An employer's sword?
This article is written based on the construction industry of the United Kingdom. The use of contra charges, or counterclaims, will generally provoke a reaction from all parties involved, often negative. A contra charge, or counterclaim, is usually raised by the party paying for the works (the Payer) because of an error, omission, or breach of contract by the party carrying out the works (the Payee).
Author: Mark Blackmore, Associate Director, Coventry - Driver Trett UK
A simple example could be that a contractor has failed to keep the site clean and tidy, or a defect has been identified that has not been rectified. If that failure continues, even after notice by the employer, the employer may undertake these works themselves, or instruct a third party to do so, contra charging the cost to the contractor.
However, there may not always be a direct contractual link between the parties involved where contra charges are advanced. For example, a sub-contractor may have caused damage, based on which the employer withholds money against the contractor. There is generally no contractual link between the employer and the sub-contractor, and by the time the sub-contractor receives the contra charge against them, it is likely that there will be the addition of the Contractor’s costs on top of the employer’s deductions.
Due to the close-knit nature of construction, the issue of contra charges generally causes friction between the parties, resulting in what some may consider trivial issues, to become personal. No one likes to have well-earned money withheld from them.
Set-off, counterclaims and abatement
There are several different types of contra charge commonly used in the construction industry: set-off, counterclaims and abatement. A comparison is sometimes formed between set-off and counterclaims, although the two are different concepts.
Set-off is only used defensively, reducing, or completely removing a claim. It provides protection, in essence acting like a shield.
A counterclaim is an offensive action, comparable to a sword and can be a claim that exists independently. Likewise, there is often confusion between abatement and set-off.
Abatement is generally used to reduce the contract price in instances where full payment may not be appropriate, such as when a contractor does not meet a performance specification, but where the employer is content to take possession of the building; the employer is accepting a reduced specification product and does not pay the full value. An abatement only applies where there is a reduction in the work carried out and does not apply as a counterclaim for a delay in executing the works; this would be a set-off.
Potentially, set-off has wider application than abatement and can (subject to the contractual provisions in question) be used to reduce any debts owed, or even nullify them. It is not used where the value claimed by the Payer is greater than that claimed by the Payee.
...when a claim is made for the price of goods sold and delivered, or work and labour done, the defendant is entitled to set-off or set up against the amount claimed...
A counterclaim can be for a greater sum and is commonly used for such things as recovering delay costs for the rectification of defective works. However, there must be a breach of contract and damages incurred as a consequence.
The right to set-off within the UK exists under common law.
In Gilbert Ash v Modern Engineering1 the House of Lords held that ‘It has been a well-sealed principle of law since the middle of the last (19th) century that when a claim is made for the price of goods sold and delivered, or work and labour done, the defendant is entitled to set-off or set up against the amount claimed, any damages which he has suffered as a result of the plaintiff’s breach of the contract, under which the goods were sold and delivered, or the work and labour were done.’
Section 111 of the Housing Grants, Construction and Regeneration Act2 provides for the use of a pay less notice as the common approach taken for set-off in the construction industry.
There are four categories of set-off used commonly within the construction industry:
- Contractual set-off
- Legal set-off
- Equitable set-off
- Insolvency set-off
Contractual set-off is usually an agreed right within a contract, where the parties have an ongoing relationship. The right to set-off can also be excluded for similar reasons. Legal set-off is a procedural remedy only applying in litigation / arbitration, where mutual debts exist and are due and payable at the commencement of proceedings. The debts must be substantiated, and therefore exclude unliquidated damages. This can also be referred to as the defence and counterclaim.
Equitable set-off can be used not only as a defence for a claim but also as grounds for withholding payment. A typical example could be a claim for unliquidated damages for negligence being set off against a claim for payments due under a contract. Insolvency set-off derives from the Insolvency Act 1986 and Insolvency (England and Wales) Rules 1986. This assists the creditor who may be required to pay debts owed to an insolvent party to avoid paying such debts.
Burden of proof
The burden of proof remains with the party withholding the money under a contra charge or counterclaim, in the same way that a party making a claim for variations would have to fully substantiate such a claim.
It is not uncommon, however, under the common forms of contract used within the UK to see a payment notice / pay less notice with a single line item for said contra charge, stating that further information is to be provided.
As with all claims, whoever asserts must prove. This may be unfamiliar ground for the paying party, who would usually be requesting more information from their contractor or subcontractor, and not often in a position where every penny claimed must be substantiated. If the employer wants to use that sword against the contractor, there is no short cut; the substantiation of all costs must be provided.
In conclusion, it is essential that the works carried out comply with the contract requirements and proper records are maintained. It is a far better position to be protected by the shield of the contract and records if a claim / counterclaim needs to be defended.
This article was written for issue 25 of the Driver Trett Digest. To view the publication, please visit: www.driver-group.com/digest-issue-25
1 Gilbert Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd (1976) 1 BLR 73
2 Housing, Grants Construction and Regeneration Act (HGCRA) 1996 as amended by Part 8 of the Local Democracy, Economic Development and Construction Act (LDEDCA) 2009, Section 109 ‘Entitlement to Payment’