The JCT publishes a comprehensive range of contract documentation for UK construction projects. JCT are widely considered to be the most commonly used (albeit often amended) construction contracts within the UK. Because of the JCT’s popularity, the JCT Design and Build Contract will be subject matter of this blog “ Suspension for non-payment under JCT ”.
So, what are a contactor’s rights of Suspension for non-payment under JCT?
The need to suspend for non-payment
On 22 September 2023, the Construction Enquirer reported:
“Payment disputes are intensifying on site as main contractors look to hold on to as much cash as possible in the current economic climate”.
What the Construction Enquirer reported in September 2023 will not come as a surprise to anyone involved in construction work. We are frequently being asked to advise our construction contractor clients on issues concerning non-payment and rights to suspend for non-payment.
The common law right to suspend works for non-payment
There is no common law right for a contractor to suspend works for non-payment.
The wrongful suspension of works would constitute a repudiatory breach of contract on the part of the contractor. The employer would be entitled to accept the repudiatory breach of contract and terminate the contractor’s employment. In these circumstances the employer would presumably refuse to make any further payment and raise a set- off in respect of the contractor’s repudiation.
It seems odd to many that in circumstances where the contractor has not been paid, he is expected to carry on working. The contractor may never get paid for the extra work that he is doing!
We have seen many situations where contractors’ suspend works for non-payment even when that suspension is legally wrong. The contractor may take a commercial decision to stop work, appreciating that legally such suspension of works is wrong. The contractor may suspend works in complete ignorance that what it is doing is wrong. Sometimes this legally incorrect stance pays off for the contractor. Sometimes stopping works completely or partially is counterproductive.
Statutory Rights of Suspension for non-payment
In an attempt to rectify the common law position concerning the ability to suspend works for non-payment, the Housing Grants, Construction and Regeneration Act 1996, as amended (the “Construction Act”) created a statutory right to suspend in respect of contracts that are governed by the Construction Act.
The Construction Act states:
112 Right to suspend performance for non-payment.
(1) Where the requirement in section 111(1) applies in relation to any sum but is not complied with, the person to whom the sum is due has the right (without prejudice to any other right or remedy) to suspend performance of any or all ofhis obligations under the contract to the party by whom payment ought to have been made (“the party in default”).
(2) 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.
(3) The right to suspend performance ceases when the party in default makes payment in full of the sum referred to in subsection (1)
(3A) Where the right conferred by this section is exercised, the party in default shall be liable to pay to the party exercising the right a reasonable amount in respect of costs and expenses reasonably incurred by that party as a result of the exercise of the right.
(4) Any period during which performance is suspended in pursuance of, or in consequence of the exercise 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.
It is important to note that in order to exercise the statutory right to suspend, the construction contract has to be caught by the Construction Act. Not all construction contracts are.
It is a condition precedent to the right to suspend that notice is served in accordance with section 112 (2) of the Construction Act. Failure to serve valid notice will mean the suspension is a breach of contract.
If a valid valuation has been notified and paid, then the right to suspend does not accrue. Similarly, if a valid Application for Payment/ Default Payment Notice has not been made then the right to suspend does not accrue.
The right to suspend does not arise just because a contractor thinks it has been underpaid. A contractor can only suspend under the Construction Act if an amount is due under the Construction Contract, and that amount has not been paid.
A difference in opinion of what is due under the Construction Contract does not give a right to suspend for non-payment.
Although the right to suspend under the Construction Act is welcome, its significance is limited. The right to suspend only arises where an amount determined as due under the Construction Contract has not been paid. If an employer under-certifies what is due, even deliberately so, then it is improbable that a right to suspect accrues. Often a contractor is unhappy with a valuation. Sometimes the employer or the certifier has deliberately undervalued. Sometimes the certifier makes arithmetical errors. Sometimes the employer serves a spurious Pay Less Notice. In these circumstances a right to suspend may not exist because the amount that is due is that as advised by the employer or certifier. The route for the contractor is not to suspend but to adjudicate on its entitlements
The rights to suspend under the JCT Design and Build Contract 2016
Most standard form contracts will give effect to section 112 of the Construction Act and incorporate a contractual right to suspend, similar to that in s 1112 of the Construction Act. If the contract does not do this, then the right of suspension would be implied into the contract.
Let us now consider Suspension for non-payment under JCT Design and Build Contract 2016.
Contractor’s Right of Suspension
4.11.1 If the Employer fails to pay a sum payable to the Contractor in accordance with clause 4.9 (together with any VAT property chargeable in respect of that payment) by the final date for payment and the failure continues for 7 days after the Contractor has given notice to the Employer of his intention to suspend the performance of his obligations under this Contract and the grounds for such suspension, the Contractor, without affecting his other rights and remedies, may suspend performance of any or all of his obligations until payment is made in full.
4.11.2 Where the Contractor exercises his right of suspension under clause 4.11.1, he shall be entitled to a reasonable amount in respect of costs and expenses reasonably incurred by him as a result of exercising the right.
4.11.3 Applications in respect of any such costs and expenses shall be made to the Employer and the Contractor shall with his application or on request submit such details of them as are reasonably necessary for ascertaining the amount in question.
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The purpose of this note was to consider the issue of a contactor’s rights of Suspension for non-payment under JCT. Although the rights to suspend are written into the JCT contract and are a powerful tool in the contractor’s armoury, the right must be exercised with caution. The consequences of suspending incorrectly can be substantial.
As with the statutory provision, the right to suspend is subject to the condition precedent of a notice being given at least 7 days before the suspension.
Also, again the amount said to be due must be due as provided for in clause 4.9 of the JCT.
In the event of a valid suspension for non-payment under JCT, the contractor is entitled to an Extension of Time and Loss & Expense.
Note, not all of the works have to be suspended. The contractor can choose what to suspend. We have advised contractors working under the JCT that it is open for them to suspend part only of their works if that is what they prefer to do.
It should be said that although we have concentrated on Suspension for non-payment under JCT Design and Build Contract 2016, similar provisions do exist in each of the JCT contracts.
Proceed with Caution
Contractors thinking about exercising their rights of Suspension for non-payment under JCT must proceed with caution.
If the contractor suspends wrongly, it risks itself being in breach of contract and its construction contract being terminated. The employer may be looking for an excuse to terminate the contractor’s employment and may use this termination not to make any further payment.
We would always advise contractors to take legal advice before serving a notice to suspend. On many occasions we have seen contractors wrongly suspending work.
Prior to suspending it is critical that the contract is understood and followed meticulously. There is no margin for error. If a JCT is amended, then particularly the bespoke amendments should be considered. Without limitation has an entitlement to payment crystalised?
MJD Solicitors frequently advise on rights to suspend for non-payment. To discuss a right of suspension for non-payment, contact Matthew Dillon of MJD Solicitors on a no-obligation basis.
Matthew Dillon LLB, Solicitor, MCIArb
MJD Solicitors
29 September 2023
This article is for information purposes, does not constitute legal advice and should not be relied upon. For terms and conditions of this article please read here
