In light of recent reports of housebuilders telling their subcontractors that they must cut their rates on live contracts ‘or else’, we ask why some housebuilders are taking such a drastic approach and what the repercussions might be.
You may recall from one of our previous articles that we drew an analogy of the employer as the Wicked Witch, the main contractor as Snow White and the supply chain as the dwarfs. In housebuilding, there is seldom a main contractor – the housebuilder usually acts as both the employer and the main contractor. So maybe Snow White has run off with the Prince leaving the dwarfs to face the Wicked Witch alone!
The recent announcements
Last week, it was reported that the Manchester office of housing giant Barratt Homes sent letters to a number of its subcontractors detailing rate cuts, which are said to have been prompted by “record economic shrinkage generated by the COVID-19 pandemic”. Barratt has since said that the letters were sent in error and apologised to the subcontractors affected, no doubt following some pressure that would have been mounted by its supply chain. Although Barratt has since retracted the letters, it is perhaps easy to see why housebuilders might seek to pass any financial effects experienced or envisaged due to the current climate down its supply chain and away from its own door. From our direct experience, we know smaller / medium housebuilders have, for example, unilaterally imposed 50% reductions to applications, citing COVID-19.
This week, the Yorkshire office of the Vistry Group (formerly Bovis Homes) is also said to have written to its trade contractors asking them to cut their rates, specifically to “review the existing pricing structure within your orders and reduce these to reflect the current market conditions”. A request like this is not unprecedented and we only need look as far back as the 2007-2008 financial crisis to see housebuilders making multiple requests for cuts in the very same year.
But can comparisons really be made to 2007-2008 and the COVID-19 crisis? As early as 24 March 2020 (the day after the Prime Minister’s announcement of a nationwide lockdown), Barratt announced that it was aiming to have all of its sites closed by the end of that day and Vistry followed suit to confirm that it had begun decommissioning its sites. Despite there being no express requirement or order requiring construction sites to close, decisive (and, dependent on your viewpoint, perhaps admirable) action was taken by many housebuilders to pause work and develop a set of working practices for the safe operation of their sites during the current emergency.
Following the Construction Leadership Council’s guidance encouraging the construction industry to keep working, Vistry recommenced work on “90% on its partnership sites and a significant number of [its own] housing sites” from 27 April 2020. Barratt began a “controlled and phased return to construction sites” from 11 May 2020. However, it is inevitable that even the short-lived site shutdowns will have had a significant and almost immediate impact on the supply chain’s cash flow (and, for the housebuilders, their projected bottom line).
Unilateral price cuts and re-tenders
Although housebuilders might have very good and legitimate reasons for considering how to bridge the gap between expected and actual profits arising from COVID-19 and their individual responses to the pandemic, that does not mean that enforcing unilateral price cuts and/or threatening re-tenders for works already contracted are lawful means of achieving that goal. In fact, the opposite is true.
The point to remember is that a contract is formed at the point that an offer to provide services is accepted. So, where a construction contract has been entered into between the Wicked Witch and the dwarfs, it is not open to the Wicked Witch to unilaterally amend the terms of the contract which have been agreed. That includes the rates and/or price. Accordingly, regardless of the reasons, any suggestion from the Wicked Witch that the dwarfs’ rates must be reduced by 15% (for example) will ordinarily warrant a plain response from the dwarfs that there is no legal basis for the Wicked Witch to effect that change without their express agreement.
Equally, if the Wicked Witch were to put pressure on the dwarfs to agree price cuts by threatening a re-tender of the works, that should be swiftly challenged. The engagement of additional contractors to execute the same works already contracted to another is usually a repudiatory breach and, by extension, the carrying out of a re-tender exercise to effect this is likely to be the same. That could give rise to a claim for damages and, if any repudiatory breach is properly accepted by the dwarfs, would leave the Wicked Witch having to find someone else to complete the works, potentially at greater cost given the current environment.
What should the recipient of a price cut letter be doing?
Any request for prices to be cut should be considered on its individual merits, not least in light of ongoing commercial relations. However, it would be wrong to believe that sub-contractors alone should shoulder the financial effect of COVID-19. A sub-contractor is entitled to be paid its agreed rates and, in the event that it is being forced to squeeze its own profits to near breaking point, is the commercial relationship really worth saving? If the answer to that is ‘no’, quick and decisive action should be taken.
That said, whether a party is entitled to terminate and/or claim damages is fact-sensitive, and the consequences of wrongly trying to bring a contract to an end can be severe. Advice should therefore be sought before taking any drastic action.
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 May 2020.