Inner House refuses appeal against dismissal of out-of-time counterclaim in building contract dispute by 2:1 decision

Lord Carloway

About this case:

• Citation:
  [2022] CSIH 42
• Judgment:
  External link
• Court:
  Court of Session Inner House
• Judge:
  Lord Carloway

D McLaughlin and Sons Ltd originally raised a commercial action against East Ayrshire Council seeking enforcement of the adjudicator’s decision, in addition to a previous action for payment. The commercial judge had dismissed a counterclaim by the defenders as it had been made out of time.

The appeal was heard by the Lord President, Lord Carloway, along with Lord Malcolm and Lord Woolman, all three of whom gave opinions. Howie KC appeared for the pursuers and respondents and DM Thomson KC for the defenders and reclaimers.

Conclusive evidence 

The pursuer was employed by the defender to build a new single storey extension at a primary school in East Ayrshire at a price of slightly over £2 million. The terms of the contract incorporated the 2011 edition of the Standard Building Contract with Quantities for use in Scotland. Between July 2017 and July 2019 the defenders made payments to the pursuers but not in the full amount due under an Interim Payment Notice dated 10 August 2017.

On 17 July 2019 a Final Certificate was issued which specified the Contract Sum as £3,343,223.82 and stated the total amount of all previously certified payments as £3,341,794.83. The amount due as a balance to the pursuers was therefore £1,428.99, which the defenders paid. However, the pursuers disputed the Final Certificate and served a notice of referral to adjudication. The adjudicator found that the defenders were liable to pay to the pursuers £427,578.75 plus VAT. The defenders did not pay this sum, leading to an action for enforcement being raised.

In response to the enforcement action, the defenders counterclaimed seeking declarator that the Final Certificate was conclusive evidence in the adjudication and since they had paid the balance due under that certificate no award ought to have been made by the adjudicator. The commercial judge dismissed the counterclaim because it had not been raised within 28 days of the adjudicator’s award.

Counsel for the defenders submitted that the commercial judge had taken an overly strict or literal approach in dismissing the counterclaim, and that the adjudication itself had come outside the permitted period and thus the Final Certificate was conclusive as to the contract sum. The pursuers submitted that as the adjudication was an enforcement of the sum due under the August 2017 interim payment notice and not a challenge to the final certificate, the time limit specified in the contract had no application.

Pay now, argue later 

Lord Carloway, in his opinion, said of the nature of the Final Certificate: “If the terms of the contract were to be followed as intended, all interim payments should be made before the Final Certificate determines, in the absence of a valid challenge, the final payment. The Final Certificate provides an end point to any disputes in relation to the final payment. It does not invalidate the interim payment regime whereby sums, which are already certified to be due or appear due in an unchallenged Interim Payment Notice, are payable even if enforcement of such payments may ultimately constitute a Pyrrhic victory.”

He continued: “Put another way, the conclusivity of the Contract Sum in a challenged Final Certificate has no bearing on what should have been paid in the interim. In due course, the first action will determine the correctness of the Final Certificate. Depending upon how the pleadings are developed, it may result in the pursuers requiring to repay the defenders some of what was paid after the adjudication, or it may not.”

On the timing of the challenge, he said: “Any decision, which is issued by an Adjudicator after the date of issue of the Final Certificate, can only be challenged within 28 days. In this case it was not. The effect of that is that the defenders are bound by it. They must pay the sum awarded by the Adjudicator, which they have done. They must await the outcome of the first action on the correctness of the Final Certificate. That approach is the only one which is consistent with the adjudication regime. The defenders must ‘pay now, argue later’.”

In his opinion, Lord Woolman said of the conclusiveness of the Final Certificate: “As applied to this case, the original court action should have constituted the only proper vehicle to challenge the final certificate. The adjudicator erred in reaching a different conclusion. He should have made a nil award. The final certificate should have been final.”

However, he also concluded: “The employer did not raise a timeous challenge to the award. It intimated its counterclaim to the enforcement action outside the prescribed time limit. I agree with the commercial judge that this led to a ‘twist in the tale’. The award can no longer be challenged.”

The reclaiming motion was therefore refused. In a dissenting opinion, Lord Malcolm opined that the commercial judge ought to have addressed the merits of the counterclaim in spite of it being raised outwith the 28 day period.