It is common for disputes over interim payment applications to be referred to adjudication. The resulting award is then binding on the parties, unless or until determined by a court or arbitration. But what is the impact of any such award on the final account process? Is the party responsible for determining the final contract sum bound by that award?
This was considered in the recent case of Essential Living (Greenwich) Ltd v Elements (Europe) Ltd [2022] EWHC 1400. In this case, the Technology and Construction Court (TCC) was asked to determine whether and if so, to what extent, an earlier decision by an adjudicator in relation to an interim application for payment was binding upon the parties for the purposes of calculating the final contract sum.
This blog post will look at the court’s approach to the issue and how this was applied in this case, as well as some key takeaways for consideration.
Background
- In December 2016 Essential Living (Greenwich) Ltd (EL) engaged Elements (Europe) Ltd (Elements) by a JCT Construction Management Trade Contract 2011 for the design, supply, manufacture and installation of modular units for a mixed-use development at Greenwich Creekside, London.
- Completion was delayed and disputes arose between the parties as to Elements’ entitlement to adjustment of the contract sum, claims for variations, extensions of time and loss and/or expense claims and EL’s claims for liquidated damages and financing costs.
- In April 2019 EL commenced an adjudication to determine the value of Elements’ March 2019 application for payment and the construction manager’s valuation of the same month.
- The adjudicator came to a decision which made awards on the various different elements of the claim forming part of the interim valuation – including the value of works, variations, liquidated damages and extensions of time. As a result, Elements was ordered to pay EL the sum of £1.8m (the Adjudication Decision).
- In October 2019, Elements submitted its documents to the construction manager for calculation of the final account. Each party had a different view of how the Adjudication Decision should apply to the final account determination:
- EL’s position was that the Adjudication Decision including its determinations made in respect of adjustments to the contract sum, variations, liquidated damages and extensions of time was binding on the parties for the purposes of assessing the final account.
- Elements’ position was that the valuation and determination of those matters within the Adjudication Decision was limited to the disputed interim payment application and therefore was not binding on the construction manager for the purposes of his determination of the final account sum.
- In October 2021 EL issued proceedings in court, seeking declaratory relief that the items forming part of the Adjudication Decision were binding for the purposes of the final account and Elements was not entitled to any sums/extensions of time etc beyond those already awarded by the adjudicator, unless or until the Adjudication Decision was overturned or modified by the court.
The court’s approach
The court confirmed that parties are bound by the decision of an adjudicator on a dispute or difference until it is finally determined by court or arbitration proceedings. Also, that the parties cannot seek a further decision by an adjudicator on a dispute or difference which has already been the subject of an earlier decision by an adjudicator.
The court noted that the Adjudication Decision determined the interim valuation of the account in March 2019, but that the adjudicator did not purport to determine the final contract sum. However, it did not follow that the Adjudication Decision could not bind the Construction Manager in respect of specific matters determined by the adjudicator, for the purposes of ascertaining the final contract sum.
The contract in this case (as in many standard form contracts) contained separate contractual mechanisms to determine the final account, to that used to determine the value of interim payments and/or extensions of time. In particular, the court found that:
- The contract contemplated a separate post-completion exercise for assessing time, that could produce a completion period for the works that differed from any earlier assessment. The contract required the Construction Manager, following practical completion, to determine the completion period for the works, expressly permitting the Construction Manager to review any previous decision and whether or not a Relevant Event had been specifically notified.
- The final account mechanisms did not permit the Construction Manager to reconsider or revalue variations that had been accepted and valued in accordance with the contractual procedure. The contract expressly noted that effect must be given to agreed variations and valuation of such variations, in the calculating of the final contract sum. The contract did not provide for those matters to be re-opened at final account stage.
Therefore, the court held that:
- The Adjudication Decision was not binding on the parties for the purposes of determining the completion period for the works. This meant that the extensions of time and resulting level of liquidated damages/delay damages as set out in the Adjudication Decision were not binding for the purposes of determining the final contract sum but
- The Adjudication Decision was binding in respect of variations considered and assessed by the adjudicator, unless or until the Adjudication Decision was finally determined by a court, or unless either party identified a fresh basis of claim that permited such variation claim to be opened up and reviewed under the terms of the contract.
Key takeaways
This case is very useful - particularly for those whose role it is to make final account determinations - and has helped to clarify a question that has been the subject of debate within the construction industry for some time. Ultimately the answer will depend upon the particular contract terms and what precisely was decided in the earlier adjudication, but the court has given useful guidance on issues for the parties consider, such as:
- Does the contract contain a separate mechanism(s) for determining the final account?
- What specifically is allowed/required of the relevant assessor when making their determination of the final account?
- And perhaps, most importantly, what precisely was decided in the earlier adjudication?
Therefore, parties should take care when making arguments during adjudications for interim applications, as they may not get a "second bite of the cherry" during the final account process. As ever, it comes back to the question of what is written in the contract and if nothing else, this case will undoubtedly have many parties dusting off their contracts to check their own final account provisions…
Claire Perry