Suspension of construction contracts for non-payment

Specialist construction solicitor, Abbie Chisnall, and trainee solicitor, Jess Munday, look at suspension of construction contracts for non-payment and give a robust warning about the dangers of getting suspension wrong.

If a party has not been paid, and therefore wants to suspend works to try and force payment, the unpaid party must instead either rely on the rights contained within their contract or on their statutory right to suspend under the Construction Act 1996 (The ‘Act’).

Contractual Right to Suspend

In order to rely on a contractual right to suspend, the contract must contain an express term which allows for a party to suspend the work as a result of non-payment.

In the presence of an express term to suspend the contract for non-payment, the parties can rely on this clause in order to do so. Parties may also wish to agree bespoke terms which will be incorporated into the contract, allowing the other party the right to suspend the work for other reasons.

For example, in Multiplex Construction Europe Ltd v R&F One (UK) Ltd [2019] EWHC 3464 (TCC), a term was written into contract permitting the suspension of works in the event that the employing party failed to provide the agreed payment security (in this instance, a payment bond). Upon non-payment of the bond, the unpaid party was able to exercise their right to suspend works.

It is very important to ensure that the contractual mechanism is followed to ensure that you do not wrongfully suspend works.

Statutory Right to Suspend

All construction contracts which are covered by Section 112 of the Act provides an unpaid party the right to suspend the contract (in absence of a contractual term) for non-payment. Under Section 112, the unpaid party:

• Can suspend work if all or part of the notified sum remains unpaid by the final date for payment.
• Can suspend performance of any and all of its obligations under the contract.
• Is entitled to the additional time involved in suspending and remobilising.
• Is entitled to the reasonable costs of suspension.

It is important to remember that suspension can only be triggered if there is non-payment of a notified sum, not just any sum you believe may be due to you. All construction contracts must set a final date for payment pursuant to Section 110(1)(b) of the Act. If this is not expressly stated in the contract, it will be implied by way of the Scheme for Construction Contracts (England and Wales) Regulations 1998. Non-payment occurs when a party fails to pay the notified sum on or before the final date for payment in line with Section 111(1) of the Act.

Take the following scenario:

• An application for payment is raised for £100,000,
• A valid Payless Notice for the sum of £20,000 is issued.

The above does not give rise to the work being suspended on the basis that the £80,000 originally applied for is not paid. The notified sum in this scenario is the £20,000 set out in the Payless Notice (albeit it may not be favourable). Therefore, if the £20,000 (the notified sum) remains unpaid at the point in which the final date for payment lapses, the unpaid party can enforce their statutory right to suspend work.

Notice to Suspend

Don’t just walk off site if non-payment occurs! To suspend works, a written notice must be provided by the unpaid party. It is equally as important to get the notice validly drafted / issued, as otherwise it may result in a repudiatory breach of contract for the wrongful suspension of a contract on the unpaid party’s behalf. It is vital to seek early advice about the format of the notice and the timescales of any notice.

We often have clients call and say that they haven’t been paid so they have walked off site/threatened to walk off site. This is a repudiatory breach of contract and could result in the contract being terminated and the Employer/Main Contractor pursuing you for a large claim for breaching the contract.

Suspension is a very useful tool to use to force payment when you are not being paid, but please seek legal advice before trying to apply your contractual or statutory rights, as applying them incorrectly could be very costly.

Please contact the Construction Division at Holmes & Hills if you would like to discuss this further or have any concerns with regards to suspending works due to non-payment.