Does a contractor have a right to withhold payment if a subcontractor is proceeding slowly? What if the contractor has an express right to terminate the subcontract for subcontractor delay? Could this be sufficient to withhold payment? This situation was considered in the recent decision of Leander Construction Ltd v Mulalley.
Leander was employed by Mulalley, the contractor, to carry out groundworks, drainage, concrete framework and associated works at a development site in Lewisham. Leander was required to complete the subcontract works by 8 August 2011 and an activity schedule set out the elements of the works, their commencement dates, the periods for carrying out the works and completion dates. The schedule was stated to be for indicative purposes only and subject to change.
By May 2011 it was evident that the works would not be completed in accordance with anticipated timeline in the activity schedule. In light of this, Mulalley withheld £131,000 in payments from Leander in respect of the alleged delay and issued two withholding notices. Leander brought a claim in the High Court to challenge the validity of the withholding notices.
The alleged delay and the withholding notices all took place before the completion date of 8 August 2011 and well before the main contract completion date of April 2012. The issue was whether Leander owed the contractor an interim obligation to progress the works that would give rise to a claim in damages in advance of the completion date.
Leander was not under an express obligation to carry out its works regularly and diligently. The contractor could, however, terminate the subcontract if Leander failed to do so. Mulalley contended that such a term should be implied into the subcontract on the basis that it was a termination event. Mulalley accepted that compliance with the activity schedule was not a contractual obligation, but submitted that the activity schedule should be used to measure Mulalley’s performance in carrying out the works regularly and diligently.
The judge concluded that it was not necessary to imply such a term to make the contract effective. The subcontract could continue to operate without this term. Previous case law indicated that the courts would not be prepared to imply such a term in these circumstances. This is guided by the general principle that contractors may plan and carry out their works as they wish so long as they complete on time.
The judge remarked that the express terms of the subcontract were against implying such a term and that the subcontract adequately dealt with remedies for subcontractor delay. The parties had agreed that a failure to proceed regularly and diligently would be dealt with under the termination provisions. Furthermore, Leander had to complete its works by a set date, and liquidated damages were provided for where Leander failed to meet this date. Even if there is an express right to terminate on the occurrence of a specific event, this does not translate automatically into a breach of contract. Termination rights have to be viewed separately from each party’s obligations under the contract.
As there was no express or implied term requiring Leander to carry out its works regularly and diligently, Mulalley’s withholding notices were invalid (as Leander had not breached the subcontract). Therefore, Mulalley was required to pay the amounts it had withheld.
The only remedy the contractor possessed in this case was to terminate the subcontract. Damages for delay could only be claimed once the completion date had been missed, leaving the contractor in a difficult position given the consequences delay to one part of the works would have on the rest of the programme.
If there is a key date that cannot be missed, for example, in the case of student accommodation or in the construction of a school, where the crucial date is the start of term, provision must be made in the contract. Any key dates that the employer is required to meet must be passed down to the contractor with sufficient time buffers. If an express term is included, requiring works to be carried out regularly and diligently, an employer may be permitted to withhold payment or pay less if such works are not progressed.