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Dither, discount or demand? How best to avoid payment disputes

legal matters

It goes without saying that people expect to be paid for the work they do. However, the ways in which they deal with this basic assumption are rich and varied. Some adopt the 'carrot approach' and offer dis - counts for prompt payment. Others go for 'heavy chasing' and send out demands covered in bold red typeface, threatening all manner of ghastly consequences for non-payment. Some prefer to wave the big stick of steep interest rates for late payment. Others do absolutely nothing at all and still expect to be paid. Inevitably, disputes arise at various points in this payment spectrum and two cases illustrate the opposite poles.

In the first, Jeancharm v Barnet Football Club (Judgment 16.1.03), the claimant manufacturer agreed to supply the defendant football club with its kit and replica shirts for two seasons.

The contract had a nifty 'swings and roundabouts' arrangement, whereby if Jeancharm was late in supplying, it had to pay a penalty of 20p a garment for every day, and if Barnet was late in paying it had to pay interest at a rate of 5 per cent a week. As the Court of Appeal wryly observed, the late delivery clause could be very expensive if, in the case of socks, for example, each sock counted as one garment. On the other hand, 5 per cent a week equated to roughly 260 per cent a year.

The parties ran an account but from the outset there were difficulties and despite a settlement meeting, the two ended up in court. After making various deductions, the judge decided that Barnet owed Jeancharm £5,142. When Jeancharm's interest clause was applied to this sum, however, Barnet's liability quadrupled to £20,000. The football club appealed on the grounds that the interest clause was more than a stick to ensure payment but was a classic penalty clause and unenforceable at common law. The Court of Appeal applied the well-known test of whether the clause was a genuine pre-estimate of loss or a penalty for non-performance. It found that, on its face, an interest rate of 260 per cent could not be described as compensatory but was obviously penal and, therefore, unenforceable.

In Dinkha Latchin v General Mediterranean Holdings SA (Judgment 16.12.03) the claimant architect had carried out work on four projects in Tangiers involving properties in which the defendant company had interests. The work spanned more than two years. During that time the claimant produced a large number of drawings and prints. There were, however, no contemporaneous records of any agreement and the parties gave conflicting versions of events.

Ultimately the judge decided that, while the parties had never reached any express agreement at any time, at the outset it was understood that the claimant's work would be unremunerated. This position could not have continued for two years and the judge was of the view that there must have come a point in the relationship when, had the parties asked themselves the question, they would have recognised that the claimant no longer intended to carry on working for free.

In reaching this decision the judge applied the 'officious bystander test', which invokes a notional nosey-parker to interrupt the parties' negotiations to ask whether a particular term has been agreed. If they notionally turn angry and say 'of course' (no doubt with an added notional 'buzz off') such a term can be implied into their agreement.

The defendant appealed on the grounds that the judge applied the right test but misapplied it to the facts of the case. The Court of Appeal disagreed. The judge was right to look at the commercial and human realities of the position. Although the claimant was interested in the ultimate job it did not follow that it would do unlimited work for nothing. The giving of instructions to a professional to carry out work usually gives rise to an implied promise to pay - because no other explanation makes commercial sense. Instead, it was for the defendant to explain why the work done at its behest should not be paid for.

So, in conclusion, it seems that if you want to avoid payment disputes it is best to be clear as to your terms from the outset but not to wield too big a stick.

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