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Does a construction contract require a final account mechanism?

The recent case of JSM Construction Limited v Western Power Distribution (West Midlands) plc [2020] considers whether construction contracts require a final account mechanism.

Payment under the Construction Act

If payment terms in a construction contract do not comply with The Housing Grants, Construction and Regeneration Act 1996 (the ‘Construction Act’), The Scheme for Construction Contracts (England and Wales) Regulations 1998 (the ‘Scheme’) implies payment terms.

Section 110 of the Construction Act requires that every construction contract provides an adequate mechanism for determining what payments become due under a construction contract and a final date for when those payments are to be made. However, the Scheme goes further and includes a final account provision.

In JSM Construction Limited v Western Power Distribution (West Midlands) PLC the court had to decide whether the contract between the parties, which did not contain an express final account mechanism, complied with the Construction Act and if not, whether the final account provision would be implied through the Scheme.

Facts on construction contract case

Western Power Distribution (West Midlands) Plc (‘WPD’) engaged JSM Construction Limited (‘JSM’) to install two cables and associated ductwork pursuant to a bespoke contract in 2016 (the ‘Contract’).

The Contract provided for interim payments, but there was no express final account mechanism.

Following completion of the works, JSM issued its final application for payment for £1.5 million. As no payment was made, JSM commenced proceedings on the basis that a term should be implied into the Contract to reflect paragraph 5 of the Scheme (that payment for a final account claim shall become due on the later of 30 days after completion of the works or the making of a claim by the payee). In response WPD contended that JSM’s entitlement under the Contract was limited to a series of interim payments only and there was no final account mechanism. It accordingly applied to strike out JSM’s claim or for summary judgment.

Decision

The main question to consider was whether the Contract provided an adequate mechanism for determining what payments become due under the Contract and when. If there was an adequate payment mechanism, the court confirmed there would be no need to imply a final account provision under the Scheme.

The Court confirmed that even though the Scheme contains a final account provision, the Construction Act does not necessarily require parties to include a separate provision for a final account in their construction contract for it to be compliant.  However, in this case there remained outstanding factual and legal disputes relating to insufficient design and the inadequacy of the contract pricing schedule, which made it unsuitable for summary determination.

Section 110 of the Construction Act requires that every construction contract provides an adequate mechanism for determining what payments become due under a construction contract and a final date for when those payments are to be made, and includes a final account provision.

Practical points to consider

This case highlights the differences between the Construction Act and the Scheme. If the minimum requirements of the Construction Act are not met the more prescriptive terms of the Scheme will be implied.

The case also indicates that not all construction contracts will need to include a separate final account clause to be adequate under the Construction Act.

Many construction contracts include a process for interim payment applications to be submitted in respect of an estimated value of the works, with the true value of the works to be determined at the final account stage. However, some construction contracts allow for a lump sum to be paid in stages with no final account process. In each case, it is a question of fact of whether a construction contract has an adequate payment mechanism.

If a construction contract does not provide a final account mechanism, contractors should ensure timely submittals of payment applications which accurately reflect the works progress, variations and claims or loss and expense that arise at the time of the payment application to avoid any entitlement to payment being lost. Employers should reject any payment application that is not a valid interim payment application. It is crucial that parties understand the specific payment procedures in their contracts, particularly any bespoke amendments.

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This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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