Exercising the right to suspend: how does the FIDIC form work?
by Jeremy Glover, Partner
We have written separately about termination in this year’s Review. What about suspension? In the event of a breach of contract by the employer, this can easily be seen as a more commercially acceptable approach – a warning to the employer. However, as Jeremy Glover explains, like the right to terminate, suspension must be exercised carefully. Any notices must follow the form required by the contract and be sent to the right entity or individual.
As a starting point, there is no common law1 right that allows suspension of performance of the works. Therefore, the right to suspend depends on what your contract says or what is implied into your contract by statute.
The Housing Grants Act
In the UK, where the Housing Grants, Construction & Regeneration Act 1996 as amended (the “UK Housing Grants Act”) applies, section 1122 allows a statutory right of suspension in the following way:
- Where a party wrongfully withholds payment after the final date for payment of a sum due under the contract without giving an effective notice of intention to withhold payment.
- The right to suspend may not be exercised without first giving to the party in default at least seven days’ notice of intention to suspend performance, stating the ground or grounds on which it is intended to suspend performance.
- The right to suspend performance ceases when the party in default makes payment in full of the sum outstanding.
In addition, where the right to suspend is exercised, the party in default shall be liable to pay to the party exercising the right a reasonable amount in respect of costs and expenses reasonably incurred by that party as a result of the exercise of the right, and any period during which performance is suspended shall be disregarded in calculating any extension of time.
The FIDIC form
The FIDIC form operates in a similar way. Sub-clause 16.1 of the 2017 Form provides that a contractor may (only) suspend or reduce the rate of work in the following circumstances:
- if the engineer fails to issue a timely interim certificate;
- if the employer fails to provide financial information about the arrangements in place to pay the contract price;
- if the employer fails to pay any sums due; or
- if the employer fails to comply with an engineer’s determination or a DAAB decision.
Before the contractor can suspend, it again must give notice, here of 21 days. That notice must comply with the formalities of sub-clause 1.3. These require that the notice must be in writing and must state that it is given under the sub-clause in question. It is recommended that the notice also set out the grounds (which are of course strictly limited to the grounds listed within this sub-clause) for the suspension.
If the default is remedied, the contractor must resume work as soon as reasonably possible. But, again, where the suspension is valid, the contractor is entitled to claim for delay or cost plus reasonable profit in accordance with clause 20. This would include de- and re-mobilisation costs incurred as a direct result of the suspension.
Both the UK Housing Grants Act and the FIDIC form allow parties to suspend in part, which do provide contractors with a range of options if faced with non-payment. Under the FIDIC form, sub-clause 16.1 requires that the contractor give 21 days’ formal notice before it may suspend the work, as opposed to the seven days stipulated in the Housing Grants Act. This may cause cash-flow difficulties for some contractors who will have to continue working despite not being in receipt of payment.
Operating the FIDIC provisions
The question of the right to suspend under the FIDIC form was considered in 2022 by the South African High Court in the case of Ndlambe Local Municipality v Quality Filtration Systems (Pty) Ltd & Anor (3574/2022) [2022] ZAECMKHC 83.
The contractor, QFS, suspended work for non-payment by the employer, NLM, of sums certified by the Employer’s Representative (“ER”). NLM said that QFS had not given proper notice under sub-clause 16.1 and had breached their contract by suspending works.
The project was for the provision of both a sea water reverse osmosis plant and a reclamation reverse osmosis plant. The contract was based on the FIDIC Gold (Design, Build and Operate) Form 2011.
The ER issued payment certificate 12 on 21 June 2022. Under sub-clause 14.8, payment was then due 56 days from the date when the payment certificate was submitted. On 22 August 2022, QFS wrote to NLM noting that no payment had been made as required under sub-clause 14.8.
