Monday 26 July 2010

Wrongful suspension of works – repudiatory breach of contract or not?

Introduction

The reaction of many contractors when faced with non-payment is to consider suspending work on site. Whether or not such a right exists is generally a complex matter and contractors are well advised to be extremely cautious and to examine all the potential pitfalls. There is in principle no common law right for a contractor to suspend performance of their obligations for non payment but section 112 of the Construction Act now gives this right to contractors on a qualifying construction contract, and accordingly introduces a potentially powerful sanction against non payment.

Section 112 provides contractors with a right to suspend performance of their obligations under the contract where:
A sum has fallen due under the contract and has not been paid in full by the final date for payment;
No effective withholding notice has been given; and
The contractor has given at least seven days’ notice of its intention to suspend.
If a contractor suspends performance without following these sanctions they would be in breach of contract. But would such conduct amount to a repudiatory breach of the contract? This issue came before the courts in the recent case of Mayhaven Healthcare Limited v DAB Builders 2009.

Court Case

Mayhaven engaged DAB to carry out and complete work to Down House Nursing Home in Plymouth under the JCT IFC 1998 standard form contract. Disputes arose between the parties which were referred to adjudication. The decision of the adjudicator directed Mayhaven to pay DAB certain sums. DAB contended that Mayhaven had failed to pay those sums and issued a notice of intention to suspend and when payment was still not received suspended work on site. Unfortunately DAB made a genuine mistake, believing that the monies awarded by the adjudicator had not been paid, whereas in fact, the sums were paid by Mayhaven in subsequent payment certificates.
Consequently, Mayhaven contended that the suspension was wrongful and constituted a repudiatory breach of contract which they accepted by letter. They argued that this amounted to a breach of DAB’s obligation under clause 2.1 of the contract which provided that DAB shall “regularly and diligently proceed with the works”. They further argued that the suspension was a clear breach of this clause which permitted immediate termination of the contract. Alternatively, the breach went to the root of the contract because a refusal to carry out the work or an abandonment of the work, without lawful excuse, before it is substantially completed is sufficiently serious to amount to repudiation.
It was accepted by DAB that they had improperly suspended the works but denied this amounted to a repudiatory breach. They argued that Mayhaven, their solicitors and the contract administrator knew that they had been paid before they suspended the works but did not inform them of this mistake and the suspension would have been avoided if they had been informed. Furthermore, they argued that they had expressed a willingness to complete the work in their suspension letter.
The court decided that a wrongful suspension of the work under the contract which gave rise to a failure to proceed regularly and diligently with the works did not automatically amount to a breach of a fundamental term. They said it will vary in seriousness, depending on the circumstances of the case. DAB had not refused or abandoned the works. The fact that DAB had genuinely relied on an express provision in the contract to suspend performance, was not by that fact alone to be treated as having repudiated their contractual obligations because it turned out that they had mistaken their rights. Taking account of DAB’s breach and all the factors and circumstances of the case, DAB’s suspension of the work was not repudiation.

Comment

This case highlights the potential risk for contractors in failing to operate the suspension rights under the contract. A wrongful suspension in other circumstances may amount to repudiation, which, if accepted, may lead to the contractor being faced with a substantial claim for damages arising from that repudiation.