What can I do when a client doesn’t pay?

Non-payment during construction is a very common issue in the West Australian building industry, BUT there are ways you can ensure you get paid on time!

How?

Avoid it!

The best way to deal with a payment dispute is to avoid it in the first place.

Steps 1 – 4 below detail practical measures that you can take to set up good payment practices.

Step 5 and the listed alternative options can assist when a payment claim is overdue.

Step 1 - Ensure you have a contract

A contract is a written record of the agreement between the parties. It sets out important information with regard to your right to payment including:

• the contract sum;
• finance and evidence of capacity to pay;
• progress payment schedule;
• timing for payments;
• interest and other rights in relation to non-payment; and
• process for disputes.

In WA the law requires a written contract between a builder and an owner where the building work is valued between $7,500 and $500,000. If you don’t meet the legal requirements you may have trouble getting paid and may be subject to additional fines.

Regardless, it is strongly recommended that you ensure you have a comprehensive written contract in place.

Step 2 - Confirm the client’s capacity to pay

If you have concerns about a client’s capacity to pay progress claims when they are due, you may:

• request the client provide you with written evidence that it has the ability to pay the contract price; and
• if there is no bank finance involved, request the client place money into a trust fund or other form of joint bank account.

Step 3 - Proper contract administration

In order to avoid payment disputes it is important to ensure you are carrying out the proper contract administration. This includes:

• ensuring variations to the contract have been properly documented and approved by the client where required; and
• any extensions of time notices have been given in accordance with the required timeframes.

Step 4 - Progress payments

If you have completed a progress stage you are entitled to make a claim for the work carried out under that stage. When you have made a genuine claim for a progress payment, the client must pay the progress payment within the timeframe set out in the contract.

For home building work valued between $7,500 and $500,000 a request for payment for work that has not yet been performed (except for a deposit) is prohibited. For all other building work, while permitted, it could be difficult to justify an entitlement to payment for work that has not yet been completed, except where the contract specifically provides for that type of arrangement.

Step 5 - Responding to non-payment

If the client fails pay a progress claim by the due date, there are a number of steps you can take under the contract. If you are using the HBCA Lump Sum Building Contract, the options include:

• Suspend the works under the Contract until such time as payment is received in full.
  
  
• Charge interest on late payments at the rate set out in Item 8 of the Schedule of Particulars. In some instances the threat of interest is a sufficient incentive to make payment.
  
  
• Lodge a caveat over the property to secure payments under the contract. A caveat will prevent the owner from selling the property without discharging their debt to you. This can be done through Landgate.
  
  
• As a final option, you can terminate the contract.
  
  First you must issue the owner with a written notice to remedy the breach i.e. a notice that the owner must make payment. If payment is not made within 10 working days after providing the notice you may terminate the contract immediately by issuing a separate notice of termination.
  
  Termination of a contract is a serious step and should only be taken after obtaining legal advice. If it is done without a genuine cause it will give the owner the right to terminate the contract and to seek damages from you.

Dispute resolution process

The HBCA Lump Sum Building Contract sets out a process under which disputes can be resolved. This may be in relation to non-payment or any other dispute.

The dispute resolution process is:

• lodge a written notice of dispute; then
• within 5 working days, meet with the owner to attempt to resolve the matter; then
• if the matter is not resolved, the parties must:
  
  • agree to mediation; or
  • agree to appoint an arbitrator; or
  • if the parties can’t agree, an application shall be made to HIA to nominate an arbitrator.

Are there any other options?

Yes. These options are separate from your options under the contract. The advantages and disadvantages of each option should be considered in relation to your particular circumstances.

Building and Energy complaint

When a dispute arises under a home building contract worth between $7,500 and $500,000 both the builder and the owner can apply to Building and Energy for determination.

If you are not satisfied with a decision by Building and Energy, you can apply for a review by the State Administrative Tribunal (SAT). SAT may also determine matters that are referred to it by Building and Energy.

Rapid adjudication

Rapid adjudication is a mechanism of the Building and Construction Industry (Security of Payment) Act and the Construction Contracts (Former Provisions) Act. It allows a party to a construction contract to make an application for a payment dispute to be determined by an adjudicator. A ‘payment dispute’ includes a rejected, disputed or overdue payment claim.

HIA has further information available regarding rapid adjudication.

Letter of demand

A letter of demand should set out the amount of money that is outstanding and provide the client with a timeframe in which to make payment. It also sets out the consequences of non-payment. It is used as a last resort prior to taking more decisive action such as going to court or arbitration.

Magistrates Court

In WA the Magistrates Court deals with civil matters up to a value of $75,000. The types of matters that are dealt with in Magistrate’s Court include debt or damages claims and consumer/trader claims. Some matters, such as building services complaints, are not dealt with by the Magistrate’s Court and come under the jurisdiction of Building and Energy or SAT.

Parties are not represented by lawyers when dealing with disputes up to a value of $10,000. When the dispute is valued over $10,000 the parties have the option to self-represent are not represented by lawyers. The fees for Magistrates Court are also reasonably low.

Despite this, preparing for court is a very time consuming and costly exercise. Taking a matter to court may also come with a significant psychological burden. Before proceeding to court, it is worthwhile considering whether there is any opportunity to resolve the dispute in another way.

In addition, where the parties have agreed to alternative dispute resolution (ADR) under a contract, the Court may require the parties to honour their contractual agreement and proceed through ADR instead.

Further information

Before exercising any contractual or legal rights, it is important that you read the contract carefully and if you are unsure contact HIA or seek independent advice.

HIA’s building contracts, trade agreements and variation forms are available via Contracts Online.