Keeping them in suspense

We all know that emotions run high when you’re not getting paid; and why wouldn’t they?

You’ve done your end of the agreement by doing the work you were required to do, and now you (quite rightly) would like to be paid for that work! Yet what many don’t know is that how you respond to an Employer’s non-payment can make or break your legal position when it comes to recovering payment.

It is not uncommon for members seeking our assistance to recover unpaid invoices to tell us, “We haven’t been paid, so we pulled our guys off site”.

This raises two key issues:

1. Whilst we understand that removing labour from site may feel like the right thing to do, it can have the reverse effect and instead put you in the hot seat for breach of contract; and

2. Pulling labour off site does not amount to a lawful suspension.

You may well be now thinking, well what on earth should we do instead? We’re not getting paid, so why should we continue? The solution for non-payment can be found in Section 112 of the Housing Grants, Construction and Regeneration Act 1996; more commonly (and easily remembered) as the ‘Construction Act’.

Section 112 of the Construction Act –your statutory right to suspend

Section 112 of the Construction Act (the “Act”) gives an unpaid party a statutory right to suspend performance of its contractual obligations. In other words, if you’ve not been paid, you are entitled to suspend any or all of the work you have agreed to do under your agreement with the Employer. However, this statutory right comes with certain caveats.

Let’s look at the following fictional example to illustrate what you can and can’t do under the Act:

BPPG ScaffPros Ltd (“BPPG”) have submitted an interim payment application for £40,000 to the Employer as per the agreed payment schedule. The Employer has not paid this application by the final date of payment and has not issued any pay less notices to BPPG making deductions from the interim payment application.

On the basis that the Employer has failed to pay the application sum (£40,000) and the contract permitted or required BPPG to make an application, then the sum applied for is the ‘Notified Sum’. As the Employer has failed to pay the Notified Sum (or issue a valid pay less notice), the Act allows BPPG to suspend any or all of its contractual obligations to the Employer but only after the Final Date for Payment has elapsed. BPPG must first give the Employer seven days’ notice of its intention to suspend and set out the reasons why performance has been suspended. If after the seven days the Employer still has not made payment of the Notified Sum, then BPPG are legally entitled to suspend performance until the Employer makes payment in full.

This caveat is key: BPPG must first give the seven days’ notice required under the Act. If BPPG simply refuses to send labour or attend site, BPPG could then be in breach of contract and (most importantly) may subsequently be liable to the Employer for any losses incurred as a result of this breach. BPPG could therefore go from being owed money by the Employer to owing money to the Employer!

Suspension for non-payment of the ‘Notified Sum’ only

Another key requirement of suspension is that suspension must be for non-payment of the sum due at the Final Date for Payment (this does not mean what you think is due as you don’t agree with the deductions made!)

Using the above example, BPPG cannot state that they are suspending for non-payment of the £40,000 plus because they believe they are owed an additional £15,000 that was not stated in their interim payment application. This also applies to payment notices submitted by the Employer to BPPG. If the Employer had submitted a valid pay less notice for £35,000 to BPPG in response to the interim payment application of £40,000, and subsequently paid the £35,000 to BPPG, (assuming the pay less notice was on time) there would be no statutory right for BPPG to suspend the works. The £35,000 stated in the Employer’s pay less notice has become the Notified Sum and the Employer has paid the Notified Sum; therefore, BPPG have no statutory right to suspend. There are of course mechanisms for BPPG to recover the remaining £5,000 should it be validly owed, but suspension is not one of them.

But my contract says I must give a longer period of notice prior to suspension!

Sometimes, a contract might specify a notice period longer than the seven days required under the Act prior to suspension. Thankfully, under these circumstances, the Act trumps the contract. This means that if your contract states that you must give the Employer 21 days’ notice before suspension, you can instead rely on your statutory right and give seven days’ notice instead.

Conclusions

If done correctly (and this is a big if), suspension can be an effective tool for getting a nonpaying party to pay monies owed. Suspension will inevitably cause disruptions to the work programme and the knock-on effect to the project can be huge. The Employer will therefore wish to avoid incurring costs relating to this delay and be keen to get the project back on track.

Another advantage to suspension is that the Act provides that the party who has suspended works for non-payment is entitled to remuneration for any costs or expenses it has reasonably incurred as a result of the suspension (e.g., de-mobilisation and re-mobilisation costs) and/or an extension of time for completing its remaining contractual obligations.

It is vital to remember that suspension must be done correctly to avoid liability for wrongful suspension/breach of contract. So, before you act, stop and think:

1. Am I entitled to suspend works? and

2. What steps do I need to take to validly suspend works?

In the first instance, we would strongly suggest seeking legal advice so that the correct steps are taken, and it is not you that trips up and gets hurt. You don’t want to potentially go from being in the right to being in the wrong!

If you wish to discuss non-payment further, contact Lawrence Pearce (Associate) and the Construction Team at Holmes & Hills LLP –call 01206 593933