What Contractors Should Do When Investors Delay Payment?

In construction activities, late payment by the project owner is a common risk that contractors often face. Such delays not only seriously affect the contractor’s cash flow and solvency but also disrupt construction progress and impact the project’s quality. Late payments often stem from specific causes. Therefore, identifying the exact cause and applying appropriate measures is essential for contractors to protect their legitimate rights and interests. This article by TNTP analyzes the common causes of payment delays and the measures contractors should take at each stage.

1. Reasons for the investor’s delay in payment

Before applying any protection measures, the contractor needs to assess the actual cause of the investor’s failure to pay on time. Clearly identifying the cause helps the contractor come up with an appropriate treatment plan, limiting the risks arising. Some common causes include:

• Cash flow imbalance: The investor has difficulties in raising capital, encounters problems in disbursement from credit institutions, or experiences a shortage of investment funds.
• Delays due to administrative procedures: Acceptance records, volume approval documents, payment or finalization dossiers often must pass through multiple departments for verification, leading to longer-than-expected disbursement time.
• Disputes over construction volume or quality: The investor may cite reasons to delay payment, such as the contractor miscalculating the constructed volume, insufficient construction compared to the design dossier or refusing to accept due to unsatisfactory quality.

2. Measures that contractors need to take when the investor is late in payment

Step 1: Prepare risk mitigation measures during the contract signing stage

Right from the time of negotiation and signing of the contract, the contractor needs to clearly stipulate payment terms, including payment schedule, method, and value for each stage. At the same time, the contract should specify sanctions for late payments, such as fines for violations, late payment interest, or compensation for damages.  Besides, the clause on the right to suspend construction when the investor breaches the payment obligation also needs to be clearly recorded as an important legal basis in the process of performing the contract.

In addition, the contractor must keep all records and documents related to the completed workload, including the record of acceptance, handover and documents confirming the volume, to serve as the comparison and proof of the investor’s payment obligation.

Step 2: Negotiate and resolve the issue directly with the project owner when a late payment occurs

When late payment arises, contractors should prioritize negotiations in good faith to maintain cooperation and find feasible solutions. During the negotiation process, the contractor can ask the investor to make partial payments to ensure operating cash flow while reducing the risk of bad debts. However, at the same time, the contractor needs to request the investor to confirm the debt in writing, clearly showing the total value of the debt, the payment term, and the signature of the authorized representative with the corporate seal. This document is not only the basis for continuing negotiations but also constitutes legally binding evidence proving the payment obligation if the dispute is settled at the Court or Arbitration.

Moreover, in case the delay in payment is prolonged and causes serious damage, the contractor may consider suspending the construction. However, this is only done when there is a clear legal basis in the contract or in accordance with the law. Before implementation, the contractor needs to send an official written notice to the investor, clearly stating the reason, legal grounds, the effective date of the suspension, and the conditions for resuming construction.

Step 3: Take legal measures to recover the payment

When negotiations fail to achieve results, the contractor can take legal measures to protect their rights.

First of all, the contractor needs to send an official payment demand notice, enclosed with a request for late payment interest and compensation for damages (if any). For compensation claims, the contractor needs to prove the actual damage that has occurred and the causal relationship with the investor’s late payment. Note that, if the damage arises due to a force majeure event or is entirely due to the fault of the contractor, the investor may be exempted from liability to compensate for damages. 

In case the investor still fails to fulfill the payment obligation, the contractor may initiate a lawsuit at Commercial Arbitration or a competent People’s Court as agreed by the parties. When initiating a lawsuit, the contractor should pay special attention to the preparation of documents, evidence and compliance with procedural requirements – factors that determine the admissibility of the claim.

In the process of applying legal measures, the contractor may seek professional legal assistance from a law firm or legal practitioner. Lawyers can assist contractors: Reviewing contracts and determining the legal basis for requesting payment; Preparing lawsuit documents, calculating late payment interest and incurred damages; Representing them in negotiations with investors or in legal proceedings to protect the legitimate interests of contractors.

The late payment from  the investor is a foreseeable risk in construction activities. However, by establishing strict contracts, managing documents carefully and proactively applying appropriate negotiation and legal measures, contractors can fully protect their rights and maintain financial stability during the construction process.

Above is the article “What Contractors Should Do When Investors Delay Payment” that TNTP sends to readers. Hope the article is useful to those who are interested in this issue.

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