Do Construction Contracts require a final account mechanism?

In the case of JSM Construction Ltd v Western Power Distribution (West Midlands) plc [2020] EWHC 3583 (TCC), the High Court in England considered whether payment provisions in a construction contract meant that a contractor was only entitled to a series of interim payments and not a final account.

Background

Western Power Distribution (West Midlands) plc (Western Power) engaged JSM Construction Ltd (JSM) to install cables and associated ductwork in the Birmingham area. The parties’ contract provided for interim payments, but there was no term that entitled JSM to raise a final account.

Following completion of the works, JSM claimed just over £1.5M as the alleged final balance, which included damages for disrupted works and an incorrect and incomplete design. Western Power disputed that JSM was entitled to this final balance.

JSM commenced court proceedings for payment. Western Power applied for JSM’s claim to be struck out, on the grounds that the contract provided only for a series of interim payments and, as such, JSM had no claim for a final account payment.

The Law

The Construction Contracts (Northern Ireland) Order (the 1997 Order) is the legislation that governs adjudication and payment in "construction contracts" in Northern Ireland.

There is no escaping the statutory rules on payment. If a construction contract does not comply with the rules, then the relevant provisions of the Scheme for Construction Contracts in Northern Ireland will take effect as an implied term.

Those statutory rules include a requirement that a construction contract must:

1. Provide an adequate mechanism for determining what payments become due under the contract and when; and
2. Provide for a final date for payment in relation to any sum which becomes due.

The regime in England and Wales is similar, albeit different legislation applies.

The Parties’ Cases

JSM argued that the absence of a final account provision rendered the payment regime inadequate, with the result that the relevant provisions of the Scheme for Construction contracts took effect as implied terms in the parties’ contract.

Western Power argued that the parties’ contract only entitled JSM to raise interim monthly invoices in line with the progress of the works. Whilst there was no provision for a final account, this did not render the payment regime inadequate.

As such, the provisions of the Scheme for Construction Contracts did not apply, and JSM was not entitled to raise a final invoice.

Decision

The Judge held that the legislation does not strictly require a provision for a final account. However, there is a broader requirement that a payment mechanism is adequate for determining what payments become due under the contract, and when. In the Court’s view that is a question of fact, and the answer will vary depending on the circumstances and other terms of a contract.

In this case, the Judge considered that it was “properly arguable” that the contract was “essentially for a fixed price plus variations … which would be valued against rates and prices agreed”. If that analysis was correct, “then it is equally arguable that a simple payment mechanism that provided for monthly stage payments throughout the works that were commensurate with the progress actually made might well be adequate for establishing what payments were due.”

The Judge was unwilling to finally determine the question at what was an interim hearing, meaning that the case will likely proceed to full trial.

Carson McDowell View

At a time when the importance of cash flow has been accentuated by the impact of COVID-19, this case highlights the importance of agreeing clear and unambiguous payment regimes at the outset of a project.

If a proposed contract does not include for a final account process, a contractor cannot necessarily rely on the Scheme for Construction Contracts implying one into a contract. As the Judge said, the purpose of the legislation “is not to save a party from an imprudent deal.”

Although the judgment was given by an English court, it is likely to be persuasive to a court in Northern Ireland tasked with determining the same issue.

If you have any queries, the Construction team at Carson McDowell would be happy to help.

*This information is for guidance purposes only and does not constitute, nor should be regarded, as a substitute for taking legal advice that is tailored to your circumstances.