Suspension of construction contracts and appointments

This article will be dealing principally with the statutory right for contractors to suspend construction contracts and professional construction consultants to suspend appointments under the ‘Construction Act’ (the Housing Grants, Regeneration and Construction Act 1996 (‘HGRCA’), as amended by the Local Democracy, Economic Development and Construction Act 2009 (‘LDEDCA’)).

Before descending into the detail of that right, it is worth noting that there is no supervening common law right for either party to such a contract or appointment to suspend, and therefore any right to suspend can only occur under statute or by express contractual provisions.

Standard form construction contracts

Generally, the standard form building and engineering contracts (e.g. JCT, NEC4) do not contain any express rights to suspend (other than the limited rights under the Construction Act – see below), and therefore if such rights are felt necessary for the project, they will need to be introduced by way of specific amendment. Such amendment will need to deal with what events will allow the contract to be suspended (in addition to any ‘force majeure’ event), what the practical consequences of such a suspension will be (including the position when the contract resumes) and the maximum period of time that the contract can be suspended before a party may be entitled to terminate.

The maximum period of suspension may be driven by provisions in an overarching development agreement or an agreement for lease whereby they may enable the project to be terminated if that period is exceeded.

Standard form professional appointments

In contrast standard form professional consultants’ appointments are likely to contain express suspension provisions, e.g. RIBA appointments. A fairly typical example is the Domestic Professional Services contract, where the client can suspend the services by giving at least 7 days’ notice. Various grounds entitling the client to give that notice to suspend are set out, but If the provision of services is not resumed within 6 months, then the architect can by giving at least 7 days’ further notice treat its performance as ended.

Suspension under the Construction Act

One of the major provisions introduced by the Construction Act as an aid for contractors (of any tier) to maintain cashflow and discourage employers (of any tier) from trying to delay or avoid payment is the right of the contractor under a construction contract to suspend the works if not paid in full by the final date for payment any sum properly due. This is in addition to the rights in such circumstances either to commence adjudication proceedings or to terminate.

Section 112 of the Construction Act, following amendments under the LDEDCA, provides that if any payment properly due has not been paid in full by the final date for payment, then the contractor is entitled to give a notice of at least 7 days of its intention to suspend the whole or any part of the works until payment in full has been received. The notice period can be whatever length is agreed in the contract provided it is for a minimum of 7 days. The notice must set out the ground or grounds for the suspension, although there is no set form that that notice must take.

If the contractor does suspend the works, whether wholly or partially, then: 1) the contractor is entitled to, and the employer must pay, a reasonable amount in respect of costs and expenses reasonably incurred as a result of the exercise of the right to suspend (s112.3A), which would include any de- and re-mobilisation costs, and 2) any period during which performance is suspended under the right to suspend is disregarded in computing the overall time taken to complete the works under the contract (s112.4) – in other words the contractor is entitled to an extension of time for that period (which will include any time taken in both de- and re-mobilising on site).

The above applies equally to the appointments of professional construction consultants.

If any construction contract or appointment does not include express compliant provisions covering this right to suspend, then to the extent that they are deficient, compliant default provisions will be imported under the Construction Act via the Scheme for Construction Contracts.

Collateral warranties

Contractors, Sub-Contractors and Consultants are commonly required to give collateral warranties. These will often contain ‘step-in rights’, typically those in favour of funders/mortgagees and employers (for Sub-Contractors), which will require them to give the beneficiary a period of notice before they exercise their right to terminate or suspend their contract, sub-contract or appointment, to enable the beneficiary to decide whether it wishes to it take over.

That period is typically 21 or 28 days’ notice for termination and 7 days’ notice for suspension. Sometimes though the notice period before they can suspend is increased to match the termination notice period. It will be recalled that the notice requirement for suspension for non-payment has to be a minimum of 7 days, but parties are free to agree a longer period if they wish.

Getting it wrong

It is very important to ensure before exercising any right to suspend the contract, sub-contract, or professional appointment, that the right to do so has actually occurred. In the case of suspension for failure to pay a sum properly due in full by the final date for payment, check that the sum is in fact contractually due; that the sum has actually been finalised and certified by a valid payment and/or payless notice, or that the amount sought has been validly applied for and has become the amount payable because of a failure by the employer to issue a valid payment and/or pay less notice. Then carefully follow the contract provisions for suspension to the letter.

If an attempt to suspend is made wrongly, then this will be invalid and will amount to a repudiatory breach of contract on the part of the Contractor, Sub-Contractor or Consultant. This would then entitle the employer if it so wished to terminate the contract, sub-contract or appointment and claim damages for breach. Something clearly to be avoided.

Commercial considerations

If a contractual right to suspend has arisen, should the contractor or consultant invoke it? The commercial implications of doing so will need to be considered.

Should it be invoked in the first place? Has there been a history during the project of late payments that are constantly having to be chased? Is it worth upsetting the employer by threatening to suspend or actually suspending, and running the risk of ruining a hitherto good commercial relationship? It can be effective to show that you’re not going to be a pushover, with the mere threat under the notice being sufficient to get payment back on a proper basis.

Should the suspension cover the whole of the works or services, or just a part? The amendment brought in by the LDEDCA gives a choice as to whether any suspension covers the whole works or services or just part. This allows for a tactical suspension of the part which will cause the most difficulty for the employer without bringing the entire contract or appointment to a complete halt.

Because of the interplay of commercial considerations and contractual rights, suspension tends to be used fairly sparingly and usually as a ‘last straw’ option.

Conclusion

Suspension can be a useful weapon in the armoury to ‘encourage’ late or non-payers to come to heel. However, before any suspension takes effect, it must be dealt with strictly in accordance with the terms of the contract and/or the statutory provisions of the Construction Act. The commercial consequences of suspending the works or services will need to be weighed up beforehand.