Obtaining payment for construction work when only part is in dispute

Client refuses to pay outstanding monies until we agree high set-off for damages

Problem:  I am the commercial director of a roof truss manufacture.  Late last year, we were approached by a new client-contractor who requested us to price for the design, manufacture, supply and installation of engineered roof trusses for a nursing care village.  We provided a price and within a few days the client forwarded to us the acceptance form, duly signed.

Our terms and conditions required the client to pay a 40% deposit with the acceptance (which was made), with the balance being due within 7 days of the trusses being installed.  On site, the installation did not take long and although it went smoothly, there was an incident with the mobile crane that we had hired to lift the trusses in place; when the mobile crane was manoeuvring on site, it hit the boundary brick wall and caused some damage.

When we were informed about the damage, we did offer to arrange to carry out the repairs, which the client rejected, stating that it would arrange for the repairs to be carried out itself.  Upon completing the installation of the trusses, we sent an invoice for the remaining 60%.  However, when we chased payment, the client wrote back stating that it was looking at setting-off £8,600 against our invoice.  Although we found the amount of the repair bill to be very high given what the damage was (and there was no substantiation to the amount), there was still in excess of £20,000 of our invoice value that was not in dispute, but when we requested that this money was paid, the client refused, stating that we must firstly agree to the set-off and raise a credit note before any monies would be paid.  What should we do?

Recommended options; litigation, adjudication or issuing a statutory demand pursuant

Response: It does appear like your client is trying to turn the incident into a profit-making opportunity.

From your outline, you have 3 options.  The first option is to litigate, meaning that you must comply with the Civil Procedures Rules’ Pre-Action Protocol, and in the first instance issue a Letter of Claim.  This process should then flush out the evidence that your client relies upon in support of its set-off, and set-out the legal basis for refusing to make payment of the portion of the monies that is not in dispute (withholding monies on the basis that there is no agreement to the set-off nor a credit note are not grounds not to make payment).

Your second option is to refer the matter to adjudication; by virtue of the Housing Grants, Construction and Regeneration Act 1996 (as amended), part 1 (adjudication) of the Scheme for Construction Contracts will be implied into your contract.  The problem with this route is that even if you are successful, you will still be responsible for your own costs, which will be a significant part of the monies outstanding.

Your third option is to issue a statutory demand pursuant to section 123(1)(A) of the Insolvency Act 1986, which is one stage before you issue a winding-up petition to the court.  Where there is a dispute over monies due, I would not usually recommend issuing a statutory demand, simply because the other side can seek an injunction to stop the presentation of a winding-up petition because the monies stated as owed is disputed – and it only requires prima facie evidence to show that there is a dispute and an injunction will be issued by the court, with costs being awarded on an indemnity basis.  However, because there is a significant amount of the monies outstanding that is not in dispute, the court has a discretion to allow a winding-up petition to be issued on the amount that is not in dispute – but I stress, this is a discretion, not a right, so there is a risk.

Before you proceed, I suggest that you consult a lawyer.

 

© Michael Gerard 2019

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

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