Resolution of disputes arising from set-off clauses between main contractors and subcontractors

Abstract

Set-off relates to the situation where a main contractor raises a counterclaim against a subcontractor's claim or where an employer raises a counterclaim against the main contractor. The alternative terms cross claim, counterclaim, contra charge, compensation and retention are explained in the context of Scots law. Set-off in the construction industry in Scotland is then discussed within the contractual frameworks upon which main contractors are entitled to exercise such rights and how these conditions of contract have been formed over recent years. A study reported shows the extent of the use of amended and unamended forms of subcontract and main contractors' own forms of subcontract which imposed more onerous set-off conditions than the standard forms, the reasons given by main contractors for exercising their rights of set-off, the level of satisfaction amongst subcontractors with the sums set-off against them, the means by which main contractors and subcontractors settled disputed set-offs, and subcontractors' reasons for accepting unsatisfactory instances of set-off. The research was undertaken using a questionnaire to a stratified sample of subcontractors throughout central Scotland in 1995. Forty-seven subcontractors responded to the questionnaire and 427 instances of set-off were recorded. The study indicated that, despite the considerable protection given to subcontractors in the standard forms of subcontract and in common law, they were prepared to settle set-offs with which they were dissatisfied without initiating contractual proceedings which would have improved their situation. It would appear from this study that subcontractors are reluctant to use their contractual entitlements either because of fears over the costs of disputing set-offs or because they fear that they will be denied opportunities to tender for work in the future. Until there is a culture shift in the industry, reliance on contractual conditions alone may be inadequate to meet the needs of subcontractors.