The client's right to withhold payment of the contractor's fee

The client's right to withhold payment of the fee in a works contract

The contractor delivers the work, the client discovers defects. What to do? Pay and then negotiate, or withhold the fee until the problem is resolved? The question is far from purely academic: in construction and renovation practice, defects in the work are commonplace, and the client's reaction in the first moments after delivery can determine the outcome of the entire dispute.

The client's remedies in the event of defective work

When the contractor delivers a defective work, the client has three fundamental remedies under Art. 368 CO: to reject the work, to demand a reduction of the agreed price, or to require repair of the defect free of charge. These are alternative rights: the client chooses which to assert based on the severity of the defect and his own convenience.

Where the SIA 118 Standard applies, the logic changes slightly. In this case, the client initially has only the right to repair free of charge (Art. 169 SIA 118 Standard). Only when the repair is not carried out may he proceed to the other remedies: rejection of the work or reduction of the price. In Ticino construction practice, the SIA 118 Standard is frequently applied, which makes the repair request the virtually obligatory starting point.

Moreover, even outside the SIA 118 Standard, the request for repair free of charge remains the most widely used and advisable remedy: it is the most direct and swift solution for both parties.

Withholding the fee: the basis in Art. 82 CO

When the client demands repair of the defect free of charge, he is entitled to a further right of considerable practical importance: to suspend payment of the fee until the repaired work is delivered. The legal basis lies in Art. 82 CO, which provides for the defence of non-performance in bilateral contracts. This applies both under the CO and under the SIA 118 Standard.

Hugo Haab, Attorney-at-Law, and Roberto Haab, Attorney-at-Law, of Haab Law Firm, draw attention to a point that is often overlooked in practice: the right to withhold payment arises only after the client has formally requested repair of the work. It is not sufficient to note a defect; the repair demand must be communicated to the contractor in a documentable manner. Without this step, the withholding is not justified (GAUCH, Der Werkvertrag, 6th edition, N 2369). A registered letter remains the safest method.

When withholding is not permitted

Not in all cases may the client rely on Art. 82 CO to suspend payment. Withholding is not permissible where the client (GAUCH, Der Werkvertrag, 6th edition, N 2371 et seq.):

• rejects the work, because the rejection already extinguishes the contractor's claim to the fee, rendering recourse to Art. 82 CO superfluous;
• demands a reduction of the fee, since in this case too the defence of non-performance is without object;
• has claimed damages from the contractor for consequential loss arising from non-performance.

In other words, the withholding of the fee operates exclusively in conjunction with the request for repair. There is a direct link between the client's claim to delivery of a defect-free work and his obligation to pay the fee. This relationship of reciprocity justifies the suspension of payment. In the other cases, this direct link is absent, and Art. 82 CO does not apply.

Effectiveness of the remedy and scope of the withholding

The Federal Supreme Court has described the withholding of the fee as an extremely effective instrument for obtaining repair of the defective work free of charge (BGE 89 II 235). This right applies to any type of defect, not only to defects of a certain significance. It is also irrelevant whether the client has already taken possession of the work or is using it despite the defects.

In principle, the client who validly raises the defence under Art. 82 CO may withhold the entire fee still due, regardless of the value of the repair required (GAUCH, Der Werkvertrag, 6th edition, N 2388). However, if the cost of repair is markedly lower than the amount withheld, the client risks acting in bad faith. Legal scholarship suggests as a benchmark a withholding equal to approximately three times the estimated cost of repair (GAUCH, Der Werkvertrag, 6th edition, N 2392): a sum sufficient to cover the foreseeable cost of the repair and at the same time to maintain adequate pressure on the contractor.

Withholding and advance payments or progress payments

In construction practice, payment almost never occurs upon delivery of the finished work, as provided on a default basis by Art. 372 CO. As a rule, the parties agree upon advance payments or progress payments linked to the state of completion. This does not prevent the client from exercising the withholding under Art. 82 CO: he may suspend both the portion of the fee not yet due and the portion already due but not yet paid (GAUCH, Der Werkvertrag, 6th edition, N 2399).

A word of caution, however: if the works contract contains a clause under which the client may not withhold the fee due as security for his right to repair (or an equivalent formulation), the scope of the withholding is limited to the fee not yet due. Before taking action, it is therefore essential to review the contract text carefully.

Work delivered in instalments and 'retention' amounts

Where the parties have agreed that the work is to be delivered in successive instalments, this does not limit the right to withhold: the client may suspend the entire fee still owed, including that relating to parts not yet delivered.

In practice, it frequently occurs that the contractor does not claim the entire fee, retaining an amount 'as security' for possible defects, to be released after an agreed period. This contractual mechanism has no connection with Art. 82 CO. Even where a security amount has already been agreed, the client retains his right to withhold the fee under Art. 82 CO in full. He may even prevent the release of that security amount in favour of the contractor (GAUCH, Der Werkvertrag, 6th edition, N 2405).

Repair by a third party

If the contractor fails to carry out the repair despite a formal request, the client has the right to entrust the work to a third party, at the contractor's expense, by analogy with Art. 366 para. 2 CO. Even in this case, the client retains the right to withhold the fee under Art. 82 CO (GAUCH, Der Werkvertrag, 6th edition, N 2374 in fine). This is an important point: having the repair carried out elsewhere does not extinguish the right to suspend payment.

Contact us

If you have discovered defects in a commissioned work and wish to protect your right to repair, Haab Law Firm and Notary Office in Lugano can assist you in assessing the most appropriate strategy. Hugo Haab, Attorney-at-Law, and Roberto Haab, Attorney-at-Law, have extensive experience in construction contract law and in handling disputes relating to defects in works. Contact us for a consultation.

For a personal consultation: info@haablegal.ch | +41 91 913 30 70