Tue, 09 Mar 2010
Introduction
The temptation for a builder to suspend performance of the works under a building contract is understandable. If the employer withholds or refuses to make an interim payment, the builder is faced with the unappealing prospective of having to stay on site without any reassurance as to when or if he is ever going to get paid. At the same time, however, the builder realises that the employer wants the project finished as quickly as possible, and so the threat of suspending works, unless payment is made, is often deemed by the builder to be legitimate pressure to exert on the employer so as to precipitate payment. However, the pitfalls for the builder in giving in to this temptation are very often not fully appreciated by him. The most obvious pitfall is that he runs the risk of being accused of having repudiated the contract. In that by suspending works and leaving site he has evinced an intention to no longer be bound by the contract. The purpose of this article (through the use of a typical example) is to examine the risks that he will be exposed to should he seek to suspend performance of the works, with particular reference to the recent case of Mayhaven Healthcare Limited v Bothma [2009] EWHC 2634 (TCC) (a decision of Ramsey J).
The scenario
A typical scenario, which is encountered in a standard building dispute litigated in the County Court, is the following: The homeowner decides to have an extension to his home built. Having secured a design and complied with any necessary planning requirements, the homeowner secures a builder to carry out the works. The contract documents normally amount to little more than a simple quotation with (1) the various works required listed in it (the list itself often leaves much to be desired) and (2) a very short description as to when payments are to be made. Normally, this will be by way of milestone payments such as (a) initial deposit, (b) then stage payments in respect of the works - such as completion of foundations, build up to roof level and so on and (c) balance upon completion of the works.
Notwithstanding a few initial hiccups, the project often gets off to a good start and the homeowner is satisfied with (a) the rate of progress and (b) the quality of the work. As a result, the interim payments are made more or less on time and there is no discernable friction between the parties. However, normally two thirds to three quarters through the project, problems (or perceived problems) begin to emerge. Such as (a) the homeowner begins to get frustrated with the lack of progress on the site, (b) he starts to notice (or thinks he notices) that the works are not being carried out to the expected quality and (c) the homeowner, perhaps with the assistance of an overenthusiastic surveyor, begins to think that in respect of the work completed on site to date, the builder has been overpaid.
Eventually, the time for the next interim payment comes round and the builder puts in his application for payment. However, unlike previously, the homeowner now claims that monies are not due because (a) he thinks that the builder has been overpaid for the works completed on site, (b) there are defects in the works and is not paying until they are remedied, (c) wants to use the issue of non-payment as a tactic to ensure the builder completes the job or (d) a combination of the above.
Now the builder is faced with the situation mentioned above. Does he continue on site unsure of if or when he will get paid or does he call it a day and leave site. He does not wish to do either and so opts for the “middle ground” of suspending performance of the works. He will often initially warn the homeowner that if payment is not made, then he will be suspending performance. However, and in any event, payment is not made and he leaves site with performance being suspended. There will be some contact back and forth over the matter, but the suspension will invariably lead to the builder, in effect, now having nothing more to do with the project. As a result, he sends a final invoice to the homeowner, which the homeowner, in turn, refuses to pay. The builder then instructs solicitors to sue in respect of the invoice. They produce Particulars of Claim in very short form claiming the invoiced sum in respect of a contract for work and materials. The homeowner, now having employed other builders to finish off the work, defends the claim and counterclaims for the cost of completing the works.
This is a typical scenario involving works to domestic premises1. What is at the heart of the scenario, and any analysis of it, are two matters. Firstly, the builder’s right (or perceived right) to suspend performance of the works. And secondly, who repudiated the contract first2 with the issue of whether the wrongful suspension amounted to a repudiatory breach on the part of the builder.
If it was the builder that repudiated first then this will be vital to the homeowner’s case. This is because, once the repudiation is accepted, he would be entitled to engage other builders to complete the works. However, if the builder, by suspending the works was not in repudiatory breach of contract by suspending the works (though still in breach (but importantly not in repudiatory breach)) then the homeowner would be in repudiatory breach of the contract by employing others to carry out works which the builder was contracted to complete. This would obviously affect the homeowner’s claim, as, had the contract not been repudiated by him, the works would have been completed by the builder and the defects (if any) remedied as part of the snagging process.
