How to balance chasing payments with paying your subcontractors
Payment issuesIn the current economic climate payment concerns for companies operating in the Middle East’s construction industry have included under certification, non-certification, late payment, disputed “pay when paid” clauses and a total absence of payment. As regards the issues of late and non-payment which are prevalent, the following matters should be considered.
As always, start by checking the contract, and then consider your rights under the governing law of the contract. How commercially viable are the contractual and legal options available to you to pursue payment? Before proceeding with any course of action you should always decide what commercial end result you require bearing in mind the client relationship going forward. Do you need to retain an amicable relationship with the client or is immediate cash flow your priority?
Contractual considerationsWhat payment provisions exist in your contract? Can a late payment penalty be levied against the Employer, and if so, are you required to put him on notice to apply that penalty? Are you entitled to claim interest on late payment of certified invoices under the contract? Do you need to submit a timely notice for this?
Check for suspension provisions. Non-payment of certified invoices may entitle you to suspend or reduce the rate of work pending payment. If you suspend, who is responsible for the de-mobilisation and re-mobilisation costs? Ensure you retain sufficient documentation so that you can submit any claims for additional costs incurred as a result of any suspension/slow down, as well as any relevant EOT.
The FIDIC 1987 Red Book is widely used in the region and the 1999 edition is beginning to become more common. A notable difference between these two standard forms in relation to payment is that the 1999 edition permits a Contractor to suspend work for non-certification, or, failure of the Employer to submit details of financial arrangements following a request from the Contractor. Both of these provisions have taken on increased relevance at the present time.
In the event of a prolonged period of non-payment you may decide to terminate the works. Again, check the provisions of the contract for the circumstances in which termination is permitted. This should never be entertained lightly and should always be seen as a last resort given that you are likely to be ending the working relationship with your client. On the other hand, if your client is refusing to pay you for valid work undertaken you may be reluctant to work for them again. However, be aware that the threat of, or actual termination may only carry weight with your client if it wishes to continue and complete the project. In the current climate this may not be the case, therefore it can be no guarantee of payment. If termination is elected, make sure that it is effected properly and in accordance with the strict requirements of the contract. The potential liabilities for incorrect termination are often very significant
In the event that you are providing the design for the works, a less drastic option would be to withhold the design documents until payment is received in full. If you are confident that the client is keen to progress with the project this could be useful leverage. Remember to check the provisions of the contract first, as ownership of copyright in these circumstances may well have been addressed.
Local lawThe local law will usually contain numerous provisions regarding suspension or termination in certain circumstances. So, if your contract doesn’t address these issues you are not necessarily prevented from taking such action. A claim for due and outstanding payment may also be supplemented to include claims for compensation, financing charges and loss of profit where such can be demonstrated to have been incurred as a result of the late or non-payment. This will need to be formulated in light of the provisions of the relevant local laws which may also contain provisions for payment of interest on a debt that has fallen due.
It is also worth noting that provisions of certain local laws may entitle a party to obtain a court order for payment against a debtor in certain circumstances. You may be able to obtain such an order if the outstanding sums have been certified. Legal advice should be sought to establish if this is the case.
PracticalitiesRegardless of the above, you should always carefully consider why your client is delaying or totally refusing to pay. If a client has insufficient funds to meet its financial obligations, then pursuing it through arbitration or the local Courts may be a further waste of your time and money. This is always a difficult scenario but you must ensure that you are not “throwing good money after bad”.
Try arranging a meeting to negotiate some form of payment plan if at all possible. You might consider accepting a series of post dated cheques if this will unlock payment (under certain local laws it can be a criminal offence if a cheque is dishonoured). Keep a written record of all discussions and copies of pertinent correspondence to demonstrate that a further agreement was reached. It is important to continue to reserve your contractual and legal rights to pursue all outstanding sums so that in the event of default further action can still be taken. Often overlooked is the value a local sponsor might add to such negotiations. Consider asking him to assist and to perhaps act as an intermediary with your client’s sponsor.
Finally, don’t forget to address your own obligations. Continue to liaise with your sub-contractors and suppliers to explain the reasons for any of your own difficulties with making payments to try and find a workable solution.
Jane Bertenshaw is a solicitor specialising in construction law at HBJ-Gateley Wareing