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How security of payment mistakes can turn the tables in a negotiation

We recently assisted a contractor client on a major infrastructure project in Queensland who was engaged in the early stages of dispute with the principal.  The contractor claimed to be entitled to significant additional time and costs under the contract, yet was facing a principal who:

  1. was generally unwilling to engage and properly consider the contractor’s claims; and
  2. had routinely failed to correctly apply contractual provisions.

Some of our client’s claims had been under consideration or assessment for several months and when decisions were ultimately made, reasons for those decisions were scarce or demonstrated the principal’s failure to properly consider the claims and apply the contract.

Strategy

We developed a without prejudice paper for the contractor to submit to the principal.  This paper set out in detail the contractual and evidentiary basis for the contractor’s claims and included the provision of expert reports where necessary.  The claims were ultimately put to the principal by contractual notices and open letters, which were then being discussed and negotiated between the parties.

One of the strategies we recommended was submitting these claims for assessment as part of a payment claim made under the Building Industry Fairness (Security of Payment) Act 2017 (Qld) (BIFA).  On previous occasions, the principal had failed to state or properly explain why the amount proposed to be paid in relation to certain claims was less, including their reasons for withholding any payment, as required by section 69(c) of the BIFA.

Accordingly, our view was that the principal may again slip-up by giving inadequate reasons in respect of certain claims, meaning that the contractor would be in a good position to run an adjudication.  This is because section 82(4) of the BIFA would operate to prohibit the principal from including reasons for withholding in any adjudication response that were not included in the payment schedule.

We assisted the contractor in formulating and submitting the payment claim, which claimed the significant additional costs that had been put to the principal via the without prejudice paper and contractual notices.

The principal’s mistake

As it transpired, the principal failed to serve a payment schedule within the time required under the BIFA.  The principal was only one business day late.  Nevertheless, this meant that the principal would become liable to pay the full claimed amount on the due date for payment under the BIFA[1].

The scheduled amount given by the principal was markedly less than the claimed amount.  While the principal had given some reasons in respect of some additional costs claims, the payment schedule ultimately served (and the arguments made within it) could not be relied upon by the principal for the purposes of the BIFA.

Our client was free to recover the full claimed amount as a debt due and owing in the Supreme Court of Queensland[2].  The principal would not be entitled to bring any counterclaim in those proceedings, nor raise any contractual defence to the action[3].

Letter of demand and engaging with the principal

We drafted an open letter of demand from the contractor to the principal, highlighting the mistake and advising that if payment of the full claimed amount was not received on or before the due date for payment under the BIFA, the contractor would take necessary steps to recover[4].

The next letter we assisted with was a without prejudice letter which set out why the principal’s position as put in the payment schedule was incorrect and demonstrated a failure to properly apply the contract.  This is important because the principal would be liable to pay the full claimed amount under the BIFA, however the BIFA provides the parties with interim rights only.  It would be open to the principal in future to exercise contractual rights to engage in dispute resolution and ultimately litigation.

Progress of negotiation

The principal’s level of engagement with the contractor increased noticeably once there was recognition that they were now liable to the contractor for the full amount claimed and could soon be the listed defendant in judgment debt proceedings for the full amount.  It was now in the principal’s best interests to try to cut a deal with the contractor to avoid the embarrassment and adverse financial impact of court proceedings.

The contractor was now in a position where it all but literally had the disputed sums in its pocket in the ensuing negotiations and discussions.  It was now up to the principal to work through the various claims and supporting documentation that the contractor had provided and come to the contractor with a reasonable settlement offer to avoid proceedings.

Furthermore, the principal was effectively forced to step into the shoes of a plaintiff should it wish to commence a contractual dispute that the contractor had been overpaid to overturn or circumvent the outcome of the BIFA.  Running this dispute would take a great deal of time and effort for the principal.

The contractor advised that the principal’s engagement on the issues had drastically increased in without prejudice discussions.  The principal had now given indications when it would revert to the contractor with assessments and offers on claims.

We recommended that any agreement reached in discussions be formally documented by a succinctly drafted deed of settlement and release.

We regularly assist construction industry participants Australia-wide in contractual disputes and security of payment processes.  Please feel free to get in touch if you would like assistance with these issues.

[1] Section 77(2) of the BIFA.

[2] Section 78(1) of the BIFA.

[3] Section 100(3) of the BIFA.

[4] The first step would be serving of a “warning notice” as required by section 99 of the BIFA.

Letter of Demand 101

Given the current economic climate, it is important more than ever for a business to ensure that they are able to receive payment for work carried out. This is particularly important for businesses in the construction industry as cashflow is the lifeblood of many construction companies, particularly subcontractors.

If an invoice remains unpaid past the due date for payment, one of the first steps would be to issue a letter of demand.

A letter of demand is a demand to get a third party to do a specific thing, or to cease doing a certain thing. However, in most instances, it is used to seek payment for debts due and payable.

A comprehensive letter of demand for an outstanding debt should include the following:

  1. Details of the arrangement/contract between the parties regarding the debt that is due and payable;

 

  1. Set out the amount owed and why it is owed;

 

  1. Provide a breakdown of the amount owed with any relevant supporting information;

 

  1. Provide a timeframe for the payment to be made, but in most instances should be a minimum of seven days; and

 

  1. The letter should clearly state what could happen if no response and no payment is received e.g. legal proceedings will be commenced.

The letter of demand should provide sufficient detail for the recipient to understand the claim that you have and why you have issued the letter of demand.

It is advisable to include a copy of the outstanding invoice, though it is not necessary. However, the added benefit of including the unpaid invoice is that issuing a letter of demand with the outstanding invoice will also start time ticking pursuant to the Security of Payment Act, in the event that you are entitled to issue a payment claim.

The courts generally do not require a letter of demand to be sent prior to commencing proceedings, however failing to issue a letter of demand prior to commencing proceedings may reduce the amount of legal costs you can claim should you be successful in the proceedings.

Whilst you do not need a lawyer to write a letter of demand, there are a number of benefits in having a lawyer draft and issue a letter of demand on their letterhead. In particular, it gives an indication to the recipient of the letter of demand that you are serious about pursuing the matter, and that you are willing to spend money in legal costs to obtain the item sought in the letter of demand. Further, seeking legal advice prior to issuing a letter of demand may assist you to understand your legal rights, and based on the legal advice, you might find that there are other potential actions or claims that could be pursued against the recipient of the letter of demand.

Bradbury Legal has issued many successful letters of demand in which our clients have obtained payment in full, even for claims exceeding $100,000.00. Though, each response will depend on the position of the recipient.

Once the letter of demand is issued, the recipient can:

  1. pay the money sought in the letter of demand in full;

 

  1. start a dialogue between the parties that could assist in reaching a settlement of the dispute; or

 

  1. not respond or dispute the claim.

 

Should you wish to pursue the matter further if there is no response and no payment received, you could:

  1. commence proceedings in a court or a tribunal; or

 

  1. prepare an adjudication application in accordance with the Security of Payment Act,

depending on your legal rights to do so.

If you require any assistance with any issues regarding debt recovery, or any other disputes which require a letter of demand, feel free to get in contact with Bradbury Legal on 02 9248 3450.