Appeal court splits over JCT/SBCC final account provisions

A recent decision of the Scottish Inner House has considered a number of difficult issues arising on the interpretation of the final account provisions of the JCT/SBCC Standard Building Contract. The case considers the conclusivity and time bar provisions in particular and their application to interim payment disputes. The three-judge court was split in different ways on key issues in the case, emphasising the difficulties of interpretation which arise on this aspect of the standard form.

The final account provisions of the Standard Building Contract

The JCT and SBCC Standard Building Contract (“SBC”) provide for a series of Interim Payment Certificates to be issued by the Architect or Contract Administrator (the “CA”) during the course of the Works. After completion of work and the expiry of the Rectification Period, the SBC provides a process for the CA to issue a Final Certificate. This certificate is intended to state a final assessment of the Contract Sum and stipulate for a balancing payment to be made by either party depending on the interim payments previously made and/or certified.

Clause 1.9 of the SBC provides that the Final Certificate is to become conclusive as to the valuation of the Contract Sum, unless legal proceedings (including adjudication) are commenced within a certain period challenging the Final Certificate. If such proceedings are commenced, the Final Certificate is to be adjusted in accordance with the outcome of those proceedings, but not otherwise. These provisions are intended to result in a swift resolution of the final account and differ from the final account provisions in the Design and Build form, where a mere written notification is sufficient to dispute a Final Statement issued under that contract (for our recent Law-Now on the final account provisions of the Design and Build form please click here).

D McLaughlin & Sons Ltd v East Ayrshire Council: a recap

East Ayrshire Council (the “Council”) engaged D McLaughlin & Sons (“DMS”) to build an extension to a school, with work commencing on 30 May 2016. The contract between the parties was an amended SBC, 2011 edition with Quantities, for use in Scotland.

Shortly after Practical Completion, the CA under the contract failed to issue an Interim Certificate when required. DMS therefore issued an Interim Payment Notice in default dated August 2017 claiming just under £950,000 based on a Contract Sum value of £3,802,614.87. No Pay Less Notice was issued on behalf of the Council and no payment was made. Despite this, DMS did not seek immediately to enforce the Interim Payment Notice by way of a “smash and grab” adjudication.

Some further payments were subsequently made by the Council and eventually a Final Certificate was issued by the CA on 17 July 2019 adjusting the contract sum to £3,343,223.82. Clause 1.9 required any proceedings contesting the Final Certificate to be commenced within 60 days. In accordance with this requirement, DMS raised proceedings in the Sheriff Court on 12 September 2019 (the “First Court Action”). DMS argued that the Final Certificate did not accurately reflect the proper value of the works, including variations, and claimed a total Contract Sum of £3,711,242.80.

More than six months later, on 23 March 2020, DMS commenced a smash and grab adjudication seeking payment of the full amount stated in its Interim Payment Notice of August 2017. The adjudicator found in favour of DMS and, in the absence of a Pay Less Notice, required the Council to pay £513,094.50 plus interest of £78,361.18.

DMS raised an action for enforcement of the adjudicator’s decision, which was successful, and the Council made payment. DMS had therefore been paid significantly more than the final account value it alleged in the First Court Action.

As part of the enforcement proceedings, the Council lodged a counterclaim seeking a reversal of the adjudicator’s decision on grounds, among other things, that the adjudicator was bound by the Final Certificate in light of the conclusivity provisions in clause 1.9 of the contract and the fact that the adjudication was commenced more than 60 days after the Final Certificate. The Outer House rejected this challenge principally on two grounds: firstly, that the conclusivity provisions in clause 1.9 did not apply to interim payment adjudications and, secondly, if they did apply, DMS was required to have challenged the adjudicator’s decision within 28 days. For a more detailed overview of the Outer House’s decision please see our earlier Law-Now here.

DMS appealed to the Inner House. The Inner House delivered three separate judgments which agree and disagree in various respects, as explained further below.

Does Marc Gilbard apply in Scotland?

DMS renewed its argument on appeal that the First Court Action, having been issued within 60 days from the Final Certificate, was sufficient to prevent conclusivity and that this applied also to any later proceedings such as the adjudication.

A similar issue had been determined in the prior English case of Marc Gilbard 2009 Settlement Trust (trustees of) v OD Developments and Projects Ltd. Mr Justice Coulson (as he then was) rejected this so called “foot-in-the-door” approach and held that conclusivity would continue to apply to any proceedings commenced after the time period, even if prior proceedings covering the same or similar issues had been commenced within the period.

The Inner House unanimously agreed to follow the Marc Gilbard decision, meaning that the First Court Action did not automatically prevent the conclusivity of the Final Certificate from applying in subsequent proceedings.

Do the conclusivity provisions apply to interim payment adjudications?

The Inner House upheld DMS’s appeal on this point by a 2:1 majority, finding that the conclusivity provisions of clause 1.9 were applicable to the smash and grab adjudication brought by DMS.

