We all know how expensive building works can become. In some industries, it is not unheard of for projects to be priced in excess of $10bn. Obviously, the contractor whose job it is to get the labour and materials on site and coordinate the complex workflows would not survive too long financially if they did not get paid during the course of the works. This is why construction contracts invariably provide for progress payments, either because the contract expressly provides for it, or because it is an implied term under the Construction Contracts Act.
It is important to remember that progress payments are interim payments on account only. Where the contract is a lump sum or fixed price contract that sets out a scope of works and a price to be paid to the contractor for completing it, the principal does not become indebted to the contractor for any part of the contract price until the works are substantially completed. Substantial completion means completion of the contractor's entire obligation except for minor defects and omissions.
This becomes important when the contract is terminated before the works are substantially completed. In that event, the principal usually does not owe the contract price or any part of it to the contractor. In some cases, the principal may even have a case to recover progress payments already made before the contract was terminated.
So where does this leave the contractor? Surely it can get something in return for all the money it has spent getting labour and materials on site and all the time it has spent coordinating and supervising works? In fact, the contractor can choose between two alternative bases for recovering payment where the contract is terminated before the works are completed. They are:
- if the termination was the principal's fault in a legal sense (we will examine legal concepts of fault, which can be complex, separately), the contractor can sue for the lost opportunity to earn a profit on completing the works under the contract; or
- the contractor can sue for payment of an amount representing the fair value of works actually done by the contractor and freely accepted by the principal. Free acceptance will usually be readily inferred when the principal requested, or contracted for, the very works that are claimed for. The contractor may claim quantum meruit regardless of who was at fault. However, if the contractor was at fault, it may have its fair value claim swallowed up by the principal's counterclaims for lost opportunities to profit from the occupation or use of the completed structure, or having to pay other contractors more than the original contract price to complete the works that the contractor did not do.
The "fair value" option may be of benefit to contractors whose contracts contain a bad bargain in that they specify a scope of works that costs more to carry out than the contract price or leave the contractor with an insufficient profit margin on completion. However, experience shows that these are the most complex and time-consuming claims to run, which often ends up benefitting no one. The reason is that, once the contract is set aside, it no longer sets the value of any part of the works. This means that the parties each have to pick the works apart, often item-by-item, and find another way to evaluate them, usually with the aid of expert evidence from quantity surveyors and the like. That may be alright when the works are relatively minor but for more complex projects this kind of painstaking analysis can come at an uncommercial cost, in terms of both legal fees and the value of wasted senior executive and professional time.
Contractors may have problems establishing a right to be paid for work done even when the contract is still on foot, for a variety of reasons, including:
- departure from the contractual procedure for variation, in which case the contractor may have to establish a separate, implied promise to pay either a fixed sum or fair value, waiver of the principal's right to insist on strict compliance with contractual procedures or the principal's free acceptance of works with knowledge that the contractor expected to be paid for it; and
- disputes about whether the works constitute a variation of the contract or remediation of defective works, or are simply part of the agreed scope.
There are three ways for a contractor or a principal to claim payment in relation to construction works which we will explore further in a separate article:
- adjudication (which is quick, cheap, final and binding but not determinative of the underlying dispute);
- statutory demand (which again, is quick, cheap, but easily defeated, puts legal costs at greater risk and gives the claimant little control over the process); and
debt recovery action (which involves proceedings before an arbitrator or judge and is slow and expensive but final and binding and gives parties the most control over the process, including settlement).
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.