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CHAPTER 4: IMPROVING THE RIGHT TO SUSPEND PERFORMANCE
Background
The Construction Act provides a statutory right for the payee to suspend performance under the contract. This right:
- is a powerful sanction in cases of non-payment, and
- allows the payee to reduce his expenditure on the project during a period when he is not being paid.
However, there are a number of disincentives to the exercise of this right which centre on the costs of suspending performance.
Current legislation
- Section 112(1) gives a statutory right to the payee to suspend performance of obligation to the payer in cases of non-payment of a sum due (less any amounts properly withheld).
- Section 112(2) provides that the right can only be exercised if the suspending party has given the payer in default seven days notice of his intention to suspend work stating the reasons why work will be suspended.
- Section 112(3) provides that the right to suspend work ends when the outstanding amount is paid in full.
- Section 112(4) provides that there should be a readjustment to the contract to compensate for the time lost during a period of suspension.
Proposal
We intend to make the existing right to suspend performance a more effective remedy by reducing the burden on the party who exercises this right. We will:
- make clear that a party need not suspend all of his obligations to the party in default when exercising the statutory right;
- provide a statutory right for the suspending party to be compensated for reasonable losses caused by the suspension; and
- provide an extension of time for any delay caused by the exercise of the right to suspend.
Discussion
Our proposals are intended to make the right of suspension more accessible and effective. The measures are not intended to alter radically the process and should decrease the costs of suspension to the suspending party. Without access to the statutory right of suspension, the payee cannot secure prompt payment or take steps to reduce his expenditure when he is not paid.
The following disincentives upon the suspending party result from the current legislative framework -
- The costs of suspending and remobilising performance under a construction contract - These are the inherent costs involved in exercising the right of suspension and then remobilising when payment is made. These costs, which may include damaged materials while clearing site, storage charges, additional management costs and the cost of retaining sub-contract labour and hired plant and equipment all fall to the suspending party (the payee). The possibility of incurring additional costs for remobilisation when the payer later makes the outstanding payment is also a burden. The current legislation requires the payee to remobilise immediately upon payment which can impose additional cost.
- The inconvenience and cost of remobilising immediately upon payment of the outstanding debt - Currently, the Construction Act makes no allowance for any delay for the suspending party to remobilise. The suspending party is required to be prepared to remobilise immediately when payment is made as the contract may also impose a sanction. Given the uncertainty about whether the payment will be made, and if so when, and to reduce the costs of suspension, the payer may have transferred labour and equipment to a different project.
- The inconvenience and cost of having to suspend all obligations under the contract - We believe that the right of suspension can be exercised in respect of suspension of any or all of the payee's obligations under the contract. However this view is not shared with the whole construction industry and there is support for some clarification.
In Improving Payment Practices in the Construction IndustryDTI asked how frequently the right to suspend performance was exercised and how frequently it was believed it would be exercised following our proposed amendments. While the majority of respondents thought it was exercised in fewer than one in 100 cases of defaulted payment at present, almost half thought that this would increase to between one in 100 and one in 10 cases of defaulted payment in the future.
Though there might be a modest increase in the use of the statutory right to suspend performance following the amendments proposed above, we also intend that improving access to the right should ensure that payment is made on time more often in future. We are considering the extent of any improvement in payment as a result of these proposals as part of this consultation.
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