The Law
Accordingly, the key issues are (a) whether the builder had a right to suspend the works and (b) if he does suspend (even if he has no right to) – will that amount to a repudiatory breach of contract.
Unless expressly permitted by the contract, a builder does not have the right to suspend performance of the works if the employer has failed to make an interim payment3.
Accordingly, if (1) the contract does not expressly state that a builder has a right to suspend performance of the works in the event of non-payment, and (2) the builder does suspend performance, he shall be in breach of contract.
However, simply because he is in breach (by exercising a non-existent right to suspend the works) this does not necessarily mean that he is in repudiatory breach of contract. However, by suspending the works there is a risk that he will be found to have abandoned the works and so be regarded as being in repudiatory breach of the contract.
The problem which builders face is that non-payment of an interim payment is not regarded as a repudiatory breach of contract4. Accordingly, simply because the employer has failed to make an interim payment, this does not entitle the builder to treat that non-payment as a repudiatory breach of the contract. Unless, of course, (1) he has ensured (which is very unlikely) that his payment terms can be construed as providing expressly or impliedly that time of payments is of the essence or (2) the extent of the non-payment (hopefully combined with other conduct of the employer – such as perhaps a flat refusal by the employer to make any further payment until all the works were complete) were such as to evince an intention on the part of the homeowner that he no longer intended to be bound by the contract.
Consequently, the builder will then be in an unenviable predicament. He will be faced with the unpalatable choice of either (1) continuing with the project without knowing whether he would get paid, (2) treating the non-payment as being a repudiatory breach of the contract, with the attendant risk that the Court may not accept that the non-payment was such a breach or (3) suspending the works in breach of contract with the risk of that suspension being classed as repudiatory.
Naturally, it is easy to see why some builders use the threat to suspend as leverage to get paid. However, as has been noted above, the builder will generally not have any such right.
One cannot examine this subject without looking at the Elvin case (and now the Mayhaven case).
Both would appear to be of assistance to a builder who has apparently wrongfully suspended the works.
The Elvin case is a curious one. It is not reported in either of the two main law reports dealing with building matters i.e. the Building Law Reports or the Construction Law Reports – but has been only reported in the Construction Industry Law Letter (the transcript is available on Lawtel). This is surprising as it goes to supporting the contention that a builder does have a common law right to suspend performance of the works. The facts are much the same as in the scenario set out above. Namely a builder suspended the works following non-payment. However, what is curious about the case, is that the Judge expressly states that the builder was entitled to suspend the works because the employer was in repudiatory breach of the contract. However, this seems contrary to previous judical opinion as well as the editions (at the time of the judgment) of the leading texts on the subject5.
So the next key question is this: If the builder does choose to suspend performance how would the court view this in terms of assessing whether it amounts to a repudiatory breach of contract. Well the answer, as tends to be the case with such matters, is it depends. And as the Mayhaven case states, the question is not capable of a simple answer. However, it cannot be said that wrongful suspension (i.e. suspension in breach of contract) automatically amounts to a repudiatory breach on the part of the builder.
The Mayhaven case was an appeal under s. 69(2)(a) of the Arbitration Act 1996 (“the 1996 Act”). The brief facts, relevant to this issue, are as follows: The Claimant was the employer. The Defendant the builder. The contract was in the JCT Intermediate Form of Building Contract (1998) Edition) incorporating amendments 1 to 5. Dispues arose between the parties, which were referred to adjudication. The adjudicator directed that the employer pay the builder certain sums. The builder asserted that the employer had not paid those sums. However, in fact, those sums had indeed been paid to the builder in a subsequent valuation. Nonetheless, on the (mistaken) basis that it had not been paid the builder suspended the works. On the same day of the suspension, the employer’s solicitor notified the builder’s solicitor that the suspension was wrongful and that it constituted a repudiatory breach of contract. That repudiation being accepted by the employer’s solicitor’s letter.
