Want to wind up work on a job early? In the latest of our jargon-busting series Michael Conroy Harris explains how to go about suspending or terminating a contract
S is for suspension
However harsh it seems, there is no common law right that allows you to stop performance of a contract if you have not been paid. You can have a contractual right to suspend work if it is clearly set out in your contract and, in the UK, you do have a statutory right to suspend under the Construction Act. You have to give at least seven days’ notice of your intention to suspend under the Act (but note that this is sometimes extended in the terms of a contract) and your notice needs to set the grounds under which you intend to suspend. Your right to suspend ends when you receive the outstanding payment but you are not liable for the consequences of the suspension. When the changes to the Construction Act take effect on 1 October 2011, you will also be entitled to your costs and expenses of the suspension and any time due to it (such as the additional time taken in remobilising).
While you have an important and powerful right, you have to use this right carefully - make sure that you do not end up being at fault by repudiating the contract. Careful distinction needs to be made between temporarily suspending performance for non-payment and walking away from the contract entirely. In the recent case of Mayhaven Healthcare vs Bothma, a contractor that thought it was properly entitled to suspend for non-payment was held to be in breach of contract when it was established it did not have the right. However, it was not found to have repudiated the contract simply because it mistakenly thought it had a right it did not have. You should not assume that this will always be the outcome, as it will depend on the circumstances each time.
If you are not able to suspend you have a statutory right to claim interest on the amount unpaid under the Late Payment of Commercial Debts (Interest) Act. This allows for a statutory rate of interest or, subject to it being a substantial remedy, such other rate as the parties agree.
T is for termination
Termination occurs when:
- Everything that needs doing under a contract is done (discharge by performance) n Nothing more can be done due to an external force (frustration)
- Both parties agree
- A breach occurs that triggers the common law right of repudiation (discussed before) or a contractual right to terminate.
Here we will look at contractual termination rights in more detail, as they are common in construction contracts. It is worth noting that the termination can operate on different levels - often it will be the termination of the employment of a party (meaning that the party doing works or performing services is no longer obliged to carry on with them) which actually leaves other obligations (such as those relating to confidentiality) in place. Other times it might be ending the contract itself. Here we are considering “termination” to mean “termination of employment”.
Some contracts have what is called termination “at will” or “for convenience”, where the party that has that right can simply end the contract by giving notice to the other party. This is usually to allow it an exit route due to other circumstances and will happen more commonly before a project starts on site (so a consultant may be terminated when the client is not able to acquire the land needed for the project) but may occur afterwards when the client no longer requires the project to be completed (such as a client mothballing a development indefinitely due to market conditions). It is usual for the party that has the right to pay for the privilege because it allows flexibility.
Many contracts allow termination for actual (or, occasionally, even the prospect of) insolvency of the parties. If the contract does not allow for insolvency, the insolvent party is likely soon to be in breach of contract for non-performance.
Termination for breach can be triggered by reference to:
- Broad standards of performance, where the failing is usually something such as “material breach” or “persistent breach”
- Set criteria, such as reaching a defined percentage (usually a figure up to 100%) of any liability cap set out in the contract.
Termination for breach (which is often defined as including insolvency) will have a mechanism for how moneys may be retained by the innocent party and/or paid to the party in breach, should there be any left after the costs of termination have been calculated.
Michael Conroy Harris is a senior legal manager at Eversheds