The Risks of Suspension under Construction Contracts

by White & Case LLP
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Two recent cases from Australia and Hong Kong highlight the serious dangers of a wrongful suspension of works under a construction contract. Wrongful suspension may ultimately lead to the termination of a contract, and serious financial consequences for the party in the wrong.

Wesiak v D&R Constructions (Aust) Pty Ltd [2016] NSWCA 353 (15 December 2016)

In Wesiak, a builder entered into a building contract with the owners of a property to carry out residential building works.

  • The builder submitted an interim invoice which the owners refused to pay. The owners contended that there was still substantial work to be done, and that they had already paid more than the contract required them to have paid at that stage.
  • The builder disagreed, and gave notice that it was suspending the work and that, unless payment was made within 10 days, it would terminate the contract.
  • Both parties agreed that the contract had been terminated with each party contending that the termination was by reason of repudiation on the part of the other.

The New South Wales Court of Appeal held that the builder's conduct was contractually unlawful. Whilst the contract allowed the builder to suspend works where the owners had failed to pay a sum which was due and payable, the sums claimed under the builder's disputed invoice were not, in fact, due as some of the works for which payment was being claimed were substantially incomplete at the time of the issuing of the invoice. The consequence was that the builder’s wrongful suspension amounted to repudiation of the contract, thus entitling the owners to terminate and claim damages from the builder.

Ipson Renovation Ltd v The Incorporated Owners of Connie Towers [2016] HKCFI 2117 (16 December 2016)

In Ipson, a contractor entered into a lump sum contract, with a body representing the owners of an apartment block development, to carry out repair and maintenance works at the property. However, shortly after entering into the contract, problems emerged:

  • a number of the apartment owners of who were dissatisfied with the project prevented the contractor and its workers from entering and bringing materials and tools into the work site;
  • following this initial disruption, the works were indefinitely suspended by the owners; and
  • during this suspension, the owners sought to reduce the contract price by removing certain work items from the contract's scope.

The question before the court was whether this conduct, individually or in total, represented a wrongful repudiation of the contract by the owners. In this regard, the court held that:

  • the prevention of access to the site was conduct of a few disgruntled owners, and could not be considered conduct attributable to the body representing all of the owners; but
  • the suspension of the works did constitute a repudiation of the contract, which the contractor was entitled to rely upon as a basis for terminating it.

The factors which collectively led the court to conclude that the owners' suspension was a wrongful repudiation were that:

  • the contract did not give the owners a general right to suspend the project;
  • the suspension was indefinite in its duration;
  • the owners had not indicated to the contractor that it would be granted any extension of time or compensation because of the suspension; and
  • the owners also sought to descope much of the contractor's work, without having a contractual basis for doing so.

Implications

The ability to suspend works in certain circumstances is an important feature of many construction contracts. However, these two cases, whilst factually distinct, demonstrate the potentially drastic consequences of getting a suspension wrong – whether by a contractor or an owner. Under common law systems, if a wrongful suspension is found to amount to repudiation of the contract, not only will the innocent party be entitled to treat the contract as terminated, but it may also sue for damages – often for very large sums.

Employers, contractors and contract administrators must therefore proceed with great caution when seeking to suspend works. Under common law systems, neither party to a construction contract has any general right to suspend the works. Careful consideration is therefore required of whether in the circumstances the contract or any applicable statute empowers a suspension of the works.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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