Wrongful suspension of works may lead to serious financial consequences for the party in the wrong.
However, the appeal to suspend works for non-payment is understandable.
Suspending works can be a valuable tool for putting pressure on an employer that is not paying its bills (either at all, or on time).
It can also be useful in a situation where there is no realistic prospect of obtaining further payment, for example where the employer or main contractor is insolvent or on the brink of insolvency, but the contract does not provide the right to terminate for insolvency.
Where this is the position, suspension of all work is an immediately effective means of cutting costs and reducing the likely losses.
However, suspending works should be considered carefully and contractors wishing to exercise this right must do so in accordance with the statutory or contractual rights to suspend performance of obligations under a construction contract.
Suspension of works at common law
There is no right at common law for a party to a contract to suspend performance of contractual obligations in the event of a breach of contract by the other party.
Instead, if the breach is sufficiently serious that it can be regarded as a “repudiatory” breach, the innocent party might either elect to affirm the contract or accept the repudiate thereby terminating the contract.
Accordingly, in a construction contract, in the event that an employer fails to pay the sum due to the contractor pursuant to the terms of the relevant contract, a contractor will not at common law be entitled to suspend performance of the contact works.
The contractor must either rescind the contract or, failing rescission, perform the contract fully in accordance with its terms.
Statutory right to suspend for non-payment
Section 112 of the Housing Grants Construction and Regeneration Act 1996, as amended by the Local Democracy, Economic Development and Construction Act 2009 (the Construction Act) gives a party to a construction contract the statutory right to suspend performance of his obligations if he is not paid in accordance with the terms of his contract.
For a discussion about what constitutes “construction contract” covered by the Construction Act, please have a look at my post here.
The unpaid party:
- has a right to suspend work if all, or part, of a sum due under the contract remains unpaid by the final date for payment (note that the unpaid party must still take into account any pay less notice served by the paying party under s. 111 of the Construction Act);
- may suspend performance of any, or all, of its obligation under the contract;
- is entitled to the additional time involved in suspending and re-mobilising;
- is entitled to the reasonable costs of suspension.
A breach of contract other than non-payment will not give the innocent party a right to suspend performance.
However, the innocent party may have a right to claim damages for breach of contract, or a statutory right to commence an adjudication to settle the dispute under a construction contract.
Who may suspend the contract?
The wording of s. 112 of the Construction Act is ambiguous as to whether it is intended to give both parties to a construction contract a right to suspend in the event of non-payment.
However, the courts have clearly indicated their view that s. 112 only allows the party undertaking works (i.e. a contractor or sub-contractor) to suspend performance of its obligations if it is not paid and that s. 112 is not intended to apply to payment/suspension on the part of the employer.
What obligations can be suspended?
Section 112 of the Construction Act allows the unpaid party to suspend performance of “any or all” of its obligations under the contract (without prejudice to any other right or remedy, s. 112(1) of the Construction Act).
In practice, this means a party can suspend some, but not all, of its construction works (or professional services if a consultant is exercising the right).
For example, the unpaid party can choose to suspend only part of their obligation before escalating to all-out suspension until the required payment is forthcoming.
In addition, the party does not actually have to suspend the construction works—it can instead suspend any of its other obligations under the contract (for example, reporting requirements or insurance policy obligations), while continuing with construction.
However, the suspended obligation must be an obligation owed to the party who has failed to pay.
The unpaid party has to be careful that by suspending its obligations they will not to breach any statutory duties, for example:
- its ongoing obligation to maintain employer’s liability insurance;
- its obligations under the Construction, Design and Management Regulations 2015.
Is notice of suspension required?
The unpaid party must give the paying party at least seven days’ notice of its intention to suspend performance (s. 112(2) of the Construction Act).
The notice must also state the ground(s) upon which the unpaid party is intending to suspend performance.
It is important that the unpaid party issues a valid notice of suspension. Failing this, any suspension may amount to a repudiatory breach of contract.
When does the right to suspend cease?
The right to suspend performance ceases when the party in default makes payment in full (s. 112(3) of the Construction Act).
Can the suspending party recover its costs of suspension?
Section 112(3A) of the Construction Act creates a statutory right for the unpaid party to seek to recover, from the paying party, reasonable costs and expenses reasonably incurred by that party as a result of any suspension.
This is intended to allow the unpaid party to recover, for example, costs of demobilisation and remobilisation.
The nature of the project and the site will be relevant in determining what other costs the unpaid party can claim, such as:
- charges in connection with amendment to insurance cover;
- general administrative charges;
- extension of any plant/equipment hireage (or delays where expensive plant cannot be immediately re-hired or delivered to site once payment has been made by the defaulting party).
It is unlikely that a party would be able to recover legal or other professional fees regarding the right to suspend.
Consequences of suspension of works
The Construction Act effectively gives the unpaid party an extension of time for suspension.
