Construction contracts often permit an employer to order the temporary suspension of work. In some cases the contract or general law may also allow the contractor to suspend performance. This article, the first of a two-part series, considers how rights of suspension arise and what consequences may follow for both parties.
Suspension By The Contractor
The issue of suspension often arises where a contractor wishes to suspend work due to the employer’s failure to make progress payments, or for some other serious but remediable breach of contract. However, suspension is by no means universally allowed, and incorrect or unlawful suspension may amount to a repudiation of contract with potentially serious consequences. It is therefore vital for a contractor to consider the terms of the contract and the principles of law governing that contract.
Some contracts provide an express right to suspend works in case of nonpayment, for example clause 16 of the FIDIC conditions of contract for construction. Many others, however, do not. The ICE conditions (7th edition) merely provide in clause 60(7) for a right to compound interest on overdue instalments.
If the contract is silent regarding the right to suspend, or if it appears to deny that right, contractors should look at the general principles of law governing the contract. Some civil law jurisdictions, such as France, provide a legal right for a contracting party to suspend where the other party is in breach of contract. However, this is not universal among civil law countries, for example Thailand has no equivalent provision (though more general legal principles may assist). In common law jurisdictions such as England and Hong Kong there is no generally recognised right for a contractor to suspend work for nonpayment, although several jurisdictions (such as England and New South Wales) have introduced legislation to remedy this.
Suspension By The Employer
It is much more common for construction contracts to give the employer an express right to suspend the work. This may be exercisable on specified grounds or more widely at the employer’s convenience and without any duty to give reasons. However, while contractual powers to suspend are often wide, use in practice is often limited because of the likely delay to completion and the high costs that the employer may have to pay as a result.
In the case of employer-directed suspension, the difficult issue is typically not whether the right to suspend exists, but whether it has been properly exercised and what are the consequences.
Was Suspension Properly Ordered?
Most contracts require an employer directing suspension of work to give proper written notice to that effect. Because of the legal repercussions that follow from suspension, it is important for contractors to ensure before work is suspended that the employer has provided the required notice. If a verbal instruction is given (for example, during a site meeting), a written instruction should be obtained. Failure to obtain the required notices may create difficulties in claiming costs and/or extensions of time.
Extension Of Time
Where suspension results from something other than the default of the contractor, the contractor will usually be entitled to an extension of time. The contract will determine the precise extent of that entitlement, and contracts vary significantly in this respect. FIDIC provides a general right to extra time wherever the contractor is delayed by an instruction to suspend (clause 8.8), whereas ICE conditions exclude this right if suspension was ordered because of weather conditions or other contractor risks (clause 40(2)). The extent of the right to extra time is often a controversial issue between the parties.
Contractors should ensure that any application for an extension of time takes account of the time required for remobilisation as well as the period of suspension.
What Costs Can A Contractor Claim?
Some construction contracts spell out the types of losses to be compensated in case of suspension.
Others simply include an entitlement to “reasonable costs” or “costs reasonably incurred”, with the interpretation of “reasonableness” being a matter for the governing law. Broadly, however, “reasonable costs” might include additional overheads (possibly with a profit component); costs of demobilisation and remobilisation; costs of insuring, protecting and securing the works during suspension; increases in the cost of materials over the period of suspension, and so on. Where costs result from a number of causes (such as variations and suspension), they may need to be apportioned accordingly.
Notice Requirements
Contract provisions regarding notification of claims will apply equally to claims resulting from suspension. It may be a precondition to any entitlement to extra time or money that a contractor gives written notice of his claim within a specified time and in adequate detail. Failure to comply with these requirements may bar any right to pursue claims. This issue will be discussed in the next article.
Termination
Suspension can have serious commercial and financial consequences for a contractor. Therefore, construction contracts often allow a contractor to terminate the contract if suspension continues beyond a stipulated period of time (typically measured in months rather than weeks). Normally, termination will require formal notice from the contractor and there may be a complex sequence involving a preliminary request to the employer for permission to proceed and then, if the request is not granted, a contractor’s notice treating suspension either as an omission of part of the works or as grounds for termination.
Clearly, a contractor must carefully consider the effect this step will have upon his contractual entitlements, including entitlements to costs of suspension. Again, this will depend to a large degree upon the wording of the contract concerned, and in particular the provisions on termination.
Robert Palmer is an Associate with Herbert Smith in Bangkok (tel: +66 2657 3888, email: robert.palmer@herbertsmith.com)