthermore, the Employer had some supervisory responsibility for the works, and had retained the right to satisfy itself on the works "in all aspects" save as to design. The issue of the Final Statement effectively discharged the Contractor, in the absence of fraud, from liability for defects in workmanship which had not been discovered at that date.

The fourth issue arose from Terrapin's appeal against the decision that the conclusive evidence defence was not available in relation to claims for failure to meet statutory requirements. Clause 6 of the contract placed an obligation on the Contractor to comply with statutory requirements. The Court of Appeal held that the Employer's obligation to satisfy itself of the works included the contractual obligations under clause 6. Clause 30.8.1 refers to the expressions "quality of materials" and "standards of workmanship" without reference to whether the Contractor's obligations arise from statute or the contract. The clause does not exclude compliance with statutory requirements.

Employers should consider this case a warning about the undesirable consequences of the Final Statement in the context of an unamended JCT 81 Form of Contract. In issuing a Final Statement they will be accepting, unequivocally, the quality of materials and standard of workmanship. By comparison, JCT 98 WCD provides that where the qualities of materials or standard of workmanship is described expressly in the Employer's Requirements to be for the approval of the Employer, the particular quality or standard is to his reasonable satisfaction. The Final Account and Final Statement shall not be conclusive evidence that such or any other materials or workmanship complies with the contract. That difference is good reason for choosing WCD 98 over JCT 81. This case also serves as a reminder for employers under unamended JCT 81 contracts to satisfy themselves as to the quality of the works.