Dealing With Back Charges
All right, it’s Anthony from Contractors Debt Recovery back with another Nobel Peace Prize winning edition of this video series. What we’re going to talk about now is back charges. Now there’s only one thing you need to understand about back charges is that there’s got to be a right to them in the contract. Often someone will say, your client will go, “Hang on you caused that damage. You did this. You didn’t do that. I’m back charging you.” Now you cannot just back charge. The contract has to expressly say that and it’s called more formally a right to set off. I can set off or deduct amounts I see you owe me from amounts I owe you. A lot of this goes on in Security of Payment adjudications.
So you’ve done $20,000 worth of work. I’m back charging you. I’m setting off $2,000 for defect or something so I owe you $18,000. That’s how it works. Now back charges is in fact slang. It’s not a legal term. It’s just a slang term that’s sort of developed in the industry. But let’s use it cause everyone does use it. But that’s what it is. It’s a right. It’s a set off. Now in the contract your client must have a right to set off and you’ll see in bigger contracts there will be a phrase something like under the progress payment section that the client can deduct moneys on account of defects, etc. etc. The client can deduct moneys owed by the contractor to it from moneys he owes the contractor. Anytime you see that type of sentence in there that is a right to set off which means they can make those deduction. They can apply back charges.
But what about all that work that’s done where your contract is your quote? Here’s a quote. Yeah. Like your quote. Get working on it. Now I would hope that if your quote terms or conditions doesn’t include a right to set off and if it does you’re mad and you’re an idiot, and I’ll bang you on the head if I can reach through the screen. But anyway you wouldn’t have that in your quote. So when you do that work where your quote is the contract effectively, your client can’t back charge you because it’s not an express term of the contract. Now this is new to most contractors when I tell them this thing. I thought they knew I could back charge. They could just, no. You have the right to the full value of the work you’ve done. If your client wants to deduct moneys they have to run a separate action, a separate claim, see you in court or separate something or rather to have that money deducted from your payment. Other than that they have no entitlement to set off.
So just be very very clear on that key distinction. So when you’re reviewing contracts one of the first things I looked for is there right to set off. And you’ll find that normally in the payment clause. There might be a separate clause actually called right to set up. Sorry, right to set off. There might be separate on called actually back charges. I’ve seen that a few times. They might just be a sentence buried somewhere in the payment clause. So look for that. Look for it and see if there’s a right to do it and you can be assured that they’ll try and impose it if there is a right to it. The final thing I’d say about back charges is be very careful of the phrase that says they can deduct moneys from moneys they owe you. They can deduct moneys that you owe them. If I got that right. And then there’s a phrase that says under this contract or otherwise.
Now those two word or otherwise is very dangerous. It means that, let’s say you’re doing two jobs for them. They can go, “Hang on. I’m going to back charge from Job B. I’m going to apply that Job A because it says I can back charge “under this contract or otherwise.” Which means ‘anything’. Now I’ve picked this up for clients and have actually struck it out and said, “You go to your client and you say those two words come out.” And there’s been a huge flurry of activity, letters from lawyers, a huge fight over those two words. It just shows how much desperately clients want to rely on that little thing to just back charge anything. You busted a bus down the road a month ago I’m going to back charge. Well the bus isn’t under our contract. Yeah, it isn’t but I’m going to pull that off your contract anyway. That’s literally what that means.
So be very careful. Just to summarize. First of all, no one can back charge unless there’s an express right to set off in a contract. That’s where you’ll probably find it. If you see this phrase under back charge or set off under this contract or otherwise, those words have to come out. And just be very aware of it. So this is part of your contract review upfront when you’re tendering or quoting to your client. And your quotation if you do work under your quote you can be very confident that there’s not right to set off so you can just send those back charges back to your client. Any questions or queries give us a call. Number is at the bottom of the screen. Other than that, I’ll see you next time.