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Conclusivity in construction contracts

A version of this article was first published in Construction Law.

Construction contracts often contain provisions deeming the final certificate to be conclusive evidence as to various matters under the contract.

Such clauses are intended to provide certainty as to the parties’ obligations at completion and to avoid the need for expensive, time-consuming inquiries into the minutiae of long-term, large scale developments.

Such clauses allow parties to specify the extent a final certificate will be treated as conclusive. Most contracts do this in two ways: (1) they specify the issues to be determined conclusively by the final certificate; and (2) they set out the circumstances in which the final certificate may be challenged, usually by imposing a time-bar within which parties may raise any dispute. The time limits are often tight; JCT specifies 28 days.

Whilst there are obvious common sense reasons for conclusive evidence clauses, they can have an immediate and significant effect; if relevant disputes are not raised promptly and in accordance with the provisions of the contract, the right to raise them may be lost forever. The courts have historically upheld conclusive evidence clauses and material noncompliance is rarely tolerated.

The court has recently illustrated the need to get it right in University of Brighton v Dovehouse Interiors [2014] EWHC 940 (TCC). In this case Brighton engaged Dovehouse to fit-out university buildings. The contract incorporated the JCT Intermediate Building Contract with contractors’ design (2005 edn, Rev 2) (2009) terms. The contract contained the typical JCT provisions as to the conclusivity of the final certificate. In particular, cl 1.9.1 provided that the final certificate would "be conclusive evidence" of the matters specified. However, there was a saving proviso at cl 1.9.2:

"If any adjudication, arbitration or other proceedings are commenced by either Party before or not later than 28 days after the Final Certificate has been issued, the Final Certificate shall be conclusive evidence as provided in clause 1.9.1 save only in respect of the matters to which those proceedings relate."

Practical completion was three months late and the parties fell into dispute over time, cost and defective works. The final certificate was issued on 9 December 2013; however, the parties had not resolved their differences. Dovehouse alleged it was entitled to a full extension of time for the delay and that the final account had been undervalued by around £1.5m.

The parties wished to avoid litigation and accepted that 28 days was insufficient time to reach a compromise. The parties agreed to try to resolve the dispute by negotiation, agreeing to extend the time for "commencing" proceedings under cl 1.9.2 from 28 to 66 days. Dovehouse had to commence proceedings by 14 February 2014. Thereafter:

  • On 13 February 2014, Dovehouse served a notice of intention to refer the dispute to adjudication. Dovehouse did not serve the notice at the address specified in the contract, however, it was not disputed that Brighton received the notice the same day.
  • Further, Dovehouse erroneously believed the contract did not provide for a specified adjudicator nominating body (ANB), stating in the notice that it would request nomination through the RICS.
  • An adjudicator was appointed by the RICS on 19 February 2013 and the dispute was referred to him on 20 February 2014.
  • The adjudicator resigned on 21 February 2014, finding that the contract required nomination through the CIArb and that he had no jurisdiction to determine the dispute.
  • A second notice, served on 24 February 2014, corrected the error in relation to the ANB. The second notice was therefore ten days after the agreed deadline.

Brighton brought proceedings under CPR Pt 8 seeking a declaration that the first notice was invalid and that Dovehouse had not "commenced proceedings" in accordance with cl 1.9.2. Brighton sought a declaration that the final certificate had become binding and that Dovehouse could not challenge it.

When are adjudication proceedings commenced?

The main argument was whether the service of the notice amounted to the "commencement" of adjudication proceedings. Brighton argued that the service of a notice was not enough and that adjudication proceedings were not "commenced" until an adjudicator had been validly appointed and the dispute referred to him. There was a plain tension between cl 1.9.2 which referred to the commencement of proceedings and the adjudication provisions of the Scheme, which did not.

Mrs Justice Carr OBE referred to Bennett v FMK Construction Ltd [2005] 101 Con LR 92, which considered similar conclusivity provisions under JCT 1998. Similarly, a first notice was served in time, the adjudicator resigned and a second notice was served out of time. HHJ Havery QC held that commencement: "must, in my judgment, refer to service of the notice of intention".

The court concluded that this analysis was correct, and applied a natural and commonsense interpretation of the clause and the Scheme.

