Dilemma 3:  Negotiating a contract claim - Dilemma

You are the commercial director of a project owner which has just had an industrial plant constructed for it by a contractor.  The plant has been completed, and is operating.  You have received a letter from the commercial director of the contractor complaining that the project owner has wrongly claimed that part of the construction works were defective, and has as a result wrongly refused to pay the contractor’s retention of US$500,000.  You arrange a meeting with the contractor.  Prior to the meeting, you ask the project manager working for your organisation to brief you about the contract claim.  It becomes apparent that, while there were some defects for which the contractor was responsible, these defects had been rectified by the contractor.  The other defects which were being claimed against the contractor were actually not defects, but resulted from a design error by the project owner’s consultant (which was not the contractor’s responsibility).  You ask the project manager why he is claiming that this is the contractor’s fault.  He explains that the design consultant is a small organisation, and is uninsured, so could not pay compensation to the project owner even if the project owner sued him.  Therefore, he believes that the only way that the project owner can recover this cost is from the contractor.  In any event, he states that “not paying the contractor the retention is a normal way of making additional profit - contractors expect it - they normally add a bit of extra in their price because they know they won’t get their full retention.  Also, they won’t dare sue us, as they will want additional work one day from us”.

 

You previously knew nothing personally about this claim against the contractor.  However, now you know that the claim is false, and that the project owner should be paying the retention to the contractor.  You feel that it would be right to pay the contractor.  On the other hand, the contractor probably would not sue the project owner, which means that the project owner would make an additional profit of US$500,000.  All the senior staff of the project owner, including you and the project manager, would receive a personal bonus based on the project’s profitability. 

 

What do you do? 

 

Consider your position, and then go to the answer on the next page.