Subcontractor was entitled to suspend work for non-payment by contractor, but had to affirm contract or accept breach within a reasonable time

Unison Projects Co Ltd v AHL Design Workshop Ltd, HCCT 37/2010, 13 April 2012

This was a dispute between a subcontractor and main contractor, involving construction work at the campus of French International School ("FIS"). The Defendant (AHL) was engaged by FIS as its design and build contractor to carry out extension works to the FIS premises ("the Main Contract"). AHL subsequently subcontracted part of the Main Contract works to the Plaintiff (Unison).

AHL made a late payment as works progressed and Unison withdrew its labour from site and suspended the subcontract works, leaving part of the works outstanding. AHL then employed other contractors to finish what had been left undone. Unison now claimed for unpaid works carried out prior to leaving the site, whilst AHL counterclaimed for money spent on having to complete/remedy that which Unison had left undone.

The main issue before the Court was whether AHL was in breach of the payment terms under the subcontract and, if so, whether Unison was entitled to suspend the subcontract works. The Court held that Unison was owed money under the subcontract and AHL was in breach of the payment terms in the subcontract. However, on the facts of this case, Unison was not permitted, at law, simply to "down tools" and walk away on an indeterminate basis, pending payment for what it was allegedly owed (Unison had remained off site for 32 days), without terminating the subcontract within a reasonable period. Unison had been entitled, the Court said, to suspend works when it did, but not entitled simply to sit idle for such lengthy period without either affirming the contract (and returning to work) or alternatively accepting AHL's repudiatory breach (by virtue of AHL's non-payment). AHL's hiring of substitute workers, the Court said, effectively constituted acceptance of Unison's breach in not returning timeously to site after its initial suspension of works. The Court awarded Unison HK$3.63 million, but after deducting sums which it found Unison liable to pay AHL, including (amongst other things) liquidated damages (assessed at HK$200,000, on the basis that by reason of Unison's delay, progress of works under the Main Contract was delayed), additional costs of completing works left by Unison, additional acceleration costs in completing the project and the value of outstanding works as at the date Unison suspended works (HK$2.5 million).

The lesson to be learnt from this case is that should a contractor decide to suspend work or terminate the contract due to non-payment, it should do so within a reasonable time. Just sitting idly on site for a lengthy period, without deciding what to do, will prejudice its rights to fully recover payment.

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Kwok Kit (KK) Cheung

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