Suspending work for non-payment

By Matt Taylor

Associate, Kensington Swan Lawyers

Traditionally a contractor who wishes to suspend work for non‑payment by a principal must rely on the terms of the contract (typically being NZS3910).

It is well established law that a contractor who suspends work for non‑payment without a contractual right to do so will leave themselves open for a damages claim for any loss suffered by the principal arising out of the wrongful suspension. This position has been altered by the Construction Contracts

Act 2002 (‘CCA’), and although the suspension of work provisions in the CCA are hardly ever used (or used correctly) they provide a quick and easy way for the contractor to suspend work for non‑payment, independent from any contractual right the contractor may have.

Clause 14.3 of NZS3910:2003 sets out the long‑winded process by which a contractor may suspend work for default by the principal. In respect of non-payment, the principal will be in default where:

• The principal has failed to pay the contractor an amount due under any payment schedule (in which case the contractor may give notice to the engineer of the default); or,
• The engineer has failed to issue a payment schedule within the time provided, (and the contractor has given notice to the principal and the engineer of such failure), a payment schedule is not issued within five working days after receiving notice.

If, after 10 working days, the principal’s default is not remedied, then under clause 6.7 the contractor may require the engineer to suspend the contract works. Clause 6.7 confers a power upon the engineer to suspend the contract works for such time as the engineer thinks fit. This does not mean the engineer must or shall suspend. Following suspension the contractor is entitled to terminate the contract without prejudice to any other rights or remedies it may have.

The ability for a contractor to suspend work under section 72 of the CCA is more straightforward. In circumstances where the contractor has properly served a complying payment claim on the principal and:

• The principal has failed to pay the claimed amount and no payment schedule has been provided by the due date; or,
• The scheduled amount in any payment schedule is not paid by the due date for payment; or,
• The principal has not complied with an adjudicator’s determination to pay by a particular date.

Then the contractor can serve a notice on the principal of its intention to suspend the construction work. If payment is not made by the principal within five working days of the notice, then the contractor may suspend work.

The CCA expressly provides that in suspending the contract works under section 72 the contractor will not be in breach of the contract, and is not liable for any loss or damage suffered by the principal as a result of the suspension. It also sets out the contractor’s right to an extension of time for the length of any suspension and protects the contractor’s right to terminate the contract. The contractor’s right to suspend under the CCA ceases when the principal pays the full amount due.

Suspension under the CCA is preferable because it is quicker, requires notice to be given to the principal only (not the engineer), and expressly preserves the contractor’s contractual rights. However, it is vital that the contractor is absolutely sure it has the right to suspend. If the contractor purports to suspend work on the basis of a non‑complying payment claim, it loses the protection of the CCA and will be liable for any damages caused to the principal as a result of the wrongful suspension. If the contractor does have a right to suspend, it can be an extremely effective method to getting paid.

• This article is not a substitute for independent legal advice.