Prepare to withstand the impending storm of construction disputes
The initial shock to the construction industry from COVID-19 is becoming one of long-term management of business in an evolving environment and the published results of the Construction News survey shows that contractual disputes are looking set to become widespread as the crisis continues.
24 per cent of those responding acknowledged the COVID-19 pandemic is likely to lead to a contractual dispute or has already done so. One in 25 businesses reports adjudication or other legal action process has already begun.
How can you prevent lawyers adding to your cash flow concerns?
First of all, keep talking to those you are doing business with to maintain confidence. The decision to instigate legal action could be made against you just as easily as by you.
It is not all bad news as 49 per cent said they currently have no contractual concerns, suggesting that a relatively high proportion of firms are adopting an understanding and flexible approach to contractual commitments in the crisis. But again, that can only come through constructive communication and careful management, and quite possibly a healthy degree of flexibility in performance of the construction contract.
On 7 May, the Cabinet Office issued guidance on this issue including:
“parties to contracts should act responsibly and fairly, support the response to COVID-19 and protect jobs and the economy… Responsible and fair behaviour in contracts now – in particular in dealing with potential disputes – will result in better long-term outcomes for jobs and our economy. In complex contracting arrangements, this should apply throughout the contracting chain. It will in the long term protect businesses, supply chains and opportunities in the economy. Bad behaviour will be bad for jobs and will impair our economic recovery.”
These are easy words to throw out, but what does it mean for you?
Nothing in the guidance overrides your existing contractual arrangements and so parties to contracts must be prepared to compromise, to be flexible and possible be creative on a case-by-case basis. It is very tempting for the private sector to pursue a hard-nosed litigious approach to get cash in and do so fast with the usual tools of issuing notice of breach and site closure, statutory demands for unpaid invoices and even smash and grab adjudication. In many cases the imperative to approach non-performance in this way could be driven by the very real fear that it is the only option for business survival.
The COVID-19 crisis has exposed more starkly within the industry the ever present issue of maintaining cash flow in the contract and supply chain.
Doubtless many businesses have been exploring emergency funding, whether Government or private funding. We now have the Bounce Back Loan Scheme for smaller businesses. Of those taking part, 33% had applied for funding and 12% had been successful, with 18% yet to find out. The remaining 66% either had no such plans or simply did not know their position. The latter stat must include a significant degree of businesses simply failing to strategically plan, as any loan arranged does not ultimately have to be drawn down.
Similarly, the option of claiming on an insurance policy is attractive. Responses to the survey gave a mixed picture but it shows few claiming for business interruption and fewer still being successful so far. 48 per cent said they or their employer had no plans to try to make a claim and just 1% of the 10% that had so far submitted a claim had successfully obtained a pay-out.
Below are some key steps you should be making progress on now to ensure your business can see out the long term effects of this situation.
Dan Sherlock is a Partner in the firm’s Dispute Resolution Team with expertise in construction claims including managing the negotiation strategy as well as conducting mediation and adjudication. The firm is a member of the Kent Construction Focus Group.
For an informal discussion contact Dan Sherlock e. email@example.com t. 01732 441750
Top Tips for managing contractual disputes
Actively manage your supply chain
Identify the threats and the effects they will cause. Deal with disruption immediately by alerting key persons along the chain.
Create designated account managers so you have individuals talking to one another, as personal contact to keep partners up to date, will help when disruption looms.
Closely manage the payment process to get on top of cash-flow
Ensure your Applications for Payment/Payment Notices contain complete information and gives nobody an excuse to adjudicate.
Ensure you comply with all contractual deadlines in the payment process – and be prepared to stay compliant even if being flexible.
Review contracts to know your risks and to prepare your response
Understand your required response when problems occur as your contractual rights and remedies often depend strictly on meeting certain conditions.
Ensure you are prepared to serve contractual notices on time and in accordance with the contract. Check the length of the notice periods, what notice is required and upon whom it is to be served.
Keep in regular contact with your designated notice giver and ensure they have the tools to do their job such as templates or training, and do they have back-up.
Make sure you have written contracts
It is an obvious but simple way to avoid disputes and manage unexpected events. Even during a contract you can confirm in writing the terms you have agreed for the benefit of all parties.
Keep records and confirm everything in writing
Along with the written contract, this is by far the best way to prepare for when a dispute arises (staff absence, delivery dates, notice dates missed/complied with, delays).
Know your contractual rights
Prepare for delay or non-payment. Can delay caused by COVID-19 allow an extension of time? How is it implemented so as to be binding?
What is force majeure and is it in your contracts?
Disruption arising from the crisis could activate the force majeure clause to relieve parties from the usual consequences of suspending performance. It can allow time extensions, suspensions without penalty and even contract termination.
Reduce working capital
Chase debtors but be prepared to be as flexible as you can with payment terms for long-term mutual benefit. Discuss and agree all outstanding variations and EOTs Deal with Variations – and get it in writing even if you have to send a subsequent confirmation of telephone or site discussions.
Understand your emergency funding options
Assume the worst for cash-flow in your supply chain and look into your emergency funding options both through private finance and any government schemes. Ultimately you don’t have to draw on them.
Refer to your trade body
They are often an underused useful resource for your business
Know what insurance you can claim on
Find out what your or your employer’s policy states on the circumstances entitling a claim. Some claims may have time limits or may require certain steps to be fulfilled. Know and manage all requirements to allow a claim to succeed.
Utilise trade credit but never assume it will always be there
Make use of trade credit but be prepared for it to be withdrawn or varied. If you have trade credit insurance then know how it works but do not assume it will always step in. Be prepared for either to be cancelled without notice.