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If you intend to engage contractors for a specific project or ongoing service arrangement, managing contracts successfully takes a lot of effort and consistency. As a business hiring a contractor (making you the ‘principal’), it is important that the price you have agreed to pay the contractor in your contractors agreement remains reasonable. This article will discuss your ability as a principal to withhold payments to contractors.

What Are My Options to Withhold Payments?

This will largely depend on the terms of the agreement. Broadly, there are a few common ways in which you may be able to withhold payments to your contractors. These include:

  • set-off. This is a right to pay a contractor less because they owe you a certain amount;
  • no right to claim payment. This arises if the contractor has not properly rendered the works, goods or services. You may be able to claim that they do not have the right to payment because of defective or incomplete works, goods or services; or
  • counter-claim. You may be able to avoid making payment to the contractor by bringing or foreshadowing a counter or cross-claim against the contractor.

For example, you may have a counter-claim to the contractor’s claim for payment if the contractor has breached the agreement. In these circumstances, you may have the right to claim compensation against the contractor.

Right of Set-Off

Including a right-of-set off under your agreement is the easiest way to withhold payments to your contractors. It allows you to set-off (withhold) any amounts owed to you under your agreement or any other agreement. This is ‘set-off’ against amounts payable to the contractor (the amount the contractor is claiming for its services).

For example, your contractor is claiming a progress claim of $20,000 for installing kitchen cabinetry. However, you have a claim against the contractor for some damage they caused to your fence when they were delivering the kitchen components. You have valued the extent of the damage to the fence at $10,000.

Using the above clause, you could withhold or set-off $10,000 from the $20,000 otherwise payable to the contractor. As a result, you would only have to pay them $10,000, not $20,000.

This is the easiest way of withholding payment. However, it is often the case that a contractor will object to a broad right of set-off in the contract. In particular, the contractor may demand that your right to set-off amounts be limited to those amounts that are payable to you under the agreement and not under any other agreement.

Challenging the Contractor’s Right to Payment

Another way of withholding payment to your contractor is to inspect the relevant works, goods or services for defects or incompleteness. If you can prove defectiveness, incompleteness or a failure to render the service according to the agreement, you may be able to withhold payment on the basis that the contractor has no right to payment.

There may be a provision under the agreement that allows you to:

  • inspect the works, goods or services for defects; and
  • require the contractor to repair any defects before their right to payment arises.

In construction contracts, it is also common to find provisions that allow you to reduce the price payable for defective works.

For example, you may be able to reduce the $20,000 payable to the contractor for the defective cabinetry.

Counter-Claim

If you do not have a right to set-off, you may be able to rely on compensation. You may have a right to claim compensation from the contractor if they breach the contract. However, to claim compensation, you may have to bring formal legal proceedings. This is not a direct way of withholding money, but you can sometimes use the threat of court proceedings as a bargaining tool.

For example, if you owed the contractor $20,000 for the cabinetry, but you were able to estimate a compensation claim for the damage to the fence, you may be able to negotiate a reduction to the $20,000.

Similarly, if the agreement provides for compensation for late work and the contractor is late carrying out the work, you may be able to use this mechanism to withhold payment. Whether you have this right will depend on the contents of the agreement.

Key Takeaways

There may be a whole range of reasons why you might need to withhold payments to a contractor. Always look to your contractors agreement to see what avenues you have to resolve your situation. Depending on your contractors agreement, you may be able to:

  • set-off payment;
  • challenge the contractor’s right to payment because of defective or incomplete works; or
  • claim compensation in a cross-claim or negotiate a reduced price.

If you have any questions about withholding payment to contractors, get in touch with LegalVision’s contract lawyers on 1300 544 755 or fill out the form on this page.

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