Four types of contract breach that contractors need to beware

Contractors, like any service provider, are keen to win work and get the deal signed off as quickly as possible, writes Adrian Marlowe, managing director of Lawspeed.

Further like any other business, contractor service providers can make the major mistake of signing up to contract terms without checking the terms thoroughly.

A nightmare in disguise?

What may appear to be written confirmation of a lucrative piece of work, and so tempting to sign up to, could turn out to be a nightmare in disguise.

Here are some examples of how things could go wrong resulting in the contractor facing a potential claim for breach of contract.

In fact, the four types of breach of contract that contractors need to be most aware of, are:

1. Failure to attend the client site when required

Many contracts require the work to be carried out on the client site, often between certain hours. Contractor contracts are contracts for services made between the hiring party, (i.e. an agency or client hirer) and the contractor’s company, with no worker rights for the individual as against either.

Failure to attend on-site for a seemingly legitimate reason such as the individual being ill, could result in refusal by the hirer to pay monies due for work done. The contract should address this so that there is no contractual penalty.

2. Failure to meet deadlines for delivery of work through no fault of the contractor

Contracts, particularly those for delivery of a project (generally necessary to comply with IR35 rules), often contain milestones, KPIs and/or deadlines.

If breached, the contract may entitle the hirer to withhold payment, even if the delay may have been caused by the hirer’s or third party’s own actions made after the contract is signed. For example, changing the timescales, or increasing the scope of work. There should be a fair process in the contract for change.

The client may also want to terminate the contract for breach, leaving the contractor both short of payment and without work. If the issues mentioned are properly discussed and accounted for in the contract, there should be no breach of contract by the contractor if the circumstances arise, and, unless agreed otherwise by the contractor, there should be no right to terminate.

3. In agency contracts, the contract may contain restrictive covenants against working for the hirer direct after completion of the work

These types of clauses are prohibited under the ‘Agency Conduct rules’ unless the contractor has opted out of those rules.

Opting out does underline the intention of the contractor to be seen as a business, and many contractors do opt out for that reason. The downside of opting out is that the contract may restrict the ability to work for the hirer direct, breach of which may land the contractor with a bill to pay the agency.

This type of clause is generally included to protect the agency’s own entitlement to introduction fees from the hirer; recognition of this fact may influence the contractor’s decision to sign such a contract, particularly if the contractor wants to reduce exposure to IR35 tax risk by having a clear intention to limit work for the hirer to the project in hand.

4. IR35 indemnities and/or other tax-related clauses pinning liability on contractors

No article such as this can go without discussion around IR35 and tax.

Clauses may allow for payments to be claimed against the contractor if the actions of the contractor result in a tax claim by HMRC against the other party. Such provisions are usually described as indemnity clauses. So for example if the hirer decides that IR35 /the off-payroll working rules do not apply, it may include an indemnity clause in the contract, designed to leave the contractor liable if HMRC investigates.

Finally, let’s review (includes going into the contact with eyes open)

The issues mentioned above are not exclusive, there are more risks for contractors to consider.

The wording of the contract is always critical and contractors should always ensure that the arrangements are fair and reflect the intentions of both parties, not just the hirer. Going into the contract with eyes open, reflecting the fact that the contractor is a business not just an individual, will result in much better security and less risk of a claim for breach of contract.

As contract specialists in this area, we provide a review services of contracts for contractors. This comprehensive service is designed to identify commercial risk so that the contractor is forewarned, aware of the risks involved when signing up, and is equipped with the tools to negotiate.