Moment of madness

I have received a huge number of enquiries over the years about whether walking off site was the right thing to do. Often a contractor had suspended work for non-payment, but sometimes suspension was due to a heated exchange and a moment of madness. For those of you who encounter such a situation, getting it wrong at that vital stage can cost your company a lot of money and even cost you your job.

Common Law position
There is no right at common law to suspend work if payment is wrongly withheld. As is normally the case, before you exercise any rights under a contract it is important to read in detail to see what, if any, rights of suspension have been granted. Suspension is intended to be temporary. If a party suspends its activities due to an alleged default of the other side, the curing of that default must lead to the carrying out of the terms of the contract. Saying in a fit of anger that you are going to "walk off the site" can be construed as termination even if your intention is only to suspend.

Section 112 of the Housing Grants, Construction and Regeneration Act 1996 states that where a sum due on a construction contract is not paid in full by the final date for payment and no effective notice to withhold payment has been given, the person to whom the sum is due has the right, albeit without prejudice to any other rights or remedy, to suspend performance of his obligations under the contract to the party by whom payment ought to have been made. There are certain set procedures under the Act that must be complied with before suspension can take place.

The right to suspend may not be exercised without first giving to the party in default at least seven days' notice of the intention to suspend performance, stating the grounds on which the action is intended. The right to suspend performance ceases immediately when the party in default makes payment in full of the amount due.

The right to suspend is not new and indeed has featured in some engineering contracts for many years. The JCT family of contracts has been amended to take section 112 into account. It is of course vital to read the suspension provisions in each contract carefully before taking any steps.

Saying in a fit of anger that you are going to “walk off the site” can be construed as termination even if you only want to suspend

One case in which the issue of suspension did arise, albeit in relation to the jurisdiction of an adjudicator, was that of KNS Industrial Services (Birmingham) Ltd v Sindall Limited. The claimant (KNS) and the defendant (Sindall) both applied for summary judgment in relation to an action brought by KNS for sums allegedly due as interim payments under a mechanical and engineering subcontract incorporating the DOM 1 conditions. It appears that KNS suspended its works after the rejection of an application by it for an interim payment, and the dispute was referred by KNS for non-payment to adjudication. Sindall argued that the suspension was unlawful and terminated the employment of KNS. Under the provisions of DOM 1, the effect of the termination was that Sindall had no obligation to make further payments until after completion of the works and was entitled to deduct the value of any non-compliant works from the final payment.

The adjudicator found that notice of suspension was premature and ineffective and thus that Sindall could rely on the contract regarding the lack of further payment until after completion of works to the relevant deductions. KNS, unsurprisingly, argued that the adjudicator had exceeded the jurisdiction when considering the relevant clauses in the contract. It sought summary judgment for the whole of the claim. Sindall reciprocated by seeking summary judgment on the basis that KNS was bound by the adjudication unless it could establish an error on the part of the adjudicator.

Consequences
The finding in this case related to the jurisdiction of the adjudicator. It was found that the adjudicator was entitled to consider any ground that justified the non-payment and could consider the provisions of the contract in relation to termination. As it appeared the adjudicator had decided that the suspension notice was ineffective as a finding of fact, it was not for the court to address whether the adjudicator was correct in his factual analysis of whether KNS had suspended correctly; but as a result of this case KNS found itself at the wrong end of the decision regarding its attempted suspension and was also left with a considerable costs order.