UNPAID CONTRACTOR: SHOULD I STOP OR SHOULD I MOVE ON?
The construction industry has always been a high risk sector for all parties involved, whether you are a main contractor or a sub-contractor. Typically, it is crucial for companies operating in this industry to maintain a healthy cash flow in order to remain sustainable and to ensure timely and efficient completion of projects.
Unfortunately, payments are not always made promptly. Contractors often find themselves in difficult situations where progress claims are submitted, but payments are withheld without any justification or valid reason. This puts many contractors in a dilemma, whether to proceed with the works or to suspend them pending payment.
On one hand, contractors are bound by the terms of their contracts. Moreover, they are often pressured by strict timelines and the risk of being subjected to Liquidated Ascertained Damages (LAD) if they fail to complete the works within the stipulated period. On the other hand, many contractors are reluctant to proceed as they would need to incur further costs for the subsequent stages of the works.
To proceed or to suspend?
Unless expressly provided for in the contract, contractors do not have an automatic right to suspend works. In the High Court case of Kah Seng Construction Sdn Bhd v Selsin Development Sdn Bhd [1996] MLJU 359, it was held that a contractor must either elect to terminate the contract or continue with the works and later sue for unpaid works. This legal position was reaffirmed by the Court of Appeal in Martego Sdn Bhd v Arkitek Meor & Chew Sdn Bhd and another appeal [2018] 4 MLJ 496.
Suspending works without proper justification may expose the contractor to the risk of termination. In the High Court case of Citex (M) Sdn Bhd v Ingeback (M) Sdn Bhd [1995] MLJU 561, the Plaintiff had suspended works due to the Defendant’s failure to make payments. The Court held that the Plaintiff was not justified in doing so, and that the Defendant’s decision to terminate the contract was lawful and valid.
Similarly, in the High Court case of Oriental Housetop Sdn Bhd v Magna Haven Sdn Bhd and another case [2021] MLJU 1505, it was held that the suspension of works was wrongful. The learned judge further acknowledged that suspending works in response to non-payment is a common mistake made by many unpaid contractors and sub-contractors.
In conclusion, contractors should carefully consider their options before deciding to suspend works, as such actions may lead to serious legal consequences.