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Contractor Doctor: If my client blocks a substitution can I claim breach of contract?

Dear Contractor Doctor,

I am an engineering contractor working through my own limited company. I provide my services to a range of major clients, usually direct but sometimes via an agency. It is quite common for me to use specialist subcontractors for modelling and calculations, and I occasionally send a fellow contractor as a substitute when I’m unexpectedly called away.

However, my most recent client has refused to allow me to exercise my right of substitution, even though it was expressly written into the contract, which leaves me concerned both about fulfilling the contract to specification and as to my IR35 status.

If my client blocks a substitution, can I claim breach of contract?

Thanks

Tony

Contractor Doctor says:

A client preventing a contractor from providing services in a way which is within the scope of the contract would almost certainly be in breach of contract. Similarly, if an agency is in the chain, if there are corresponding substitution provisions in the upper and lower level contracts, and if the client refuses to allow a substitution which would be in accordance with those provisions, then the client would be in breach of its contract with the agency, and would cause the agency to be in breach of its contract with the contractor.

However, as Roger Sinclair of Egos explains, a substitution clause is likely to be subsidiary to the main contract. Any breach and subsequent remedy must be considered under contract law, from the perspective of a contract to provide services. The possible contract breach should not be confused with IR35 tax legislation, or with its IR35 consequences. The purpose of the contract is to govern the performance of services – and not to regulate or avoid the payment of tax.

“If A contracts with B for A to perform a task for B, but B then says ‘I’m not going to let you perform the task in the way the contract has provided’, then B would be in breach of contract,” says Sinclair. “Even if the right of substitution is fettered and the contractor must obtain client consent for a substitute, the contract may provide that such consent may only be withheld on reasonable grounds related to qualifications, experience or an issue such as security. Withholding of consent which could not be justified on the specified grounds would still be a breach.”

Implications of a breach of contract

If exercise of a right of substitution has been blocked and a breach of contract has arisen, the contractor should look first to the provisions of the contract for dealing with a breach, says Sinclair. They should first look at the seriousness of the breach and then take action accordingly, rather than simply upping sticks and walking off site.

“Many contracts make provision for remedying a breach and often require the party considered to be in breach to be given notice of the breach and an opportunity to remedy the situation within a specified period,” explains Sinclair. “If the contractor has been refused the right to substitute, they should consider whether they should first put the client on notice, and give the client an opportunity to remedy the position.”

Sinclair says the next step is to evaluate the seriousness of the breach and whether it warrants termination of the contract: “Consider the example where there is a contractual clause that requires the contractor to deliver invoices within 15 days of the timesheet being signed. In the event that the contractor delivers an invoice after 16 days, it is unlikely that such a breach would justify the client in terminating.

Preventing performance of services under contract

“If, however, the client insists that a substitute will not be permitted to perform the service, it is likely that this would generally be a serious enough breach to justify termination of the contract, where the client does not have the contractual right to decide who does the work.”

The best thing is to ensure situations like this don't arise in the first place. By obtaining professional legal assistance from the outset, contractors can negotiate out many potential problems before the contract begins

Roger Sinclair, Egos

Sinclair warns contractors against introducing IR35 into the equation: “Substitution is relevant to IR35, but IR35 is not relevant to substitution, nor is the motivation of the client in preventing substitution which is permitted by the contract. What is relevant is that the client is preventing the contractor from performing the very services that the contractor has contracted to perform; thus the client is preventing the contract from being fulfilled. Contract law provides the remedy.”

When the agency is in breach

If there is an agency in the contractual chain, and if the upper and lower contracts differ in their provisions for substitution, then the agency could find itself in hot water, as it could be in breach of contract with both the client and the contractor – and on the receiving end of claims for damages from each of them.

“The response to any perceived breach of contract on whatever grounds should be proportionate,” says Sinclair, who concludes: “The best thing is to ensure situations like this don’t arise in the first place – by obtaining professional legal assistance from the outset, contractors can negotiate out many potential problems before the contract begins.”

Good luck with your contracting!

Contractor Doctor

Published: Thursday, May 27, 2010

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