When 'full and final payment' is anything but

Customers are always coming up with increasingly inventive ways of avoiding payment, especially in difficult economic times.

An old trick which is undergoing resurgence in the construction industry is the avoidance of the final payment syndrome. Retentions have historically been difficult to recover but there has been a recent increase in examples of customers avoiding making the final payment altogether for the final payment by a list of alleged defects, omissions and snagging items never previously heard of will be drawn up just when the developer or builder was hoping to get his hands on some long awaited profit for the job.

Another trick supporting non-payment of the final payment is the sending of a cheque ‘in full and final settlement’ by the customer. If you face this situation there are a number of points to consider:

1.         Does the payment offer represent a fair deal bearing in mind the value of any snagging or defective works to be completed? If it does, then make a commercial decision to accept it and move on from the project.

2.         If the payment does not represent a fair deal then pay the cheque into your account and at the same time, or very soon after or you will lose this right, send a letter to your customer informing them that the cheque is not accepted in full and final settlement but only on account of your claim. Include a request for payment of the balance within seven or 14 days. This can be done by enclosing an up-to-date statement allowing credit for the part payment.

3.         If payment is not forthcoming within the requested period then it is usual to provide the customer with seven days notice of your intention to take court action to recover the balance of your claim.

4.         A claim may be issued in the small claims track of the County Court if your debt claim is for less than £5,000. A small Court fee will be payable.

5.         In the claim form refer to the case of D&C Builders Ltd v Rees (1965) in support of your claim for the balance.

A word of caution!

If the customer simply sends the cheque “in full and final settlement” then the above plan of action should work.  However, if the customer sends the cheque with wording along the lines:

“I enclose my cheque in the sum of £xxx in full and final settlement of your claim for payment.  If you are not prepared to accept my cheque on this basis, then you must return the cheque to me.”

Then there is a greater risk that the Court will allow the customer’s trick and that you will be unable to recover the balance if you pay the cheque in.  This is because the customer has expressly stated that you must return the cheque if it is not to be accepted in settlement.  As usual the devil is in the detail.

For more information on construction disputes or contracts please contact Lorna Carter, Principal Legal Executive in Hewitsons’ construction law team on 01223 461155.