Appeal court highlights final account provision difficulties

Mark Kirke is partner and Lee Lothian is associate at CMS Cameron McKenna Nabarro Olswang

A recent decision of the Scottish Inner House considered a number of difficult issues arising from interpretation of the final account provisions of the JCT/SBCC Standard Building Contract (“SBC”). The three-judge court was split on the interpretation of the conclusivity and time bar provisions in particular.

The JCT and SBC provide for a series of interim payment certificates to be issued during the course of the works with a final certificate issued after completion and the expiry of the rectification period.

Clause 1.9 of the SBC provides that the final certificate becomes conclusive unless challenged by legal proceedings (including adjudication) commenced within a certain period.

D McLaughlin & Sons Ltd v East Ayrshire Council

In this case East Ayrshire Council (“the council”) engaged D McLaughlin & Sons Ltd (“DMS”) to build an extension to a school in terms of an amended SBC, 2011 edition with quantities, for use in Scotland.

Timeline

  • DMS issued an interim payment notice in default dated August 2017. The council did not issue a pay less notice in response.
  • A final certificate was issued in July 2019 which did not include the full sum of the August 2017 interim payment notice.
  • In accordance with clause 1.9 DMS raised proceedings within 60 days challenging the final certificate and seeking further payment (the “first court action”).
  • More than six months later DMS commenced a smash and grab adjudication which resulted in an award in its favour.
  • DMS raised an action for enforcement of the adjudicator’s decision.
  • The council issued a counterclaim seeking a reversal of the adjudicator’s decision on grounds he erred by not upholding the final certificate.
  • The Outer House held that the conclusivity provisions did not apply to interim payment adjudications, and the counterclaim failed because it had not been brought within the 28-day period for challenging the adjudicator’s decision.

The council appealed to the Inner House where three separate judgments were delivered which agree and disagree in various respects.

The appeal

 DMS renewed its argument that the first court action, having been issued within 60 days of the final certificate, was sufficient to prevent conclusivity applying to that and 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 in which this “foot-in-the-door” approach was rejected.

The Outer House unanimously agreed to follow the Marc Gilbard decision, meaning 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 Outer 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 calculation made in the final certificate is the assessed contract sum amount less the amount of all previous interim certificates and any actual payments in respect of interim payment notices.

Lord Carloway disagreed, 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 clause 1.9 did not apply.

Lords Malcolm and Woolman 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. Lord Carloway disagreed.

Did the adjudication time bar apply?

The contract included a 28-day time bar for adjudication challenges after the final certificate (clause 1.9.4).

DMS successfully argued at appeal that this clause applied to its adjudication, even if the final certificate was otherwise conclusive. This argument was accepted by Lord Carloway and Lord Woolman, both judges adopting a literal reading of the clause.

Lord Malcolm adopted a more contextual approach, interpreting the clause as providing a time limit on 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 means 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.
  • The majority judgment in relation to interim payments suggests the issuing of the final certificate will have the effect of nullifying unpaid smash and grab claims.
  • The literal interpretation adopted by the majority in relation to the adjudication time bar at clause 1.9.4 means any adjudication decision received after the final certificate will be subject to the 28-day time bar.

This case highlights the difficult issues which can arise on the final account provisions of the JCT/SBCC Standard Building Contract.

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