Scottish Court of Session Decisions

The Standard Form of Building Contract, with which the present appeal is concerned, requires that the Contractor is to submit the Final Account and the Final Statement for agreement by the Employer within three months of Practical Completion (clause 30.5.1). Clause 30.5.2 provides that the Final Account is to set out the Contract Sum together with the adjustments to the Contract Sum by way of deduction or addition as set out in clause 30.5.3. Clause 30.5.4 states:

The conditions of contract also provide for the situation in which the Contractor fails to submit the Final Account and Final Statement in the three month period. On its expiry the Employer may give notice to the Contractor that if they are not submitted within two months from the date of the notice the Employer may himself prepare or have prepared a Final Account and a Final Statement (clause 30.5.6). The Employer's Final Account and Final Statement require to take the same form as those of the Contractor (clause 30.5.7).

The Final Account and the Final Statement submitted by the Contractor may have two effects. Firstly, if nothing in either of them is disputed by the Employer within one month from the end of the Defects Liability Period or from completion of making good defects under clause 16 or within one month of the submission of the Final Account and the Final Statement, whichever is the later, the Final Account and the Final Statement so submitted are to be conclusive as to the balance due between the parties in accordance therewith (clause 30.5.5). A similar provision is made by clause 30.5.8 in regard to the Employer's Final Account and Final Statement. These provisions have to be read along with the consequential terms of clause 30.6 which states:

Secondly, the Final Account and Final Statement, when they are agreed or become conclusive as to the balance due between the parties in accordance with clause 30.5.5, or the Employer's Final Account and the Employer's Final Statement when they become conclusive as to the balance due between the parties in accordance with clause 30.5.8 are, subject to certain exceptions with which we are not concerned, to have effect in any proceedings arising out of or in connection with the contract as conclusive evidence that, inter alia, where it is stated in the Employer's Requirements that the quality of materials or the standards of workmanship are to be to the reasonable satisfaction of the Employer, the same are to such satisfaction (30.8.1.1).

The present case is concerned with a contract under which the appellant (here referred to as the Contractor) undertook to design and construct for the respondent's predecessor authority (here referred to, along with the respondent, as the Council) a swimming pool complex at Stranraer. The contractor gave certain undertakings as to the kind and standard of materials, goods and workmanship which would be used in the performance of the contract.

Practical completion took place on 20 December 1993, in consequence of a letter issued by the Council's District Architect of the Council's predecessors. The Contractor failed to submit the Final Account and Final Statement within three months of that date. By letter dated 23 May 1994 the District Architect gave notice to the Contractor that if it failed to do so within two months of that date, he intended to prepare or have prepared a Final Account and a Final Statement under clause 30.5.6. On 2 June 1994 the Contractor wrote to the Council stating: "The Final Account including our claim will be submitted to you by 23 July 1994 (i.e. within two months of the date of your letter of 23 May 1994)". On 20 July 1994 the Contractor sent to the Council what it described as its "Final Account Statement" for the contract. The enclosed document listed various figures against a number of items of work performed by the Contractor. The total at the end of the document, described as "Final Account Statement", included a sum in respect of a "Loss and Expense Claim". It was also stated: "Direct Payments/Charges to be advised", but without a figure, as a deduction from the total. It appears that thereafter there were certain negotiations between the parties in respect of the Contractor's claim for loss and expense. The figure in respect of direct payments and charges was agreed. On 9 December 1994 the regional director of the Council's consultants wrote to the Contractor a letter in the following terms:

Attached to the letter was a document as follows:

It will be noted that there is a discrepancy of £2.00 between the "Amount of Agreed Final Account" and the figure stated in the letter. It is matter of agreement that this is of no significance.

On 10 January 1995 the Contractor wrote to the Council a letter stating:

The enclosed document, which was headed "Final Account", set out various sums against work done by the Contractor, along with a number of deductions including direct payments and charges, and the addition of £7,000 in respect of direct loss and expense. It brought out a total "Amount of Agreed Final Account" of £1,963,256.78. Thereafter there was some correspondence between the Council and the Contractor in regard to a certain item which had not been correctly stated. This did not affect the total figure, and was dealt with by making an alteration to the sum in respect of loss and expense. By letter dated 19 January 1995 the Council sent to the Contractor what it described as a "Revised Final Statement" in respect of the contract for the Contractor's approval, signature and return. In reply the Contractor, by letter dated 24 January 1995, returned this document "approved and signed as full and final settlement on the above contract". The letter stated once more that the Contractor looked forward to payment of the outstanding balance including full release of retention. The document was on the same general lines as that submitted by the Contractor on 10 January, subject to the adjustment of the item for loss and expense to which we have referred. The "Amount of Agreed Final Account" was unchanged. The Contractor's representative completed and signed a docquet at the end of the document stating:

The document was signed on behalf of the Council to show its agreement.

