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legal alert: TCC supports strict compliance with contractual final account mechanism

28 Feb 2018

In the case of Systems Pipework Ltd v Rotary Building Services [2017] the TCC strictly upheld the final account provisions in a sub-contract.

Rotary (contractor) engaged Systems Pipework (sub-contractor) to supply and install cooling systems under a sub-contract that was “loosely based on terms in standard forms of sub-contract.”

The Sub-Contract Clauses

a) Clause 28.5 - SPL was required to submit to Rotary its proposed Final Account within 4 weeks of completion of the sub-contract works.
b) Clause 28.6 – Rotary was required to assess the proper amount due for payment in respect of SPL’s Final Account based on the information submitted under clause 28.5 and notify SPL accordingly within 13 weeks of receipt of the proposed Final Account.
c) If SPL failed to submit a proposed Final Account, Rotary was entitled to value SPL’s Final Account on a fair and reasonable basis and notify SPL.
d) SPL had the right to dispute Rotary’s notification (whether under point (b) or (c) above) in writing within 14 days, failing which Rotary’s notified figure was deemed agreed and binding on the parties.

The Facts

SPL carried out works up to 31 January 2016, referred to as “DC1” and works carried out thereafter up to the end of May 2016, referred to as “DC2”.  The chronology then, is:
 
• 17 May 2016, SPL sent a revised final account for DC1 to Rotary. 
• 22 May, SPL made an interim application for payment for DC2, which was not paid by Rotary.
• 2 September 2016, Rotary issued a document to SPL referred to in the covering letter as “our final account assessment for the works”
• 16 September, SPL commenced an adjudication for its entitlement to payment for DC2.

The adjudicator decided in favour of Rotary, so SPL issued Part 8 proceedings seeking to challenge that decision. 

The TCC had to consider whether Rotary’s 2 September document amounted to a proper notification of the amount due for payment under clause 28.6 and whether this notified figure was binding on SPL.

The Judgment

The TCC held:

• Rotary’s document of 2 September did not constitute notification under clause 28.6 of the amount due in respect of the Final Account. 
• This was because the document and covering letter did not refer to it being a notification of an amount due but rather was badged as a Final Account assessment. 
• In addition, neither the document nor letter identified any particular sum which was due for payment to SPL or Rotary. It was only Rotary’s assessment of the value of works carried out.
• Further, Rotary’s document did not refer to clause 28.6. Coulson J asserted that “if a notice under a certain clause has a draconian effect pursuant to the contract, the notice should make clear that it has been issued under that clause”.
• If however, Coulson J was wrong and it was found that there was proper notification by Rotary to SPL, SPL had dissented to Rotary’s notification by serving an adjudication notice.  This means there “could never have been an actual or deemed agreement in the sum notified on 2 September”, so the binding provision at the end of clause 28.6 did not come into force.

Lessons Learnt

The courts will therefore uphold procedural time bars in contracts.  However, the party relying upon the time bar must be able to show it has complied with the requirements in the relevant contract clause, otherwise the court will not apply the time bar.  Further, the party relying upon the time bar must ensure clear notification is given – to be safe, refer to the contract clause relied upon in any notice required to be given.

 

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Sarah Wilson | Partner

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