Contra-charge controversy cleared

On what basis are contra-charges and set-off sums permitted?

Suzannah Newboult is a construction specialist at DLP Piper LLP.
Suzannah Newboult is a construction specialist at DLP Piper LLP.

On what basis are contra-charges and set-off sums permitted?

Almost all contractors or sub-contractors operating in Qatar will be familiar with the schedule of contra-charges (also known as back charges) offered up in justification for a hefty deduction from an interim, or even final, payment certificate. So familiar is the concept of contra-charging that it is often accepted that the deduction, a form of set-off, is simply part of the account assessment process. The employer or main contractor assumes a right to set-off their contra-charges; the contractor or sub-contractor assumes that they are permitted. Are they?

The law only allows set-off where the two sums of money owed are undisputed and payable. In our case this would mean the interim payment payable by employer/main contractor on the one hand and, the amount of the contra-charge claimed from the contractor/sub-contractor on the other. Rarely are either undisputed.

If it is not the law that enables the set-off, then the right to set-off can only arise by the agreement of the parties. Such agreements are often found in construction contracts. FIDIC for example provides that the amount the employer is entitled to be paid by the contractor may be included as a deduction in the contract price and payment certificates. The employer is only entitled to set-off against or make any deduction from an amount certified in a payment certificate, or otherwise make a claim against a contractor in accordance with that provision. So far so good. However, the employer must be entitled to deduct the payment from the contractor. In other words, there must be a contractual entitlement to the contra-charge.

Contracts may expressly provide for employers to deduct for the cost of water or power available on site and used by the contractor, or for the use of employer equipment. Commonly, contracts also provide for the employer to engage a third party to carry out remedial works where the contractor fails to do so during the defect liability period, with a corresponding entitlement to contra-charge the cost to the contractor. All of these examples can be found in FIDIC.

It is less common however, for contracts to allow the employer to intervene by supplementing the contractor’s labour or supervision forces and contra-charging it back to the contractor. There may be provisions requiring a contractor at his own cost to increase working hours or personnel where the works have fallen behind programme, and also entitles the employer to recover his costs of increased supervision and delay damages. This is distinct however, from the unilateral imposition of additional labour by the employer for which there is seldom contractual right, let alone an entitlement to recover the costs.

It may be that payment provisions are approached more broadly, where requiring the application for payment and/or assessment for the payment certificate to take account of any deductions becoming due under the contract ‘or otherwise’ (another FIDIC provision). On this basis, employers may argue an entitlement to deduct costs arising from the contractor’s breach of contract. In the example above, an employer may argue that the contractor is in breach of contract by failing to meet a progress milestone and claim the costs of engaging a third party to supplement the contractor’s labour in order to rectify that breach. However, whilst the employer might be allowed to deduct damages for breach of contract it is not entitled to take the physical action of supplementing the labour. Further, it is likely in this instance that the employer’s sole remedy for delay is in the levy of liquidated damages.

So check that the grounds for any back-charges, contra-charges or set-off sums are permitted by the contract or the law.

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