Contractors, Think Twice Before Suspending Your Works

Non-payment or delay in payment is a common occurrence in the construction industry. When faced with such a situation, a contractor would understandably be most tempted to suspend or “slow down” its works until payment is made by the employer.

After all, no contractor would want to finance a construction project on behalf of the employer and it is the employer who is in breach of contract by failing to make payments at the first place.

However, a contractor who is considering of suspending works for the non-payment by the employer should think twice before doing so.

A wrongful suspension of works on the part of the contractor may expose it to a potential claim for substantial damages by the employer.

 

No General Right to Suspend Works

In the absence of any express contractual provision[1] conferring the right to suspend works on a contractor, a contractor generally does not have the right to suspend its works even when the employer itself is in breach of contract for failing to make payments that are properly due to the contractor.

If the non-payment is so serious that it constitutes a repudiatory breach on the part of the employer, the contractor may choose to terminate its contract with the employer and sue the employer for damages arising from the employer’s breach of contract.

However, if the contractor chooses not to terminate the contract or if the non-payment does not constitute a repudiatory breach on the part of the employer, the courts have held that a contractor must continue to carry out the works under the contract.

This is the position of law that is well-adopted in the Commonwealth[2]. In Malaysia, this position is adopted by the Malaysian court in the case of Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd [1997] 1 CLJ Supp 448, at page 457, where Low Hop Bing J (as his lordship then was) held as follows:-

“In my opinion, in the absence of a specific provision in the contract, a contractor has no automatic right to suspend works simply because one or two of his certificates have not been paid: see Keating on Building Contracts (5th ed) [1991] at p 157.

In Lobenham v South Pembrokeshire District Council [33 BLR 39] at pp 69-70 it was argued on behalf of the plaintiff builder that, “there was a general rule whereby a contractor was entitled to suspend his operations on (the employer’s failure to pay), quite apart from the terms of the contract.”

May LJ said in answer to this submission that….

We are quite satisfied that there was no legal basis on which suspension of work could be justified in this case.

A similar result is reached by the learned author of Hudson’s on Building & Engineering Contracts (11h ed. At para 4.223 where he states that a contractor’s response to actual or alleged breaches of contract by the owners by suspending works or deliberately going slow… are “extremely perilous”.

In my judgment, it is trite law that a contractor can only terminate his contract with his employer (at common law, as opposed to the exercise of an express termination clause) if he shows, inter alia, repudiatory breach by the employer in the sense that the employer has evinced an absolute refusal not to perform his side of the contract (Ban Hong Joo Mines Ltd v Chen & Yap Ltd [1969] MLJ 83; 85).

There is no intermediate right in a building contract to suspend works. If the contractor insists on the continued performance of the contract, ie. he affirms the contract, he must himself continue to perform his primary obligations under the contract, ie. to continue performing the contract works. This is why suspension of the works by the contractor, ie. not continuing with his primary obligations, becomes itself a repudiatory breach by the contractor.

Even if the plaintiff can establish that the defendant is in repudiatory breach of contract, the plaintiff would have no right to suspend works, but instead would have had to elect to either terminate the contract or insist on due performance. By suspending works without valid legal cause, the plaintiff has in fact repudiated its contractual obligations. This repudiation entitled the defendant to terminate the contract, which was duly done on 3 July 1992. As there was no provision in the rudimentary contract between the parties conferring a right to suspend works for non-payment of certified sums, the plaintiff’s admitted suspension was wrongful.” [Emphasis Added]

 

Justification for the General Rule

Whilst the general rule is seemingly harsh on the contractors, the courts have justified the imposition of the general rule in the following manner.

To allow the contractors to suspend works would in reality enable the contractors to exert powerful tactical pressures on employers in pursuit of possibly unwarranted and inflated claims or to muscle their way through disputes with threats or actual acts of suspension instead of having their disputes adjudicated[3].

As such, projects could be held to ransom with severe consequences and this in turn would create chaos in the construction industry.

 

The Construction Industry Payment and Adjudication Act 2012

This harsh rule has in recent years been relaxed to a certain extent by the enactment of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”).

In this respect, a contractor who has obtained an adjudication decision in its favour may suspend the performance of its work, without being in breach of contract and is entitled to an extension of time as well as loss and expense incurred, if the adjudicated amount is not paid for by the employer[4].

 

Conclusion

As can be seen above, the decision to suspend work is a serious decision with severe consequences which cannot be taken lightly. A contractor who is considering of suspending works for the non-payment by the employer should obtain competent legal advice before doing so.

 

[1] Such as that which is contained in the PAM Standard Form of Contract 2006

[2] see the English Court of Appeal’s decision in Channel Tunnel Group Ltd & Anor v Balfour Beatty Construction Ltd & Ors [1992] 1 QB 656, at pages 666-667 and the New Zealand Court of Appeal’s decision in Canterbury Pipe Lines Ltd v Christchurch Drainage Board [1979] 2 NZLR 347, at pages 351 to 352.

[3] Hudson’s Building and Engineering Contracts (12th ed) at pages 1084 and 1085 and Jia Min Building Construction Pte Ltd v Ann Lee Pte Ltd [2004] 3 SLR (R) 288, page 306

[4] s. 29 of CIPAA

 


By Mak Hon Pan (view profile)
Partner, Azman Davidson & Co

+603 2164 0200 (ext no. 120)
mak.honpan@azmandavidson.com.my

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