Suspending Construction Works for Non-Payment: What To Do

There’s no better reason to down tools on site than not being paid. Unfortunately, walking off-site could lead to the employer terminating the contract and then pursuing the contractor for breach of contract and damages.

The situation surrounding the suspension of construction works due to non-payment is governed by both the construction contract and, in some cases, statute. 

Early legal advice is crucial in preventing a contractor from exacerbating a bad situation. Suspension of work is a powerful tool, but it’s a double-edged sword and must be used with caution.

Understanding Your Right to Suspend Work

Contractual vs. Statutory Rights

The starting point for a potential suspension of work is usually the construction contract.

A comprehensive agreement will anticipate the potential for non-payment and set out the consequences of late or missed payments.

These clauses outline the specific steps a contractor must take, such as issuing a warning notice before suspending work.

If the contract is silent, then, in certain cases, a contractor may still have the right to suspend work. Section 112 ofthe Housing Grants Construction and Regeneration Act 1996(the Construction Act) provides contractors and sub-contractors with the right to suspend construction work in certain circumstances.

Contractors must adhere to the letter of the law, or they risk being held liable for high legal costs and damage claims, even if the client has wrongly withheld payment.

The Construction Act outlines the procedures that contractors must follow. Notably, the Act does not apply to all construction jobs.

Do you have a statutory right to suspend?

The Construction Act offers both a right to suspension and adjudication; however, these provisions do not apply to all contracts.

Section 106 of the Act provides that the automatic right to adjudicate and the right to suspend performance do not apply to a construction contract with a “residential occupier”. 

Contractors must determine whether the statutory provisions apply to their contract or if the contract contains an express right to suspend, before downing tools. 

Preconditions Before Suspension

Before the formal process of suspension begins, a contractor should verify that the payment is overdue by reviewing the contract and ensuring that there hasn’t been a mix-up or mistake. 

Remember, the due date, the date on which the work is valued, and payment is theoretically due, is not the same as the final payment date, which is the date by which the money must be in the contractor’s bank account.

The period between these two dates varies, depending on the terms of the contract.

Have you received a Pay Less Notice? The employer may have made a partial payment following a Pay Less Notice, which may mean you are not entitled to suspend..

A Pay Less Notice is a formal declaration that the employer intends to pay less than the stage payment, in whole or in part,and sets out how much they will withhold, and why. 

If the employer misses the contractual or statutory deadline for a Pay Less Notice, then they are still legally required to pay the full amount even if they dispute it, although they may be able to claim it back later.

Serving a Valid Suspension Notice

Under the Construction Act, the right to suspend works may not legally be exercised without first giving the defaulting party at least seven days’ notice as stipulated in Section 112 (2) of the Act. The construction contract itself may have other requirements.

In addition, if suspending under the Construction Act, the contractor can recover a reasonable amount in respect of costs and expenses reasonably incurred as a result of the suspension.

Failing to give the client the required notice can expose the contractor to potential liability for breach of contract. This is despite the client not having made the requisite stage payment.

What Happens During a Lawful Suspension

During a lawful suspension, in addition to seeking the original payment, a contractor is also usually entitled to recover costs incurred during the suspension due to non-payment.

Additional expenses may include costs relating to the return or non-return of hired equipment, as well as the costs associated with laying off staff. Special measures may be necessary to secure the site, and work that is partially completed could start to deteriorate.

What Are the Risks of Wrongful Suspension?

Failure to follow the correct protocols when suspending work under the construction contract or the Construction Act, where it applies, may constitute a wrongful suspension.

Wrongful suspension can have several potential impacts: 

• The contractor may be liable for the employer’s reasonable costs, incurred as a result of the suspension, even though the client may have wrongly withheld the payment.
• The suspension may be considered a repudiatory breach of contract. The employer could terminate the project and then take legal action for damages.
• The wrongful suspension is unlikely to extend the project duration for the purposes of liquidated damages and may reduce the time available to the contractor to complete the work without financial penalties.
• The employer may claim the costs of acceleration measures after work resumes, the expense of extra resources, plant, and staff to get the project timeline back on track.
• Wrongful suspension can cause damage to the working relationship, which may impact the project if it continues. It also causes reputational damage and jeopardises future business relationships.

Before You Suspend: Explore Other Remedies

It’s often the case that in many refusal-to-pay scenarios, the client believes they have a genuine reason to withhold payment. The construction contract should outline a protocol for handling disputes.

Early communication and negotiation can pay dividends; a potential dispute situation can be headed off with a compromise. The client may be experiencing cash flow issues, which can potentially be resolved with a revised payment schedule, avoiding a suspension.

Being upfront with a contractor can avoid a suspension altogether if the cause is financial rather than dispute-based over the quality of work. Alternatively, partial suspension will allow the project to continue, albeit in a limited capacity.

Adjudication or other forms of Alternative Dispute Resolution (ADR), such as mediation, can resolve a dispute quickly and economically, and doesn’t remove the right to litigate later.

Structured settlement routes, if there is a willingness amongst the parties to compromise, can resolve disputes and avoid suspensions. It demonstrates good faith and keeps the overall project alive and healthy.

Frequently Asked Questions

What Is the Right to Suspend Under the Construction Act?

The Construction Act provides a statutory right for contractors to suspend performance in the event of non-payment in certain circumstances. Contractors must follow the correct procedure, including serving a clear statutory notice.

Can I Suspend Only Part of the Work?

It is possible to suspend part of the work where the right to suspend under the Construction Act applies. If it does not apply, then you will need to consult the terms of your contract for any suspension provisions. 

How Quickly Must I Resume Work After Payment?

Usually, work must resume immediately. However, you should consult any suspension provisions in your contract. 

Suspension Decisions Require Careful Legal Assessment

Suspension of construction work for non-payment often stems from disputes, where the client believes they have legitimate grounds to refuse payment. Disputes are one thing, but understanding whether you should, or can, stop work is another.

Most cases require a careful review by an expert legal professional. It’s vital to do this before you stop work, or you risk replacing one set of problems with another and creating a bigger financial problem than a missed stage payment.

At Helix Law, our expert team of construction law specialists has extensive experience in resolving disputes and addressing non-payment situations. We’ll analyse your construction contract and provide a strategic and commercial way forward.