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Has the pendulum swung too far the other way?

This was the question raised in the recent case of System Pipework Ltd v Rotary Building Services Ltd, in which the court was concerned with whether the claimant had lost its right to make its own final account claim because it failed to challenge the defendant's assessment/valuation of the final account within 14 days.

This was the question raised in the recent case of System Pipework Ltd v Rotary Building Services Ltd, in which the court was concerned with whether the claimant had lost its right to make its own final account claim because it failed to challenge the defendant's assessment/valuation of the final account within 14 days.

The primary aim of the Construction Act was to protect a sub-contractor's right to payment. Paying parties are now required to swiftly identify what (if anything) they say is due and why. Many cases have addressed the "draconian consequences" of parties failing to issue notices and/or detailed challenges to such notices within tight time constraints.  But to the extent to how such application of rigorous contractual terms is applied to the settlement of the final account is fairly new territory.

The case began when the claimant (System Pipeworks) carried out the sub-contract works between December 2014 and the end of May 2016, nominally split into "DC1" Works and "DC2" Works. On 17 May 2016, the claimant emailed the defendant (Rotary) a "revised final account for DC1" and asked for "review and comment". On 22 May, the claimant made an interim application in respect of the DC2 Works, which was not paid.

On 2 September 2016, the defendant served a lengthy document described as "our final account assessment for the works carried out on the above project by your company". Clause 28.6 of the Sub-Contract contained a deeming provision giving the claimant 14 days to dissent to a final account notification, otherwise it became binding. On 16 September 2016, the claimant commenced an adjudication in respect of the non-payment of DC2.  The adjudicator found the defendant liable for the sums due for the DC2 Works, which they belatedly paid.

On 20 September 2016, the defendant commenced a second adjudication seeking a declaration, pursuant to clause 28.6 of the Sub-Contract, that their letter of 2 September was their final account assessment and that the claimant was bound by that assessment. The adjudicator agreed with the defendant and the claimant therefore commenced court proceedings.

Coulson J granted declaratory relief to the claimant, concluding that what had to be notified was "the proper amount due for payment in respect of the Final Account". An assessment of the value of the final account was only one part of that process and was not a proper notification of the amount due, in form or fact or substance. Importantly, a notice that has a draconian effect must make it clear what clause of the contract it has been issued under and must set out the sum that is due; Rotary's notice fell short of this requirement. Coulson J further concluded that by service of the adjudication notice the claimant had, in any event, dissented to the defendant's notification meaning that the binding provision of clause 28.6 never came into force.

Complicated payment rules now present in most construction contracts and the number of judgments establishing that the right to payment can be lost "for all time" if parties fail to comply with those rules has led to the suggestion that, in context of the original intention of the Construction Act, "the pendulum has swung too far the other way".  

However, this welcome judgment provides clear guidance that the established principles of the key authorities relating to interim payment applications (clear notices, free from ambiguity, properly labelled to ensure the payer is aware that the payment period has been triggered, statement of the amount due) should also be applied to disputes concerning final account assessments.

Parties regularly either fail to appreciate the importance of complying with the payment terms of the contract or simply do not want to be seen to be too ‘contractual’ in case of upsetting the other party and creating an uneasy relationship during the project. Put such sentiments aside.

Whether at interim or final account stage in the payment process, compliance with the precise terms of the contract is critical. If Rotary had done so this case would not have come to court.