SHOULD I STAY OR SHOULD I GO?
Exploring the contractor’s right to Suspending and/or Slowing down Works for non payment
There is a saying that cashflow is the lifeblood of the construction industry. Though cliché, the significance of that is evident to all in the industry. When there is no payment from the employer to the contractor when due (or contractor to the subcontractor), what recourse does a contractor have? Regardless, if it is because the certifier fails to issue payment certificate or despite there being a certificate, the employer fails to pay according to the same – the consequence to the contractor is the same: he is not getting paid. Short of terminating the contract, can the contractor stop work in the middle of the project until he is fully paid what is due? Or can they slow their progress down? (termination is a drastic recourse. Whilst it has its own advantage and disadvantages, that topic falls outside the ambit of today’s discussion)
The general rule is this: that unless the terms of the contract allows, a contractor cannot stop work or slow down his progress of works: Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd  1 CLJ Supp 448. If he does so, he will be in breach of the terms of his contract. Depending on the express terms contained in the contract, the consequence to the contractor may be severe.
Thus, the contractor is in a catch 22 dilemma: without payment, his cashflow will be affected and will be at a loss in having to continue with the works. But if he stops, he risks committing a breach of the contract himself. Most standard contracts would list “suspension of works” and “failure to proceed regularly and diligently” in one form or another as events of defaults which may lead to termination by the employer.
But as the above rule is phrased, this can be overcome if the contract has a clause allowing the contractor the right to either suspend or slow the rate of progress of works. For example, clause 30.7 of the PAM 2006 standard form (or clause 26.15 in the PAM 2006 Sub-Contract) provides that the contractor may suspend the execution of works until such time payment is made. However, a contractor wanting to exercise the right to suspend or slow down under a particular clause must comply with the same strictly.
For example in clause 30.7 of PAM, the contractor must take note of the following:
- clause 30.7 is only applicable in instances where the employer fails to pay the amount due as shown in the payment certificate, less any deduction the employer is expressly entitled to make under the contract (if it was a question where there was a failure to issue the payment certificate or that the amount certified is erroneous, this clause may not apply).
Care must also be given to ensure that there is indeed an amount due that is payable. In an Australian case: Wesiak v D&R Constructions (Aust) Pty Ltd  NSWCA 353, a contractor gave notice that he is suspending his work unless payment to his interim invoice was made. The employer on the other hand says that there was no money owed and that the work was substantially incomplete. The Court of Appeal agreed with the employer and found that there were no monies due and owing to the contractor under the interim invoice. As a result, the contractor’s suspension was held to be wrongful and amounted to a repudiation of the contract.
- the contractor must give the employer a written notice delivered by and or registered post stating that if payment is not made within 14 days, the contractor may by a further written notice, delivered by and or registered post, forthwith suspend the works until payment is made; and
- clause 30.9 imposes on the contractor to secure and protect the works, including a cessation insurance cover during the period of suspension.
But what if the contract that was entered into did not contain such clause like the above? This is where the enactment of the Construction Industry Payment and Adjudication Act 2012 (“CIPAA”) comes in to assist an unpaid party. And because it is statute, it applies to all construction contracts, barring limited exceptions under the Act.
CIPAA allows for a contractor to “suspend the performance or reduce the rate of progress of performance” of the works if he has not been paid. However, a contractor can only resort to this if he has done the following:
- he has initiated adjudication against the employer and obtained an adjudication decision against the same;
- he has not been wholly paid the adjudicated amount within the time stipulated under the decision;
- he has complied with all the notice requirement under CIPAA.
At first blush, resorting to CIPAA would seem more complicated and arduous than invoking contractual right of suspension like clause 30.9 of PAM. CIPAA requires the contractor to institute adjudication, which would lead to more time and cost.
Yet, an adjudication decision would counter the risk of a wrongful suspension / slowing of progress because there was no monies due like in Wesiak v D&R Constructions. The process under CIPAA is also significantly faster than other conventional processes such as court or arbitration. Unless agreed by both parties, the adjudication decision must be delivered within 45 days from the close of the adjudication response or reply.
If the contractor is fortuitous to have both contractual right and CIPAA options available and contemplates exercising such right, he must consider the pros and cons of each processes and which suits his situation best. It is a matter of managing risk vs speed of recovery.
KELVIN NG CY
Partner at Vin & Isaac Lee
Advocate and solicitor in the High Court of Malaya
Adjudicator under the AIAC panel.
*written for Berita MFPA August 2017 Ed