Guidance for contractors in construction: contract disputes

Construction contract disputes are endemic, and despite various legislative changes they remain a persistent problem that can be expensive to unravel. It is a familiar scenario in which a quantity surveyor, employed by a large contractor, disputes the value of the work carried out by a smaller contractor on behalf of the main contractor. In such a dispute, often driven by a clear financial incentive to increase profit margins, contractors may become even more aggressive with their disputes if they believe the smaller contractor is experiencing cashflow problems. In this article, we outline some key steps that can be taken to avoid such disputes and/ or maximise recovery of debts.


Construction contract disputes: how to avoid or resolve them

The contract

The unfortunate truth is that construction contracts are often heavily geared towards the main contractor. Most private sector contracts will operate under the JCT or NEC standard form, which are heavily geared towards the main contractor. The first port of call is therefore to review the terms of the contract and ensure that they have been formally agreed.

If it is simply the case that a subcontract has been sent but not signed, you need to be cautious. If you have commenced work without highlighting any issues with the contract, it will likely be deemed that you have accepted the terms of the contract by continuance.

If there is no contract, you’ll need to see whether there is a letter of intent and review it. It is likely that the terms in a letter of intent will be very basic and much more geared to the subcontractor. However you may not be able to rely on arbitration to enforce the debt in any disputes.

Compliance

The next stage is to ensure you have complied with all terms set out in the contract. Putting resources into contract management is one of the most valuable thing you can do in order to achieve maximum value.

If you foresee difficulties in keeping to the terms and timescales set out in the contract, it is important to formally agree a variation, or an extension of time at the earliest possible stage. You should always make sure that this is formally agreed in writing.

Getting paid

The below diagram is a simplified version of the standard subcontract payment process.

contractor-payment-process

In short, you need to submit any applications for payment ahead of the due date. Within 5 days after the due date the subcontractor must submit either a payment notice or a pay less notice. If nothing is received by this date, you can submit your own payment notice with the amount you believe is due. The payment will then fall due to be made as per the terms specified under the contract, after deduction of any retention.

If the balance remains unpaid after this date, this is the point at which a payment is actually deemed as due.

Recovery action

If payment still hasn’t been made, recovery action can then be taken to pursue payment from this point onwards. The following options are available in order to do this:

Suspension of performance

A suspension of performance notice can be issued confirming that no contractual obligations will be carried out until the account is brought up to date. This is not limited to further work and also extends to providing insurance cover.

You must give the employer seven days notice of suspension of performance before you cease work. If payment is received in this time period, you remain bound to the schedules under the contract.

Following this process can be highly effective, as any delays on the job become the liability of the main contractor. However, it is important to ensure that you do have the right to suspend works and proper process is followed otherwise you may be in repudiatory breach of contract.

Mediation

If you are unable to suspend performance, for example, in situations where the contract has come to an end or the amount outstanding is under significant dispute, the first port of call should be to offer to enter into mediation. A mediator will speak to both parties separately and attempt to come to a compromise without the need for further legal action.

All conversations with a mediator are on a without prejudice basis, so cannot be used in court if mediation fails. However, any agreement reached in the mediation process is enforceable.

Agreements through mediation can be achieved with minimal costs. Nevertheless, if a main contractor refuses to enter into mediation, it’s possible they may incur a costs penalty at any final hearing, even if they win a claim.

Arbitration

Arbitration is a short version of going through the court process, however both parties will need to pay for the arbitrator’s time. An arbitrator will review the evidence provided and provide a decision which may then be enforceable by the court, but only by seeking a formal award. Unlike a court decision, the outcome is generally not disclosable to the public which can be appealing to the main contractor if they are facing multiple disputes.

Arbitration will generally depend on the contract and employers are not compelled to enter into the process. In addition if stated in the contract, the agreements may be non-binding which would make the process unappealing. There are also very few grounds for appeal if you do not agree with the arbitrator’s decision.

Adjudication

Adjudication as a method of dispute resolution is often known for its speed, as the decision is generally returned within 28 days of commencement. 

Decisions in adjudication are binding and can generally only be only overturned by entering into formal litigation. Even if this happens, enforcement of a decision can generally continue leaving a pay now, discuss the merits of the case later scenario.

Whilst adjudication can assist with cashflow in the short term, if a court overturns an adjudicator’s decision through formal litigation this can result in the bill being flipped and having to pay money back to the employer.

It is not possible to contract out of the adjudication process.

Litigation

If all else fails, it will be necessary to revert to formal litigation to recover the debt. This will involve full court proceedings which may be protracted over several months or even years. It will be necessary to pay for solicitors, barristers, expert witnesses and the court fees, which in most cases will be in the region of £10,000.

This is obviously not appealing and can cause businesses to struggle from a cash flow perspective, potentially causing your business to become insolvent.

Facing insolvency 

If, as a result of not getting paid, your business ends up facing serious cash flow problems and ultimately, insolvency, there are a number of practical steps you should take to maximise realisations and assist in the setup of any new business:

  • Progress review – ensure all day books and diaries are up to date and note whether projects are running to schedule.
  • Applications – ensure that all payment applications are submitted and push to have as many balances certified as possible. This will assist with collectability.
  • Confidentiality – unfortunately the construction industry is full of gossip and you should attempt to keep this as low key as possible until you are ready. If there is a hint you may be facing difficulties, employers may try and take advantage of the situation.
  • Early – it is better to seek advice at an early stage, even if you are only beginning to suspect a problem. The faster you act, the more can be preserved.
  • Documentation – ensure all documentation in relation to the projects is readily available and be prepared to answer any questions from an appointed surveyor or solicitor.

We refer to this as the paced approach. In taking these steps, even if that company has to enter administration or liquidation, the following benefits may be achieved:

  • The ability to novate ongoing contracts to a new company.
  • Potentially preserving jobs for your workforce.
  • Adding value to the work carried out to date, increasing collectability.
  • Increasing realisations into the estate and likely mitigating any personal guarantees you have to the bank or otherwise.

 

If you are subcontracting, having difficulty getting paid by the main contractor and this is affecting your cash flow, then do not hesitate to contact one of our Business Rescue Experts.

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