Invalid Suspension, Own Goals and other Disasters
Unless you have just spent the best part of 10 years living in outer Mongolia you will be aware that The Housing Grants Construction and Regeneration Act (1996) (The Act) changed the commercial life of Contractors and Sub-Contractors working in the UK forever when it was introduced here on 1 May 1998.
Unless you have just spent the best part of 10 years living in outer Mongolia you will be aware that The Housing Grants Construction and Regeneration Act (1996) (“The Act”) changed the commercial life of Contractors and Sub-Contractors working in the UK forever when it was introduced here on 1 May 1998.
Contractors and Sub-Contractors now have access to rapid resolution of disputes through Adjudication and can suspend work on site if payment in full is not made. More often than not, aggrieved parties use the suspension and adjudication rights of the Act in combination to obtain swift access to justice and persuade a reluctant paying party to hand over the cash.
All very well in theory, but in practice I have lost count of the number of disputes I have been called to adjudicate upon where an allegation is being made that a party has invalidly suspended and that substantial damages have been incurred by the claimant as a result. The simple truth is that invalid suspension can have horrendous consequences for a party and can even lead to corporate failure.
This is what the Act says:
112 Right to suspend performance for non-payment
- Where a sum due under a construction 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 his obligations under the contract to the party by whom payment ought to have been made (“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 on which it is intended to suspend performance.
- The right to suspend performance ceases when the party in default makes payment in full of the amount due.
- Any period during which performance is suspended in pursuance of the right conferred by this section shall be disregarded in computing for the purposes of any contractual time limit the time taken, by the party exercising the right or by a third party, to complete any work directly or indirectly affected by the exercise of the right.
Where the contractual time limit is set by reference to a date rather than a period, the date shall be adjusted accordingly.
The Act makes clear that a party’s right to suspend performance of its contractual obligations becomes available only once the final date for payment of an amount that has become due under the contract has passed without payment being made in full and provided that the paying party has not issued an effective withholding notice in respect of any shortfall in the amount paid.
If, and only if, the foregoing circumstances are satisfied, suspension can begin after seven days have elapsed from the service of a notice stating the ground or grounds giving rise to the right to suspension. The suspension must end immediately upon receipt of payment in full of the amount due.
But there are problems. Establishing what sum is due under a contract is not always as easy as its sounds. Just because a Contractor or Sub-Contractor claims an entitlement to an interim payment does not automatically mean that the sum claimed or indeed any other amount for that matter has become due.
Whether a sum has become due under a Contract is a matter which can cause great confusion. Discrepancies in quantities, applicable rates, the validity of withholding notices, payment milestone or valuation dates can all cast doubt on whether or not a sum claimed has actually become due.
No sane party ought to consider suspending work unless it has clear evidence that an amount has become due in the form of an Architect’s Certificate, a Contractors payment notification, a valuation confirmed in writing etc, etc. Whether a sum is due or not is a dispute that should be dealt with in adjudication.
Please don’t risk the very survival of your company by suspending work without entitlement. If in doubt, take advice.
Peter Vinden is a practising adjudicator, mediator, expert and conciliator. He is Joint Managing Director and Chairman of Vinden and can be contacted by email at firstname.lastname@example.org