CONTRACTORS IN SUSPENSE ABOUT FAILURES TO MAKE PAYMENT

Several times a year we are consulted by Contractors whose complaint is that they were not paid and accordingly stopped work or left the site. Now they want to know how to recover the amounts due to them. This misconception that there is an automatic right to suspend work or to leave the site if payment is not made is clearly a common misconception in our industry. Unfortunately for Contractors unless their contract provides them with a specific right to stop work when payment is not made their obligation is to continue to carry out the work and to follow the remedies which are provided in the contract, namely to dispute the Employer’s right to withhold payment. Thereafter they may also be entitled to exercise their lien and to retain possession of the site as a form of security against any claim they believe they have.

Where however a Contractor has abandoned the site or simply stopped work, such an action in the absence of a contractual provision entitling the Contractor to do so would constitute a repudiation of the contract entitling the Employer to accept the repudiation and cancel the contract. Such an action would place the Contractor in a very difficult position since it would no longer have any claim for damages being the loss of profit on the remaining portion of the work and the Employer would have a claim for damages against the Contractor being the difference in cost between that of the original Contractor completing the work and the costs of the replacement Contractor brought in to complete the work subject to the normal common law rules of mitigation of damages for breach.

There is no doubt that where a right is created in a contract allowing a Contractor to stop work or reduce the rate of work, during the execution of the work, this constitutes a very powerful right and will usually bring the issue to a head very quickly. This is not always the case however and in a road contract in Malawi the Italian Contractor suspended the work for 18 months following from the Malawian Government’s failure to honour a certificate due to lack of funds. This was a 4th edition 1987 FIDIC contract in which the Contractor was entitled to suspend under the circumstances.

Although on the face of it, it would seem to be common sense that Contractors ought to be able to suspend where they are not paid, there is nothing in our common law which would allow such a suspension. Accordingly, in the absence of contractual provisions to create such a right the contractor may not suspend in these circumstances. This flows from the common law concept of a construction contract being an “entire contract” in terms of which the Contractor carries out all the work free from defects prior to receiving any payment whatsoever. Only on completion under this regime does the Contractor then receive a single balloon payment of the entire contract sum. It necessarily follows that the common law does not recognize the right to interim certification and payments and as a consequence does not recognize a failure to make an interim payment as being a breach of contract giving rise to a right to suspend. However, this right does exist in some of our standard forms of contract. For example, FIDIC 1999 suite, clause 16.1 provides that if the Engineer fails to certify or the Employer fails to make payments, the Contractor may suspend the work after giving 21 days notice to the Employer. Where payment is subsequently made, then the Contractor is also entitled to recover its Cost plus reasonable profit as well as claim the relevant extension of time caused by the suspension. Under this regime the Contractor, subject to having given the proper notices, is entitled to suspend and thereafter may exercise its right to terminate the contract. The NEC suite of contracts does not have an equivalent provision albeit the Contractor would be entitled to terminate for failure to certify or make payments and to claim interest on the amount underpaid.

It necessarily follows that contracts which do not contain an express clause entitling the Contractor to suspend leave Contractors in a much weaker position. It cannot be stressed too highly that Contractors faced with a payment problem must read their contract carefully to understand what rights they may have in the circumstances. If they do not do so they may expose themselves to a significant claim for damages from the Employer notwithstanding that it was the Employer who was effectively the “guilty party” in the first instance.

Employer’s Right to Unilaterally Terminate

Although we have not seen the domestic forms of contract, JBCC and GCC2004, incorporate unilateral rights of termination such rights do exist in the FIDIC 1999 suite as well as the NEC suite of contracts. Under these two forms of contract the Employer is entitled to unilaterally terminate the contract for its own convenience. See for example clause 15.5 of FIDIC and clause 90.2 of NEC 3.

As to what compensation is paid depends upon the terms of the contract since once again the common law does not allow parties to walk away from a contract for their own convenience. FIDIC also expressly states that clause 15.5 may not be used to take work away from the Contractor in order for the Employer to execute the balance of the works or to bring in alternative Contractors. This, in South Africa, is, in any event, the common law position flowing from the judgement of McEwan J in the 1977 case of Hydro Holdings (Edms) Bpk v Minister of Public Works and another. However, since this is a common law judgement it would be possible to exclude this position by way of a contractual term as has been done by Eskom in the Medupi Power Station conditions of particular application to the Yellow Book FIDIC contracts.

Lessons to be Learnt

Contract documents are of course not the most exciting documents to read. Be that as it may it is vital that Contractors do read their contracts and more particularly having read them understand what their rights and obligations are. The modern form of construction contract is a complex document with many interlinking clauses. It is very easy for Contractors to make contractual mistakes based upon lack of understanding of the documents and the law will not come to the assistance of the ignorant. The old adage, if you do not understand then ask, is applicable and Contractors will have only themselves to blame if they do not follow the rules. There are no referees in construction contracts giving out warnings followed by yellow cards and then perhaps red cards. You only have one chance and if you get it wrong the strong probability is that you will be shown a red card!

Chris Binnington