| Date | 28 November 2001 |
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| Judgment | Stour Valley Builders -v- Mr and Mrs T P Stuart |
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| The Issue | General discussion concerning the pitfalls for main contactors in settling subcontractor accounts. |
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| Implication |
Formal agreements to conclude subcontractor's accounts need to be carefully drawn up to avoid the risk of these being opened up later. |
printThe commercial process through which a main contractor settles its accounts with its subcontractors, in amounts which will underpin its main contract final account, involves a very delicate and sometimes treacherous balancing act. The picture is quite a common one. The main contractor has a difficult account to resolve with its client. The account involves substantial claims which the client's advisers are vigorously defending. These claims naturally include a myriad of issues that cut across various subcontract packages, and of course each subcontractor is pushing for payment. In addition, in the process of preparing a very detailed recommendation for payment, both the valuation of variations and the 'measured' elements of the final account have been severely reduced by the client's QS. All the relevant subcontractors dispute these adjustments. At this point the main contractor needs to consider very carefully how it will proceed. It should keep its eyes on the following. • Whether proper and timely payment and withholding notices have been sent to all subcontractors. Though the courts have recently advised that the absence of a payment notice will not prevent the main contractor from arguing that a lesser amount is due to the subcontractor, clearly it is bad commercial practice not to be up to date with such notices. The absence of a withholding notice will always be fatal to the main contractor's rights to apply a deduction or set-off. •· Whether 'pay when certified' provisions are in place under the subcontracts, and the extent to which these can be relied upon in the event of formal proceedings between the parties. There is uncertainty whether such clauses would be treated as unlawful in the light of the Construction Act. In any event the main contractor will normally seek to operate a pay when paid provision in the event of the insolvency of the employer. •· The requirement under certain standard forms of subcontract for the main contractor to pursue all rights and benefits to which the subcontractor may be entitled under the main contract. This is a typical provision in many standard forms and is found for example in DOM/1 clause 22 and in the FCEC blue form of subcontract clause 10.2. •· The ability of subcontractors to enter into arbitration with the employer, 'borrowing' the name of the main contractor to do so, and the manner in which the subcontractor may be required to indemnify the main contractor for costs and liabilities which may result from this process. •· The position of nominated subcontractors, where sums certified on their behalf are being contested by the subcontractors, but to the limited advantage of the main contractor, since further payments will be viewed as 'money in - money out'. •· Add disputes over defects, the insolvency of a subcontractor, arguments over extension of time and liquidated damages, and you have the makings of a contractual and commercial nightmare. This situation is of course worsened, from the main contractor's perspective, by the prospect of adjudication under the Construction Act. Whereas prior to the Act a main contractor had the upper hand in holding back the demands of subcontractors until it could resolve its position with the client, adjudication now means that subcontractor's accounts often now have to be resolved soon after completion. Great care should be taken to ensure that subcontractors' final accounts are formally recorded. All the points mentioned above need to be considered in settlement agreements, and expressly dealt with where they are potentially relevant. A properly drafted settlement agreement is not a 'construction contract' for the purposes of the Construction Act and therefore not capable of being referred to adjudication. This can have serious consequences for a party later seeking to challenge the 'deal'. Both parties also need to be careful of the commercial tactics used to obtain settlement agreements. Some main contractors will try to settle subcontractor's accounts by unreasonable commercial pressure, and then use the subcontractor's documents to claim substantially greater amounts from the client. In certain instances the subcontractor has learned about this and re-opened its claims. Where the agreement for full and final settlement of the subcontract has not been recorded in a completely watertight manner (all too often it is not), the subcontractor may succeed. In 1992 the Court of Appeal looked into the practice of seeking to impose a settlement by paying part only of a disputed account. In Stour Valley Builders-v-Mr and Mrs Stuart, the employer, Stuart, wrote to the builders stating: "I am enclosing a cheque in full and final settlement of all charges for £8471". The builders, Stour, banked the cheque, telephoned to say it was not accepted as full and final settlement, and sued for the balance. The court held that Stour had not prejudiced its position by banking the cheque. Main contractors need to put in place good commercial management techniques in this type of situation. It is essential to hold regular account review meetings, at which all the commercial issues, live and potential, are aired and priorities set. The meetings need to be chaired by someone who is properly experienced in these commercial matters. That person needs to be a good manager and motivator, but above all a confident decision maker. Adjudication has brought about a turnaround in the delicate commercial balance that exists between main contractors and subcontractors. The old tricks are increasingly becoming a thing of the past.
CJ-0147
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