Does non-payment constitute repudiation? The debate continues…

26 April 2012

The debate over whether non-payment constitutes a repudiation of a contract, which would entitle the contractor/sub-contractor to suspend works, is unending.

The question was again brought before the court recently in Unison Projects Company Limited v AHL Design Workshop Limited. The dispute involved Unison (sub-contractor) and defendant AHL over the extension of an existing school building of the French International School.

Unison was to install structural steelworks for a newly added floor and an aluminium 'Kalzip' roof. No written sub-contract had been signed. Late payment of one invoice issued by Unison became an issue. Two months after the invoice had been issued, Unison withdrew from the site and suspended the works. The question was whether Unison was entitled to suspend works.

Payment & Suspension

Without a written contract, comprehensive terms and conditions governing payment, suspension of works, and termination of the sub-contract were absent. The court examined the quotation and acceptance of the quotation, and was satisfied that stage payments proposed by Unison in its quotation, and accepted by AHL, formed the contractual basis for payment.

The court was satisfied that whilst AHL had received all payments under the main contract (except the retention), it had failed to pay Unison money for the works it had done. Solely on this basis the court concluded that AHL was in breach of the payment terms of the sub-contract.

The court then considered whether Unison was entitled to suspend works given that AHL was in breach of the payment terms. An earlier letter written by Unison's former legal representatives said that 'out of the invoiced amount of HKD23,741,000 only HKD16,995,000, namely 67% of the contract sum when the contract is 93% completed' was paid.

The court's approach to determining whether Unison was entitled to suspend the works seemed inconsistent. At first, it decided that Unison was not entitled to suspend, which coincided with the general and traditional view.

However, the court then referred to Wui Fu Development Co Ltd v Tak Yuen Construction Co Ltd, which followed JM Hills & Sons v London Borough Camden (where the English court observed that withholding a substantial sum legitimately due to a contractor would be unreasonable, so it would not be unreasonable for a contractor to suspend works). On this basis, the court then decided that Unison was entitled to suspend the works.

Without elaborating whether in its view the breach on the part of AHL did indeed constitute a repudiatory breach, the court then jumped to the remedy that would have been available if there was a repudiation, ie. the option to the innocent party to accept the repudiation or to affirm the contract despite the breach. The court's view of Unison's suspension of works was an act of standing in the middle ground between these options, and Unison was not entitled to do so. Instead, it should have taken steps to accept the repudiation. It therefore appeared that the court was of the view that the breach of AHL was a repudiatory breach. The nature of AHL's breach remained obscure. The court avoided describing it as repudiatory, rather it was a 'serious breach'.

It is therefore hard to understand why in the court's view the option that would have been available to the innocent party facing a repudiatory breach of its counterpart would have been available to Unison. Whilst ruling that AHL was in breach of the payment terms, the court also held that Unison was in breach by standing in the middle ground between affirmation of the sub-contract, and acceptance of AHL's 'repudiation'.

The reliance on Wui Fu was also questionable in that case the court was satisfied that the amount outstanding was the assessed amount and was an amount legitimately owed to the contractor in that case. In Unison's case, however, the amount it claimed was its own assessment and there was no evidence that the invoiced amount was a sum legitimately due. The calculation of quantum at the end of the judgement indeed showed that the amount claimed by Unison was not legitimately owed because the court was satisfied that there were actually monies due owed by Unison to AHL, and such monies were deducted from the amount claimed by Unison. Out of the claimed amount of HK$8,426,961.09 only HK$3,363,246 was awarded by the court.

Implications

Under the common law, there is no right to suspend works for any reason at all, except the contract provides otherwise or where repudiation on the defaulting party has been established thereby entitling the innocent party to accept the repudiation and discharge itself from further performance of the contract.

The question whether there was a repudiation due to non payment is one of degree. To answer the question it is necessary to examine whether by not paying or paying late the party in default has evinced an intention not to be bound by the more important terms of a contract. This view was echoed in several other Hong Kong cases including Creatiles Building Materials Co Ltd v To's Universe Construction Co Ltd, Hongkong Underground Engineering Ltd v Welcome Construction Co Ltd, and Maysun Engineering Co Ltd v International Education and Academic Exchanges Foundation Co Ltd t/a Hong Kong Institute of Technology.

If the non payment or late payment is a one-off event, it will unlikely be a repudiation. Even where the issue arises again, it may still not be a repudiation. It all depends upon the frequency and seriousness of the failure to pay in accordance with the contract terms. It is the cumulative effect of the failure that matters.

For example, in the case of Alan Auld Associates v Rick Pollard Associates cited by Unison at the trial, all invoices issued by the by the consultant who suspended his service issued over a period of one and a half years were late. The delays of payment ranged from one to nine months with over half of the issued invoices being paid late for at least four months. The court found that the breaches of the payment term were substantial, persistent and cynical. Hence, the contract had been repudiated.

Unison's complaint was the late payment of its invoice issued in February 2010. Two months later, in April 2010, it suspended the works. It appeared from the facts that the late payment was a one-off event, and prior to the February invoice, Unison had not suffered any other payment issues. As a matter of fact, it was Unison's own case that it had been paid 67% of the contract sum at the time of the suspension. Further, contrary to evincing an intention not to be bound by the contract, AHL was ready to make payment to Unison. A cheque for a sum more than 50% of the invoiced amount was drawn and was ready for Unison's collection.

Given the facts, it cannot be said that AHL was in repudiation. This was probably the reason why the learned Judge avoided describing the breach as repudiatory. It follows that Unison was not entitled to suspend the works. The option of affirming the contract or accepting the repudiation being a remedy for repudiation was also not available to Unison.

Lowering the standard?

The danger of the judgment is that it has the effect of lowering the standard of the legal test for repudiation due to non-payment, and may open a floodgate for sub-contractors' suspension.

It will be interesting to see how higher courts will look at this judgement if AHL seeks to appeal against this judgement. In any case there is a lesson to be learnt by the industry that construction and engineering disputes should be more efficiently resolved by ADR where the parties can choose individuals of the right calibre and with relevant experience to deal with their issues.

This article is from our April 2012 edition of Construction Law Asia newsletter.

Author(s) Alice To