l ega l
PERFORMANCE OF A CONTRACT:
GETTING PAID
law allows for substantial performance. This
is where performance may be deficient but
does not derogate from the purpose of the
contract. For example, where the contract is
for the supply and installation of windows for
a house and a lock is damaged or there is a
small scratch on the glass of one window.
BRYAN PICKARD
Greenhalgh Pickard
Solicitors and Accountants
Y
ou will probably be familiar with
this scenario: You complete the
work and on request for payment,
the customer sends you a long list of
complaints and refuses to pay the balance
of the contract price. In most cases, the
customer says they will accept the work as
is in exchange for a substantial reduction
in the contract price. So what is your legal
position?
Unless there is agreement otherwise, a party
to a contract is entitled to be paid when the
contract has been performed. Performance
means exact compliance with the contract.
Less than exact compliance is a breach of
the contract and does not entitle the nonperforming party to payment. This type of
contract is referred to as an entire contract.
Unless there is anything to the contrary, a
contract will be an entire contract if payment
is a lump sum. For example, a building
contract where the parties agree that
payment is on completion of the work.
Understandably, courts have been reluctant
to allow a minor failure in performance of a
contract to allow a party to refuse to pay the
contract price. Except in limited cases, the
24 Australian Window Association
While substantial performance may mean
that a party can demand payment of the
contract price, it does not discharge that
party from the contract. They are still
obliged to complete the contract and, if
they fail to do so, the other party has a right
to claim damages for the incomplete or
defective work. What this means in practical
terms is that while the party carrying out the
work can demand full payment, it is hardly
worthwhile to do so if a party holds back
payment representing the cost of rectifying
or completing the work where there is no
dispute about that work.
The same principles for payment that apply
to entire contracts also applies to severable
contracts. A severable or divisible contract
is where the contract provides payment
in instalments corresponding to a definite
proportion of a party’s performance.
Typically, building contracts fall into this
type of contract. A contract is not a
severable contract just because payment
is in instalments. The payment must be
dependent on a defined proportion of the
work. For example, payment of 50 per cent
on delivery of goods to site and 50 per cent
on completion of installation.
Where a contract is severable, a party is
entitled to recover the severable part that
has been performed even though there
has been a failure to complete the entire
contract. Like entire contracts, the same
considerations apply to the recovery of
instalments of severable contracts. Using the
above example, the failure to deliver a small
component of the goods to the site should
not prevent recovery of the payment for that
instalment
A note of caution: What constitutes
substantial completion is a question fact and
the courts have not been entirely consistent
in its application and there has been
some diversity of opinion on its operation.
However, this is not a reason to be timid with
customers who want to withhold payment
for spurious or trivial reasons to negotiate a
price reduction.
Respond quickly where customers claim
that the work is defective and document
the defect or deficiency. Your best friend is
your mobile phone. Take photos and record
conversations. Often non trade customers
have unrealistic expectations about the
goods and work. Remember, your obligation
is to provide the goods and services to
conform to the contract and any statutory
requirements. Remember, when dealing
with consumers and small business (from
December 2016) statutory requirements
include the warranties implied by the
Australian Consumer Law as well as the
applicable building standards.
Be particularly cautious with those
customers who withhold payment and
complain about the work and will not allow
you an inspection. This is a repudiation of
the contract that allows you to commence
action for breach of contract. Some building
legislation imposes a right of entry to
rectify defective work and a person cannot
unreasonably refuse. A failure to do so
is taken into account when determining
damages for the breach of the warranty.