Patent Defects and the Final Account

Tue, 07 Dec 2010

Building projects are usually finally concluded once the final account is settled. By this point in time two things will usually have occurred:
1. the work is complete, and any defects arising during the Defects Liability Period (if there is one) will have been rectified, and 
2. the value of work done, including claims for extra remuneration, will have been agreed.
The final account usually records the amount due to the builder for the work done and therefore finally concludes the builders entitlement to payment. Having reached agreement upon the final value of the work the builder will be bound by the account, which operates as a contract of compromise, unless some vitiating factor is present: such as economic duress. So, as a general rule, builders cannot make further claims for payment once the final account is settled. In these circumstances, the final account effects conclusive certainty for employers who are then freed from the risk of further claims in respect of the value of the work done.
But does the final account bring the same conclusive certainty for builders? In other words, are builders absolved from further liability for defective work after the final account is settled? 
Before examining this question it is important to remember that builders retain a residuary liability for defects after completion of work for the duration of the relevant limitation period - being either 6 years for simple contracts, or 12 years for specialties (unless the contract provides otherwise). But the final account is usually settled well within the limitation period. So this leads to the subsidiary question: does the final account foreshorten what would otherwise be the limitation period for commencing claims for defects? 
In answering this subsidiary question it is necessary to bear in mind three things:
• First, it is necessary to make a distinction between patent and latent defects. In this respect latent defects are hidden, while patent defects are visible or observable upon reasonable examination whether actually observed or not (see Yandle and Sons v. Sutton, Young and Sutton [1922] 2 Ch 199; Sanderson v. National Coal Board [1961] 2 QB 244; and Rotherham MBC v. Frank Haslam Milan and Co Ltd and M J Gleeson (Northern) Ltd (1996) 78 BLR 1 (CA)). 
• Second, defects give rise to two rights: 
o firstly, a right of abatement - that is a right to reduce the amount payable in respect of the works, or particular aspects of the works, by reference to their value in their defective state (see Mondel v. Steel (1841) 8 M. and W. 858, 1 BLR 106); and
o secondly, a right to compensation (damages) - that is the cost of remedial work and any consequential loss (see East Ham Corporation v. Bernard Sunley and Sons Ltd [1966] AC 406).
• Third, whether builders retain any liability for defects after the final account is agreed depends upon the terms of the building contract (if there is one) and/or the terms of the final account itself. 
Having regard to these preliminaries it is now useful to consider the decision in of Mr Justice Coulson in YJL London v Roswin [2009] EWHC 3174 (TCC).
In Roswin the building contract incorporated the JCT Standard Form of Building Contract With Contractors Design 1984 edition. This contract contained an elaborate final account procedure which envisaged that the builder would submit a final account for agreement by the employer, but also provided a default mechanism in the event the builder failed to do so in the prescribed period (essentially it allowed the employer to submit a final account if the builder did not do so on time). This contract also provided, in clause 35, that the final account would become "conclusive" as to the amount due to the builder one month after the latest to occur of the following events: either the end of the Defects Liability Period, or the day named in the certificate of making good of defects as the date upon which all notified defects were made good, or the date of submission of the builder's or the employer's (default) final account (as the case may be). 
Despite the elaborate arrangements in the contract the final account procedure in clause 35 was not strictly followed by the parties after practical completion. Instead, there were protracted negotiations about the final account. Eventually the employer's agent submitted a final account to the builder for signature. This final account was itself fairly elaborate, comprising both a 'final account statement' and a 'final account summary'. The former contained a stipulation that the agreed value was in full and final settlement of all demands; while the latter listed disputed items that had been taken into account in reaching the agreed value recorded in the final account statement. 
Three days after receiving these documents the builder assented to them. However, the employer declined to pay the balance due. Unsurprisingly, the builder issued court proceedings. 
When the matter came before the court the employer raised a number of defences:
• First it was argued that the final account agreement was not the final account for the purposes of the contract (i.e. clause 35) because the elaborate contractual procedure had not been strictly complied with. This proposition was rejected on the basis that the parties had clearly intended the signed document to constitute the final account for the purposes of the relevant contractual provision. Further, Coulson J. concluded that as the final account agreement was the final account for the purposes of clause 35 it had the effect, as provided in clause 35, that it was "conclusive as to the balance due between the parties".
• Second, it was argued that the final account agreement did not prevent the employer raising allegations of defective work by way of defence. This proposition was also rejected, but this aspect of the decision was more nuanced and overlapped with the finding that the final account was conclusive as to the amount due.
In rejecting the employer's second argument Coulson J. made one finding of law and two findings of fact. The finding of law was that, as a matter of construction of the contract, patent defects fell within the ambit of the final account agreement. The findings of fact were that most the defects relied upon in the defence to the action were the same defects as were summarised in the final account summary, but all of them were patent. The result was that none of the defects relied upon by the employer could be used as the basis for an abatement or set-off. 
The nuance was that having firmly shut the door on the use of patent defects as a basis for refusing further payment Coulson J was equally careful to leave open the possibility that latent defects might not have been intended to be covered by the final account agreement. If they are not encapsulated by the agreement then latent defects remain as a residuary category of liability for builders after the final account is settled - and will remain so until the relevant limitation period expires, which will be 6 years after practical completion for simple contracts or 12 years for specialties (unless the contract provides otherwise).
Given that each contract has to be construed in context to ascertain the common intention of the parties it does not follow that the outcome will be the same in all cases, but the Roswin decision may flag up a judicial reluctance to bind parties to matters they did not have in their contemplation when settling the final account. This reluctance translates into a likelihood that in the absence of clear words to the contrary (either in the building contract, or in the final account) builders are unlikely to be released from liability for latent defects merely by assenting to a final account. This proposition is consistent with the judicial presumption, established in Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd [1974] AC 689, (1973) 1 BLR 75, that neither party intends to abandon any remedies for breach of contract in the absence of clear words to the contrary.
It worth adding that it is unlikely that the position would have been different in if the parties in Roswin had followed the contractual procedure to the letter rather than signing the final account agreement. Similarly, it is unlikely that the position would be any different if the building contract did not include a "conclusivity" provision equivalent to clause 35 of the JCT contract.
One inevitable result of the Roswin decision is that when claims for defective work are made after the final account is settled an enquiry should be made to establish whether the defects in question were patent when the final account was settled. If so claims in relation to them will most likely be barred. 
However, it cannot be said that claims for latent defects are inevitably barred in the absence of clear words to this effect. In this respect builders almost certainly retain a liability after the final account is agreed in relation to latent defects discovered subsequently.

Related articles

By Ian Dove QC and Peter Goatley The purpose of this paper is, firstly, to provide a broad overview...

Date: Mon, 18 Jan 2010
Under pressure from the construction industry the Government opted, in 1996, to enact legislation - ...

Date: Wed, 10 Feb 2010
By David Lock QC The effect on confidentiality in care proceedings following the judgment in Ward.&...

Date: Sun, 21 Feb 2010