Contra-charges & defending claims

Contra-charges should not be imposed for tasks that remain incomplete. In such situations, the contractor typically just withholds payment for the incomplete work. Nevertheless, the contractor sometimes not only withholds payment to the sub-contractor for work left undone but also applies a contra-charge for the expenses incurred in hiring another party to complete the work.

Effectively, this ‘double dipping’ allows the contractor to get the work done for free. Such practices are not likely to be permitted by the terms of the contract. It is imperative for sub-contractors to be aware of their rights and to challenge any such unfair practices.

Contra-charges include:

• Claims for liquidated and ascertained damages (LADs) or liquidated damages (LDs) due to delay
• Claims for unliquidated damages
• Costs arising from defective work
• Losses passed on from other subcontractors or consultants
• Other claims where the employer or contractor alleges breach of contract by the other party

While it is possible for contra-charges to be applied at any stage of a project, they usually surface at the end, once the work is complete.

The reasons for this timing can vary. Sometimes, it is because the contractor uncovers legitimate issues or inconsistencies while reviewing the final account, which then warrant these deductions.

Frequently the imposition of contra-charges is tied to the contractor’s financial circumstances, rather than genuine issues caused by the sub-contractor. The contractor may have exceeded the project budget, and with the sub-contractor off-site and unable to verify whether the claims made are genuine, the contractor might resort to contra-charges to mitigate their overruns, which they are not entitled to do.

For practical purposes, it is not possible to stop a contractor from imposing construction contra-charges in the first instance, whether or not the charges are genuine. However, if the contra-charges are disputed, then the sub-contractor usually has the option to adjudicate against the contractor to establish the proper value of the deduction, which may well be £nil.

Fortunately for the sub-contractor, they do not have to prove that the contra-charges are false. Rather, it is for the contractor to prove that the contra-charges are genuine. To do this, the contractor must show:

• That there was some breach of the contract by the sub-contractor.
• That the contractor suffered a loss.
• That the loss they suffered was caused by the breach.
• That they have correctly quantified their loss.

This is not easy to do. We have seen contra-charge claims allegedly worth millions of pounds completely struck out because the contractor could not prove its entitlement to make those claims.

It is important to remember that if the charges seem excessive, you certainly have the right to challenge them.

In terms of records, your best tools are:

• Detailed records (e.g. site logs, correspondence, progress photos)
• Evidence that challenges the facts or causation claimed
• Proof that you fulfilled your obligations or that losses were not due to your actions
• Effective contract administration and real-time documentation can be critical

When faced with substantial and potentially unjust contra-charges, it is advisable to seek specialist advice promptly. Early intervention can be crucial in effectively defending against such claims.

• First, try to negotiate. Open communication channels with the contractor to discuss the charges. Understand their perspective but also make your case, armed with any supporting documentation you have.
• Whilst they have the burden of proving their claims, any evidence that you have that contradicts them will be very valuable. You should collate all of this.
• Apply the same level of scrutiny as they would to you if they were assessing your variation or loss and expense claims.
• If negotiations do not yield a satisfactory outcome, you can consider adjudication or arbitration.

The burden of proof is on the party making the assertion. So, if the party you are carrying out work for is claiming a contra-charge, they must prove:

• That you breached an obligation, and
• That their loss resulted from your breach.

In civil proceedings (including adjudication), the standard of proof is the balance of probabilities – meaning the claiming party must show their version of events is more likely than your version of events.

Some construction contracts include cross-contract set-off clauses, which allow money owed on one project to be deducted from payments due on another. These clauses can be problematic for contractors working on multiple jobs with the same client.

Some contracts may include clauses stating that the client’s estimate of damages is binding, making it more difficult to challenge deductions. These types of provisions can tilt the playing field and should be carefully reviewed before agreeing the contract.

If the other party refuses you the opportunity to rectify defects in your work, you might be able to argue that they have failed to mitigate their losses and that as a result the amount they are entitled to deduct should be reduced.

It depends on the contract. Construction contracts often require specific notices to be issued before contra-charges can be deducted. For example, under JCT contracts, certain notices must be given before liquidated damages can be deducted, and pay-less notices may be required.

A pay less notice may include a contra-charge, stating that the paying party believes you owe them money. Sometimes this is called a negative pay less notice. This can result in a reduction or complete withholding of the payment you expected. It is important to review the basis of the claim carefully and respond with your own evidence if necessary. Depending on the wording of your contract, you may need to issue your own pay less notice if you do not agree with their valuation.