How final is a final certificate?

What is the status of an interim certificate after the final certificate has been issued? Also, will contract provisions setting out a strict time limit for challenge of a certificate or award be enforced?

The interplay between adjudication, court proceedings, interim certificates and final certificates is not straightforward. In the recent case of D McLaughlin and Sons Ltd v East Ayrshire Council [2022] CSIH 42, the Scottish Court of Session considered the question of whether a final certificate ought to be treated as conclusive of sums due to a contractor in a subsequent adjudication about an outstanding interim payment. The court then further considered whether an adjudicator's decision, which had found that the final certificate was not conclusive, could be enforced.

While this is a Scottish case, the court referenced the relevant English court decisions in this area and the points in issue could be equally relevant to disputes under English law.

Background

• East Ayrshire Council (EAC) engaged D McLaughlin and sons Ltd (DMS) to construct an extension to a school. The contract included the terms of the Standard Building Contract with Quantities for use in Scotland 2011 (the contract).
• As is the case with many construction contracts, the contract payment mechanism provided for the issue of interim certificates, and a final certificate following completion of the works. Clause 1.9 of the contract provided that, in any dispute resolution proceedings, the final certificate has effect as ‘conclusive evidence’ in respect of the contract sum unless it is challenged in court proceedings within 60 days of issue. Clause 1.9 of the contract further provided that in the case of a dispute where an adjudicator gives his decision after the date of the final certificate, a party who wishes to challenge the adjudicator’s decision must initiate legal proceedings within 28 days.
• In August 2017, in the absence of an interim certificate issued by EAC, DMS issued an interim payment notice for c. £950K (as allowed by the contract). EAC failed to issue a pay less notice so this sum became due for payment. EAC made some payments towards this sum, but not the full amount, with c. £440K remaining outstanding.
• In July 2017 EAC issued a final certificate which brought out a balance due to DMS of c. £1,400 which EAC paid.
• DMS challenged the final certificate by raising court proceedings, within the 60 day period required by the contract. Notwithstanding the ongoing court proceedings, DMS also referred the interim payment notice to adjudication, seeking payment of the outstanding balance of c. £440K.

The adjudication

• EAC defended the adjudication arguing that the final certificate was conclusive evidence of sums due to DMS under the contract, including all preceding interim certificates/valuations.
• The adjudicator noted that this was a "smash and grab" adjudication based on EAC’s failure to submit a pay less notice. He therefore had no remit to look at the true value of the works. The adjudicator reasoned that the final certificate concerns a true valuation of the works, but that in any event, as the final certificate had been challenged and had not yet been determined by court proceedings, which were ongoing, it could not be conclusive at this time. Accordingly, he awarded DMS the full amount of the outstanding interim payment.
• EAC failed to pay the adjudication award, but also failed to dispute the adjudicator’s decision within 28 days, as required by the contract. The first time EAC disputed the adjudicator’s decision was by way of a counterclaim in the court proceedings, some 72 days after the adjudicator’s award.

The court’s decision(s)

DMS successfully enforced the adjudicator’s award in court. The judge in the enforcement case held that the use of a counterclaim to stymie enforcement was to be discouraged, but in any event, EAC had failed to challenge the adjudicator’s award within 28 days and therefore were out of time to do so now. EAC paid the award, but appealed the decision with a motion to reclaim the awarded sum.

The appeal was considered by three judges in the Scottish Court of Session and the decision was by no means unanimous. Ultimately, two of the judges declined the appeal and refused the reclaiming motion, while one judge would have allowed the appeal. An interesting point is that while all three judges considered the same cases they each had slightly different reasons for their decision.

The decisions are all detailed, but in summary, the judges held as follows:

• Lord Carloway – the final certificate did not affect the right to receive payment of outstanding sums due under an interim certificate. In any event, having gone through the adjudication process, any challenge would need to be raised within 28 days as required under the contract. As it was not then the adjudication award was upheld. Appeal not allowed.
   
• Lord Woolman – in circumstances where the final account had been certified and paid, the only proper vehicle to challenge sums payable under the contract should have been the court action which was started within the 60 day period prescribed under the contract. The adjudicator erred in his decision and should have awarded "nil" to DMS on that basis. However, having gone through the adjudication the contract was clear that any challenge to the adjudicator’s award should have been raised within 28 days. It was not. Therefore it could no longer be challenged and DMS were entitled to enforce the award. Appeal not allowed.
   
• Lord Malcolm (dissenting) –agreed with the first part of the reasoning of Lord Woolman, but went further to say that if the debt created by the absence of a pay less notice is pursued in order to obtain more than is due (and paid) as per the final account, the conclusive status of the final certificate is being challenged. In the circumstances, the adjudication was, in effect, a challenge to the final account, rather than (as put forward by DMS and accepted by the adjudicator) treating the adjudication as no more than an overdue enforcement of the interim payment notice. The only valid challenge to the final account was the pending court action. Therefore the appeal should be allowed and EAC should recover the adjudication sum.

Conclusion

So what does this mean for employers and contractors moving forward? As ever, this case was heavily reliant on the specific contract terms, but those terms are not uncommon.

It appears that, subject to the contract terms, a final certificate may be conclusive unless challenged in accordance with the contract. However, the judges in this case disagreed over the extent to which the final certificate affected the contractor’s right to adjudicate on an unpaid interim valuation sum. What does seem clear from the judgment is that contract terms specifying time limits for challenge to certificates or awards are likely to be strictly upheld. This case also upheld the ‘pay now, argue later’ general proposition in relation to the enforcement of adjudication awards (albeit that one of the judges did not entirely agree with that in this case).

Ultimately, it is rare to come across a scenario where a contractor brings a "smash and grab" adjudication on an interim payment, after certification and payment of the final account – but where that final certificate is subject to challenge and/or is not yet finally conclusive. But this decision does potentially open the door to future adjudications on that basis.

This case underlines the importance of getting payment and pay less notices right at the time and of dealing with interim payment disputes on a timely basis – preferably before the final account stage. And so, how final is the final certificate? To give a very lawyerly answer - "it depends…"