Suspension rights on contracts

In the current climate new research reveals that the time it takes UK firms to pay bills has increased to its highest on record. Companies are now taking longer to pay bills than at any time since laws to combat late payment were introduced in 1998.

The construction industry is no exception: it has one of the worst payment records among contracting parties. It can be tough for those suffering from non-payment.

Suspension or termination rights

Faced with this, many subcontractors are taking serious measures by suspending contracts or bringing them to an end.

If the contract is defined as a ‘construction contract’ according to the Construction Act, a term allowing a subcontractor to suspend its obligations under the contract will be automatically implied until payment is made.

Alternatively, there might be a term in the contract permitting the subcontractor to terminate the contract for non-payment. As long as the correct procedures are followed, these can be effective measures. However, not all subcontractors are aware of their rights or the contract might not contain such provisions. This can lead to the drastic step of suspending or abandoning the work.

Common law position

Generally a subcontractor has no common law right to suspend the contract or even bring it to an end for non-payment because it is not deemed serious enough. This would only occur if the subcontractor could prove this showed that the main contractor did not mean to accept the obligation of the contract any further, rather than refusing to pay.

If there is no procedure in the contract permitting suspension, a subcontractor that does suspend work runs the risk of being in repudiatory breach, even if the main contractor hasn’t paid. If a subcontractor wishes to suspend the contract for non-payment, it has to establish this as a repudiatory breach of contract.

This is excellently illustrated by CJ Elvin Building Services v (1) Peter Noble (2) Alexa Noble (2003).

Generally a subcontractor has no common law right to suspend the contract or even bring it to an end for non-payment because it is not deemed serious enough

The Nobles engaged Elvin to carry out refurbishment and alteration works on a substantial Hertfordshire period residence. As so often occurs in the construction industry, the contract was poorly drafted, and there were no agreements on the price or prices to be paid for the work and materials. It was an implied term of the contract that Elvin would be entitled to a reasonable price and instalments by way of staged payments.

Elvin submitted an interim invoice for payment of £17 625 and a statement of final account showing a balance for payment of about £54 000, although some works were still in progress at the time. The Nobles did not pay these amounts.

They told Elvin that they were in the process of securing additional funds as assets held by them on the stock market had plummeted due to a crisis in the US. Elvin was not happy with this situation but gave them a few days’ grace to raise the money. Within a week, the Nobles increased their loan and overdraft facility by more than £100 000, but Elvin was not told.

Two weeks later, the Nobles issued a snagging list to Elvin which identified incomplete or defective work. They also advised Elvin that, on completion of the work, payment would be released, but in the meantime the money would be deposited with their solicitors.

Letters went back and forth but no payment was made, so Elvin suspended work. The Nobles alleged that Elvin could not suspend work for non-payment and repudiated the contract.

The judge held that Elvin was entitled to be paid a reasonable sum and within a reasonable time of three to four weeks. In failing to pay, the Nobles were in serious breach of contract, and their financial difficulties did not excuse them from paying.

Furthermore, the fact that the Nobles’ short-term financial problem disappeared within a week of it appearing clearly showed they were not prepared to pay, whether funds were available or not. Elvin was entitled to suspend the work.

Comment

Non-payment of sums due under a contract can amount to repudiatory breach by the main contractor. This will obviously depend on the terms of the contract. Many contracts have termination or suspension rights that permit the subcontractor to terminate or suspend the contract on the grounds of non-payment by the main contractor.

The obligation to pay on the part of the main contractor is one of the most important obligations it has. Refusal to fulfil payment obligations or threatening not to make further payments is potentially repudiatory.