Inner House denies appeal against dismissal of late counterclaim in construction contract dispute by 2:1 decision

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A claim by a local authority challenging the denial of its counterclaim against an arbitrator’s decision that a final certificate for an amount owed to a building contractor was inconclusive has been dismissed by a decision of 2:1 in the inner chamber of the Court of Session.

D McLaughlin and Sons Ltd initially brought a commercial action against East Ayrshire Council to enforce the arbitrator’s decision, in addition to an earlier action for payment. The commercial judge had dismissed a counterclaim by the defenders for lateness.

The appeal was heard by the Lord President, Lord Carloway, together with Lord Malcolm and Lord Woolman, all three of whom gave their opinion. Howie KC appeared for prosecutors and respondents and DM Thomson KC for defenders and recoverers.

Conclusive evidence

The pursuer has been employed by the defender to build a new one-storey extension to a primary school in East Ayrshire for a price of just over £2million. The terms of the contract incorporated the 2011 edition of the standard build contract with quantities to be used in Scotland. Between July 2017 and July 2019, the defenders made payments to the prosecutors, but not the full amount due under an interim payment notice dated August 10, 2017.

On July 17, 2019, a final certificate was issued which specified the amount of the contract as £3,343,223.82 and listed the total amount of all payments previously certified as £3,341,794.83. The amount owed in balance to the pursuers was therefore £1,428.99, which the defenders paid. However, the prosecutors challenged the final certificate and served notice of referral to arbitration. The arbitrator found that the defenders were liable to pay the prosecutors £427,578.75 plus VAT. The defenders did not pay this sum, which led to the opening of an action for compulsory execution.

In response to the enforcement action, the defendants requested a declarant declaring that the certificate final was conclusive evidence in the arbitration and that since they had paid the balance due under that certificate, no award could be made. should have been rendered by the arbitrator. The commercial judge dismissed the counterclaim because it had not been raised within 28 days of the adjudicator’s decision.

Counsel for the defendants argued that the commercial judge had taken an overly strict or literal approach in dismissing the counterclaim, and that the adjudication itself had occurred outside of the permitted period and that the final certificate was therefore conclusive as to to the amount of the contract. The prosecutors argued that since the award was a forced execution of the amount due under the August 2017 interim payment notice and not a challenge to the final certificate, the time period specified in the contract had no effect. application.

Pay now, chat later

Lord Carloway, in his opinion, said of the nature of the Certificate Final: “If the terms of the contract were to be followed as intended, all interim payments would have to be made before the Certificate Final determines, in the absence of valid dispute, the final payment . The Final Certificate provides an end point to any final payment dispute. It does not invalidate the interim payment scheme under which amounts already certified as due or appearing due in an undisputed interim payment notice are payable even though the enforcement of such payments may ultimately amount to a Pyrrhic victory.

He continued: “In other words, the conclusion of the contract amount in a disputed final certificate has no bearing on what should have been paid in the meantime. In due time, the first action will determine the correctness of the final certificate. Depending on how the pleadings are developed, the prosecutors may or may not require the defendants to be reimbursed a portion of what was paid after the judgment.

Regarding the timing of the challenge, he said: “Any decision made by an arbitrator after the date of issuance of the final certificate can only be challenged within 28 days. In this case, it was not. The effect of this is that the defenders are bound by this. They have to pay the sum awarded by the Adjudicator, which they have done. They must wait for the result of the first action on the correctness of the final certificate. This approach is the only one compatible with the arbitration regime. Defenders must ‘pay now, argue later’.

In his view, Lord Woolman said of the conclusiveness of the Certificate Final: “As applied to this case, the original legal action should have been the only proper means of challenging the Certificate Final. The arbitrator erred in reaching a different conclusion. He should have made a zero price. The final certificate should have been final.

However, he also concluded: “The employer did not raise a specific challenge to the sentence. She insinuated her counterclaim to the enforcement action out of time. I agree with the commercial judge that this led to a “twist in the story”. The price can no longer be disputed.

The motion for recovery was therefore dismissed. In a dissenting opinion, Lord Malcolm held that the commercial judge should have ruled on the merits of the counterclaim despite it being raised outside the 28-day time limit.

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