Suzannah Fairbairn and Alastair Young | Dentons
Why is this question so common?
For the construction industry, the uncertain economic climate can mean a lack of cash and liquidity across the supply chain. Employers are increasingly seeking to rely on their contractual rights and remedies to avoid having to pay, or to delay payment. As a result, one of the biggest issues we see contractors facing in the current market is the lack of cash-flow due to non-payment, late payment or underpayment.
In these circumstances, the contractor often feels it has limited options to ensure it gets paid, and sees suspending works as its only viable option. If there is a clear contractual entitlement to suspend works, then this can be a very powerful tool for the contractor. However, if there is not a clear entitlement and/or the contractor wrongfully suspends its works, then this can lead to serious repercussions.
I have an unamended FIDIC contract – can I suspend?
- You have a right to suspend in certain circumstances (Sub-Clause 16.1, 1999 Edition), including:
- if the engineer fails to issue a payment certificate; and/or
- if the employer fails to pay any amounts due.
- You can rely on this only if:
- there has been a failure to pay an amount that has been certified, or a failure to issue a payment certificate at all. It does not apply if the engineer certifies “nil”, no matter how good your grounds for disputing this “nil” certification;
- you have given at least 21 days’ notice after the payment or certificate became due; or
- you have otherwise performed the contract, and you are exercising this right, in a manner consistent with the requirements of good faith (Article 246(1) Civil Code).
- If this applies, then:
- you are entitled to an EOT, cost and profit arising from the suspension, as long as you have fulfilled the necessary notice requirements for contractor’s claims (Sub-Clause 20.1); and
- this right is in addition to any entitlement to financing charges and to termination.
- However, the right to suspend works is often deleted from contracts in the region (or at least heavily amended), so check your contract carefully before attempting to rely on an assumed contractual entitlement.
My contract does not contain a right to suspend – is there any other way?
- Article 247 of the Civil Code provides a possible right to suspend works. This states: “In bilateral contracts, where the reciprocal obligations are due, each of the contracting parties shall have the right to abstain from executing his obligation in case the other party does not honour his obligation.”
However, this does not necessarily give you an entitlement to suspend the works if you have not been paid. An attempt to rely on this article is risky.
- There is no right to suspend mentioned in the part of the Civil Code dealing with construction contracts (Muquwala).
- The requirement for reciprocal obligations is problematic because the payment relates to work already completed, rather than work that you are hoping to suspend.
- You would need to be able to demonstrate, at a minimum, that: (i) you were not in breach of the contract first; (ii) you were willing and able to perform your obligations; (iii) the suspension is proportionate; and (iv) you are acting in good faith.
Is it worth a try?
- You should only suspend the works if you are confident that you are entitled to do so and have fully complied with the notice provisions and any other requirements.
- If you suspend without entitlement, this would be a breach of contract and the employer might be able to terminate the contract and/or claim (often very substantial) damages.
- A clear contractual right to suspend can be very effective (however, commercially this can be very difficult to obtain).
- Even an unamended FIDIC does not assist where the issue is routine under-certification.
- Make sure you have fully complied with all the contractual requirements – failure to do so could be fatal to your right to suspend and open you up to significant claims.
- It is very risky to suspend without a clear contractual right to do so (although it may be worth considering in exceptional circumstances).
- Do not simply slow or stop work without notice.
- The result of suspending works without entitlement can be severe.
- If you are suffering cash-flow problems, take legal advice early.