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There is commonly confusion around builders’ and contractors’ right to payment when disputes arise or contracts are terminated before completion of works. Where does the confusion lie and what is the contractor’s right to payment for incomplete works?
Construction contracts usually provide for progress payments, either expressly, or because it is an implied term under (in Western Australia) the Construction Contracts Act 2004.
However, at law, progress payments are interim payments on account only (most of the standard contracts reflect this). 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 at law 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. The contractor’s right to interim payments are just that – interim contractual rights and not final rights.
The implication of this is that when the contract is terminated before the works are substantially completed, the principal does not owe the contract price or any part of it to the contractor unless the contract expressly provides otherwise. (There are different provisions dealing with this in various of the standard contracts). In some cases, the principal may even have a case to recover progress payments already made before the contract was terminated.
So if the contract does not allow the contractor to recover part of the contract price, where does this leave the contractor?
The contractor can choose between two alternative bases for recovering payment where the contract is terminated before the works are completed (provided the contractor is not at fault). They are:
The “fair value” option may be of benefit to contractors whose contracts contain a bad bargain in that they specify a scope of work 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 work. 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 a cost that is disproportionate to the outcome sought.
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:
There are four main ways for a contractor or a principal to claim payment in relation to construction works which we will explore further in a separate article:
Murray Thornhill is the Managing Director at HHG Legal Group. If you would like further details in relation to this information, please contact us on 1800 609 945.
*This information serves as a general guide and does not constitute legal advice. It is based on our research and experience at the time of publication. Please consult our knowledgeable legal team for any specific inquiries or advice relevant to your circumstances, as the content may not have been updated subsequently.
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