Contractors are coming under pressure to agree to ‘discounts’ the client isn’t entitled to, says Peter English. But there’s no need to agree to them, as the following example shows
In the recent landmark case of Southern Glass Services (SGS) vs Barratt Homes Southampton, an adjudicator ruled that Barratt had “improperly withheld” more than £19,330 in “discounts” that it had deducted and to which it was not entitled.
In September 2005 and April 2006, Barratt sent a letter giving notice of its intention to deduct 3% from all payments made to SGS with immediate effect. This “discount” was in addition to any that had been agreed under the contract. Barratt’s intention was to enable SGS to “remain competitive in the marketplace” to the benefit of “us all”.
SGS decided not to accept this imposition and engaged PJ English Associates to fight Barratt after winning contracts to supply and install curtain walling and glazing on two phases of the Oceana Boulevard site in Southampton.
After several months of attempting to persuade Barratt to pay back the wrongly deducted discount, SGS commenced adjudication on 12 January 2008 and the adjudicator’s decision was published on 18 February, some five weeks later.
Amazingly, Barratt wrote again to SGS on 28 January 2008, expressing its intention to introduce an immediate discount of 3% which would be applied retrospectively on invoices not yet submitted. This letter went on to say: “We will assume your agreement to this deduction unless we hear from you to the contrary.”
Both our own research and that undertaken by leading construction bodies leads us to believe that this adjudication is the first of its kind in the industry. It is seen as a landmark decision that could entitle thousands of subcontractors to claw back “discounts” and other illegal deductions.
This adjudication is the first of its kind in the industry. It is seen as a landmark decision that could entitle thousands of subcontractors to claw back ‘discounts’ and other illegal deductions
Clearly, this is an issue that affects everybody – at whatever level you trade.
For example, say you are a small contractor carrying out 50 projects a year. The “hits” you take are small, maybe each £1,000 and you may think they are not worth chasing. Yet if you add up their value, that’s £50,000 directly off your bottom line. At a margin of 15% that’s more than £330,000-worth of business you’ve got to do just to stand still. The larger the contractor, the larger the potential risk.
All of this can be avoided by just taking a few simple steps:
- Always build a relationship with a recognised dispute resolution practice that can deal with issues as they arise. On many occasions their experience is such that they will see potential problems well in advance and will be able to advise on the best procedures to avoid them escalating into costly disputes
- Always ensure that you have an agreement that can at least be evidenced in writing before commencing any performance on the contract
- Understand your rights under the Construction Act
- If additional discounts have been taken, then write to the contractor to protest and make it clear you are not prepared to agree to a unilateral imposition of any discount over and above that already agreed and request repayment of the additional discount taken within seven days. The National Specialist Contractors Council has published an excellent letter for this purpose, see www.nscc.org.uk
- Check to see if the ultimate client is in the public sector. If so, send a copy of your letter to: NSCC, Carthusian Street, London EC1M 6EZ. This will assist NSCC in compiling evidence against contractors that fail to pay their supply chains on time
- If payment is still not forthcoming after the time given in your letter, then assert your rights under section 112 of the Construction Act and issue a seven-day notice that you will suspend the performance of your work until payment is made
- Resort to adjudication on the amount of additional discount taken now, or continue to send letters of protest each month and go to adjudication on the whole amount of discount illegally withheld after completion of your work.
Remember, taking a few simple steps now could add thousands of pounds to your bottom line profit over the next 12 months.
Peter English is chief executive of Leicester-based dispute resolution practice PJ English Associates