Final Account Notices: Systems Pipeworks Limited v Rotary Building Services Limited [2017] EWHC 3235

In order to take advantage of the onerous terms of the HGA (defined below), a notice must leave no doubt in the reasonable person's mind that it is a formal notification under the agreement. This applies equally to final account notices as it does to interim payment applications.

Background

Historically there was an issue in the industry caused by employers and contractors ignoring sub-contractors claims for payment, delaying or refusing payment with only vague reasons given. The Housing Grants, Construction and Regeneration Act 1996 (the "HGA") now means that a party must identify early on what is due and why. The rigorous terms under the HGA cover interim payments, but also the rights and obligations arising from dispute resolution and final account settlements.

The Facts

The defendant, Rotary Building Services Ltd ("Rotary") was hired to undertake works at the Davidstow Creamery in Cornwall. Rotary engaged the claimant, Systems Pipework Ltd ("Systems") under a sub-contract to install the steam, condensate, chilled water and cooling water systems at the site.

Systems carried out the works between December 2014 and the end of May 2016. On 17 May 2016, Systems emailed Rotary a "revised final account for DC1" (DC1 being the first section of the works, up to January 2016) and requested that they "review and comment". On 22 May the claimant made an interim application in respect of the DC2 works, those after January 2016, which was not paid.

On 2 September Rotary provided Systems with a large document described as "our final account assessment for the works carried out on the above project" which contained a long assessment of the numbers involved. Rotary argued this was a notification under the contract, whilst Systems argued it was not a valid notification of the final account.

Rotary maintained that the 2 September document was, in part, an assessment of Systems' claim of 17 May for the works up to January 2016, and partly a final account valuation of the remainder of the works. The document, crucially, contained no such identification or reference.

On 16 September adjudication was commenced by Systems for payment for the DC2 works from January 2016 onwards. The adjudicator decided in favour of Systems and Rotary reluctantly paid for the DC2 works and this element was settled.

Rotary had already started a second adjudication seeking a declaration that Systems were bound by the final account assessment of 2 September 2016. The adjudicator found that Systems were bound in large part by the 2 September assessment (but not in full due to the abovementioned DC2 sum being settled).

Systems commenced court proceedings seeking a declaration on the issues below.

Issues

• What notification was Rotary obliged to provide in order for it to be binding under the contract?
• Was the 2 September assessment satisfactory notification?
• If the 2 September assessment was notification, was it validly dissented from?

Principles

Mr Justice Coulson followed the recent guidance of Arnold v Britton [2015] AC 1619 and Wood v Capita [2017] UKSC 24 as to the general principles of construction that what matters is what a reasonable person, having all the background knowledge available to the parties, would have understood the words of the contract to mean, using the language in this commercial and factual context.

He also considered a raft of cases on time limit clauses in construction contracts. These included Caledonian Modular Limited v Mar City Developments Limited [2015] BLR 694 where Coulson J himself noted that if contractors want the benefit of the HGA regime, they must set out their interim payment claims with proper clarity. If the employer is at risk that failure to serve a pay less notice will render him liable in full for the amount claimed, he must be given reasonable notice that the payment period has been triggered. Further, in Henia Investments Inc v Beck Interiors Limited [2015] BLR 704 Akenhead J noted that documents relied upon as interim applications must be free from ambiguity so that the parties are clear as to what needs to be done.

Issue1: Notification required

• In accordance with the contract, the court considered that Rotary were undertaking a valuation because there had been no final account provided by Systems. Therefore, what was needed was the notification of the amount due, similar to the need to identify the amount due for payment by way of an interim assessment as set out in previous case law. On the specific wording of the contract, the assessment of final account had two parts; firstly, the assessment/valuation of the total amount payable; and secondly, the deduction of previous payments and any ongoing retention.

Issue 2: was proper notification provided

• The 2 September letter was not considered to be proper notification of the amount due for payment in respect of Systems' final account. Neither the accompanying letter nor the assessment itself said it was the notification of an amount due. Further, neither document contained a sum said to be due and payable. It was a purported assessment of the value of the works carried out and therefore only one half the required exercise.
• There was no reference to the relevant contract clause. In the view of Coulson J, "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".
• The court held that as a matter of construction, the 2 September letter was a final account assessment, not a notification of an amount due. Sums previously paid, retention etc. were not considered. The reasonable recipient would not have regarded the documents as a notification of the sums due.
• If a party is to notify another that a sum is due, under a clause that provides for a deemed agreement that binds the parties unequivocally, then it is a prerequisite of the arrangement that the sum due and the clause are clearly set out in the relevant notice. It isn’t sufficient to say the recipient could have worked out the final figure for themselves.

Issue 3: If notification was sent, was there dissent?

• Even if there had been proper notification, Coulson J considered that there was necessary dissent to allow Systems to pursue all final account claims.
• Notice of adjudication was considered to be dissent in writing, as required by the contract. Rotary argued that it wasn’t enough for Systems to say they dissented; they had to say what they dissented from and why. But that is not what the contract said. It simply stated that dissent must be in writing.
• Coulson J therefore held in favour of Systems.

Comment

Coulson J clarified that any notice under the HGA, be it for interim applications or final account payments, must clearly state the clause reference to which they relate; the fact that the notice is a notification under the relevant provisions and contain all necessary information. Being able to deduce a final figure from the information provided was not enough. So be warned, clarity on notices can mean the difference between the payment notice sticking and it being just yet another piece of paper with figures on it.

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