Whether you are engaging independent contractors for a specific project or an ongoing service arrangement, managing contractors successfully can require much effort. As a company hiring an independent contractor, this would make you the ‘principal’. However, there are often times when the contractor you hired may not fully complete the project or not complete it to the standard you require. This article will discuss your ability as a principal to withhold payments to contractors.
Withholding Payments to a Contractor
You may want to withhold payments to a contractor for different reasons. Commonly, if the work still needs to be completed correctly, you do not have to pay them for the work they have not completed. However, withholding contract payments will likely result in a dispute, as the contractor may need help understanding why you are withholding the payment.
What Are My Options For Withholding Payments?
These are a few ways to withhold payments to your contractors. These include:
- set-off, which is where there is a right to pay a contractor less because they owe you a certain amount;
- no right to claim payment, where you may be able to claim that the contractor does not have the right to payment because of defective or incomplete work, goods or services; or
- a counter-claim, where you may be able to avoid making payment to the contractor by bringing or foreshadowing a counter or cross-claim against the contractor.
1. Right of Set-Off
Including a right-of-set off under your agreement is the easiest way to withhold payments to your contractors. It allows you to withhold any amounts you owe under your agreement. This is a ‘set-off’ against amounts payable to the contractor (or the amount the contractor claims for its services).
This is the easiest way of withholding payment. However, it is often the case that a contractor will object to a broad right of set-off in the contract. In particular, the contractor may demand that your right to set off amounts be limited to those payable to you under the agreement and not under any other agreement.
2. Challenging the Contractor’s Right to Payment
Another way of withholding payment to your contractor is to inspect the relevant work for any issues, such as defects or incompleteness. If you can prove that their work was defective, incomplete or failed to render the service according to the agreement, you may be able to withhold payment because the contractor has no right to the payment.
There may be a provision under the agreement that allows you to:
- inspect the work, goods or services for defects; and
- require the contractor to repair any defects before their right to payment arises.
3. Counter-Claim
If you do not have a right to set off, you may be able to rely on compensation. For example, you may have a right to claim compensation from the contractor if they breach the contract. However, you may have to bring formal legal proceedings to claim compensation. This is not a direct way of withholding money, but you can sometimes use the threat of court proceedings as a bargaining tool.
Similarly, if the agreement provides for compensation for late work and the contractor is late carrying out the work, you may be able to use this mechanism to withhold payment. But, again, whether you have this right will depend on the agreement’s contents.
Continue reading this article below the formDo I Have To Pay a Contractor Upon Termination of the Agreement?
If the agreement between you and the contractor is terminated or ends before the work is completed, then you will not have any obligation to pay the contractor. Generally, any termination clause will be outlined in the agreement. It is also important to note that if you cancel the contract, you have met all the termination requirements. Otherwise, you could be in breach of the agreement.
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Key Takeaways
You may need to withhold payments to a contractor for a range of reasons. If you are still determining if you can withhold payments, always double-check the contractor agreement to see if you have the option to withhold or even terminate the agreement. Depending on your contractor’s agreement, you may be able to:
- set-off payment;
- challenge the contractor’s right to payment because of defective or incomplete work; or
- claim compensation in a cross-claim or negotiate a reduced price.
If you have any questions about paying a contractor, contact our experienced employment lawyers to assist as part of our LegalVision membership. You will have unlimited access to lawyers who can answer your questions and draft and review your documents for a low monthly fee. Call us today at 0800 005 570 or visit our membership page.
Frequently Asked Questions
Technically, the contractor has no right to claim the payment if they have not completed their work.
You can reduce the amount payable for the work depending on what is written in your agreement. Nevertheless, you should ensure that you carefully inspect the defective work first and then request that the contractor fix the work before reducing the payment.
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