Subcontractor options in the event of non-payment

November 13th, 2013, Published in Articles: PositionIT


A contractor was awarded a tender by a municipality to construct low cost housing. The scope of the project was of such a nature that the contractor had to use additional subcontractors. The contractor concluded the agreement with the municipality and was responsible throughout the project for the obligations contained in the main agreement. To establish the obligations in respect of the plumbing work contractually, the contractor and plumbing subcontractor concluded a further agreement (a subcontract) to regulate their relationship and the rights and obligations regarding the plumbing work.

The subcontractor managed to execute the bulk of his obligations in terms of the subcontract a few months after commencement of the project, but only received partial payment from the contractor. The latter had fallen behind schedule with the project and his obligations in terms of the main agreement and the municipality withheld payment due to the delay. This, however, caused a cash flow problem for the contractor, making him unable to pay his subcontractors. The plumbing subcontractor, however, wished to complete the project, as he was committed to the next project, but was hesitant to continue and to incur further costs for which he may receive no payment.

The natural reaction of any subcontractor would be to terminate his services and not to render any further services until outstanding payments are settled. But would this necessarly be the correct route to follow? By simply not arriving on site, the subcontractor would run the risk of breaching the subcontract. It is important for the subcontractor to act strictly in accordance with the provisions of the subcontract, to enforce his rights.

Any comprehensive agreement contains provisions determining what must happen should the contracting party not meet their obligations. There are also a number of standard agreements such as the JBCC agreements which can stipulate subcontractor relationships. The agreements usually require a written notice to the other party in which compliance with outstanding obligations within a specific time frame is required. Such a notice by the subcontractor must also show that he will suspend his services for the period during which the contractor fails to meet his obligations towards the subcontractor.

After this notice, the subcontractor will be entitled to remain off site and will gain relief from having to complete his obligations within the agreed contractual timeframes. The subcontractor ensures that he retains his rights in terms of the subcontract and places himself in the best possible position for any future legal action against the contractor by providing the contractor with notice in terms of the sub-contract.

It is natural to be concerned about non-payment or other failures on the part of a contractor. However, it remains vitally important that you keep to the letter of the contract and exercise the remedies prescribed therein. It may also be prudent to obtain legal advice prior to the issue of any notices to ensure that aspects such as possible retention rights etc. are not prejudiced in the event that you vacate the site.

It is advisable to obtain legal advice on the correct course of action to be followed where there is no contract or where the contract is silent on how to handle the situations. The value of a good agreement should never be underestimated. Consider having a proper agreement drafted or using an appropriate standard agreement which clearly sets out the rights, obligations and remedies of the parties and thereby contributes to the correct management of problems which may arise during the execution of the agreement.

Henk Cilliers, Cilliers & Reynders Incorporated

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