Clarkslegal LLP - Solicitors in Reading and London

Legal Updates

How to Manage a Business in a Recession

16 February 2010 #Construction

FETA members attended a `managing a business in a recession` seminar recently, presented by Clarkslegal partner David Rintoul. The Seminar focused on two issues key to the current economic climate, namely protection of rights under a contract and how to enhance cash and recovery of monies due.

Protection of rights

All agreed contract terms must be recorded in writing, to help avoid disputes over applicable contract terms and, if necessary, to allow sub-contractors to go to adjudication, the construction industry`s most commonly used dispute resolution process.

In agreeing contract terms, try and ensure so far as possible and where commercially practicable that sub-contractors` terms and conditions apply. Therefore, and assuming sub-contractors terms and conditions are sent with an initial quote, on receipt of an order always check whether or not they are accompanied by main contractors` terms and conditions. If so, that is likely to be deemed to be a rejection of any terms and conditions sent with a quotation. If sub-contractors are not willing to contract on those terms and conditions, then they need to reply either expressly rejecting those terms or requesting amendment of certain key terms.

It is also essential to keep good contemporaneous records throughout the project to help avoid dispute or as evidence to be relied upon in subsequent dispute resolution process.

To ensure protection of rights, do your terms and conditions provide:

• for the right to suspend work, or to terminate the contract in the event of non-payment; and

• that title to goods that you supply and install does not pass to the main contractor until payment in full has been made.

Another key issue at present is the making of payments, with main contractors looking to extend payment periods for as long as possible. Sub-contractors need wherever possible to negotiate payment periods down to a minimum. Additionally, be alive to the possibility for obtaining payment in advance, for example for materials manufactured but not yet delivered to site.

Other payment matters to check include:

• while contractors cannot make payment until payment has been made to them for sub-contract works carried out, except for upline insolvency, contractors sometimes try and get around this by inserting provisions to the effect that payment due shall only be made upon certification. Such clauses should be negotiated out

• entitlement to interest for late payment. Legislation allows recovery of interest at 8% above base;

• attempts to increase retention rates beyond the norm, typically 3% — 5% before practical completion and 1.5% — 2.5% up to expiry of the defects liability period;

• attempts to link release of retention not to practical completion of the sub-contract works but to completion of the main contract works, and which could be significantly after completion of the sub-contract works;

• non payment of retention monies into separate trust funds;

• any refusal to make payment in full of sums certified - a notice of withholding should first be issued explaining the amounts proposed to be withheld and the grounds for withholding.

Many contractors require sub-contractors to provide collateral warranties in favour of the end client and other third parties. Carefully read any draft and check that the tender documentation made it clear from the outset this was required. If you have design obligations, check that any collateral warranty is approved by professional indemnity insurers, to ensure that you do not take on any uninsured obligations.

Recovery of Monies Due

If monies due are certified or are otherwise clearly undisputed, then the quickest and least expensive option can be to threaten issue of winding up proceedings. This often results in payment being made, but if not, can always be actioned with the issue of a winding up petition.

In the event of a dispute, it is essential to keep open lines of communication to try and narrow differences and agree facts. If those discussions do not for whatever reason lead to direct negotiations and agreement. then a third party mediator could help to help facilitate and broker a deal. He does not act in any judicial capacity.

Mediation can help to preserve ongoing commercial relationships, although it does require the parties to want to resolve the dispute. Its advantage is that it is a without prejudice process that can be used at any time and only becomes binding once final terms of agreement have been reached.

If negotiations are either not possible or have become bogged down for some reason, then it is possible, assuming a contractual or statutory right, to go to adjudication at any time, to include after conclusion or earlier determination of the contract works, subject to compliance with the following criteria:

 • All contract terms are in writing to include, for example,. instructed variations relied upon;

• There is a clear dispute between the parties that can be referred to adjudication. This requires the claim to have been presented and either rejected or, in the absence of a response, sufficient time to have passed of the claim, for that claim to be deemed to be rejected/disputed. This will usually be a minimum of four to five weeks depending on the nature and complexity of the claim;

• The contract in respect of which the dispute has arisen must be for `construction operations`. This requires installation of works on site. Sub contracts for labour or supply only are not covered.

Adjudication can be very cost- effective and quick. Once a notice of adjudication has been served and an adjudicator appointed, either by agreement or by an adjudicator nominating body, then the Adjudicator`s decision is provided within 28 days, extendable by agreement.

The adjudicator decides which of the parties will pay his costs, the usual principle being that the `loser` pays those costs. Adjudicators can, however, apportion costs between the parties if there is no overall `winner`.

The parties` legal and expert costs incurred are not recoverable from the other party, regardless of the outcome.

Adjudicators` decisions are binding unless and until subsequent litigation or arbitration, or by other agreement.

Therefore, if any payment ordered is not made, then the Court will look to enforce adjudicators` decisions, even if they are wrong in fact or law, unless the Adjudicator has either answered questions not put to him or has somehow breached the principles.

Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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