Right of suspension not unlimited in case of default by contractor!
If a contractor is in default in the execution of the contracted work, the client can in principle suspend his payment obligation. But this right of suspension is not unlimited. The Court of Arbitration for the Building Industry in The Netherlands recently ruled that the suspension should be in proportion to the default. Dutch construction lawyer Marco Guit explains the arbitration award.
Client suspends payment of invoices
In this case a contractor had built a loading dock for the client. There was a discussion about the quality of this loading dock. The client wanted the contractor to repair the loading dock, but the contractor did not do so. The client then suspended payment of the invoices. In total the client did not pay almost €75,000. According to the contractor this was unreasonable. The contractor in his turn invoked his right of retention.
Building dispute at the Court of Arbitration in the Netherlands
The building dispute about the quality of the loading dock and the suspension rights invoked by both parties was submitted to the Court of Arbitration. The Court awarded the client damage compensation in the amount of over €15,000 for the poor quality of the loading dock. On this point the case was decided in the client’s favour and he was therefore entitled to suspend part of the construction price due to this defect. However, the Court noted that the client had not paid almost €75,000. According to the Court, the client had therefore suspended too high an amount.
Contractor was right to invoke right of retention
The client had in fact wrongfully suspended payment of a major part of the invoices. Because there was no legal reason for this suspension, the client was in default. The contractor was therefore entitled to invoke the right of retention. The costs incurred by the client (providing a bank guarantee to terminate the right of retention) are therefore to his own account. He is not entitled to have these costs compensated.
Right of suspension in reasonable proportion to defect
A right of suspension means that a debtor who has a due and claimable claim on his creditor is entitled to suspend compliance with his obligation until his claim is paid. The award shows that there a certain limits to exercising a right of suspension. The suspension has to be in a certain proportion to the outstanding claim. In building agreements this means – somewhat exaggerated – that a party cannot retain €10,000 if there is a socket missing in a newly built house.
Invoking right of retention carries certain risks!
In this case the contractor was right to invoke his right of retention. But you have to be careful with this! If a right of retention is invoked frivolously or wrongfully, causing damage to the other party, the party that wrongfully invoked the retention right can be held liable for compensation.