Nationwide Sureties

In the construction industry, contractors are often faced with situations where payments are delayed or withheld. While it might seem like an obvious solution to abandon a contract when payment issues arise, contractors in the UK must be cautious before taking this step. The Housing Grants, Construction and Regeneration Act 1996, commonly referred to as the Construction Act, provides important legal frameworks that govern payment disputes. Section 112 of this Act, which deals with the contractor’s right to suspend work due to non-payment, plays a pivotal role in determining what a contractor can and cannot do when faced with payment issues.

Understanding Section 112 of the Construction Act

Section 112 gives contractors the right to suspend work if they have not been paid in accordance with the contract or within the statutory deadlines provided by the Act. The provision was introduced to provide contractors with a legal remedy when payments are delayed or withheld unjustly. However, this right comes with specific conditions and procedural requirements that must be carefully followed.

1. Notice Requirement: Before suspending work, the contractor is legally obligated to issue a written notice to the employer (or the party responsible for payment). This notice must specify the amount due, the period for which payment has not been made, and state the contractor’s intention to suspend work if payment is not received within a certain time. According to the Construction Act, the notice period must be at least seven days. Failure to provide adequate notice can result in the suspension being considered unlawful, exposing the contractor to potential liability for breach of contract.
2. Right to Partial Suspension: Under Section 112, contractors are also allowed to partially suspend their work if they prefer to continue with some elements of the contract while withholding other services. This flexibility can help maintain a working relationship with the employer and keep the project progressing to some extent, while also signalling that non-payment is being taken seriously.
3. Cost Recovery: Another significant aspect of Section 112 is that the contractor is entitled to recover reasonable costs and expenses incurred as a result of the suspension of works. This includes costs related to the delay or disruption caused by the suspension. However, these costs must be reasonable and directly attributable to the suspension in order to be recoverable.

Risks of Abandoning the Contract:

1. While the Construction Act grants the right to suspend work, abandoning the contract outright without adhering to the statutory requirements is a very different matter. Contractors must be aware of the potential consequences of abandoning a project due to non-payment, which include:
2. Breach of Contract: Abandoning a contract without following the proper legal procedures can lead to the contractor being found in breach of contract. This can result in the employer taking legal action for damages, which may include the cost of hiring replacement contractors and any financial losses incurred due to project delays. The contractor’s decision to walk away could also nullify their right to recover outstanding payments or even result in claims for penalties or compensation from the employer.
3. Loss of Retention: Many construction contracts in the UK include a retention clause, where a percentage of each payment is held back until the project is satisfactorily completed. If a contractor abandons a project, they risk losing the retention monies owed to them, further exacerbating the financial strain caused by non-payment.
4. Damage to Reputation: In an industry where reputation is key, abandoning a contract can have long-term negative impacts on a contractor’s standing within the sector. Employers, clients, and project managers may view a contractor who walks away from a project as unreliable, making it harder to secure future work. Furthermore, such actions could be flagged in future pre-qualification questionnaires (PQQs), which assess a contractor’s past performance before awarding contracts.
5. Forfeiture of the Right to Suspend: Section 112 of the Construction Act is designed to be a protective measure for contractors, but if a contractor opts to abandon the contract, they may forfeit their right to suspend work in accordance with the law. The suspension process provides legal safeguards, but these are only available if the contractor follows the proper steps. By abandoning the contract, a contractor removes the opportunity to use this statutory right as leverage.

Practical Considerations for Contractors:

• Contractors should carefully consider their legal options before taking any drastic steps when faced with non-payment. The following practical steps can help mitigate risks and preserve legal rights:
• Follow the Correct Procedures: Always issue a notice of intention to suspend work as required by Section 112. This formal process gives the employer an opportunity to rectify the situation and protects the contractor’s position.
• Seek Legal Advice: If payment disputes persist, contractors should seek advice from legal professionals with expertise in construction law. Legal counsel can provide tailored guidance on the best course of action, whether that be suspending work or pursuing legal remedies such as adjudication or arbitration.
• Consider Alternative Dispute Resolution (ADR): Rather than abandoning a project, contractors might consider using ADR mechanisms such as adjudication, which is a fast-track dispute resolution process commonly used in the UK construction industry. This can help resolve payment disputes while keeping the project on track.
• Maintain Documentation: Contractors should ensure that all communications regarding payment issues are well documented. This includes issuing notices, keeping records of unpaid invoices, and maintaining correspondence with the employer. Such documentation can serve as vital evidence if the matter escalates to a formal dispute resolution process.

While non-payment is a serious issue that can cause significant financial stress for contractors, it is crucial to act cautiously before abandoning a contract. Section 112 of the Construction Act provides a legal framework for suspending work due to non-payment, but contractors must strictly follow the provisions of this section to avoid legal consequences.

By adhering to the notice requirements and considering alternative solutions such as dispute resolution, contractors can protect their legal rights and financial interests without jeopardising their future opportunities or risking breach of contract claims.