Construction Contracts – Suspension (Payment Suspension on Insolvency)
When a contractor or subcontractor becomes insolvent, it is common for the contract to provide for a suspension of all further payments. The suspension generally continues for a year or longer. By the time the payment becomes due, the payer introduces various reasons for not paying. These include set-off for additional costs suffered due to the insolvency, delay and defect rectification costs. The result is often that the outstanding payments are not recovered.
Following insolvency, sometimes significant sums are tied up under payment suspension provisions. This can be particularly disadvantageous for contractors where practical completion of a project has been achieved, but the developer has been slow to make the last one or two interim payments. If the slow payments push the contractor into insolvency, the suspension provisions render any prospect of trading on all the more unlikely.
Since 1 October 2011, new legislation has introduced restrictions on the use of payment suspension provisions (see s.111(10) of the Housing Grants Construction and Regeneration Act 1996 (revised)). Now most payment periods that have started in a construction contract before the contractor’s insolvency may not be suspended following the insolvency. This means that the payer must still pay the amount due by the final date for payment, even if that date occurs after the insolvency. The only time this does not apply is if the insolvency occurs after the last date on which the payer could issue a pay less notice under s.111(3) HGCRA. This is usually up to 7 days before the final date for payment of an amount due.
The same principle may apply to past payment periods where the payer has not paid an amount due. Although the legislation is unclear in this regard, there is certainly a reasonable argument that past payment periods cannot be suspended.
None of this prevents contractual, equitable or insolvency set-off by the payer. However if the payer decides not to pay, the payer may be forced to explain the basis on which he is not paying, rather than just rely on a suspension provision. In turn, unless the payer has valid reasons for not paying, the insolvent contractor may enforce payment.
For insolvency practitioners of insolvent contractors and sub-contractors it is important to be aware of this new legislation. This is firstly because where there are live contracts before the insolvency (which were entered into on or after 1 October 2011), consideration should be given to when an appointment is made. If possible it should not be after the last date for the payer to issue a pay less notice. This is to prevent the payer from suspending payment for that period. Further, where payment is not suspended there is quite likely to be an opportunity to recover, at an early stage, payments which were previously out of reach.