Make sure you’re clear on the terms of a contract before suspending for non-payment. If you get it wrong, you could end up being burned

The worst of the downturn may be over, but it will be a while yet before we construction lawyers can put away our notes on matters such as termination for insolvency and suspension for non-payment. In hard times, employers and main contractors find reasons not to pay, and contractors and subcontractors in turn raise the stakes by suspending work, or even terminating.

The right to suspend is a statutory one. It arises under the Construction Act, and does not exist in common law. Exercising the right can be risky. If the contractor has an erroneous view of what is due, its suspension may be unlawful. Worse, it may find that the employer now treats the suspension as a repudiatory (serious) breach of the contract and retaliates by terminating the whole contract. John Redmond recently discussed a similar problem on these pages, but he looked at it from the employer’s end of the telescope (“Just cause and impediment”, 4 February).

In what circumstances can an employer answer the contractor’s missile of a suspension with its own nuclear weapon: a termination for wrongful suspension?

If the contractor’s error was procedural only - something was wrong with the notice, or it was served at the wrong address, for example - then the courts will usually sympathise. In Eminence Property Developments vs Heaney (2010), the owner of a block of flats gave notice to its purchaser to complete the purchase by 15 December. Unfortunately, his lawyer had miscalculated the date under the contract. The purchaser in fact had until 19 December to complete.

The purchaser waited, as the trial judge put it, for the owner “to fall into the elephant trap that it had dug for itself”. The 15 December date passed with no completion, and the owner duly ended the contract, as he thought he was entitled to. The purchaser’s lawyers now pounced and accused the owner of a repudiation.

The Court of Appeal sided with the owner. He, or rather his law firm, had made an obvious blunder, rather like a clerical error. The test was whether the owner was showing an intention not to be bound by the contract. That was not the position here, said the court.

Applying this reasoning to the case of the suspension notice that is served wrongly, or where the required seven days’ notice under the Construction Act is not given, or where no grounds are stated, a contractor will often be able to avoid the disastrous consequences of being in repudiatory breach. It will still have to bear the costs of any delay, of course.

But suppose that a contractor interprets a complex contract term in a way that supports his valuation, and then suspends for non-payment on the strength of its view - which then turns out to be wrong. Could it be accused of a repudiation?

There are two precedents here. One case, Federal Commerce & Navigation vs Molena Alpha (1978), found that to say you acted in good faith when repudiating a contract on a mistaken understanding of the law, is no defence. Conversely, in Mayhaven vs Bothma (2009), Mr Justice Ramsey, echoing an earlier case, said that a party that honestly but wrongly relied on a provision in a contract to suspend the work, was not to be treated as having repudiated the contract simply by that fact alone - one had to look at all the circumstances. So it seems that here the position is less clear.

A contractor is perhaps best advised to take a cautious, rather than an aggressive, stance in these situations. If the contractor makes clear that it is open to arguments about its interpretation of the contract or its valuation, and is willing to discuss these – while still exercising its right of suspension – it would be hard to say that it had no intention to perform the contract at all.

This might offer some protection from the employer’s trump card of termination if the contractor turns out to be wrong on the law.

Contractors should also consider commercial points. Except in clear-cut cases of non-payment, suspension of the works ought to be a last resort. An employer will often see this manoeuvre as an attempt to force it to the negotiating table, and may harden its attitude accordingly. Often when that happens, neither side wins.

Ian Yule is a partner in Shakespeare Putsman