The final straw

Section 108(1) of the Construction Act provides that “a party to a construction contract has the right to refer a dispute arising under the contract for adjudication”. Sections 104 and 105 define what is meant by “construction contract” and section 107 requires construction contracts to be recorded in writing.

So, it should be easy for parties to ascertain whether they can refer their differences to adjudication. And so it should – but there are always grey areas.

Take, for example, monies due under the final account. Where the parties to a construction contract fail to agree the final account, either party may refer the matter to an adjudicator to determine the sum due. Compare this, however, with the situation in which the parties engage in final account discussions and agree a figure. The parties do not record the figure in writing. The paying party then reneges on the agreement and/or denies there ever was one. Does an adjudicator have the jurisdiction to determine whether there was an agreement and/or uphold the agreement and require the parties to comply with the terms?

This raises a fundamental question. Is the agreement of the final account and subsequent failure to pay it a dispute “arising under the contract”? Or is the agreement of the final account a separate agreement that is not a construction contract within the meaning of the act?

Surely, you argue, the agreement of the final account must arise under the contract, as must failure to pay what was agreed. A final account must be agreed only because a party has carried out works under the contract and requires payment. It is a fortunate contractor that submits a final account and has it paid in full by return.

However, while the JCT domestic forms of subcontract provide a mechanism by which the final account sum is to be ascertained, they do not confer an express right or obligation on the parties to agree a final account. If the parties cannot reach agreement, the sum due must be determined in accordance with the dispute resolution procedures, including adjudication.

So, it can be argued that the agreement of a final account does not strictly arise under the construction contract but is ancillary to it, and that it is therefore a separate contract.

•  It could be argued that the agreement of final account is a separate contract, which is immune to adjudication
•  Contracts should include the right to agree final account

Could it be argued that there is an implied obligation to agree the final account? The provisions of the JCT domestic forms do allow a contractor to adjust the sum claimed by the subcontractor. If the subcontractor accepts the adjusted figure, the final account has arguably been agreed under the contract. But the position is far from clear.

This is a fine distinction, perhaps, but one that could be used by a responding party. If the agreement of a final account figure does not arise under the contract, but is in fact a separate contract, it can be argued that the parties have no right to refer the question of payment to an adjudicator.

This means that the party seeking to enforce the agreement will have no option but to issue court or arbitration proceedings.

If they do, the nature of the disagreement is such that there is likely to be a dispute of fact, which can only be decided by the judge hearing the oral evidence of the respective parties.

This makes the summary process – obtaining early judgment on the basis that there is no real defence – unsuitable. Accordingly, the claimant is faced with a lengthy and more costly dispute resolution. This is contrary to what was envisaged by the act.

There are two possible solutions. The first is a preventative: ensure your contract provides an express right to agree the final account and to refer the agreement to adjudication if necessary. The second is remedial: if your contract contains no express right, request the adjudicator to ascertain the sum due under the final account and refer to the alleged agreement as evidence of what would be a proper and fair sum.