Section 112(4) of the Construction Act provides that any period during which performance is suspended (including time required to de-mobilise and mobilise) pursuant to the power contained in s. 112 does not count in the calculation of any contractual period taken by the party, or by a third party, to complete any works directly or indirectly affected by the suspension.
Where the contractual time limit is set by reference to a date rather than a period, the date shall be adjusted accordingly.
Suspension of the works is also commonly expressly included in construction contracts as a ground for entitlement to an extension of time.
For example, see clause 2.29.6 of the JCT Standard Building Contract With Quantities 2011/2016 and clause Y2.5 of the NEC4 Engineering and Construction Contract (clause Y2.4 of the NEC3 form).
Third parties directly or indirectly affected by a statutory suspension can also claim extensions of time.
For example, if sub-contractor B validly suspends performance of his obligations to contractor A, if sub-contractor C’s work is delayed because he must wait for sub-contractor B to complete its work, then sub-contractor C can seek an extended time limit to its sub-contract, to the extent it is directly or indirectly affected by sub-contractor B’s suspension.
Wrongful suspension of works
If the unpaid party wrongly suspends the works, it will be in breach of contract. As a result, it will be at risk of a claim from the employer for damages for breach of contract.
The situation must therefore be given very careful consideration before an unpaid party decides to suspend performance of all or part of the works.
An unpaid party should exercise particular caution if it is likely that the paying party is actually capable of paying but, for some reason, has not done so.
Careful distinction needs to be made between temporarily suspending performance for non-payment and walking away from the contract entirely.
Although the principle that wrongful suspension may amount to a repudiatory breach of contract is the usual position, it is not an absolute principle, as in Mayhaven Healthcare v Bothma.
In this case a contractor that thought it was properly entitled to suspend for non-payment was held to be in breach of contract when it was established it did not have the right.
However, it was not found to have repudiated the contract simply because it mistakenly thought it had a right it did not have.
Following Mayhaven, it is clear that the court will take into account the circumstances in question and consider whether the contractor’s decision to suspend the works did, in fact, constitute a repudiatory breach of contract.
However, contractors should not assume that this will always be the outcome, as it will depend on the circumstances each time.
Power to suspend for reasons other than non-payment
It is common for construction contracts to expressly provide for a party to suspend performance as a consequence of non-payment in line with the right to do so imposed by the Construction Act (i.e. where the contractor is unpaid and has given the required notices).
If the parties want to have broader rights to suspend the works (particularly the employer, which has no right to suspend under the Construction Act), these need to be expressly provided for in the contract.
In these circumstances, the parties ought to make sure that the contract between them expressly sets out the rights required (i.e. when suspension is permitted), the process for suspending obligations under the contract (notices to be given etc.) and deals fully with the key practical issues/implications that arise when a project is suspended, for example:
- removal of equipment/machinery from site
- time/money consequences for the contractor
- process for resumption of work
- effect on bonds/PCGs, etc.
- insurance consequences
- impact of price fluctuations in relation to labour, materials, equipment, etc that may affect the contractor
When remedy of suspension is likely to be used
Where the unpaid party judges that there is a realistic prospect of obtaining further payment, suspension of work may be considered as a tactic to obtain payment.
However, there are various factors which may make suspension of work an unattractive option.
Where the paying party can pay but is not paying, there is likely to be some issue in dispute. This may mean there is a risk that the unpaid party may turn out to be wrong if it pursues the suspension route.
It is likely to be sensible to obtain legal advice before suspending work, unless it is common ground that the right to suspend has arisen.
Legal costs are likely to be incurred and to be difficult to recover unless there is express contractual provision providing for recovery.
In addition, where there is really a dispute between the parties as to whether a sum is due or not, other remedies may be preferable, e.g. bringing a claim for breach of contract, which may be done in adjudication.
Notwithstanding an unpaid person’s right to suspend performance, it may choose to enforce its rights by less draconian means, in order to maintain the commercial relationships between the parties.
Such remedies can include:
- commencing an adjudication;
- claiming contractual interest, or interest under the provisions of the Late Payment of Commercial Debts (Interest Act) 1998 of 8% over Base Rate (or as set out in the contract).
- issuing a Letter of Claim in compliance with the Practice Direction: Pre-Action Protocols and commence legal proceedings.
If a client is withholding payment, the right to suspend construction work can be a powerful leveraging tool. It protects your rights as a construction contractor.
However, this is only the case if you correctly follow the contract suspension procedures.
Wrongful suspension of works may ultimately lead to the termination of a contract, and serious financial consequences for the party in the wrong.
Most cases require a complex analysis before it would be deemed wise to suspend work.
One misstep can cost you a fortune and create a whole new set of problems.
That is why it is always advisable seeking legal advice before moving forward with a suspension of work.
This content is provided free of charge for information purposes only. It does not constitute legal advice and should not be relied on as such. No responsibility for the accuracy and/or correctness of the information and commentary set out in the article, or for any consequences of relying on it, is assumed or accepted by Adriana Badescu.