QFS then wrote to the ER dated 20 September 2022. This letter was headed “Notice: PC12 – Sub-clause 16.1: Contractor’s Entitlement to Suspend Work (2)” and continued:
“On 13 September 2022, QFS notified the Employer of its duty to pay and stated that should the Employer fail to action the payment of PC12, by the 20th September 2022, then QFS will exercise their right to suspend the works as per Sub-Clause 16.1 of FIDIC DBO”.
NLM did not pay the certified sum by 20 September 2022, though the payment was made at a later date.
The ER issued a further payment certificate 13 on 25 July 2022. This too was not paid within the 56-day period and QFS sent further notices, on 9 and 26 September 2022, again referring to the right to suspend in terms of sub-clause 16.1.
Lowe J said that there was no doubt that sub-clause 14.8 required payment of interim payment certificates within 56 days of receipt of the corresponding statement and supporting documents. There was no dispute that the payment certificates were given as indicated in respect of 12 and 13. Payment certificate 13 remained partially unpaid. That certificate was the basis for the decision to finally suspend the works by QFS respondent.
Further, sub-clause 14.8 itself, which did not provide for or require any notice, did, however, provide strict time limits upon the employer within which to pay. Under sub-clause 16.1, upon failure to make a sub-clause 14.8 payment timeously, the contractor may, not less than 21 days after giving Notice to the employer, suspend work. It was clear that this sub-clause enabled a contractor to suspend work and in doing so:
“put pressure on [the employer] to honour its payment obligations without taking the step of terminating the contract or unlawfully refusing to work if not paid”.
The judge was of the view that the QFS notice:
“more than clearly identifies the document as a ‘notice’ and refers again more than clearly to LoC140 being ‘Notice 14.8 Delayed Payment’. In terms, the notice then continues to set out the time line being a due date for payment on 29 August 2022 in respect of payment certificate 13. However, there was a delay in respect of the issue of a notice, and LoC141 is referred to being a letter of 9 September 2022 ‘as per the requirements of sub-clause 14.8’. It is clear in the context of the papers and annexures that this is a notification to applicant concerning its failure to pay payment certificate 13 then being ‘already 11 days overdue’”.
It could, therefore, not be “seriously contested” that, on 9 September 2022, there was written notice given by QFS that there had been a failure to pay payment certificate 13, then 11 days overdue. The 21 days started to run then, not on 26 September 2022. The letter of 26 September 2022 was also a “notice”, and it referred back to the information in the letter of 9 September 2022 including reference of the entitlement to suspend within 21 days, which right would accrue on 30 September 2022.
The judge also noted that there was no suggestion that payment was not due in payment certificate 13, or that a claim was being set off against the payment certificate to justify non-payment. Further, the payment certificates were issued by NLM’s own representative and payment had been repeatedly delayed. QFS had said that it could not sustain these services if it was not paid. Lowe J concluded that:
“it is clear on any sensible reading of the notice of 26 September which sets out fully to those involved and who would have been in possession of all the correspondence and notices, the entire time line and there can be no doubt, in my view, that on a proper reading thereof, applicant would have been more than fully aware that it had received notice in respect of the non-payment of an amount due in terms of clause 14.8, warning of the failure to pay within 21 days of the giving of the notice as being such as to entitle suspension, a reminder hereof being given on 26 September 2022, the 21 days period expiring as of 30 September 2022”.
QFS was, therefore, properly entitled to suspend.
Conclusions
The South African case provides a good example of how suspension is supposed to operate under the FIDIC form. The employer failed to comply with its payment obligations under sub-clauses 14.7 and 14.8, which meant that the provisions of sub-clause 16.1 came into operation giving the contractor the right to suspend the works if the non-payment continued for 21 days post notice.
It also demonstrates the commercial considerations that come into play. The contractor did not suspend at the first opportunity and gave the employer every opportunity to make good its default before actually pressing the suspension button.
And when the contractor’s actions were challenged, the court went back to basics, checking that there was an entitlement to suspend under the contract itself and then checking the formalities, whether the suspension notice complied with the formal requirements of the contract. Here, the contractor did everything right and complied with each of those requirements. The suspension was accordingly valid.