How final is a Final Certificate?

A recent Scottish case (D McLaughlin & Sons Ltd v East Ayrshire Council) grappled with the complexities of a smash and grab adjudication in relation to an interim certificate commenced after the issue of a Final Certificate.

The circumstances in which the dispute arose are unusual. D McLaughlin & Sons Ltd (DMS) were employed by East Ayrshire Council in the construction of an extension to a primary school, with works commencing in 2016. The works were let under a JCT standard form.

In August 2017, DMS issued an interim payment notice in the sum of £949k relating to a gross value of c£3.8m. The Council failed to respond with a pay less notice, and as such the sums fell due. The interim payment notice remained unenforced until practical completion and the issue of the Final Certificate. DMS had made the “smash” in 2017 but only “grabbed” in March 2020.

The Council issued its Final Certificate on 17 July 2019, with a gross value of c £3.3m which equated to a payment to DMS of only £1,428.99. DMS raised court proceedings to challenge the Final Certificate on 12 September 2019. However, midway through these proceedings in March 2020 and well after the issue of the Final Certificate, DMS commenced a smash and grab adjudication for the sum of £427.5k which was the balance of the sum dues under the 2017 interim payment notice.

The Council unsuccessfully argued in adjudication that the interim payment notice was invalid following the issue of the Final Certificate, with the Adjudicator finding that the interim payment remained due. The Final Certificate concerned the true value of the final account whilst the adjudication on the smash and grab basis did not address the true value.

The Council refused to make payment, so DMS sought to enforce it, forcing the Court to look at the interaction between interim payments and the final certificate regime.

Clause 1.9 provided that the Final Certificate had a conclusive effect as to any adjustments to the Contract Sum, and any extension of time and loss and expense due, subject to any decision in adjudication, arbitration or other proceedings commenced before the Final Certificate (cl 1.9.2). If any such proceedings are commenced within 60 days after the Final Certificate, then the Final Certificate’s conclusivity is restricted to those matters that are not the subject matter of those proceedings (cl 1.9.3). Further, if an adjudicator gives a decision after the issue of the Final Certificate, a party must commence an arbitration or legal proceedings within 28 days of the adjudicator’s decision or the decision becomes binding (cl 1.9.4).

The Court found in favour of DMS. The Council then appealed to the Inner House (the Scottish equivalent of the Court of Appeal).

The key issue before that Court was whether interim payments remained due after the issue of the Final Certificate.

The Court held that the Final Certificate related to the Contract Sum in question and not to the validity of any interim payments due. As such, any outstanding interim payments would remain due after the issue of the Final Certificate. The adjudication relating to the interim payment and subsequent enforcement proceedings could not be considered a challenge to the Final Certificate, but rather a separate action for separately owed sums on an interim basis. In other words, the conclusivity of the Contract Sum in a Final Certificate has no bearing on what should have been paid in the interim.

If the Council had taken steps to protect its position by challenging the adjudicator’s decision within the 28-day period allowed under clause 1.9.4 then this would have meant the Council did not have to pay the sums awarded in the interim. As they had waited until DMS raised enforcement proceedings to do so, the deadline to challenge the adjudicator’s decision had passed and the adjudicator’s award fell due for payment.

It is worthy of note that Lord Malcolm, dissenting, found that the Final Certificate put the issue of interim payments behind the parties. The merits of the contractor’s valuation of the works were to be determined only in the proceedings regarding the Final Certificate.

Whilst this is a Scottish case, the relevant terms of the contract are the same as in English JCT forms.

Therefore, those owing sums via interim payment measures ought not to consider themselves free from the prospect of adjudication just because a Final Certificate has been issued and must continue to take all steps necessary to protect their position.

That said, those who are owed sums under interim payment provisions do not have a guarantee that the English courts will find these are recoverable following the issue of the Final Certificate.

The key lesson from this judgment is to be proactive. Any application for payment, at any stage, ought to be met with a payment certificate or a pay less notice. To fail to provide either is to ask for trouble. Any failure to do so runs the risk of a smash and grab adjudication. Be warned!