Hi ho, hi ho, it’s back to work we go


22 April 2020

In light of the Construction Leadership Council’s revised guidance (version 3), the Government is encouraging the construction industry to keep working (whilst simultaneously extending a nationwide lockdown). With a general mood in the market for sites to be re-opened, it is likely the construction industry will now start taking its first real steps to re-mobilisation. 

As the industry is adaptable, it won’t take long for new systems of work to be adopted and for minds to turn to getting back onto a more stable financial footing.

This Government has been more generous than other nations with its furlough promise. The Job Retention Scheme is a handout and not repayable. Other schemes exist, such as guaranteed loans and deferred tax arrangements, but these measures, whilst helpful, require the money to be re-paid.

Taking the above headline and applying the analogy to a development, the employer may be seen as the Wicked Witch, the main contractor may be seen as Snow White and the supply chain could be seen as the dwarfs. You may have your own view on who the wicked witch is! The question posed is: "has Snow White paid the dwarfs for the work they did in February / early March?" Payment terms for sub-contractors are often around 45 days from application, so it is now that the work done in February and early March is due and payable. Has Snow White paid you for this work or is she holding on to her cash? It may be that Snow White never got paid by the Wicked Witch, but there is no such thing as pay when paid in fairy tales or the construction industry (unless an insolvency event has occurred).

What are your options as a sub-contractor?

The existence of long term commercial relationships is vital for any successful business, so there needs to be a dose of reality before launching into action. However, commercial relationships need to work both ways; therefore if your main contractor is not paying sums rightly due (particularly if they have been paid by the employer), ask yourself, is that relationship as strong as you might like? Did the main contractor certify your application? Did the main contractor issue a spurious Pay Less Notice?

Based on our experience, you need to push for payment and place yourself at the front of what might be a very long queue. You shouldn’t feel that you can’t talk about money because of the health crisis and its unprecedented impact on normal life – if anything, you should ensure that others don’t use it as an excuse not to pay.

  • Option 1 - Get on the phone to the main contractor, email and agitate to get your payment. Be Grumpy (and then Happy when you get paid), but don’t be Sleepy, Bashful or Dopey. You need that money to pay your staff, your suppliers and your bills.
     
  • Option 2 - If the sum has been certified as payable, but just isn’t being paid, you can consider the options of statutory demands and/or winding-up petitions. It is a long held misbelief that you have to issue a statutory demand against a company before issuing a winding-up petition. You do not.  This is a pretty strong option, but it can be very effective. You need a clear admission that the sum is due (and no hint of a dispute or cross-claim). The effect of a winding-up petition on the debtor will be immediate and potentially very serious but if you are being messed around when your money is due, the debtor will have to suffer the consequences. Linked to this article is an article we wrote nearly a year ago on the use of winding-up petitions.
     
  • Option 3 – What if your application was hacked to pieces and/or you were issued a Pay Less Notice? Or what if your application was not dealt with at all? If it was the former and was nothing more than a veiled attempt to avoid making payment, you may consider Adjudication on the true value. If it was the latter, you may consider a Smash and Grab Adjudication. There is no point being nice about money you are owed which is unfairly being withheld. You need to show you are serious – chances are it will be you that is paid and not the other dwarfs.

Also don’t forget those old debts and old unpaid retentions. Strongly worded chasers from your lawyer can elicit payment quicker than you think and you are probably entitled to interest and compensation in addition to the amount owed.

What should you be doing as a main contractor?

If you are being fair and reasonable you have nothing to be concerned about. If you have treated your supply chain well, they will recognise this. However, even if you have, sub-contractors who are close to insolvency will try to recover what they are owed. If you were them, this is what you would do, so be prepared.  If you are certifying applications, make sure you do it on time. If you are deducting sums for poor work, make sure you are doing it correctly, with valid Pay Less Notices if appropriate. The last thing you want as a main contractor is a Smash and Grab Adjudication because you’ve missed some notices from a near insolvent sub-contractor. He is going to get the money and potentially then go bust and you are never going to be able to get it back!

If you are faced with a Winding-up Petition threat (or worse just served with one) you must act fast.  The linked article above highlights what you need to do, but speed is key.

So as we hopefully see the gradual full return to work with civil engineering and building works cranking back into gear, make sure you are in the best financial position. This article comes from a lawyer who may be the real Wicked Witch in this scenario, or is it Prince Charming? With a number of companies entering into insolvency long before COVID-19, to ensure that you are not joining them after the pandemic is over, you need to be as pro-active as possible at getting cash in.

If you would like to discuss any of the issues raised in this article further, please contact Andrew Rush or another member of Birketts’ Construction and Engineering Team.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at April 2020.