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MUCH has been discussed in this column about contractors who collect initial payments and then disappear without even starting work. How the house owner should protect himself has also been discussed. However, a contractor who is also a reader, wrote in to say that this is only one side of the story. What about contractors who carry out work or suppliers who supply materials but do not get paid in the end?

Of course, this is not to say that there are no such instances of non-payment or delayed payments. In fact, most contractors carry out their obligations to the utter satisfaction of the employer. And yet some of them end up not getting paid or have their payments unduly delayed.

When this happens, the contractor may become indebted to suppliers for materials purchased on credit. This can have an adverse effect on the contractor. If he has deep pockets, he can pay off the supplier with his own money. On the other hand, if the contractor does not pay the supplier for materials purchased, it may effect his credit standing in the eyes of the supplier or the community of material suppliers, and he may even lose his right to credit facilities in the future. This in turn can affect his ability to secure future contracts.

A contractor needs to protect himself against such occurrences. The best protection would be to collect all the money in advance before even starting work. However, this is not fair or practical as it leaves the house owner with little to hold on to.

In a way, a contractor is in a better position because the house owner is there with assets which are tangible. On the other hand, the contractor’s assets may not be known or it may be that the contractor is under-capitalised as a company. So at first sight it would appear that the contractor is in a better position to trust the employer and allow some leeway for the latter to pay.

However, the trust may be misplaced when payments are not forthcoming. Unless both parties mutually agree that all payments are to be made upon completion of the job, it would be desirable to divide the work into stages and for payment to be made within a specified number of days upon the completion of each stage.

In some cases, the stage is reached and passed but payment is not made. Based on promises that payment is coming, the contractor continues with the work. The next stage is reached and yet payment is not forthcoming.

Can the contractor just pull out his workers and stop work to put pressure on the house owner? Whilst this may seem like the best thing to do, the contractor could be heading for trouble if there is a time frame for work to be completed. In some cases, there may be a provision that if completion is delayed, a penalty will have to be paid.

When the contractor stops work, the employer may turn the tables on him by terminating the contract for stopping work and suing the contractor for the delay as well as the higher costs of engaging another contractor.

So what should a contractor do to avoid such a situation? The solution lies in structuring the contract to allow the contractor to either stop work or terminate the contract if payment for each stage is not made.

The contract must clearly provide for payment to be made within a stipulated number of days when work is completed at a particular stage. If this payment is not made, the contractor has a contractual right to terminate the contract for non-payment. Having so provided, the contractor must exercise his right, relying on this clause to terminate the contract for breach on the part of the employer.

Having done so, the contractor can then walk out on the job and sue the employer for the costs of work done and the loss of profit for the work not done. At least the contractor will have no further liabilities. If the employer has to incur more costs in employing another contractor, that will be something that he has to bear.

There could be a dispute as to whether the work has reached a certain stage for payment to be due. This will be a matter to be determined by the adjudicating tribunal.

A similar problem can arise in a situation in which the parties have agreed to buy and sell a particular quantity of goods over a period of one year, with such goods to be supplied in equal batches over 12 months.       

Along the way, batches of goods may be supplied and payments requested and made after the goods are delivered. Things are fine for the first few months but after the fourth and fifth batches, payment is not forthcoming. Can the supplier stop the delivery of further batches of goods?

The question that arises is whether the parties agreed to one contract to be carried out through 12 deliveries or whether there are 12 contracts for 12 deliveries. If it is the former, the supplier cannot stop the delivery because his right is only to recover the payment but if each contract is a separate contract, then it is a different matter.

Whatever the arrangements, the supplier could still protect himself by stipulating that failure to deliver within the stipulated period would be a ground to withhold further delivery or terminate the contract.

In all these matters, both parties need to be clear about the arrangements they have under the contract.