Domestic Construction - Payment Disputes
Domestic Construction Dispute (Payment)
We have acted for both property owners and contractors at different times in this situation.
There are some recurring themes across the cases we have been involved in:
- Contracts specify a price or “Contract Sum” which is exceeded when extra time or work is required, and the paying party withholds the excess
- Periodic payments are demanded where no visible – or very little – work done since last payment
- Formal contractual procedures are by-passed – for example by spouse giving verbal instructions – and increased cost only becomes apparent when already incurred
- Surveyor becomes involved and values completed works at significantly less (or more) than the contractor (or the owner) believes that he is entitled to
- Contractor has other work to do and either claims for lost profit for being unable to take it on, or goes away and abandons the work
- Property owners take a broad-brush approach to contractor’s entitlement and withhold arbitrary sums of money over quality issues that are of special importance to them
- Contractors inflate claims for periodic payments because they are trying to fund other jobs and their own private commitments during the particular time period
Contract Sum
Payment disputes on construction contracts generally, and domestic ones in particular, arise from the expectation that a certain amount of work is going to be done in a certain amount of time for a certain amount of money.
Industry standard forms have elaborate mechanisms for adjusting the amount of work, time and money initially agreed, as it is almost a given on a job of any size that such changes will be required.
Nevertheless, both the property owner and the contractor may have made arrangements on the assumption that the original scope, duration and payment would not be exceeded (or reduced) to any significant extent.
This leads to disputes which are basically problems for one or both parties, rather than legal or technical controversies.
We have found that a direct negotiation, or one facilitated by a mediator, has been the most productive way forward here. We can assist in the negotiation, provide the mediator, or be an advocate in a mediation.
We prepared a paper – which was delivered as a talk and turned into an article for the Construction Law Journal – entitled “When will you Pay me?”, which covered some of the cases we have dealt with in more detail.
Periodic Payments
Periodic payments are a statutory right on larger projects lasting several months. Even on smaller jobs, the parties will often split the payments up into stages, with a proportion paid up-front, and other amounts at regular intervals until the end of the agreed contractual period. There may be a professional contract administrator involved to certify the amount of each payment, but particularly on smaller jobs, fixed amounts may be stipulated for payment after set periods of time.
Evidently, the up-front payment will normally be on account of work to be undertaken and materials to be purchased. If, however, the work and materials already paid for have not materialised by the time set for the next payment, then the property owner will be feeling reluctant to make a further on account payment. If a growing discrepancy between work and materials paid for and actually delivered continues then the property owner may well refuse outright.
It is very important in these situations to notify the contractor formally at the right time of any intention to pay less than the sum the contractor applies for. Failure to do so can result in the contractor becoming entitled to the full sum, irrespective of potentially valid objections. Clear reasons need to be given in the notice as to why particular sums of money are being withheld.
We have referred such disputes to adjudication and responded to them on behalf of the contractor and the property owner.
Adjudication must usually be provided for expressly in domestic contracts, as it is not always an implied right under statute as it is in commercial construction contracts. We have contested the jurisdiction of adjudicators on these grounds in court and bought time for negotiated solutions to be found. Even when a third-party decision maker is appointed to adjudicate upon a dispute, we remain alert to the possibility of settlement and look for solutions that can be agreed rather than imposed.
Unauthorised Instructions
For any substantial refurbishment project, there will be a scope of works prepared by a professional or by one or other of the parties. If a standard set of contractual terms and conditions is used as well, there will be an agreed procedure by which this scope of works can be changed or varied during the course of the project. If there is an independent contract administrator, then they will usually issue the instruction to make any change to the contractor – otherwise, the property owner may do so.
However, things can go wrong when an unauthorised actor decides to change the materials or the fittings from those in the specification. The lack of authorisation itself may incur a greater cost than the difference in price of materials chosen: other fittings may also have to be changed to accommodate the new fittings, and the contractor may charge for the extra time and effort that he has to put in as a result.
We aim to negotiate a compromise in such situations. Although there may be a technical breach of contract by the contractor, there is still a benefit to the property owner from the work done and the materials supplied which cannot simply be dismissed. There may be cash flow issues to consider for both the property owner and the contractor, but both will want to see the job finished as soon as possible and avoid further expense from litigation.
Surveyor’s Valuation
The surveyor in this situation may be the contract administrator, or he may have been called in midway through the project by a concerned property owner who feels that he is not getting value for the money he is paying from the contractor.