The matter went before an arbitrator. The builder accepted that his suspension of the works was wrongful (because it was based on a mistaken belief he had not been paid). So the question for the arbitrator was whether the builder’s wrongful suspension of the works gave rise to a repudiatory breach of contract. The arbitrator concluded that the builder’s wrongful suspension did not give rise to a repudiatory breach. What seems to have been critical findings of fact by the arbitrator were that (a) the builder did not absolutely refuse to complete the work, notwithstanding his suspension, and (b) when he suspended the works, the arbitrator found that the builder was willing to complete the works.
On appeal (under 2.69(2)(a) of the 1996 Act) to Ramsey J, his Lordship concluded, after examining the relevant law, the following: “If a contractor under a construction contract breaches that contract by wrongfully suspending the works, does such conduct amount to a repudiatory breach of contract? As I observed in argument, the answer to that question whether a contactor’s wrongful suspension of the works amounts to a repudiatory breach will depend on the terms of the contract, the breach or breaches of the contract and all the facts and circumstances of the case. The question is not capable of a simple answer, as a matter of general principle”.
So where does that leave a builder in the scenario set out above i.e. where there has been non-payment of an interim payment by the employer. It would appear that the builder has a choice – dependent on whether the non-payment amounts to a repudiatory breach.
If (and that is a strong if) the non-payment by the employer can be regarded as a repudiatory breach of the contract, then the builder can either (1) accept the repudiation of the contract, with it thereby being terminated and him leaving the site permanently, (2) he does not accept the repudiation and continues with the work or (3) he does not accept the repudiation and suspends the work (albeit in breach of contract).
If the non-payment by the employer cannot be regarded as a repudiatory breach of the contract, then the builder can either (1) continue with the work or (2) suspend the work (albeit in breach of contract).
It is to be noted that in either scenario where there has been non-payment, the choices are the same as regards suspending the works.
However, if that course is adopted, and even if the contractor does not have a contractual right to suspend (and so suspension would amount to a breach), so as to pre-empt any allegation of repudiatory breach, the builder would be well advised to make plain that he is more than willing to complete the works and his suspension is just that i.e. a “suspension” and not an absolute refusal to complete the work.
So, in practical terms, provided those matters are made clear and this is what the Mayhaven case assists with, by suspending the works, the chances of him being found in repudiatory breach of contract by suspending the works are reduced.
Conclusion
A builder should be wary of seeking to suspend performance of the works in the event of non-payment where he does not have the contractual right to do so or where he may be mistaken about exercising an express right do so. Should he decide to suspend the works he would be well advised to make it plain that he is willing to complete the works and that his suspension is merely that – a suspension – not an absolute refusal to complete.
1 Accordingly, the right to suspend provided by section 112 of the Housing Grants Construction and Regeneration Act 1996 is not addressed. This is because in the above scenario the contract would not be a “construction contract” under the Act and the relevant provisions would not apply, because the building contract was with a residential occupier (Section 106).
2 The important issue of repudiation is unfortunately, and surprisingly, very often ignored in poorly drafted pleadings.
3 Supamarl Ltd v Federated Homes Ltd 9 Con LR 25 at 28; Channel Tunnel Group Ltd v Balfour Beatty [1992] 1 QB 656at 666H; and Canterbury Pipe Lines v Christchurch Drainage Board (1981) 16 BLR 76 at 88 to 94. Though note my comments on the Elvin case.
4 Mersey Steel and Iron V Naylor (1884) 9 App Cases 434 and Decro Wall v Practitioner in Marketing [1971] 2 All ER 216.
5 Keating on Building Contracts (7th edn.) para 6-96 and Hudson’s Building and Engineering Contracts (11th edn.) paras 4.223 to 4.225. Plus now see the 8th edition of Keating at para 6-085 where the Elvin case is referred to.
