I would appreciate some guidance on how to tackle being threatened with legal action by a contractor for non settlement of an invoice when the work was not done correctly.
I'm one of four Directors of a MCL for a residential estate consisting of 122 leasehold one bedroom flats and maisonettes who own the freehold. Directors are elected leaseholders who voluntarily manage the non-profit Management Company assisted by a managing agent.
In September 2017 we sought quotes to replace an ageing intercom system in seven blocks of 10 flats, 70 properties in total. As part of planned works the leaseholders have paid into a reserve fund via their service charge.
We issued a works instruction to our chosen contractor as per the fixed price quotation. After a catalogue of issues and excuses over nine months that constantly delayed completion and two requests for large additional payments to complete the works we lost all confidence in the contractors ability to complete the job professionally and deliver in a reasonable time and cost. We finally decided not to continue using him after he said he had completed the work he quoted for and then asked for more money to give us a fully working system, none of which was outlined in the original quote as additional costs. He then submitted his invoice which included one of the additional payment we had already agreed.
Within days of receiving the invoice the system in every block was sabotaged/vandalised with wires cut to timers and junction boxes. As we were not satisfied with the quality and scope of the work with no way to even test it, we paid 50% of the invoice and obtained a detailed report from a professional contractor about the damage caused and an estimate of how much work was required to give us a fully working system. As suspected the report highlighted that there were numerous problems with the installation to date and that the system was incapable of working, even allowing for the sabotage, until rectified. Many issues were found i.e. old non-compatible parts had not been replaced with new parts and the wiring was incorrect. It wasn't fit for purpose. This was separate to the damage that had been done by vandalism.
As the initial contractors 9 months work was unsatisfactory we had to appoint another contractor to rectify the faulty works and complete the job. We had to pay for this in addition to the 50% sum already paid to the initial contractor. We couldn't go forward with open ended demands for more money and further delays, we couldn't leave the system as it was and we couldn't reinstate the old system.
The initial contractor is seeking payment in full as he says he had completed what he quoted for, a working trade button, but not including the handsets. Even though we have raised the issues in the professional report he will not accept any evidence that it was incorrectly installed. The contractor paid an electrician to do the wiring for him.
After threats of legal action if full payment is not settled immediately and heavy penalties for daily delays, the contractor has suggested we settle out of court and offered a 10% reduction on his invoice. We would welcome to settle this matter out of court but would have to accept the offer of only a 10% reduction. It is unlikely that this will be increased if we try to negotiate and we feel that 50% is already generous and fair considering the extra expense we have had to rectify his errors.The total cost of 50% and the cost we paid to rectify will still be about 30% above what another company quoted initially for a fully working system completed in two weeks.
Generally the advice is that it is mutually beneficial for both parties to settle out of court due to high costs. As the £5600 amount disputed is under £10k we assume it would be a small claims court. However our main issue is that this is not one business against another. The service charge is paid by the leaseholders so they will have had to directly pay for the cost to rectify a system that was not fit for purpose, and in addition to fund the cost of the initial contractor unless we continue to dispute payment of more than 50%. This has been considered fair as it covers the cost of the hardware supplied and fitted but not works that had to be redone. He has added VAT which was not shown on the quote but we checked and he is voluntarily VAT registered as a one man small business (VAT number was at top of quote but we did not realise VAT was to be included when reviewing the quotes).
We would be grateful for your advice on where leaseholders stand with defending a case if taken to court by a contractor for payment. Leaseholders, through their service charge would have to directly fund any legal costs that are not recoverable, fund any losses if the case was lost, or fund paying to have the job done twice.
For a non-profit organisations do we have access to free legal services, is there an organisation that we can go to for advice? Are we considered consumers covered by consumer law? Would Trading Standards assist and what financial protections are there in such circumstances against the threat of being taken to court with high costs and being intimidated to settle over and above what should be paid for a very poor standard of work? Would legal costs be covered by some building insurances? What are the non-recoverable costs for a successful arbitration outcome or defending our case in a small claims court?
Obviously if we lost we would have to pay the full invoice plus other legal costs. We are not sure if mediation would be of any benefit as the dispute is based on a factual technical report. He is unlikely to be part of a trade association as he is a one man facilitator who sub-contracts, something we only found out during the process. He also ends e mails saying he does not wish to discuss the matter further.
As Directors we wish to act in the best interest of leaseholders but when dealing with such a threatening unreasonable contractor we are also conscious of potential legal costs making matters worse. We are currently checking the lease to see if there is any provision for legal costs. Any advice you can offer would be very much appreciated.
Thank you for your enquiry.
I am sorry to hear about your situation and can fully understand why you do not wish to pay the full sum being demanded by the initial contractor.
Unfortunately, the terms of the leases (relating to the properties in the estate) are unlikely to render the initial contractor liable for legal costs of defending any claim which the contractor issues against you as I assume that the contractor was not party to any of the leases.
I note that the amount in dispute is £5,600.00. As such, you are right that any claim which the contractor issues is likely to be allocated to the Small Claims Track (the Small Claims Track is the usual track for claims with a quantum of less than £10,000.00).
Other than in exceptional circumstances, on the Small Claims Track the winning party can recover no more than its “fixed costs” from the losing party. Fixed costs include any Court fees and travelling expenses incurred by the winning party together with further nominal sums. Given that any claim would be issued by the initial contractor, the contractor would have to pay such Court fees (in the first instance at least).
It is distinctly possible that the building insurance policy covers the costs of defending the claim (especially if the policy includes legal expenses cover). You/the managing agent should check all insurance policies carefully and liaise with the insurer.
If an insurance policy does not cover your legal costs, your costs (to the extent that they are not recoverable from the contractor) may be recoverable via the general service charge account (and I note that you are checking the lease in this regard). However, unfortunately, this would ultimately result in the tenants footing the irrecoverable costs (via their service charge contributions).
Mediation could be an option here. If the contractor issues proceedings and you file a defence, The Court will most likely issue Directions Questionnaires. The Questionnaire will probably ask whether you wish to use the Court’s small claims mediation service. If both you and the contractor indicate that you are prepared to mediate, the Court will (if it deems the case suitable for mediation) arrange a mediation appointment. Such appointments are conducted by telephone and at no cost to the parties.
If the contractor issues a claim against you in respect of the disputed amount, you may well have a defence based on the Sale of Goods Act 1979 and/or the Supply of Goods and Services Act 1982. Such defence may be on the grounds that the goods/services are not of satisfactory quality. In addition, it may be that the goods do not correspond with the description given to the goods by the contractor or that they are not fit for purpose.
You/your managing agent should examine any contract which you entered into with the contractor prior to the commencement of the works. If the contractor gave a fixed price quote for the works, he cannot expect to be paid more than that quote (unless he renegotiated the price).
Richard Owen, Solicitor at JB Leitch Ltd