Final statements revisited When is a valid Final Account Statement not conclusive evidence of the sum due?

A valid final account or final statement will usually be considered conclusive evidence of the sum due under a construction contract where expressly provided for in the contract.  The consequence is that the contract sum, as adjusted in that document, will be binding on the parties unless disputed or challenged in the manner specified by the contract and within the timescales provided for by the contract.  An analogous clause is typically seen, for instance, in the SBCC / JCT standard form contracts.

In Atalian Servest AMK Limited v B W (Electrical Contractors) Limited, the contract provided that the Final Account Statement would be binding unless the parties agreed to modify it, or “adjudication or court proceedings were commenced within 20 working days”.  The court decided that the Final Account Statement was not binding because adjudication proceedings had been raised timeously.

There are some interesting points arising here, not least the impact of the first adjudicator’s resignation on the status of the Final Account Statement.  The appeal judgment also includes some discussion about the conduct of the adjudication; in particular, criticism of the parties’ excessive approach and admiration for the second adjudicator who “used a broad axe with a blunt edge to reach a robust and summary conclusion”.

Dispute

In 2020, Atalian Servest AMK Limited (“AMK”) carried out electrical sub-contract work on two new stands at the Lords Cricket Ground, London.  They engaged B W (Electrical Contractors) Limited (“BWE”) as sub-sub-contractors for certain elements of the project.  Following completion of electrical works on, BWE submitted its Final Account valuing the work at approx. £3.1m due to BWE.  In turn, AMK issued its own Final Account Statement (“FAS”), resulting in the sum of £1.04m due to AMK.

BWE referred the matter to adjudication, claiming the sum calculated in their own Final Account.  The first adjudicator resigned (we will come back to the impact of this).  A fresh Notice of Adjudication was served some three months later and a second adjudicator determined that the true value of the FAS was £2.5m, with a net sum payable to BWE of £1.4m (plus interest).

Following conclusion of the adjudication, BWE raised two separate proceedings for (1) enforcement of the adjudicator’s award and (2) determination of the “true value of the works”.  AMK responded to BMK’s enforcement proceedings by arguing that the Adjudicator’s decision was unenforceable.  AMK also raised proceedings to have the Adjudicator’s award set aside, arguing that the FAS was binding and consequently the sum of £1.04m was due to AMK.

BWE actions

In the enforcement action, AMK argued that the adjudicator’s decision was not enforceable because he had arrived at his conclusion, not by answering the question referred to him (i.e. what sum was properly due under the subcontract), but rather by deciding that the contract had been superseded by a “beck and call” contract created by the parties’ conduct.  In coming to that decision, the adjudicator reached his decision based on what a “fair price” would be in terms of that “Beck and Call Contract”; notwithstanding neither party had suggested that a “Beck and Call Contract” had been established.

Notwithstanding this, the Lord Ordinary held that the adjudicator had not embarked on “a frolic of his own” without regard to natural justice; he had made a genuine attempt to determine the dispute that was referred to him.  Consequently, the judge held that the adjudicator’s decision is binding until final determination of the parties’ dispute in the substantive action.

AMK action

AMK raised separate proceedings for declarator and argued the FAS was valid and binding until the final determination of the dispute in the substantive action.  Reluctantly, the judge agreed to deal with this application as competent, even though it was satellite litigation that did not seek a final resolution of the parties’ dispute.

The judge found that AMK validly issued the FAS; however, he refused to find that the FAS was binding on the parties pending the resolution of the substantive action.  The wording of the contract in this case provided that the FAS was binding unless relevant proceedings (adjudication or court proceedings) are timeously raised (within 20 working days).  The original adjudication was raised within 20 working days of AMK’s FAS, therefore the FAS was not binding on the parties.

Appeal decision

AMK challenged the Lord Ordinary’s decision, arguing that the second adjudication was not a continuation of a prior adjudication, but was a fresh process and was brought too late.

