Final account conclusivity clauses: “foot-in-the-door” makes a comeback

A recent decision of the Scottish Outer House has considered a clause requiring the commencement of proceedings within a short period of time in order to prevent a final account statement from becoming final and binding. In a departure from the approach taken in previous English and Scottish cases, the court found that an initial set of proceedings commenced within the required time period was sufficient to remove finality for all purposes, including in subsequent proceedings commenced outside the time period. The decision is likely to provoke argument as to the correct approach to be taken to other similarly drafted provisions.

Final account procedures and the rule in Marc Gilbard

The JCT and SBCC Standard Building Contract (“SBC”) provide, after completion of work and the expiry of the Rectification Period, a process for the Contract Administrator to issue a Final Certificate.  This certificate states a final assessment of the Contract Sum and stipulates 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. 

This clause was considered in the English case of Marc Gilbard 2009 Settlement Trust v OD Developments and Projects Ltd.  Mr Justice Coulson (as he then was) rejected the “foot-in-the-door-approach”, where it can be argued that commencing one set of proceedings then allows the relevant party to commence other proceedings outwith the contractual time period.  He held that conclusivity would continue to apply to any proceedings commenced after the time period, even if the same or similar issues were covered by proceedings that had been commenced within the period. 

The Scottish courts agreed with this decision and applied the same approach in D Mclaughlin & Sons Ltd Against East Ayrshire Council.  The original decision by the Outer House was appealed.  However, the Inner House unanimously agreed to follow the Marc Gilbard decision and found that the relevant court action in that case did not automatically prevent the conclusivity of the Final Certificate in subsequent proceedings.  For a more detailed overview of the Scottish courts’ decisions please see our earlier Law-Now articles here (Outer House decision) and here (Inner House decision).

The same issues have come before the Scottish courts again, this time outside the JCT/SBCC context and with a different result.

Atalian Servest AMK Ltd v BW (Electrical Contractors) Ltd

In 2020, Atalian Servest AMK Limited (“AMK”) was carrying out certain construction work at Lord’s Cricket Ground in London.  It engaged BW (Electrical Contractors) Limited (“BW”) as a subcontractor for various electrical works.  The works did not proceed smoothly and significant differences existed between the parties at final account stage.

The subcontract between the parties contained the following final account provisions:

“33.3   Within 28 days of the receipt of the Final Account, AMK shall state the amount which it considers to be due to the Subcontractor (‘the Final Account Statement’).      

33.4     The Final Account Statement shall be final and binding on the Subcontractor unless the parties agree to any modification of it or, where the Subcontractor disagrees with the AMK Final Account Statement, unless the Subcontractor has commenced adjudication or court proceedings within 20 working days of the date of the AMK Final Account Statement.”

BW submitted its Final Account to AMK in accordance with the above provisions. On 6 May 2022, AMK issued its Final Account Statement claiming a sum due to itself from BW. BW disputed the Final Account Statement and commenced an adjudication on 19 May 2022 and court proceedings on 27 May 2022. The adjudicator was persuaded to resign on 15 June 2022 and BW commenced a second adjudication on 8 September 2022.

The second adjudication was commenced more than 20 working days from the Final Account Statement leading AMK to argue that the statement was final and binding in that adjudication. AMK claimed that, following Marc Gilbard and D McLaughlin, raising timeous challenges to the Final Account Statement did not enable BW to bring subsequent challenges in other proceedings outwith the stipulated time period.

“Foot-in-the-door” adopted – Marc Gilbard distinguished

The court rejected AMK’s arguments and distinguished the conclusivity provisions in clause 1.9 of the SBC standard form contracts from the clause in this case. The court highlighted that:

“Clause 1.9.1 [of the SBC] begins by providing as a basic rule that a Final Certificate issued in terms of the contract is, read short, to be conclusive evidence of the matters to which it relates in any proceedings (be that adjudication, arbitration or litigation) in any way connected with the contract. The relevant exception for present purposes is that if such proceedings are raised within the period stated, the Final Certificate is not to be conclusive “in respect of the matters to which those proceedings relate”.”

In addition to textual differences, the court noted that the rule in Marc Gilbard and D McLaughlin was in part based on the commercial object under the SBC contract of giving the Final Certificate the greatest degree of conclusivity and finality reasonably available in conformity with the wording of the contract. This object was able to be identified because the SBC was a well-established standard form “which had for a long period been the object of examination and comment within the construction industry as well as judicially, from which rich background the object of maximising conclusivity clearly appeared.”

In the present case, the subcontract was not based on a standard form and the commercial justification for the result in the Marc Gilbard and D McLaughlin cases was lacking. The court was of the view that the wording in the subcontract between the parties “plainly does not contemplate the extreme degree of intended finality which has been ascribed to the JCT/SBC standard form; its basic position as to the effect of the Final Account Statement is far less emphatically stated than is the case in the JCT/SBC form concerning Final Certificates”.

The court concluded accordingly that the commencement of a single set of court or adjudication proceedings within the 20 working day period was sufficient to prevent the Final Account Statement from becoming binding for all purposes thereafter.

Conclusion and implications

This decision provides an interesting contrast to the decisions on the JCT/SBCC form. Whilst the D McLaughlin and Marc Gilbard decisions provide strong authority for rejecting a “foot-in-the-door-approach” under those standard forms, there now appears to be scope for parties to bespoke contracts (or to standard form contracts with significant amendments) to argue that such principles are not capable of broad application and the court should simply construe the relevant clause as is.

The present decision also raises a number of questions which may need to be worked through in future cases. For example, the extent to which the use of a standard form contract can affect the degree of finality which the parties will be taken to have intended. The present decision also suggests that the subcontractor would have been able to remove finality from the Final Account Statement simply by commencing an adjudication, even if that adjudication were subsequently to be withdrawn the following day. Whether there is a middle ground to be discovered between this minimal degree of finality and the “extreme degree of intended finality” ascribed to the JCT/SBCC form remains to be seen.

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

Atalian Servest AMK Ltd v BW (Electrical Contractors) Ltd [2023] CSOH 14