Most standard form construction contracts (for example, the JCT Design and Build form) include a final account process to determine the final balance due between the parties. Such final account processes might include mechanisms to determine discrete elements, for example the time for completion of the works.

The Scheme for Construction Contracts (England and Wales) regulations 1998 (the “Scheme”) says (at paragraph 23(2)) that an adjudicator’s decision is binding until the dispute is finally determined by litigation, arbitration, or agreement between the parties.

In Essential Living (Greenwich) Ltd v Elements (Europe) Ltd [2022] EWHC 1400 (TCC), the court considered whether an adjudication decision regarding an interim application was binding for the purpose of the final account mechanism under the Contract (defined below).

We set out below: the relevant facts in Essential Living; the court’s decision; and commentary for construction professionals and practitioners.

Essential v Elements: the relevant facts

In December 2016, Essential Living (Greenwich) Ltd (“Essential”) engaged Elements (Europe) Ltd (“Elements”) to design, supply and install some modular units at a project in Greenwich.

The contract between the parties (the “Contract”) was based on the JCT Construction Management Trade Contract 2011 with amendments.

The relevant terms of the Contract were as follows:

• The Trade Contract Sum was £25.751m.
• The completion date was 11 December 2017.
• Elements was entitled to monthly interim payments.
• The Final Trade Contract Sum – being the final value of the works – was the Trade Contract Sum adjusted to account for any variations.
• After completion of the works, Essential’s agent was able to adjust the completion period under clause 2.27.5.

Elements achieved practical completion on 31 May 2019 – some 18 months after the completion date under the Contract.

In July 2019, Elements obtained an adjudicator’s decision in relation to its March 2019 interim application (the “Decision” and the “March 2019 IA” respectively). The adjudicator ordered Essential to pay Elements £1.842m.

From October 2019, the parties were in discussion regarding Elements’ final account but were unable to reach an agreement as to the Final Trade Contract Sum.

In October 2021, Essential issued proceedings against Elements, seeking declarations on and relating to the Decision.

Essential v Elements: the court’s decision

Among the issues that the judge considered relevant were:

• the impact of the Decision on claims for extensions of time, liquidated damages and delay damages (“Issue 1”); and
• the impact of the Decision on the calculation of the Final Trade Contract Sum, including variations and loss and/or expense (“Issue 2”).

Essential’s position was that the Contract should be interpreted generally on the basis that the Decision was binding. Elements’ position was that the Decision was legally irrelevant to the calculation of the Final Trade Contract Sum and fixing of the completion period.

The judge referred to paragraph 23(2) of the Scheme (set out above) and said that, while an adjudicator’s decision is binding, consideration must also be given to the parties’ underlying rights and obligations.

As to Issue 1, the judge said that clause 2.27.5 of the Contract set out a separate, post-completion procedure to determine the completion date. (Claims for extensions of time and liquidated damages would then follow.) That exercise had not been completed when the Decision was issued. The Decision could not therefore override clause 2.27.5 and the Decision was not binding in that respect.

As to Issue 2, the court noted that the Decision referred to the March 2019 IA and did not purport to decide the Final Trade Contract Sum. The judge also noted that the Contract did not allow variations to be re-valued during the final account process. The judge said that, to the extent that variations were agreed or decided in the Decision, the Decision was binding.

The judge said that “careful analysis” was required to ascertain whether any variation was binding or not. Such analysis would involve looking at the basis of the claim, whether it amounts to a new cause of action, and whether such a claim is permitted under the contract.

Essential v Elements: commentary

When determining the final account under a construction contract, the starting point is that any adjudication decisions regarding interim applications are binding. Consideration should then be given to the current circumstances and terms of the contract.

Generally speaking, if a final account mechanism includes a new process – such as a post-completion assessment of the completion period or variations – an adjudication decision regarding an interim application on those matters will not bind the parties.

Parties in the final account process should review any adjudication decisions against the final account claim and contract terms to ascertain which elements are binding for the purpose of the final account.

If a party is aggrieved as to a binding element of a final account, that element can be challenged in litigation or arbitration.