Consequences of Pausing Contracts

Pausing Construction Contracts

Many issues can arise that could cause significant delay to a project, be it disputed land or perhaps the collapse of funding for a development in the private sector. Both examples are solvable but could take time. Is it possible to suspend the works whilst working on a resolution is? What are the consequences for doing so, and how should you administer the standard forms of contract to manage this?

Notwithstanding the above, from a contractor’s perspective, what are the options available to suspend the works under the contract, for example, in the event of non-payment or perhaps the works being frustrated, i.e., there is no sign of forthcoming resolution in the near or distant future.

There is a fine line between suspension and termination. Depending on the reason for pause or suspension, either party may have the right to terminate the contract immediately or within a certain period depending on the form of the contract. Therefore, understanding the options and ramifications is essential as you step through the issue.

Suspension

In the standard forms of contract, there is no clause expressly linked to the scenario of suspending the works. Some clauses allow the employer to instruct a stop to the works. Still, no clause allows either party to unilaterally suspend the works – except for the reason of non-payment under the Housing Grants Construction and Regeneration Act 1996.

However, if you require a contract to include a wider right to suspend the works, you will need specific variations to the standard terms. With any amendments, they should be clear regarding what triggers the suspension, who serves the notices, plus once triggered what the action required on either party is and by when. For example:

• Who insures the works through the period of suspension?
• What happens to items of value on-site such as materials, plant and equipment.
• Who is responsible for making the site safe (assuming the works have started on site)
• The entitlement in regards to recovering time and cost.
• What the process and timescales are for starting the project again post-suspension including who serves notices etc.

Let’s return to the suspension of works due to non-payment, according to clause 112 (3) of the Construction Act. The Construction Act requires the payer to include adequate mechanisms for determining what payments become due and, thereby, the frequency. They are to serve notices, including a calculation of how they arrived at the amount due. Failure to adhere to this can have drastic consequences for the payer.

If the payee does not get paid on time, they can serve a notice on the payer that they will suspend the works for non-payment, more commonly known as a 7-day notice. In the 2011 Construction Act amendments, the payee’s rights were increased effectively that upon suspending the works they are not to be prejudiced for doing so, i.e., they are not penalised for late completion because of such suspension including assessing the period of suspension and the time required to remobilise. They are also paid their costs incurred due to the need to suspend the works for non-payment.

However, a word of warning is needed here as suspending the works due to non-payment for a contested sum can backfire on the party issuing the suspension. If you wrongly suspend the works, the other party can claim that you are, in fact, in material or repudiatory breach, and therefore, they could use this to terminate the contract.

Also, suppose a repudiatory breach is found. In that case, the payer/employer could not only terminate the contract, but they can also arrange for another contractor to complete the work and make a claim for the difference in costs to complete the works as a consequence of such breach. The employer’s position would be that the contractor’s suspension notice is not valid. If they have refused to return to the site to complete the works, effectively abandoning the project, this is a repudiatory breach.

However, the contested sum can work both ways, i.e., the payer may consider the payee has been overpaid to date and is simply seeking redress, or they disagree over the valuation of a variation. In contrast, the payee will believe they are fully entitled to that which they have claimed. Case law on whether wrongly issued suspension notices are a repudiatory breach appears to be hit and miss. It generally depends on the details on a case-by-case basis, hence the need for caution before serving.

Other Remedies

There are options to resolve such matters other than suspension of the works. Regarding interim payments, they may be subject to an element of interpretation when held up against progress. It is easy to see how a suspension notice for non-payment could be taken as a material/repudiatory breach instead.

Rather than suspending the works for non-payment, there is the option to launch adjudication proceedings or mediate to resolve the matter. Setting out your position with legal support, including a reference to the Late Payment of Commercial Debts (Interest Act) 1998, which is 8% over the Bank of England Base Rate against amounts due, could also unlock the issue.

