Is a signed Full and Final Account Settlement Statement binding?

Key Words:

Authority to sign, Binding Compromise, Consideration, Contract, Court of Appeal, Estoppel, Final Account, Final Account Statement, Full and Final Settlement, Loss and Expense, Rectification, Signed Statement of Account, Technology and Construction Court, Unilateral Mistake,

Introduction

Although a Final Account Statement generally has no status under most forms of contract, it does bring about a sense of finality to the negotiations leading up to the agreement of the Final Account.

It is common custom and practice for both the Employer (or the Employer’s representative) and the Contractor to sign the Final Account Statement to signify that the Final Account figure represents the full and final settlement of all claims etc.

What happens, however, when a Final Account Statement has been signed but one of the parties does not wish to be bound by the terms of that Statement?

Just such a situation was recently considered in the Court of Appeal case of Hurst Stores and Interiors Ltd. v M L Europe Property Ltd (1 April 2004).

Hurst Stores and Interiors Ltd. v M L Europe Property Ltd.

The “Hurst” case was originally heard in the Technology and Construction Court on 25 June 2003.

M L Europe Property Ltd. (MLEP) employed Hurst Stores and Interiors Ltd. (Hurst) as fit-out trade contractors on Merrill Lynch’s new European Headquarters in the City of London.

MLEP’s professional team included Mace Ltd. (Mace) who co-ordinated and administered the trade contracts.

The trade contract provided that Hurst should submit, on a monthly basis, priced “interim final accounts” on a standard Mace interim statement of account (ISA) form.

The ISA form contained the words, “… we agree … … the values shown represent the full and final value of all … … work … … instructed and nothing further remains to be charged against them. The total (for the list of instructions) represents the full and final value of our contract works at the date of this statement.”

Six months before the completion of the project, Mace provided a variant of the ISA form which identified the statement as being “final” (not “interim”) and replaced the standard wording reference so that it read, “In consideration of the agreement that final payment is to be made by the Client, we hereby agree that payment to us of THE FINAL PAYMENT will be accepted by us in full and final settlement of all our claims … … arising out of or in connection with the Trade Contract Works which have accrued up to and including the date of this statement …”.

Hurst’s Project Manager, who routinely signed and dated the monthly interim statements, signed this variant of the ISA form also. Although Hurst’s Project Manager had authority to deal with all matters concerning payment and finance, prior to signing the variant of the ISA form he did not understand that he was being requested to deal with all contractual claims or to allow for them. He was not advised of the revised wording (which he himself had overlooked) and he did not appreciate that by the “full and final settlement” terms Hurst was being invited to forego claims (e.g. loss and/or expense claims).

Some 7 months after the variant of the ISA form had been signed by Hurst’s Project Manager, Hurst prepared a Final Account which included for “additional preliminaries” and for “disruption”.

Mace refused to accept this Final Account on the basis, amongst other things, that there was already an agreed and signed final account statement (i.e. the variant to the ISA form signed by Hurst’s Project Manager).

Hurst referred its Final Account disputes to an Adjudicator who found that, because of the signed Final Account Statement, Hurst were prevented from making further claims for additional costs that had accrued up to the date of the signed Final Account Statement.

Hurst sought a declaration through the court that the signed Final Account Statement was not binding because;

(i) There was a unilateral mistake by Hurst’s Project Manager.

(ii) Hurst’s Project Manager did not have authority to make a binding compromise in the terms of that document.

(iii) The document was not supported by consideration.

(iv) That MLEP was estopped from contending that the document was binding because they had never previously made that contention.

In the 25 June 2003 TCC case Mr Recorder Colin Reese found that;

(i) There was a unilateral mistake by Hurst’s Project Manager and that rectification to that document should be made to delete the reference to full and final settlement of all claims etc. because there was knowledge (but not necessarily proven actual knowledge) by the other party of the unilateral mistake.

(ii) The introduction of a previously un-contemplated type of final accounting document involved a variation of the trade contract for which Hurst’s Project Manager did not have authority to bind Hurst.

(iii) There was ample consideration.

(iv) There was no estoppel applicable.

It followed from the facts which supported the unilateral mistake that the judge felt able to rectify the Full and Final Account Settlement document by, effectively, deleting those terms which indicated that it related to a Full and Final Settlement.

MLEP appealed against the above judgment but on 1 April 2004 the Court of Appeal dismissed the appeal, and in doing so confirmed the findings of Mr Recorder Colin Reese under items (i) and (ii) above.

Conclusion

The above case highlights that if a Full and Final Account Settlement Statement is signed by mistake (i.e. because of the insertion of terms that give the document a status that had not been noticed by the person signing the Statement) and if it can be shown that the other party had knowledge of that mistake (even if that knowledge was only what might be considered as being “constructive” knowledge) the courts are likely to rectify the Final Account Statement to remove the offending terms.

In addition, unless expressly provided for within the contract, a Final Account Statement will probably be viewed as being a document that was previously un-contemplated by the Contract, and as such the representatives given authority to sign documents under the contract would not necessarily have that same authority for signing what would effectively be an ex-contractual document.

Therefore, often a simple Final Account Statement is not the best vehicle for confirming a Final Account, but what is required is a tightly drawn up supplementary agreement that builds on the contract terms and documents and records the wishes of the parties to vary the terms of the contract. Without this, as Mace found in the above case, the Final Account Statement may not be worth the paper that it is written on.

Author: Alway Associates

Date: October 2004

Alway Associates

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