We are seeing an increasing number of Main Contractor / Sub-Contractor disputes which relate either in part or entirely to issues of Contra Charges. They form a regular part of disputed interim or final accounts which are referred to adjudication and typically, it is the ‘Contra Charger’ (!) and not the ‘Contra Chargee’ (!) who is on the wrong end of the decision.
The existence of Contra Charges is probably asa result of an error or mistake which is likely to have been an alleged breach of contract or negligence on the part of a Sub-Contractor. No one likes to be told they have erred, and it is rare for people to admit their mistakes; this is human nature. As a result,Contra Charges and the deduction of monies due from a Sub-Contractor’s account are typically emotive issues which frequently leads to ambiguity and dispute between various parties in the supply chain.
On a typical construction project, where contract sexist between the Main Contractor and any number of Sub Contractors, damage may be caused by Sub-Contractor “A” to works carried out by Sub-Contractor “B”. The rectification costs will often be claimed by “B”against the Main Contractor. In turn, the Main Contractor will seek the costs claimed by“B” , with an addition for its own management costs and sometimes delay or disruption related costs against “A” .The interdependence of several parties to a Construction Contract often all “pointing fingers at each other” when damage or errors occur, does nothing for the collaborative spirit and team ethos often essential to effectively delivering construction projects.
However, the Contra Charge process needs to be effectively managed to ensure the MainContractor protects itself commercially and contractually. To this extent it is imperative a system of recording alleged breaches of contract or negligence by various parties is put in place; including the formal notification of alleged breaches and the imposition of Contra Charges through further notifications from theMain Contractor to the supply chain.
Record keeping is an essential element for establishing entitlement for ContraCharges, Abatement and / or SetOff. The “burden of proof” rests with the Contractor and therefore record keeping and detailed particularisation to demonstrate both liability and quantum is necessary.
The relevance and importance of good site records cannot be over-emphasised; the records produced must be accurate, informative and explain what actually did happen on site.The foundation of any successful Contra Charge account is the level of records available to support the Contractor’s case. So often, a lack of good records can severely prejudice the success of any prospective claim accounts.
In the same way that the Contractor will be expected to justify entitlement and the quantum of a change or variation under the Main Contract, the Contractor will similarly be required to evidence its entitlement toContra Charge sums and provide supporting particulars of the sums being deducted from the Sub Contractor’s account. Therefore, the Contractor must be cognisant of the fact that when dealing with Contra Charges, it is the Contractor who must satisfy the requisite “burden of proof” and demonstrate it has achieved the “duty of care” expectation when engaging with the supply chain.
Without the necessary substantiation and an appropriate “duty of care”, theMain Contractor may be left having paid the costs of “B” without meeting the necessary “burden of proof” that they can recover these costs against “A”.
To ensure the Main Contractor adequately protects itself the inevitable recommendation from Pyments is to refer to the Contract… (or Sub-Contract) … (or Sub-Sub-Contract)!! Using the JCT 2016 Design & Build Sub-Contract as example (see extract above) the appropriate conditions of contract when applying the administrative aspect of remedying errors or mistakes within the Sub-Contract Works are set out at Clause 3.11.
With specific reference to the Sub-Contract, it is essential for the Contractor to clearly set out the ‘non-compliant work’. The Contractor must also consult with the Sub-Contractor prior to issuing any direction in respect of the ‘non compliant work’; and consultation must have regard to the Sub-Contract Code of Practice.
The Sub-Contract Code of Practice is not specifically quoted in this article however theJCT 2016 DB Sub-Contract reinforces the “duty of care” principle. The Code of Practice requires a detailed assessment of both the extent and significance of the non-compliance and the reasons for the non-compliance recorded. It also recommends the Parties agree the amount and method of the remedial works and the practicability for both time and costs associated with same (i.e.; rectification or removal).
So, what happens when the Sub-Contractor does not rectify the ‘non-compliant work’? The Contractor has the power to issue any reasonable direction to the Sub-Contractor in regard to the Sub-Contract Works (Clause 3.4), and the Sub-Contractor shall forthwith comply with all directions issued (Clause 3.5) subject to reasonable objection being notified. Non compliance with directions is referenced at Clause 3.6.
...if within 7 days after receipt of a notice from the Contractor requiring compliance with a direction the Sub-Contractor does not comply, the Contractor may employ and pay other persons to execute work of any kind necessary to give effect to that direction. The Sub-Contractor shall be liable for all additional costs incurred by the Contractor in connection with such employment and an appropriate deduction may either be taken into account in the calculation of the Final Sub-Contract Sum or be recoverable by the Contractor from the Sub-Contractor as a debt.
Although the JCT 2016 DB Sub-Contract does not place a mandatory obligation on the Contractor to issue a notification in accordance with Clause 3.6 it is strongly recommended a notification is issued providing information which where possible / practicable includes the following:
• The amount and extent of rectification / remedial works to be given to others;
• The details of those employed to undertake the rectification /remedial works;
• The specific location and timing of the rectification / remedial works;
• The additional costs incurred for which the original Sub-Contractor is liable.
Whilst this information may not be available in the first instance it is recommended that the Contractor informs the Sub-Contractor as and when additional detail becomes available. When assessing disputedContra Charge accounts, transparency of contemporaneous information and a demonstration that the Contractor has acted fairly and reasonably in the circumstances, isa preferred backdrop when such issues are referred to third party dispute resolution.
Upon employing others to rectify / remedy the ‘non-compliant work’ there is a “duty of care” placed upon the Contractor to ensure the costs incurred and seeking to be deducted from the Sub-Contractor are proportional and reasonable. It is not an ‘open cheque book’ for the newly employed Sub-Contractor to undertake the remedial works.
As you may have gathered, the repeated message in this article is the emphasis on theContractor to consider the “burden of proof”and demonstrate sufficient “duty of care” to the supply chain. If deductions are made to interim applications the Sub-Contractor may have the right to adjudicate on these items. In many instances we are finding that when putto the test through the adjudication process, the supporting information in respect of both liability and quantum for the deductions made from the Sub-Contractor’s account was lacking and the adjudicator could not find for the MainContractor, even on the “balance of probability”threshold requirements in adjudication.
For each and every deduction from the Sub Contractor’s account the Main Contractor is reminded “he who asserts must prove” to ensure appropriate recovery when Contra Charge issues arise.
The common mistakes Contractors make are:
1. Failing to ensure that information is available to inform the Sub-Contractor contemporaneously that a proven breach has been notified;
2. Failing to provide reasonable opportunity for the Sub-Contractor to remedy before“others” are employed; and
3. When “others” are employed, failing to maintain a detailed cost log and failing to communicate the costs effectively to theSub-Contractor.If you have any queries or require any assistance on issues of Contra Charge please do not hesitate to get in touch.
Enquire about our services, discuss custom projects, or simply drop us a line with any questions you may have.
.svg)
.svg)
.svg)
.svg)
.svg)
.svg)
.svg)