When the gloves come off – construction disputes on the COVID-19 road to recovery
The worst of the direct disruption to the construction industry by COVID-19 seems to have passed, and the industry has set out optimistic plans for the recovery. But, with the UK in recession and government supports like the furlough scheme coming to an end this autumn, is a sharp rise in disputes on the horizon? Here, our construction team explore the disputes landscape as we approach the close of 2020.
In April, the Construction Leadership Council (CLC) backed the Royal Institute of Chartered Surveyors’ Conflict Avoidance Pledge, alongside a number of key industry bodies. The pledge, which we detailed in a previous update, seeks to set a trend for de-escalating disputes at an early stage by encouraging reasonable approaches and use of conflict avoidance mechanisms throughout the industry. That backing was followed by a ‘best practice’ guidance note for approaching contracts and disputes (available here). The clear message has been that COVID-19 represents the most significant threat to payment practices and cash flow across the entire construction supply chain since (at least) 2008.
To a large extent, the threatened wave of disputes has successfully been held back, in part thanks to the clear, pragmatic advice above, but also due to substantial government interventions that make it far easier to commit to the ethos of the pledge. The furlough scheme has acted as a safety net to allow businesses to reduce overheads and substantially head-off potential cash flow issues. Alongside this, the UK Corporate Insolvency and Governance Act 2020 has restricted use of the winding-up process against debtors. Both supports fall away on 31 October 2020 and 30 September 2020 respectively.
The questions then will be: to what extent have serious cash flow issues in the industry been masked by these supports? When they fall away, will the ethos of the CLC guidance and RICS pledge be sustainable? Will businesses simply be forced to take more aggressive action against others in the supply chain? Mark Beard, President of the Chartered Institute of Building has taken the view that “the worst sort of behaviour hasn’t happened, but I think it’s put off the day of reckoning. I think it’s inevitable we’ll see more bad behaviour.”
As a side point, remember as well that the recent Supreme Court decision in Bresco vs Lonsdale has opened up adjudication as a viable route for insolvent companies. This decision may well prove to be significant if insolvencies spike.
The guidance published by the CLC is sensible, and responsible construction businesses should continue to follow it as far as possible. However, businesses should also:
— review where they currently stand with other developers, contractors, consultants and suppliers;
— think about where there may be scope for disagreements (these may, for example, only arise at the end of a project, when the parties consider the final account); and
— be prepared for some to take a more aggressive approach to disputes when the impact of COVID-19 on cash flow really starts to bite.
If you would like any advice on an ongoing or potential dispute, our specialist Construction team are here to help.
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: firstname.lastname@example.org