In particular:

  • The notice is a critical document defining the scope of the issues, the relief sought and the jurisdiction of the adjudicator; it goes beyond merely stating that a party intends to refer a dispute to adjudication.
  • Clause 1.9.2 provides that if any adjudication proceedings are commenced within time, the final certificate shall be conclusive evidence "save only in respect of the matters to which those proceedings relate". The matters to which adjudication proceedings relate are those identified in the notice.
  • The requirements of the Scheme in relation to a notice are similar to those in the CPR relating to the claim form to commence court proceedings.
  • The notice sets out the four corners of the dispute and cannot be expanded by the referral; this resonates directly with the document envisaged as engaging the saving proviso.
  • Service of a notice is similar to issuing a claim form or service of an arbitration notice: a step the claimant can take unfettered by other matters. However, there are a number of steps outside the parties’ control regarding the appointment of an adjudicator and the service of the referral. For example the ANB has up to five days to nominate an adjudicator, who has two days to accept. That an adjudicator is not appointed by the date of the notice is not relevant.
  • There would be no logic in requiring a more cumbersome process to "commence" adjudication for the purposes of cl 1.9.2 than to commence litigation or arbitration.

The court concluded that the consequences of missing the deadline imposed in cl 1.9.2 were likely to be severe, therefore the parties should be taken to have intended and wanted certainty and control over the date of "commencement" of proceedings. Construing the Scheme so that the referral rather than the notice was the key step in commencing adjudication would not achieve that purpose or accord with commercial common sense.

Effect of the adjudicator’s resignation

Both parties agreed the adjudicator was right to resign. It was plainly an appropriate concession. An adjudicator appointed through the wrong body has no jurisdiction.

Brighton argued the resignation meant the adjudication became a nullity and therefore could not be treated as having been "commenced" under cl 1.9.2. It was undisputed that if Dovehouse wanted to have an effective adjudication it would have to start again which would include issuing a new notice.

The court rejected that argument and confirmed that whilst any referral may have been invalidated by the incorrect nomination procedure and the referral would be rendered a nullity, it didn’t invalidate the notice.

Service at the wrong address

The court rejected the argument that Dovehouse was required to specify within the notice Brighton’s address stated in the contract or to serve at that address.

Therefore the notice remained valid. The court held:

  • Service of a notice was governed by the Scheme, which was a complete code, and did not require the notice to be served at the address stated in the contract.
  • In any event, the contract provided for "any effective means of service".
  • Not every breach of the provisions of the Scheme would render a notice invalid. Even if Dovehouse was in breach, it would not be material given the function of the notice to inform the other party of the dispute. Brighton had received the notice and understood the scope of the dispute.

Wrong nominating body

The court also rejected Brighton’s suggestion that naming the wrong ANB in the notice rendered it invalid. The court pointed out there was no requirement to name the ANB in the notice, so the erroneous suggestion that the ANB was the RICS rather than the CIArb didn’t affect the validity of the notice.

Effect on cl 1.9

Given that the adjudication was commenced upon the giving of a valid notice and given the court’s decision that the notice was valid, the court concluded that the saving proviso in cl 1.9.2 was engaged.

Ultimately, the court held that the only step Dovehouse needed to take to engage the proviso was to serve a valid notice. Whether the subsequent adjudication progressed properly did not affect the validity of the notice. Accordingly, Dovehouse was permitted to pursue its second adjudication.

Discussion

The key point is the application of that reasoning to the conclusive evidence provisions of JCT contracts.

The surprising result is that provided the notice is valid, subsequent events are unlikely to matter; once the proviso is engaged, it remains engaged.

It has been suggested that this could open the system to abuse by parties serving comprehensive notices to avoid the conclusivity provisions in circumstances where they have no intention of pursuing the dispute. Carr J’s judgment leaves this position unclear:

  • On one hand, she suggested that an abandonment of an adjudication could result in the abandonment of the proviso. However, she didn’t reach a hard landing on this because Dovehouse immediately re-commenced adjudication and had not "abandoned" anything.
  • On the other hand, she appeared to accept the reasoning in Lanes v Galliford Try [2011] EWCA Civ 1617 that where adjudication is not pursued the right to adjudication is not lost forever. The Court of Appeal drew no distinction in the case of an adjudication being thwarted by the error of the referring party.

The more technical arguments raised by Brighton received short shrift. The confirmation that "not every breach of a requirement of the Scheme is such as to render a notice invalid" is a useful reminder of the TCC’s general approach and its desire to avoid overly technical arguments. Ultimately, Dovehouse was lucky.

The arguments were finely balanced. With minor amendments to the adjudication procedure, Dovehouse would not have succeeded. A key lesson is to make sure procedures are followed properly. If Dovehouse had not made a series of basic errors in its first notice, this dispute would not have arisen.