Non-payment remains one of the most immediate commercial risks on a live construction project. Where a contractor or subcontractor is carrying the cost of labour, materials and plant, an overdue payment can quickly affect its ability to continue performance.
The Housing Grants, Construction and Regeneration Act 1996 provides an important statutory remedy. Under section 112, a party to a construction contract may suspend performance of some or all of its contractual obligations where a sum due has not been paid in full by the final date for payment, provided the statutory requirements are satisfied. Not less than seven days' notice of intention to suspend must first be given to the party in default, specifying the ground or grounds relied on. The wider payment regime under the Act was substantially amended by the Local Democracy, Economic Development and Construction Act 2009. The existence of the right does not, however, make suspension automatic.
The right is not universal. Sections 104 to 107 define what counts as a construction contract for these purposes, and section 106 excludes contracts with a residential occupier. The first question in any suspension analysis is therefore whether the Act applies to the contract at all.
Establish the payment position first
The contractor should first establish what sum has become payable under the contract and whether the relevant payment notices have been served correctly. Sections 110A and 111 of the 1996 Act govern payment notices and the obligation to pay the notified sum, subject to a valid Pay Less Notice.
That distinction is important. A dispute over the proper valuation of the works is not necessarily the same as a failure to pay the sum that is presently due under the statutory payment machinery.
The contract itself also requires careful review. The timing and form of notices, any bespoke amendments and the relationship between the contractual provisions and the statutory regime can all affect the position.
Where the requirements are satisfied, suspension can provide significant protection against prolonged non-payment. It is nevertheless a serious contractual step. A suspension will often affect programme, sequencing and relationships with other members of the project team, and those consequences should be considered before notice is served.
Two further points are worth drawing out. First, a valid suspension carries its own entitlements: section 112(3A) allows the suspending party to recover a reasonable amount in respect of costs and expenses reasonably incurred as a result of the suspension, and section 112(4) requires the period of suspension to be disregarded in computing the time for completion. Second, a suspension that turns out to be unjustified is itself a breach of contract and may be treated by the paying party as repudiatory. That asymmetry is precisely why the payment position needs to be established before notice is served rather than afterwards.
Adjudication may also be available under section 108 of the 1996 Act, which gives a party to a construction contract the right to refer a dispute arising under the contract to adjudication.
The appropriate remedy will therefore depend on the payment position, the contract and the wider commercial circumstances. What should be avoided is an informal decision to stop work before the statutory and contractual basis for doing so has been established.
Accurate at the time of writing. This information is provided for general information purposes only and should not be relied upon as legal advice.
