Mutual suspension in construction: a classic impasse

The Arnhem-Leeuwarden Court recently issued a ruling on a classic impasse during the execution of a construction contract: a client refuses to pay a (progress) invoice from the contractor because, according to the client, there are deficiencies in the work and the client believes that the contractor should first rectify them. The client therefore (implicitly) invokes suspension. The contractor then refuses to continue working until their invoice is paid. Their work is therefore suspended. However, only one party can justifiably suspend their obligation. Who this party is depends on various factors. These factors are discussed on the basis of the ruling in this blog.

Essence of the Court’s ruling

The client had appealed against the judgement of the subdistrict court. The subdistrict court had ruled that the client was not entitled to suspension. When the contractor’s invoice became due, there was no claim for rectification of deficiencies against the contractor. This means that the contractor was then allowed to suspend their work (the work had not yet been delivered) until the client paid. The Court upheld this ruling and clearly explained the legal assessment framework.

Assessment framework

The basic principle behind suspension is that the party that is last to perform may wait until the other party has performed. The condition is that the claim invoked by one party against the other must be due and sufficiently related to the obligation that has not yet been fulfilled (Section 6:52 (1) and 6:262 of the Dutch Civil Code). If two parties reciprocally invoke suspension, it must be determined who should have performed first (with which party the fulfilment ‘rests’  first, Parliamentary History Book 6, p. 203). In its ruling, the Court determined that the following must be investigated in order to answer that question:

1. whether the counterclaim (for rectification of deficiencies) submitted by the client already existed before the contractor’s invoice became due, and
2. whether the extent of the deficiencies (and the rectification) warrants the suspension (proportionality requirement).

(1) Rectification obligation during the work

The first part of the assessment concerns the moment at which the client’s counterclaim arose. In this specific dispute, the question is whether the contractor already had a rectification obligation before the due date of the invoice (and therefore also before the work was delivered). Even before delivery, a contractor may be obliged to rectify deficiencies in the work. In addition to delivering the work, the contractor has an ongoing obligation to deliver good and proper work. In line with this obligation, the contractor is in principle also obliged to continuously rectify any deficiencies that come to light.

This rectification obligation is limited by law (Section 7:759 of the Dutch Civil Code) in favour of the contractor after delivery. After all, the contractor is then released from liability for defects that were discovered by the client upon handover and were (implicitly) accepted. In the case of new, undiscovered deficiencies, the client must first give the contractor the opportunity to rectify them. However, this restriction after delivery does not mean that the contractor is not already obliged to rectify deficiencies before delivery. Rectification during the work is part of the same primary obligation as performance of the construction contract.

(2) The magnitude of the deficiencies must warrant suspension.

A second element of a legally valid suspension is proportionality. Not every deficiency warrants a (complete) suspension of payment. The suspended amount of the invoice must be in reasonable proportion to the deficiency to be rectified. For example, suspending a EUR 15,000 invoice is likely justified for an incorrectly installed support beam, but not for a poorly finished sealant edge. The Court made a distinction between deficiencies that result in the work not complying with the contract and deficiencies that can easily be rectified upon delivery (ECLI:NL:GHARL:2022:3242). Some judges also apply the rule that the suspension may not exceed the estimated costs of rectifying the deficiencies that led to the suspension (ECLI:NL:RBMNE:2023:2141 and ECLI:RBDHA:2017:4571).

If the client’s suspension of payment is justifiable but excessive, they will still owe this (excessively suspended) amount and will be in default if payment is not made on time. This results in a situation in which the contractor can, in turn, suspend the obligation to rectify the deficiencies underlying the suspension until the client has first paid the excessively suspended amount. A client may therefore find themselves in trouble if the suspension is too excessive.

Suspension of payment due to deficiencies

The fact that the client can also invoke suspension on the grounds of deficiencies before delivery has been explicitly confirmed in a 2014 ruling (ECLI:NL:HR:2014:95). In that case, the Supreme Court ruled that the fact that the work had not yet been delivered did not prevent the client from invoking the right of suspension. The fact that the deficiencies could still be rectified (before delivery) is also not relevant. According to the Supreme Court, ‘the right of suspension is precisely intended to put pressure on the contractor to comply with the counterclaim and, in the event that the contractor fails to do so, also serves as a guarantee of payment (by means of offsetting) of the damages resulting from the contractor’s default’.

Deficient work or work not yet completed?

The fact that the work has not yet been delivered is relevant for determining whether the contractor is in breach. A distinction must be made between (1) inadequately performed work and (2) work not yet completed. During the execution of an assignment, the contractor is obliged to rectify deficient work. However, a contractor is only obliged to complete the work on the (contractually agreed) delivery date or after a (reasonable) deadline set by the client. Although this sounds logical, the distinction between deficient and ‘incomplete’ work is not always clear: the finishing work carried out on a house can still be damaged or be sloppy during construction, but is often rectified at a later stage. This constitutes ‘incomplete’ work. The same applies to doors and windows that are installed but do not yet function correctly during the execution of the work.
The mere fact that work has not yet been completed before delivery does not, in principle, provide sufficient grounds for suspending payment. (The situation is obviously different if interim partial instalments or so-called milestones have been agreed.)

Conclusion

Usually, parties cannot resolve the impasse of mutual suspension on their own. It is often only afterwards that it is decided—by the Court—who was entitled to suspend at what moment and who was not. And that can have very negative consequences for the party that was ‘wrong’. It is therefore very important for both the client and the contractor to have a clear understanding of whether (1) there is a rectification obligation and (2) whether the suspended amount is proportionate. Furthermore, the parties may consider continuing work with a guarantee of payment of the invoice and/or if the alleged deficiencies are examined by an expert during the work.

If you have any further questions about the right to suspend a contract and the rectification obligation before delivery, please feel free to contact Rosa Ruimschotel for advice.