Key Considerations for Resolving Payment Disputes in Construction Contracts

Payment disputes are a frequent challenge in construction contracts, and each situation demands a tailored approach for a resolution. In this article, we look at some essential principles to help navigate and resolve payment disputes effectively:

1. Ensure Clarity in Contractual Terms

Clear and detailed payment terms should be integral to any construction contract. Before signing, carefully review and negotiate a payment regime that aligns with your expectations and capabilities. Standard payment methods include:

• Single payment upon project completion
• Stage-based payments tied to project milestones
• Monthly interim payments based on work completed

We recommend avoiding advanced payments whenever possible, as they can pose unnecessary financial risks. If unavoidable, limit the advance to the smallest possible amount.

 2. Adhere to Contractual Procedures

Once agreed upon, strictly adhere to the payment procedures outlined in the contract. Deviating from these procedures can lead to confusion, financial losses, and potential legal disputes. Ensure that:

• Notices are issued promptly according to specified deadlines.
• Payments are made on time and in accordance with contractual obligations.

Following these procedures mitigates the risk of misunderstandings and establishes a clear framework for dispute resolution.

3. Implement Proactive Project Management

Proactive project management is key to preventing payment disputes. Focus on two primary areas where disputes often arise:

• Quality and Quantity: Maintain meticulous records of work progress and quality standards throughout the project. This helps preempt disputes over the adequacy of completed work.
• Variations and Additional Work: Clearly document any changes or additional work requests, including reasons for and approvals of these variations. A well-defined process for managing variations minimises potential conflicts.

4. Resolving Payment Disputes

In the event of a dispute, gather and review all relevant documentation, including contemporaneous records of work and communication. While preparing this information and seeking legal advice may incur initial costs, it often saves money and time in the long run.

Negotiated Resolution: Attempt to resolve disputes amicably through negotiation at the earliest opportunity. Early negotiation is generally the most cost-effective method and can preserve ongoing relationships.

Formal Resolution Options: Depending on the contract terms, consider escalating the payment dispute to more formal dispute resolution mechanisms:

• Adjudication: Common in commercial contracts, Adjudication provides a swift resolution by an independent third party.
• Arbitration: If stipulated in the contract, arbitration offers a private and legally binding resolution process.
• Litigation: As a last resort, litigation through the court system may be necessary to enforce contractual rights or to claim damages.

Summary

To minimise payment disputes in construction contracts, start by establishing transparent and fair contractual terms. Rigorously adhere to these terms throughout the project and maintain proactive project management practices. Should a dispute arise, act proactively with thorough evidence preparation and seek resolution through negotiation whenever feasible.

By following these guidelines, construction professionals can mitigate the risks associated with payment disputes and maintain smoother project outcomes.

For more information or to receive legal advice, please get in touch with Andrew Cullyer, Construction Litigation expert, on 023 8063 9311 or email andrewcullyer@warnergoodman.co.uk.