The present appeal arises out of an arbitration between the Council and the Contractor in regard to a claim made by the Council on the ground that the Contractor's work was not in accordance with its contractual obligations. It is not in dispute that, despite the passage of time since practical completion, the document enclosed with the Contractor's letter dated 24 January 1995 constituted a Final Account for the purposes of the contract conditions. The questions which have been stated by the arbiter for the opinion of this court are:

The answer to the first of these questions depends on whether, as the Contractor contends, the "Statement of Final Account" attached to the letter from the Council's consultants dated 9 December 1994 should be regarded as a Final Statement for the purpose of clause 30.5.4. During the course of the discussion it was not disputed that, if that document was a Final Statement, it had become conclusive for the purposes of clause 30.8.1. In these circumstances the single point in dispute is focused by the first of the two questions posed by the arbiter.

Counsel for the Contractor submitted that what was a Final Account or a Final Statement depended on the function which each of them fulfilled. It was envisaged by the Conditions of Contract that there would be negotiation between the parties. This could be seen from the references to such documents being agreed. Such negotiations were inevitable. It did not matter whether the Final Statement followed or preceded the Final Account. The only part of the Final Account which mattered from the point of view of preparing the Final Statement was the adjusted contract sum which resulted from giving effect to clauses 30.5.2 and 30.5.3. It did not matter which of the parties issued the Final Statement. The correspondence between the parties showed that neither party regarded it as necessary to have a Final Statement in more formal terms, but were content with the Statement of Final Account attached to the Consultants' letter dated 9 December 1994. It was unnecessary to insist on slavish adherence to matters of technical expression. As regards the content of the "Statement of Final Account" counsel for the Contractor emphasised that the timetable which was envisaged by the contract conditions involved that a Final Account and a Final Statement could be required at a time when the Employer still had the right of retention over money which otherwise would have been paid to the Contractor. The Council had not issued a Notice of Completion of Making Good Defects under clause 16.4 of the Contract Conditions, and accordingly was able to retain one half of the Retention Percentage in terms of clause 30.4.1.3. The Final Account and the Final Statement did not require to be postponed until the stage at which the Employer no longer had the right of retention. If so, it was a necessary consequence that a Final Statement would require to leave the matter of retention to one side. The parties were entitled to treat the consultant's "Statement of Final Account" as adequate for their purposes in determining the balance which was due to the Contractor from the Council. This was the sum of £27,298.78. In the circumstances there was no good reason to deny contractual effect to that Statement. Payment had been made in accordance with it.

We do not consider that the Contractor's submissions are well-founded. In the first place it is obvious from the terms of the letter dated 9 December 1994 that the Council's consultants did not proffer the document which was attached to the letter as a Final Statement. Instead they requested the Contractor to submit a Final Statement to reflect those agreed amounts. In the second place we consider that the Contractor's argument proceeds on a misconstruction of clause 30.5.4 of the Contract Conditions. This requires the ascertainment of the balance as between, on the one hand, the adjusted Contract Sum and, on the other, "The sum of amounts already paid by the Employer to the Contractor". It is plain that the latter refers to actual payments, and accordingly means the amounts net of retention. However, the "Statement of Final Account" attached to the letter dated 9 December 1994 shows a "Balance" achieved by deducting from the "Amount of Agreed Final Account", not the sum of amounts already paid, but the "Previously Certified Gross Value", with the result, as stated, that the "Balance due" excluded the amount retained. We note in passing that parties did not employ a formal certification system, but this is of no moment, since the important point is that sums were retained in accordance with the Contract Conditions. Where an employer is exercising a right of retention, the money retained will form part of the balance which is set out in a Final Statement for the purposes of clause 30.5.4. The employer's right to retain such money is preserved by the opening words of clause 30.6 where it states that the balance brought out in the Final Statement is payable as a debt "subject to any deductions authorised by the conditions". The fact that the Employer is for the time being able to retain money does not mean that the balance set out in the Final Statement should be reduced thereby. The argument for the Contractor that contractual effect should be given to the fact that parties were content to accept the "Statement of Final Account", and acted on the basis of such agreement appears to us to beg the question as to whether the document was a Final Statement or some other calculation which was agreed for the purpose of making up the Final Account and ascertaining the sum which was for the time being payable. At the time with which we are concerned the matter of retention was, as counsel for the Council pointed out, a live issue. The Council had submitted a list of defects to the Contractor and was holding retention money in security for their being made good.

It is important, in our view, to bear in mind that the Contract Conditions state explicitly that certain legal effects are to flow from a Final Statement which is agreed or has become conclusive. We agree with the submission by counsel for the Council that it is essential that a party against whom a document may have conclusive effect should be able to identify whether, and if so when, it has been issued, so as to enable him to determine what steps he should take to protect his position by applying for arbitration before it is too late to question its effect. In the present case, the Contractor's position is that by agreeing to the "Statement of Final Account" the Council incurred the disadvantage that this document, as a "Final Statement", became conclusive evidence that the Contractor's quality of materials and standards of workmanship were to the reasonable satisfaction of the Council where that was stated in the Employer's Requirements. While there may be room for some variation in the form which a Final Statement could take, a document should not be regarded as fulfilling that description unless it plainly fulfils that description and accordingly leaves neither party in any doubt as to its import. These considerations seem to us to reinforce the conclusion that before a document is to be regarded as a Final Statement for the purpose of the Contract Conditions it should be unmistakably in accordance with the contractual provisions.

For these reasons we consider that both questions posed by the arbiter should be answered in the affirmative.