Lord Malcolm emphasised the nature of the calculation made in the Final Certificate as being the assessed Contract Sum amount less the amount of all previous Interim Certificates and any actual payments in respect of Interim Payment Notices (i.e. smash and grab type sums). The fact that the Final Certificate did not account for Interim Payment Notices which had not yet been paid gave rise to the prospect that a smash and grab adjudication could be brought after the Final Certificate seeking a greater payment than that made under the Final Certificate. In Lord Malcolm’s judgment:

“If the debt created by the absence of a pay less notice is pursued in order to obtain more than is due as per the final account, the conclusive status of the final certificate is being challenged, in which case clause 1.9 comes into play.”

Lord Carloway disagreed with this approach, relying instead on standard wording in the SBC that the Final Certificate was not to affect “the rights of the Contractor in respect of any interim payment not paid in full by the Employer by its final date for payment”. The reference to “interim payment” in Lord Carloway’s view covered both Interim Certificates and Interim Payment Notices and this saving provision meant that clause 1.9 did not apply.

Lord Carloway also disagreed that the smash and grab adjudication involved any challenge to the conclusivity of the amount of the Final Certificate. Lord Malcolm and Woolman on the other hand ruled that the adjudicator ought to have made a nil award based on the application of clause 1.9 and the conclusivity of the Final Certificate (in the adjudication proceedings).

Did the adjudication time-bar apply?

The contract between the parties included the following time-bar, in its unamended SBC 2011 form, for adjudication challenges after the Final Certificate (clause 1.9.4):

“In the case of a dispute or difference on which an Adjudicator gives his decision on a date after the date of issue of the Final Certificate, if either Party wishes to have that dispute or difference determined by arbitration or legal proceedings, that Party may commence arbitration or legal proceedings within 28 days of the date on which the Adjudicator gives his decision.”

DMS had earlier successfully argued before the Outer House that this clause applied to its adjudication, even if the Final Certificate was otherwise conclusive due to the commencement of the adjudication outside the period allowed for in clause 1.9. This argument was renewed on appeal and was accepted by Lord Carloway and Lord Woolman. Both judges approached the question in a straight-forward fashion adopting a literal reading of the clause. In Lord Carloway’s judgment:

“The terms of clause 1.9.4 are straightforward and clear. Any decision, which is issued by an Adjudicator after the date of issue of the Final Certificate, can only be challenged within 28 days. In this case it was not. The effect of that is that the defenders are bound by it.”

Lord Malcolm adopted a more contextual approach, noting the context of the provision within a clause dealing with the conclusivity of the Final Certificate. In his view a literal reading would be unacceptably wide and would apply to adjudications which had nothing to do with the Final Certificate or even payments at all (a claim for defects, for example). He preferred to interpret the clause as providing a time limit on challenges to adjudications which were brought in accordance with the rest of clause 1.9 i.e. adjudications challenging the Final Certificate brought within the stipulated time period, 60 days in this case. As the smash and grab adjudication had been commenced late, the time-bar “was not in play”.

Implications and conclusions

This is a significant appellate decision with important ramifications for final account claims under the JCT/SBCC SBC form. In particular:

• The acceptance of the Marc Gilbard decision at an appellate level and in Scotland means that all challenges to the Final Certificate under the SBC form will need to be included within proceedings commenced within the time period specified in clause 1.9 (28 days in the standard form).
• The majority judgment in relation to interim payments suggests that the issuing of the Final Certificate will have the effect of nullifying unpaid smash and grab claims, either entirely or where they are not pursued via proceedings issued within the clause 1.9 timeframe (the majority judgments are unclear as to which).
• The literal interpretation adopted by the majority in relation to the adjudication time-bar at clause 1.9.4 means that any adjudication decision received after the Final Certificate, regardless of whether it concern payments or the Final Certificate, will be subject to the 28-day time-bar. Parties involved with historic defects claims under this form should bear this in mind.

Although not mentioned in the Court’s decision, it is worth noting that the 2016 edition of the SBC has made significant amendments to the adjudication time-bar to make clear that it applies only to adjudications to challenge the Final Certificate commenced within the period specified by clause 1.9. This brings the 2016 form in line with the views of the minority judge in this case, Lord Malcolm.

As noted in our Law-Now on the Outer House decision, this case highlights the difficult issues which can arise on the final account provisions of the JCT/SBCC Standard Building Contract. Parties should give careful consideration to how such provisions apply in specific scenarios to avoid losing rights of challenge as happened in this case. As noted above, a much simpler final account procedure is available under the JCT/SBCC Design and Build form, where a written notice is sufficient to dispute the final account and prevent conclusivity.

References:

Marc Gilbard 2009 Settlement Trust v OD Developments and Projects Ltd [2015] BLR 213

D Mclaughlin & Sons Ltd Against East Ayrshire Council [2021] CSOH 122

D Mclaughlin & Sons Ltd Against East Ayrshire Council [2022] CSIH 42