This judgment concerns a dispute in which the subcontractor halted its works as a result of the main contractor's material default of payment. The contract was based on NS 8415 and concerned carpentry in connection with the erection of a residential building to be erected over an existing shop.
Before the contract was signed and the works on the residential building commenced, the subcontractor was commissioned to carry out bill works in connection with the redevelopment of the underlying retail space and the rehabilitation of a dormitory building located directly adjacent to the retail space.
The home for halting works as a result of payment default is NS 8415 point 30.2. We have written a separate article on “Remuneration and payment” where in paragraph 14 of the article we write about the right to stop in case of payment default, and the article can be found here.
This is based on the corresponding provision of NS 8417 paragraph 29.2, but there are no differences between them. The corresponding rules also apply to NS 8416, NS 8405 — NS 8407.
In the specific case dealt with by the judgment, the general contractor had defaulted on several occasions, and the subcontractor had therefore notified a halt and halted its works several times. Each time, the works were resumed after the general contractor paid.
In the first phase, the invoices related to the works that the subcontractor made on bills in the commercial sector and apartment buildings respectively, but gradually the invoices also concerned works with the residential part.
While the commercial part and dormitory buildings were executed according to the billing principle and invoiced in accordance with these rules, the residential part was invoiced in accordance with a reunified payment schedule.
The stoppage resulting in dispute between the parties was notified by the subcontractor by letter dated 28.3.2023 (Tuesday), and with effect from 31.3.2023 (Friday).
Thus, the requirement of at least 24 hours notice was met.
The basis for the termination was non-payment of an outstanding amount of approximately NOK 4.9 million, of which approximately NOK 1.2 million related to the dormitory building. The reason for this clarification is a statement from the general contractor that the outstanding for the dormitory building could not be seen in the context of the outstanding for the residential part. This was on the grounds that it was only the residential part that the parties had a written agreement on, while the dormitory building was carried out on the basis of a separate, oral agreement and at expense. For these reasons, General Contractor considered that the default of payment for the two claims had to be assessed separately from each other.
The Court of Appeal did not agree with the prime contractor. Partly because the Court of Appeal considered the works with the dormitory buildings to be, in fact, a type of work which it would have been natural to regard as a modification work under the main contract concerning the housing part. This, however, was not conclusive.
In the view of the Court of Appeal, the right of termination had to be based on the general principles of bond law whether non-payment could be returned to the written agreement (the residential part) or the oral one (the housing part and the apartment building).
About this, the court writes on page 10 that it is “the same real considerations that apply — to the protection of the subcontractor. If, in fact, there is a material default, the subcontractor must be able to resort to punching in order to guard against making further deliveries which are unlikely to be paid either. In a situation such as the present one, the right of termination must be applied to all work/services in the contractual relationship, when the assignments and the performance of the work have such a connection. Strong real considerations, including reasonableness, suggest that an overall assessment of the default should be made, without a “watertight bulkhead” between the written subcontract agreement and the oral agreements. All in all, it concerns a reported non-payment of a significant amount, approximately NOK 4.5 million including VAT, which in sum was a major burden for SBNB. The payment default lasted over a relatively long time, putting SBNB in a difficult financial situation”.
General Contractor agreed that the payment default was material if aggregate outstanding were to be seen collecting.
That the default is material is a key condition for halting works, cf NS 8415 paragraph 30.2.
However, the Court of Appeal clarified that also a payment default that included only outstanding for the residential part of NOK 3.1 million was to be regarded as a material default in payment that justified the use of the right of termination.
We cannot find information on how much the subcontractor had invoiced in total at the time of the stoppage. However, it is clear from the judgment on page 10 that the subcontractor had invoiced almost NOK 36.8 million, while the general contractor had paid NOK 28.4 million. The claim in the appeal case amounted to NOK 8.4 million with an additional NOK 7.4 million in interest.
The main contractor's reaction to the subcontractor's stoppage was that the former contested the stoppage and declared intervention, cf NS 8415 paragraph 39.8.
Since the subcontractor's stoppage was justified, it meant that the general contractor had no right to intervene.
In conclusion, it is mentioned that the main contractor submitted a claim that the invoices relating to the residential part were not sufficiently documented.
This quotation was not accepted by the Court of Appeal despite the fact that the installment invoices for the residential part were not documented with measurements and other documentation necessary for verification, cf. NS 8415 paragraph 28.3.
About this, the Court of Appeal writes the following:
“In the view of the Court of Appeal, it is not uncommon for this type of subcontract agreements to be issued instalment invoices based on an agreed payment schedule. This is consistent with the pricing format of the contract and the underlying offer. For all practical purposes, the connector has only one total price, if you disregard the surcharge for the window delivery and the increased insulation. For further invoicing, SBNB has divided this price into six different cost types according to the nature of the work in the payment plans. When there is a correspondence between actual progress and the payment schedule, this must be considered sufficient documentation. In such a situation, the parties will have a record of how far the construction process has progressed at any given time, and the general contractor has every opportunity to check at the construction site that the progress is according to the payment schedule.
In this case, the parties have agreed on such a procedure, and it was not until there was a serious conflict between the parties regarding the payment of overdue instalment invoices that the lack of documentation became an issue.
(...)
The Court of Appeal considers that the instalment invoices were sufficiently documented both for the work performed and for the value added — as the parties have in fact acted”
