NON-PAYMENT DISPUTES ARISING FROM CONSTRUCTION CONTRACTS

stem from various causes, such as the paying party claiming that the work has not yet been accepted, or the parties failing to agree on the volume of work performed. When a dispute arises, the business that is owed payment needs to correctly identify the type of dispute and apply an appropriate handling process to increase the likelihood of recovering the debt.

Classification of disputes related to payment obligations arising from construction contracts

In practice, payment disputes in construction activities arise from many different causes, the most common of which are related to the acceptance of completed work. If the parties cannot reach an agreement on issues related to the volume or quality of the work during the acceptance process, disputes can easily arise. Specifically:

First, disputes related to the volume of work performed. During the construction process, the volume of work performed may change compared to the original agreement, or additional work may arise. If the parties cannot agree on the additional work volume as a basis for determining the amount to be paid, the paying party may refuse to accept the payment amount being claimed.

Second, disputes related to the quality of the work performed. In many cases, the paying party delays payment because the project has technical defects or does not meet the quality standards agreed upon in the contract, and requests the contractor to rectify the issues before payment. Disputes are often prolonged when the parties cannot agree on the acceptance standards or the scope of required repairs.

In addition, disputes may also arise because the paying party has lost the ability or willingness to pay. This means that although there may be no dispute regarding the acceptance of work or the acknowledgment of debt, the paying party later becomes insolvent or, for internal reasons, no longer wishes to make payment.

All of these situations may lead to disputes related to payment obligations under economic contracts in general and construction contracts in particular.

Process for handling disputes related to payment obligations arising from construction contracts

To resolve disputes effectively, businesses should apply a step-by-step handling process as suggested below in order to increase the likelihood of recovering the debt.

The first level is reconciling the outstanding debt and payment conditions. At this stage, the business should prioritize discussions and reconciliation of accounts with the debtor to confirm the amount payable and the payment plan. This may be carried out through meetings and the preparation of written records confirming the debt amount, the reasons for late payment, and the payment timeline. A debt confirmation record will serve as important evidence for dispute resolution if the dispute continues. If the parties cannot agree on the amount of debt, the business should review the contract and related agreements between the parties to determine the payment obligations. The results of this review will form the basis for issuing a formal payment request in the next stage.

The second level is sending a letter of demand and warning of potential legal action before a dispute resolution authority. If negotiations do not produce results, the business may send a written payment request clearly stating the legal basis of the claim, the amount payable, the payment deadline, and the legal consequences if the delay continues. The letter should include the debt reconciliation statement and relevant supporting documents. At the same time, a clear deadline should be set, after which the dispute will be escalated to formal proceedings before a dispute resolution authority to create pressure and encourage payment.

The third level is initiating legal proceedings before a dispute resolution authority. When negotiation measures fail, the business may initiate legal action to resolve the dispute. The business must clearly determine the principal amount claimed, late payment interest, penalties for breach, or damages if applicable. In addition, litigation costs and the practical ability to recover the debt should also be carefully considered before deciding to initiate proceedings before the competent dispute resolution authorities.

Important documents when resolving disputes related to payment obligations arising from construction contracts

To increase the likelihood of recovering debts under construction contracts and to protect lawful rights and interests when disputes arise, businesses should collect the following documents:

First, documents demonstrating the contractual relationship between the parties, including the construction contract, appendices, unit price schedules, or other agreements duly confirmed by the parties. These documents help determine the rights and obligations of each party in the contractual relationship.

Second, documents demonstrating the volume and quality of work performed, such as acceptance minutes, confirmations of construction volume, construction logs, as-built drawings, site photos, and material quality documentation confirmed by relevant parties such as supervision consultants or construction material inspection units. These documents help establish that the work has been fully performed, on schedule, and in accordance with the parties’ agreement.

Third, documents demonstrating payment obligations, including payment requests, debt reconciliation statements confirmed by the parties, invoices, and payment demand letters. In addition, communications through messages, emails, or written documents from the debtor acknowledging the payment obligation or proposing a payment schedule may also be used as evidence.

In summary, to develop an effective dispute resolution strategy, businesses need to prepare comprehensive documentation such as the contract and its appendices, acceptance records, debt reconciliation statements, payment demand letters, and communications between the parties related to payment obligations. Preparing these documents not only clarifies the payment obligation but also serves as important evidence to protect the lawful rights and interests of the business when disputes arise.

Frequently asked questions

What should be done first if the debtor cites quality issues to withhold payment?

When the debtor claims that the project has quality defects, the business should review the technical standards agreed upon in the contract and its appendices, and determine whether the alleged defects exist. If necessary, the business may request an independent third-party inspection to assess the project’s quality. The results of this assessment will serve as an important basis for determining whether a quality violation exists and whether the debtor’s delay in payment is justified.

Should an undisputed portion of the payment be separated for early recovery?

Separating the undisputed portion of the debt for early recovery is a reasonable strategy. This approach helps businesses reduce financial pressure and prevents the entire payment from being drawn into a prolonged dispute. At the same time, initiating legal action only for the disputed portion also demonstrates good faith and helps maintain the business relationship between the parties.

When should negotiation be escalated to a dispute?

The transition from negotiation to dispute resolution should be considered when negotiation efforts do not produce results, and the debtor does not demonstrate a genuine intention to pay. For example, the business has sent a payment demand letter but receives no response, or the debtor takes no concrete action to fulfill the obligation. In such cases, the business should consider applying stronger legal measures to protect its lawful rights and interests.

How can late payment interest and penalties for breach be claimed?

For late payment interest, businesses may claim interest based on the rate agreed upon by the parties in the contract or its appendices. If the agreed interest rate does not comply with legal regulations, or if the contract or appendices do not specify an interest rate, the relevant legal regulations may be applied.

Regarding penalties for breach, businesses may only claim such penalties if the contract or its appendices contain an agreement on the application of penalties when a party breaches its payment obligations. If the contract or appendices do not include such an agreement, it will be understood that there is no basis to claim penalties for breach.

In summary, disputes related to payment obligations arising from construction contracts should be handled by correctly identifying the type of dispute, preparing sufficient supporting documents, and applying an appropriate dispute resolution process. Proper preparation of documentation and the selection of an appropriate resolution method will help businesses increase their ability to protect their lawful rights and interests.

The above article, “Non-payment disputes arising from construction contracts”, is provided by TNTP. Should you require further assistance, please feel free to contact TNTP for timely support.

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