Expect an uptick in disputes this year as economy worsens

Immediately post covid, employers, contractors and subcontractors loved each other for about 10 minutes. It was the covid equivalent of Christmas Day football in the trenches. They collaborated; they agreed extra-contractual entitlements – it was almost surprising not to see it form the basis for a Christmas advert or two.

But as profits tumbled and pockets were hit, we saw mindsets harden and compromises become harder. Formal disputes became more likely in consequence. This year, that is only going to get worse – potentially a lot worse.

Much ink has been spilled on the outlook for the year ahead. A few headlines:

• UK construction output is forecast to fall by 3.9% in 2023, according to the Construction Products Association;
• Order books will continue to weaken as rising borrowing costs and input prices contribute to a weakening economic outlook;
• The fall in demand for private housing new-build and private housing repair, maintenance and improvement is due to declining real wages and potential further rises in interest rates.

In this environment, it is natural that there will be an increase in disputes between developers, contractors, subcontractors and supply chain partners, as the risks of construction delivery delays and further price increases continue to rise. Typically, behaviours start to change when contractors’ cash flow visibility and confidence come under pressure.

Expect quick recourse to adjudication 

The construction industry has been hit hard over the past 18 to 24 months. Post covid, the industry initially experienced a mini-revival in activity, but this has fallen away as input costs have increased dramatically, causing projects to stall and contracts to be either not signed or deferred. Subcontractors and contractors are starting to react to reduced order books for the year ahead with a much greater focus on cost control and cash flows.

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Cash flow and logistics pressures are likely to trickle down from main contractors, forcing smaller and poorly capitalised subcontractors to be far more mindful of their contractual rights and obligations for recovery of both time and money as they will often be unable to absorb non-payment and rejection of required time extensions.

In such circumstances adjudications will be initiated, often for sums significantly out of line with employer expectations. Companies will seek to take advantage of suspension rights, if they are not getting paid, and may walk off the job. Lawfully suspending works for non-payment is generally more effective than adjudication to secure payment quickly (albeit not without considerable risk if done without basis). Ultimately, the quickest way of resolving disputes is to turn the pressure on as fast as possible. But we will see both options exercised across the sector.

Serving contractual notices

Under most construction contracts, subcontractors’ rights to claim for additional costs incurred or to demand a time extension – due to factors outside their control – are usually tightly stipulated. Main contractors must be informed by service of a contractual notice, within a very short period after delays or cost increases become apparent. Often, contractual notices lead to disputes which require resolution through the courts. For example, delays to planning approval – typically the responsibility of the employer – can affect the contractor delivery schedule. Another example is unforeseen weather conditions that prevent safe construction completion, such as an unusually extreme winter season.

In the coming year, expect to see more contractual notices being served. This is not only because of an uptick in catalysts that prompt such notices, but also because the quieter market will give subcontractors greater corporate bandwidth to pursue claims to which they are legally entitled.

There is no magic bullet, but a lot can be done to minimise the chance of funding price increases or getting caught up in someone else’s demise

These are not necessarily red flags for insolvency risk, but they can be. Thus, these behaviour shifts by subcontractors should be taken seriously by main contractors.

There is no magic bullet, but a lot can be done to minimise the chance of funding price increases or getting caught up in someone else’s demise. In particular:

• Review the suite of contracts regularly relied upon – do they properly meet the demands of the current market, such as rapid price fluctuations?
• Keep a close eye on the supply chain: carry out credit checks as a matter of course before engagement, and immediately act on any warning signs – be supportive but put in place contractual notices to allow for swift termination if required.
• Maintain diligent oversight of offsite materials.
• If an employer, do your financial due diligence on your main contractor and its directors. Cheap and recently incorporated may be a warning sign, with such companies less likely to have credit lines and likely to be particularly vulnerable to cash flow issues.

Contracting parties would be well advised to talk often and regularly, so that risks as well as commercial pressures are known and can be addressed. Early collaboration remains key, even if it feels like the slow option. It is in no one’s interest to see supply chain insolvencies on projects, and in this market no one is immune.

Peter Clyde is a legal director in Addleshaw Goddard’s construction team