AMK argued that the judge had erred in his interpretation of the contract and had failed to give sufficient weight to the underlying policy concerns identified in D McLaughlin & Sons v East Ayrshire Council (which considered an SBCC standard form); namely that it would be undesirable for any timeously commenced adjudication or court proceedings to provide a “foot in the door” so that the FAS was no longer binding pending the outcome of subsequent proceedings brought outwith that specified period.

As part of this AMK argued that the second adjudication was not a continuation of the prior adjudication, but a fresh one.  AMK argued that the dispute referred to in the second adjudication was different in respect of (a) the FAS; (b) BWE’s claim for extension of time; and (c) BWE’s calculation of the sums making up the Final Account.

BWE’s position was that all they had to do to stop the FAS from being binding was to have “commenced adjudication or court proceedings within 20 working days”. An adjudication had been timeously commenced.  The adjudicator’s subsequent resignation in those proceedings made no difference.  The differences in the notices were irrelevant because a “fresh notice” required to be served after an adjudicator resigns and in any event, the same aggregate payment was sought in both notices.

The Inner House agreed with BWE.  The resignation of the first adjudicator did not bring the adjudication to an end and did not terminate BWE’s right to challenge the FAS.

A period of settlement discussions had followed the first adjudicator’s resignation so a fresh Notice of Adjudication to appoint a second adjudicator was not served until nearly three months later.  The court held that BWE had followed the procedure set out in paragraph 9(3) of the 1998 Scheme by serving the fresh notice.  They held that the second adjudication was materially the same as the first one as the fundamental question remained the same: what sum was properly due?

Despite the second Notice of Adjudication being served after the expiry of 20 working days, the court’s view was that adjudication proceedings had been timeously raised and the FAS was not binding.  AMK’s challenge was therefore refused and the adjudicator’s award was enforced.

Conduct of the adjudication

The parties’ conduct of this adjudication came under fire from the judges.  The first adjudicator resigned because he received nine packing cases of files and declared the dispute “incapable of proper resolution in the timescales set by the Construction Act”.

Although paper heavy adjudications are not entirely unknown, the court commented on the enormous volume of written materials presented in this case, observing that the second adjudicator took on a “nigh impossible task”.  The Referral was described as a “tendentious document”, containing a substantial number of legal submissions about the burden of proof and the law of evidence.  The response to the referral was 50 pages long with 20 appendices, incorporating an opinion of senior counsel and several witness statements.  A 38 page Reply and a Rejoinder with 19 appendices followed.

The court observed that the presentation of an excessive amount of material (as both parties did) and the tabling of a wide range of legal and factual issues should not be allowed to derail the robust and summary adjudication process.

The court found that the second adjudicator, having cut to the chase (which he summarised as “AMK piled on the work and BW piled on the men”) had reached a robust and summary conclusion.  This decision reaffirms that the courts will almost always enforce an adjudicator’s decision, but for breach of natural justice or if the adjudicator fails to exhaust their jurisdiction.

Opinion

Despite the fact-specific nature of the clauses in dispute, Atalian provides a useful insight of the consequence to a Final Certificate where a timeously raised initial adjudication is raised and aborted and a second adjudication is raised after which time a final certificate or final account would have become conclusive and binding.

The fact that the first adjudicator’s resignation was beyond the control of the parties may have played an influencing factor.  It is interesting that despite AMK argument being based on the policy concerns raised in D Mclaughlin & Sons v East Ayrshire Council, the decision at appeal seems to rely heavily on the differences of the clauses in the two cases.  It will be interesting to see how these strands of case law develop.

As a parting thought, Atalian serves as a useful reminder of the wide-ranging powers of an adjudicator and the high test to argue that an Adjudicator has acted in breach of natural justice or has failed to answer the questions posed.  The court will be reluctant to interfere with an adjudicator’s decision unless a clear and unequivocal failure is demonstrable.

You can access the judgment: https://www.scotcourts.gov.uk/docs/default-source/cos-general-docs/pdf-docs-for-opinions/2023csih18.pdf?sfvrsn=e12720d2_1