If the surveyor is administering the contract and certifying the payment that is due to the contractor, then his valuation can be challenged but it will not be easy. Matters of professional judgment on the value of partially completed works may best be made by the professional who has administered the contract throughout. Easily demonstrable miscalculations on quantities would be the exception, but one would expect the certifier to correct such errors himself when they were pointed out.
If on the other hand the surveyor is appointed midway through the project, or towards its end, to review payments made and proposed to be made, then his valuation – even if objectively accurate – may not reflect the parties’ entitlement under the terms of their contract.
We aim to analyse the contract and anticipate what a judge or an adjudicator would decide if the matter were referred to them. We would then seek to negotiate on this basis. If the position taken by the other party is well outside these parameters, then we will arrange to have the matter referred to court or adjudication for a binding decision.
Contractor’s Other Work Commitments
Large contractors will typically have multiple commitments as a matter of routine, but the smaller contractors do sometimes focus their energies on a single project – for a time at least.
Nevertheless, the next opportunity will usually arrive during an ongoing project, and the pressure will be on to reallocate resources so as to secure the work.
This can lead to drift on the existing project and complaints from the property owner if the same periodic payments are demanded for an ever-diminishing quantity of work.
On a project contracted under an industry standard form, there will usually be a provision to notify the contractor that he is not proceeding regularly and diligently with the works, and to terminate the contract if the contractor does not improve his work rate. Further payments can then be withheld whilst others complete the works, and the contract administrator may ultimately certify an amount owed by the contractor to the property owner. This amount can then be pursued in court or in adjudication if need be.
Domestic projects however often have neither an industry standard form nor a professional contract administrator. The property owner will be threatened by the contractor with claims for lost profits if he replaces him, which will be an expensive business in any event. Arrangements for living elsewhere may be coming to an end, with the prospect of further expense in negotiating a new lease.
We can help by analysing the least bad strategy for completing the works and getting the property owner back into their home. The property owner or contractor may be running out of money, so formal proceedings to determine who is in the right legally may be fruitless. Nevertheless, the prospect of insolvency can focus minds on finding a workable solution.
Arbitrary Withholding of Money
The property owner may be seeing defects and delay building up on a project, and without carrying out a detailed valuation, decide upon a round-figure sum to withhold from the contractor to compensate for all of this.
Under industry standard form contracts, a retention of 5% of each payment can routinely be withheld against the possibility of defects emerging later. A pre-agreed figure for damages for defined periods of delay beyond the contractual completion date may also be recorded. A domestic property owner with a simpler contract may not have agreed such terms with his contractor and may try to impose them unilaterally should the contract not proceed to plan.
The instinctive response of most contractors in this situation is either to go slow or stop work altogether. Cashflow may not permit them to do otherwise. An impasse or stand-off is thus quickly reached.
Many contractors may then refer the dispute to adjudication. If this is not provided for expressly in the contract, the right may be implied by statute, provided that the property owner does not intend to occupy the property as his dwelling. We have seen property owners caught out by this, when they have had works done to a property which they formerly occupied with a view to letting it out to others.
The adjudication process is rapid – just 28 days – and favours the party who refers the dispute to adjudication. Any responding party will benefit from experienced advice and representation, especially if they are the lay property owner who has never been involved in an adjudication before. Together with the adjudication provisions, statute may also imply into the contract a detailed set of notice requirements governing payments, which both sides may not have followed.
We can analyse the contract and the payment paperwork passed between the parties during the project to establish the applicable express and implied terms and the extent to which they have been complied with by both sides. We can then try to reach a negotiated way forward. If one side wants to proceed to adjudication, we can provide representation and advocacy during the process.
Contractor’s Other Financial Commitments
The contractor may use payments he receives on a job to settle liabilities on other jobs, or to pay taxes or settle personal expenses.
This is the contractor’s equivalent of a Ponzi investment scheme. The property owner may depend on the contractor’s next customer to pay for his materials. When the money stops flowing in, or if the contractor is pursued successfully by an earlier customer for damages, then the property owner may have spent money on works and materials that he is never going to see.
Like investment scams, they can be hard to see coming. If, however, the contractor is already in difficulties, this should show up with a proper credit search. The main thing is to know whether the contractor has traded under different names.
We can help to investigate and assess this risk, at the start of the project, or at whatever stage it becomes apparent that there is a problem.
Our approach
Overall, our approach is solution-focused. We realise that dealing with any legal dispute is only a part of getting a construction job done. We can and do work with everyone involved to achieve aims.
