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Contracts are the basis for any relationship or transaction and are legally binding on both parties. If one party breaches a contract, the other party can seek a remedy in court. It may be the case that you have entered into a contract with a contractor. In some cases, your contractors may not have completed the agreed task, or to the standard that you were expecting. This article explores whether you can withhold payment to contractors under a New Zealand contract. 

Withholding Payments to a Contractor

There are many reasons why you may want to withhold payment from a contractor. For example, your contractor may not have completed the work that was allocated or they might have done something incorrectly. In this case, you do not want to have to pay for work that they have not completed.

There are certain circumstances where you can withhold payment. However, your contractors may disagree or not understand why you are withholding payment. Such instances will likely result in a dispute.

Importantly, speak to your contractor before deciding to withhold payment. There may be a misunderstanding or confusion regarding the contract. If this fails, engage a lawyer to ensure you are in the right position to withhold payment. 

Below we explore circumstances where you can withhold payment to your contractor.

Breach of Contract

If your contractor breaches the original contract, you have the option to withhold payment. Breaching a contract means that they have not followed the terms in the contract. If you convey to your contractor that you are withholding payment, they may go to court to enforce the contract. Specifically, they will be seeking to enforce your payment for their work. Next, the courts can decide whether there has been a breach of contract and whether you must pay your contractor.

Alternatively, you may have a dispute resolution process embedded into your contract. In this case, you can follow this to come to a resolution. Most dispute resolution processes will entail either mediation or negotiation. 

Termination of Contract

If the contract with your contractor has been terminated before any work has been completed, you are not under an obligation to pay your contractor. A termination clause allows either party to cancel the agreement if certain conditions have been met. Generally, your contract will outline these conditions. For example, one party can activate the termination clause if the other party breaches the agreement.

Firstly, It is important to ensure that you meet the conditions in the termination clause before cancelling the agreement. This is because if you terminate the agreement before meeting the conditions, you could be in repudiation of the contract. 

Repudiation is a breach of contract and your contracting partner can bring court proceedings against you for breach of contract. 

Different Options for Withholding Payment

New Zealand law covers how you can schedule payment to contractors. Previously, you could counterclaim or set-off payments before a debt had arisen. However, you can counterclaim or set-off payments if you do this in a payment schedule.

Counter Claim

If you have contracted with someone to do a job, you must set up a payment schedule that determines how you pay your contractor. If you are trying to counter-claim payment because your contractor has breached the contract, you might need to bring legal action against your contractor. 

Set-Off

You are also able to set off payment under a payment schedule. This means that you take away what you owe your contractor from another job. For example, suppose you have someone building your pool but it ends up being defective. In that case, you can take away payment for the pool from the next job that they are completing. However, these set-offs must be legitimate and a contractor can appeal this in court.

Key Takeaways

Contractual relationships help build trust between parties, especially in transactions. This is especially true when you are using contractors. However, there may be a situation where your contractor does not do the job or they have not completed something to a high enough standard. This can create issues surrounding payment. The best thing to do is to always discuss the situation with your contractor to try and find a solution. However, sometimes withholding payment or court proceedings may be required. 

For legal assistance with managing your contracts, contact LegalVision’s contract lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What happens if my contracting party takes me to court because I am withholding payment?

The court will decide whether your contracting party has breached your contract and whether you are legally entitled to withhold payment.

Can I set-off off a payment schedule for the same project?

No, but you may be able to withhold payment due to a breach of contract.

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