Frustration

Suppose a contract, due to the occurrence of an unforeseeable event, is so radically different to the original scope or intent. As a result, the parties can’t meet their contractual obligations. In that case, the contract can be terminated by law.

The criteria as to whether frustration has occurred are that it cannot be caused by either party’s default. The contract needs to be entirely different, and there is no provision in the contract upon which the parties can deal with the event. No doubt, after the COVID-19 pandemic, this would have been considered in several projects as a reason to terminate.

It sounds like a get out of jail card for either party where a risk they are responsible for has occurred, and they make a case for termination on the grounds of frustration. However, the courts take a narrow view of the criteria that constitute frustration, with claims for the cost of the works being far higher than the price for the works not being accepted. Equally, severe weather, including flooding, has not been accepted as grounds for frustration.

Payment for suspension?

Aside from non-payment or a case for frustration, if the works require a suspension period, there are a few options available. Depending on the circumstances, this determines if payment is required:

1. If the employer is aware that they are not going to provide access for some time or provide something critical for the completion of the project, they would need to issue an instruction to the contractor requiring them to stop work. Under the main forms of contract like NEC or JCT, instructions would allow the contractor to recover their costs in adhering to such an instruction.
2. For a force majeure event, under JCT it is possible to provide the contractor with time relief. In contrast, under NEC the contractor could be entitled to a compensation event and recover both time and cost. Still, it would need to pass the foreseeability test, i.e., the interpretation is that an experienced contractor could not have reasonably foreseen such an event occurring needs to be met before the compensation event is triggered.

However, timing plays a crucial part here when deciding what to instruct the contractor. In both the JCT Design and Build Contract and the Standard Building Contract, if the employer issues an instruction and such suspension of the works continues for two months, the contractor can notify the employer they intend to issue a termination notice. At this point, if the suspension continues for a further 14 days, the contractor can issue a termination notice.

For NEC contracts, a similar principle applies. Upon the project manager issuing a notice to stop works, the contractor is entitled to a compensation event which includes time and cost recovery. If an instruction to re-start works has not been given within 13 weeks, then either party may start proceedings to terminate the contract.

For any form of contract, if you know the suspension is likely to go on for a period of longer than 13 weeks, or the specified period stated by the contract, rather than incur the costs through the period of instructed suspension, you may be better heading straight to termination.

Case Law

In the case of Mayhaven Healthcare Limited v Bothma [2009], Bothma was a contractor who issued a suspension notice because they believed they had not been paid. However, it was established that they had been paid for the items in question in future valuations. The employer, Mayhaven, treated the suspension of works as repudiatory, and it is claimed the legal representatives of Bothma agreed with this position.

Mayhaven argued that Bothma’s actions constituted a clear repudiatory breach as they had a contract to proceed regularly and diligently with the works, and they had not due to the incorrect serving of a suspension notice and enacting on it.

The ruling was that Bothma were not in a position of repudiatory breach as they were willing to complete the project. Therefore, Mayhaven’s argument that they had effectively abandoned the works was incorrect. The judge’s position was that a material breach needed to be so fundamental it was clear that a wrongfully issued suspension should be considered on scalability of severity depending on the circumstances. In this case, they did not believe a material breach had, in fact, occurred.

Pausing or terminating?

Suppose you have concerns about risks to the development or project that you are progressing, for example, through planning or are perhaps procuring at speed alongside arranging land access or acquiring land. In that case, it may be prudent to include a terminate ‘at will’ clause in the contracts you are about to place. Doing this could protect you in that you will have an option to terminate unilaterally should these risks arise.

Conversely, suppose an unexpected issue arises but does not meet the criteria for a frustration case. Depending on the circumstances, before deciding whether to suspend works, you should consider which party holds the risk and the expected duration of the event. You would need to be confident the project would still go ahead if the intent is for such an agreement to be in place during a hiatus period before proceeding as planned.

Photo by Cytonn Photography on Unsplash

About Dean Suttling

A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.