Suspending works for non-payment: What's changed?

Five years ago, an industry consultation by the DTI indicated that the right of suspension was being used in less than 1% of cases of non-payment.

However, the statutory right to suspend works under section 112 for non payment has been dramatically broadened for construction contracts entered into after 1 October 2011. Under such a contract, a payee who has not been paid the full amount due by the final date for payment, and has given the payer seven days’ notice to remedy the breach may now:

• suspend “any or all” of its obligations - this means that payees could choose the most difficult part of its obligations to suspend such as obtaining planning permission, completing difficult design or performing difficult time critical works. There is no requirement that there be a link between the amounts which were unpaid and the obligations which were suspended. There is also no express requirement of “reasonableness” in this amendment - and a question would arise whether the obligation of mutual trust and co-operation (such as in the NEC) would also relate to a party’s statutory right to suspend;
• claim a “reasonable amount” in respect of its costs and expenses “reasonably incurred” as a result of the suspension; and
• claim any period of time “in consequence of the exercise of the right” - again without any express obligation of reasonableness. An example of such a claim could include cancellation of plant/materials on a long lead-in time (eg 16 weeks), which could permit the payee to claim an extension of time for the period of suspension for non-payment (eg 2 weeks) PLUS the new lead in time for the cancelled order (eg 16 weeks).

The changes outlined above are obviously intended to make suspension more attractive to payees - and if suspension is going to be exercised more often, this could raise the question of what happens to a subcontractor whose main contractor has suspended any or all of its obligations under s.112.

There is no mention in either the 1996 or 2009 Acts of how the right of suspension could affect subcontractors. Therefore, the matter will be dealt with contractually.

In the JCT 2011 suite, for example, the right of suspension in the main contract is removed from the list of relevant matters and dealt with in its own clause reflecting the new rights under the 2009 Act. The subcontract specifically contemplates the suspension of the main contract and requires the contractor to copy any notice of intended suspension to the subcontractor and immediately notify of any actual suspension. The consequences of suspension are very broadly addressed: the contractor may direct the subcontractor to cease or resume carrying out works and issue such further directions as may be necessary in regard to either cessation or recommencement. The consequences of main contractor suspension are caught in relation to time as a “relevant sub-contract event” and as to cost as a “relevant sub-contract matter”.

In practice, the suspension of any or all of its obligations by the main contractor may cause great alarm as to the certainty of the funding of the project and the risk that the main contractor will also stop paying down the line, starving the subcontract of cash on the particular job and potentially forcing domino insolvencies.

However, where the period of suspension is short and payments resume, these changes could trigger more co-operation between subcontractors and main contractors who make the most of the opportunities to work together:

• to decide which obligations are proving difficult to achieve, and only suspend these, continuing with other profitable obligations which will hopefully be paid by the client in subsequent applications;
• to obtain the longest extensions of time - however caution must be exercised if the contractor was already in culpable delay under the main contract as concurrent delay is always a risky position; and
• to recover the greatest loss and expense flowing from the payer’s breach.

While there is the opportunity for greater commercial collaboration, there is also room for a much greater commercial disconnect if the main contractor is awarded long extensions of time in consequence of the suspension (eg the lead in times discussed in the example above) whereas the subcontractor’s works were not greatly affected and it is kept to tight completion dates.

Combine all of the above with the facts that this rather dramatic right to suspend also applies to unwritten / verbal agreements, there remains a risk of repudiatory breach if wrongly suspended, and that the new payment regime and the requirement to pay the “notified sum” by the final date for payment is currently untested in the courts, and this makes for very interesting times indeed.

Merissa Martinez is a partner at Trowers & Hamlins