Contractors' Questions: Can my client refuse to pay?

Contractor's Question: I have worked for my current client, who is a development agency, since last year as a freelancer on various projects, including one for their client (the customer) who commissioned work with the agency. I have never signed a contract with the agency but was taken on to develop an IT system for their customer. But from the outset, the customer's project specifications and requirements constantly shifted, rubbishing the original deadline of 3 months. In fact, once work started, the customer issued a new specification which was much more substantial.

I have not been paid for this project since June (but have undertaken another project with the agency which I have been mostly paid for) but prior to that I had been paid monthly for the customer's project. To make matters worse, the customer is expecting delivery of the project now, while the agency is refusing to pay me the last invoice for the previous project until I deliver the final code for the customer's project. But details on system functionality have not been provided by the customer so I am currently refusing to do anymore work until invoices are brought up to date. The customer is threatening to take legal action against the agency. As I've got no contract, and the final project has not been delivered, should I be concerned?

Expert's Answer: When supplied by an agency, the basic contractual position is that the contractor contracts with the agency and the agency then contracts with the customer. Any rights or responsibilities under those contracts rest only with the party involved i.e. you/the agency, the agency/customer. Any breaches under each of these contracts can only be actioned by the contracting parties. This means, should the agency not pay, your claim is again the agency not the customer. If the customer brings a claim for failure to complete a project, they claim against the agency, which in turn would need to bring a separate claim against the contractor. To a degree this protects the contractor against direct customer claims, as in this case. It is for the agency to enforce the contract against you.

Even though you do not have a contract in writing with the agency, one exists. Your issue is what the terms of this contract are. Generally custom and practice under the project will dictate these. In this case, you were paid monthly on the project up to June. This indicates payment is required monthly. Failure to pay monthly may mean the agency is in breach of the terms of their contract with you.

If you have provided your services correctly, I can see no reason why you should not have been paid since June. This means you are likely to have claim against the agency for breach of contract and your pay. It is worth noting that if the agency has not paid because the customer has not paid, the agency must still pay you. Regulation 12 of the Conduct of Employment Agencies and Employment Business Regulations 2003 states they are responsible for payment in any event.

As to supplying the final code, if a breach of contract is fundamental, then the breaching party arguably has no rights under a contract. It is hard to see how failure to pay could not be fundamental. The failure to pay would therefore absolve you of your responsibilities and you could well 'down tools'. This could include withholding the final coding, especially as it has not been paid for!

The fact that there is a dispute regarding one project should make no difference to payment under another. Often agency contracts contain a clause allowing for the retention of any monies owed under other projects. However there is no written contract here and it is highly unlikely any such clause will be implied. If it withholds pay, the agency will be in breach of both of their contracts with you. It is difficult to see how the agency could defend your right to pay under the second contract, especially if you have fully completed the work and it has nothing to do with the former.

Obviously disputes with agencies need to be assessed commercially in light of the damage they could do to future business, but it appears you may well have grounds to threaten legal proceedings of your own.

The expert was David Buckle, head of the employment division at Cubism Law.