Whether it’s a project or a service agreement, successful contract management takes a lot of effort and consistency on the part of the principal, even if the contract doesn’t expressly require supervision or review by you. Like most relationships, what you will get out of it is to a large degree dependant on what you are prepared to put in.
So, if you have dropped the ball on your contract management, and you now need to get tough with your contractor, what are your legal options exactly? Here are a few things to consider when looking at contractual remedies against a non-performing or defaulting contractor:
- withholding payment;
- setting off payments (against amounts owed to you or claimed by you); and, of course, when all else fails, there is
- termination (which we are not going to cover in this article)
Claiming damages is the standard contractual remedy for breach and may require commencement of formal legal proceedings. Many people think that there must be an easier way of getting redress, particularly if they are the payer and they have not yet paid all the money due under the contract.
Principals often assume that they can withhold all or part of agreed periodic payments under a contract willy nilly (or at least ex parte) in the event that there has been a failure of performance of some kind on the part of the contractor during the relevant period. However, under most contracts with a fixed payment structure, it is likely that you are legally required to make the payments even if the contractor has not performed all of its obligations under the contract.
Examples of this are where construction or engineering contracts require staged or monthly progress payments to be made, and service contracts where it has been agreed that the contractor will receive a set monthly fee.
This is particularly likely to be the case where the contract obliges you to monitor the contractor’s performance under the contract, you may have failed to do so adequately, and this may have contributed to the contractor’s failure to perform.
Note also that withholding can be dangerous, as unlawful withholding will deliver into the contractor’s hands the right to terminate the contract on the grounds of your failure to meet your payment obligations, and allow the non-performing contractor to claim damages from you for that breach.
When there are express set off clauses in contracts, they are usually the kind that allow the principal to deduct from payment owing to the contractor amounts owing to the principal under the contract (for example, sometimes there are service agreement payments flowing from you to the contractor, and intellectual property royalties flowing back the other way to you under the one relationship).
Some “set off” clauses go further, and allow the principal to also deduct amounts which it claims are due from the contractor (for example, by way of damages for non-performance of the contract by the contractor), in essence providing you with a great self help remedy avoiding the need for you to go to court. These are great clauses in theory, but the only contractors that would agree to them are the type who don’t (or can’t) read contracts, and as such they are very rarely seen in practice!
It is actually more common to see clauses (such as in most non-residential real property leases) that require the tenant to pay all amounts due under the lease “without deduction or set off whatsoever” – in other words, attempting to expressly exclude any right of set off at all!
In general, if there is a genuinely undisputed debt owing from the contractor to you, and there is no express exclusion clause such as the one above, you can set the debt off without any express set off clause in the contract, relying on the law of equity. The key here is that the claim you have against the contractor must be so clear and unequivocal and so closely connected to the claim for payment that it would be unjust for the contractor to succeed in its claim for payment without conceding your claim.
In any other situation, (and again, particularly if the contract obliges you to monitor or supervise performance and you may have failed to do so adequately), the position is similar to that described above under “withholding”, and if you attempt it without the benefit of a magic set off clause such as described above, you will expose yourself to termination of the contract by the contractor, for breach of your contractual obligation to pay.
See how it works? If the contractor turns around and terminates for your breach, you will have handed them a loaded gun, and you definitely don’t want that! Please seek professional advice early in the event your contract management hits the rocks and you need to go legal.
The experts here are, as ever, ready, willing and able to help you through the tough times. Get in touch with LegalVision for your free consultation with our Client Care team and to receive a fixed-fee quote for your legal needs.