Suspended sentence

ne of the sanctions in many contracts open to subcontractors if they are not paid monies due, is to suspend work until payment is made. Section 112 of The Housing Grants, Construction and Regeneration Act 1996 provides that:

• where a sum due under a contract is not paid in full by the final date for payment and no effective notice to withhold payment has been given, the person to whom the sum is due has the right (without prejudice to any other right or remedy) to suspend performance of their obligations under the contract to the party by whom payment ought to have been made, ie the party in default;
  
• the right may not be exercised without first giving to the party in default at least seven days notice of intention to suspend performance, stating the ground or grounds;
  
• the right to suspend performance ceases where the party in default makes a full payment of the amount due.

While suspension of works is an attractive, and sometimes the only, option available to encourage payment of monies due, it should only be used following careful consideration. Its incorrect use, or non-compliance with contract procedures, can lead to unwelcome consequences for the subcontractor.

Suspension of works when there is no sum due, or failure to give the typical seven days notice in writing required, will result in the subcontractor being in breach of the contract and liable for any damages caused.

Care must be taken, for example, should it be alleged that the works carried out in respect of which payment is applied for, have not been properly completed or are defective. Section 112 provides that suspension of works cannot occur when there has been an effective notice to withhold payment issued, setting out in sufficient detail what monies are to be withheld and the ground(s) for withholding. The subcontractor must also ensure that the final date for payment of sums due has passed.

A case for caution
In the case of CJ Alvin Building Services –v- Peter and Alexa Noble the Act did not apply to the contract as it was for extensive work to the defendants' residential home.

It was agreed between the parties that while a contract existed between them, there was no entitlement provided in it for suspension of works. The contractor was entitled to stage payments, to be paid within a reasonable time by the employer. There were no provisions equivalent to those in Section 112 of the Act.

Suspension of works where there is no sum due will result in the subcontractor being liable for any damages caused

The contractor invoiced the employer at various times throughout the works. On one occasion the employer responded by explaining that, owing to the events of 11 September 2001, it was experiencing cash flow difficulties and hoped these would be resolved quickly. The contractor subsequently suspended the works when payment was not made.

The judge considered whether the employer had an obligation to pay all or part of the outstanding sums at the date of suspension of the works. He found that there had been a course of dealings between the parties during the works whereby the subcontractor submitted regular invoices. The sums due arose following several unpaid invoices. The employer had at least three to four weeks within which to pay the invoices and this was a reasonable time for payment to be made.

The judge, who relied upon the report of a single joint expert who had examined the works, undertook an analysis of monies owed. A deduction of £23 000 was made from the sum claimed by the contractor. The judge held that this sum reflected the value of work that, at the time of suspension of the works, was required to be undertaken to remedy defective or incomplete work. Nevertheless, he found that a balance of £40 000 was still due and owing.

Having found that the employers were in breach of contract for failing to pay the 'significant outstanding sum', the judge considered whether in all the circumstances the contractor was entitled to suspend the works. He dealt with this matter quickly. He held that the employers were in serious breach of what, to the contractor, was the most important term of the contract, namely that reasonable sums due should be paid at reasonable intervals. The suspension of works was due entirely as a result of the employers' breach of contract in failing to pay.

The judge did not agree with the arguments of the employers that the suspension of works was wrongful and constituted a fundamental breach of contract. He found that the employers could not rely upon their own breach to justify a contention that the contractor was in breach. Accordingly he found that the subcontractor was entitled to suspend works and ordered that £40 000 be paid by the employer.