AGREED TO DIFFER

Legal
Useful though final account agreements can be to wrap up a job, their relationship with the building contract can contain a few unexpected surprises, warns Angus Dawson

Employers and contractors often use final account agreements to wrap up payment, and other issues, at the end of a project. These arrangements are often made without applying the strict terms of the contract.  But in two recent cases, final account arrangements have been challenged, raising some points to note.

No escape
In Jim Ennis Construction Ltd v Combined Stabilisation Ltd, a sub-contractor tried to wriggle out of a final account agreement in order to claim additional sums which it did not cover. The sub-contractor first argued that the agreement was null and void as it did not specify the date for payment of the sum due. It separately argued that it was entitled to terminate or accept a repudiatory breach of the agreement as the main contractor had failed to pay the full amount set out in the agreement. 

On the facts, the court rejected the sub-contractor’s arguments. The judge held that the absence of a specific payment date was not fatal but rather implied a term that payment was due within a reasonable time.  The judge also held that the failure to pay the full amount did not entitle the sub-contractor to terminate. The main contractor had been acting in good faith in looking to set off costs that it had incurred as a result of damage caused by the sub-contractor on site.

If the parties had intended that the sub-contractor should be entitled to terminate in these circumstances, this should have been stated in the agreement.

Sting in the tail
In YJL London Ltd v Roswyn Estates LLP, the court considered how a final account agreement sat alongside the final account provisions in a JCT 1998 contract. 

The employer argued that the agreement did not displace the requirements in the building contract for a final account and final statement and that payment was not therefore due. It also argued that the agreement was flawed as it did not set out those sums which had previously been paid under the contract, as required in the final account provisions in the contract.

The judge held that the final account procedure in the contract had been dealt with by means of the agreement and that the contractor’s failure to issue a final account or final account statement did not deprive it of its entitlement to payment. 

The agreement effectively replaced the regime under the contract. It made clear that it was intended to be final and binding and this was therefore the case.

Unintended consequence
The judge also held that the final account agreement effected a full and final settlement of all claims under the contract. The interesting, and perhaps unintended effect of this, was that the contractor was relieved of all liability for defective work that was identified or reasonably capable of being identified at the time of the agreement.  The employer was not therefore entitled to set off sums against the final account figure to account for defects as it had released the contractor from liability under the contract. It was arguable that the contractor was also released from liability for future defects which become apparent.

These cases make clear that a properly drafted final account agreement is capable of displacing the final account procedures in a building contract.  They also make clear that a failure to specify payment logistics in the agreement is unlikely to be fatal.  Care needs to be taken however to ensure that a final account agreement does not unwittingly let the contractor off the hook for defects in the works.  An employer will usually want to retain its ability to bring a claim against a contractor for latent defects.

Angus Dawson is assistant solicitor at Macfarlanes

In plain English
What happens if an overrun isn’t your fault?

TIME AT LARGE
Under a building contract, the contractor is usually required to complete the works by a specified date. If it fails to hit this date, the employer can normally claim liquidated and ascertained damages (‘LADs’). The contract usually then entitles the contractor to an extension of time if the works are delayed by particular events or circumstances. Those circumstances need to be set out in the contract.

Time will become at large if (a) the contract includes a fixed completion date, (b) the contractor is delayed by an act of the employer and (c) that act does not entitle the contractor to an extension of time. In those circumstances the courts will find that it is unfair for the contractor to be held to the completion date specified in the contract, and to be required to pay LADs for failing to meet that date.

What happens if time becomes at large? The contractor is no longer required to complete the works by the contractual date for completion and the employer loses its ability to recover LADs. The contractor will simply be required to complete the works within a reasonable time and the employer will only recover any losses it can prove it has suffered if the works are complete late. Time will be at large.