Next year, workloads will shrink and firms will be more aggressive, so 2009 is likely to be a boom time for one group of professionals at least …
Attitudes have changed dramatically over the past 12 months. Even in the past six, risks that were perceived as manageable or minimal are now dealbreakers. So what might all of this mean for 2009?
Interim arguments Waiting until the final account to sort out interim disputes is no longer going to be an option: cash flow will be too important. In a buoyant market, disputes were often left to the final account when a wrap-up deal was done. Now the timely receipt of interim payments is likely to be crucial for many contractors. Might this mean more contractors, unwilling to continue the works without guarantee of payment, exercising their right to suspend?
Liquidated damages When delaying a project might have meant an increase in its value, the application of liquidated damages did not figure largely with clients. Many did not insist on recovery and, in turn, contractors did not pursue extensions of time. All indications are that that is no longer the case. The number of withholding notices for liquidated damages is on the increase and is likely to continue to rise.
In addition, the level of liquidated damages is likely to be challenged. The view may be taken that these are a windfall for the client as, in the current climate, even if the development were available, it could not be let or sold. This is unlikely to be a successful argument, as the test for liquidated damages is whether they are a genuine pre-estimate of loss at the time of signing the contract. Parties will have to think carefully about what level of damages to put into their contracts.
Final account fall-out The signs are that fewer deals are being done between contractor and client on the final account. In the heady days of a rising market, both parties were usually prepared to share some of the pain – on the basis that profits were there for the contractor (either through that job or repeat business) and the client had an immediately appreciating asset. Neither party can afford to do that in this market.
Claims against consultants When losses cannot be recovered through a main contract, parties may try to extract them from their professional advisers. This is usually seen as a last resort, but that view is likely to change. In design and build, we are likely to see more claims against consultants for pricing errors at tender stage and in the timing of provision of information during the contract, so professional indemnity claims will increase. Where developers are insolvent, where else can contractors turn?
Funders that loaned on the strength of market valuation and relied on advisers to monitor the projects will also be scrutinising the performance of those advisers.
Collateral warranty packages At the front end of projects, the risk of developer and contractor insolvency will lead to more onerous obligations to procure collateral warranties – an insistence (perhaps pushed by funders) to use “best” endeavours or indeed an absolute obligation to obtain warranties.
Bonds and guarantees It is likely that performance bonds will be called upon where possible. The issue then will be whether the bond actually covers the event in question. Most bonds kick in in the event of “default” or breach of contract by the contractor, and insolvency may not constitute a breach. So unless the bond or underlying contract has been amended, it could be worthless.
Public sector work Although pressure on public sector budgets will ultimately reduce work in that area, this is currently the only consistent source of work for many contractors. The means whereby the public sector advertises and procures such work has already been tested this year in the cases of Letting International vs London Borough of Newham and McLaughlin and Harvey vs Department of Finance and Personnel. In each of these cases the challenge was to the public body’s use of sub-criteria not disclosed to the parties. In the McLaughlin and Harvey case, the contractor’s preferred remedy was to get onto a list of framework contractors. Although the court did not allow this, it did set aside the whole process. Are we likely to see more challenges from unsuccessful tenderers on the back of this?
The demise of design and build? There was a view that regular use of the design-and-build contract came out of the last recession as more clients wanted single-point responsibility. Will the view now be taken that retaining direct control of the design is likely to reduce risk and price?
Despite all of the above there will undoubtedly be positives that emerge in 2009. One thing is for sure: in the short to medium term, building contracts will be negotiated and operated differently.
Lindy Patterson is a partner in Dundas & Wilson