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Debt Recovery and Construction Contracts

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When faced with bad debts the preferable option is adjudication

Construction Contracts Debt recovery & Adjudication

Having effective means for debt recovery in construction contracts is critical.

But what happens when cashflow dries up, invoices go unpaid, and debts turn bad?

 Matthew Dillon discusses Debt Recovery, Litigation, Disputes & Adjudication for construction contracts  and gives his opinion of what contractors should and should not do to recover bad debts. 

Why do construction invoices go unpaid?

Occasionally there is a legitimate dispute. Reasons for disputes include:

  • Contract terms and conditions have not been understood and payment is not due.
  • A disagreement as to the valuation of the construction work.
  • There are defects or incomplete work.

 

If there is a disagreement, we will need to use the dispute resolution process in the construction contract

In the last six months is an increase in bad debts in the construction industry. Often spurious defences are raised. In such circumstances it is easy for an experienced solicitor to unpick the excuses for non-payment.

Pay Less notices may or may not be raised setting out grounds for non-payment, but the Pay Less Notice, even if valid, is little more than an explanation of why the payer considers there is no debt due to the Contractor under the Construction Contract.

Often, construction invoices go unpaid simply because the payer is managing his cash-flow. This is nothing new – see our post on the issue of unpaid interim-valuation for subcontractors.

Often employers and main contractors pay those who shout the loudest. Those who adopt a softy-softly approach go unpaid. When cash is tight, as it is now, many main-contractors use sub-contractors as a form of interest free credit.

Lately, many subcontractors have come to us because they haven’t been paid for their work and need help getting their money.

Some of these sub-contractors are faced with spurious Pay Less Notices.

Recover Costs & Interest under The Late Payment of Commercial Debts (Interest) Act 1998

Many custom construction contracts and informal trading agreements do not include provisions for charging interest on late payments. The layperson may think that assists the payor and penalises the payee. Such a belief is incorrect.

If you are the payor in a construction contract, you will want an interest clause.

If you are the person providing a service and receiving payment in a commercial context, then it is best for there not to be a provision awarding interest for non-payment.

If If your contract doesn’t cover late payment, the Late Payment of Commercial Debts (Interest) Act 1998 will apply.

This Act enables a creditor to claim interest at 8% above the prevailing base rate, together with compensation between £40 and £100 on each invoice, and reasonable costs of debt recovery. This is far higher than what most contracts expressly provide for.

What are reasonable costs debt recovery costs? We wrote about this in the context of the late payment legislation at debt-recovery-and-reasonable-costs.

We believe that the reasonable costs that can be recovered are usually no more than an extra £200. This includes the cost of hiring a lawyer and sending a standard debt recovery letter.

The Use of Adjudication for Debt Recovery

I have already doubted the merits of litigation in my blog post -construction-adjudication-or-litigation/.

It is simply too easy for a reluctant debtor to create months or years of delay in litigation.

In simple terms, we believe that the county court is not equipped to handle construction contract disputes quickly and affordably.

In limited circumstances it is possible to use the insolvency processes. Statutory demands can be served for undisputed debts. It may be appropriate to threaten or issue a winding-up petition.

Insolvency procedures can be effective for recovering bad debts, but should only be used in certain situations due to risks.

Guide to Construction Adjudication

Our preference is for Adjudication.

For further detail on how to use adjudication for debt recovery in construction contracts we refer to our guide on adjudication.

Where debts in construction contracts are lower than £100K then the low value adjudication procedures for debt recovery can be use and we refer to a post we wrote on this adjudication-for-low-value-construction-disputes/.

Recovering Debts through Adjudication

We acted on behalf of subcontractors who were owed money in conflicts involving dubious reasons for payment withholding. Some instances were devoid of appropriate payment notifications, resulting in abrupt and opportunistic adjudication

Prior to initiating an adjudication, it’s crucial to comprehend the contract, anticipate the probable defence, and devise a plan for recovery. By being discerning in our approach to the adjudications, we managed to guarantee that many of the adjudications we started in the past quarter fell under the scope of the low value scheme

Adjudicator Nominating Body – RICS or TECSA

Historically we have always used RICS to nominate adjudicators. The reason for this was twofold.

  • Where there was a written construction contract it would invariably list the RICS as the Adjudicator nominating body.
  • We had always considered that a dispute was better suited to an RICS adjudicator.

Having recently explored the nominating service offered by TECSA (Technology and Construction Solicitors Association) for low value disputes, we opted to use TECSA for our recent disputes.

After appointing a TECSA Adjudicator, it seems that the debtors in our recent adjudications decided not to resist the process. The issues were quickly resolved, and payments were received within a few weeks of sending the Referral Notice.

Recent Debt recovery successes in Adjudication 

  • Retention Dispute with House Builder settled within 2 weeks of Referral after main contractor had spent several months resisting significant retention release; see which discusses -retention-payment-in-construction-contracts.
  • Final Payment due on a JCT Contract with an institutional investor paid within 2 weeks of Referral, after several months of broken promises about payment.
  • Final payment due on a bespoke contract for our plumbing contractor paid after the developer accepted that the alleged defects in a Pay Less Notice were without merit. Invoice paid after the Notice of Adjudication was served.
  • Payments made to our subcontractor client across three applications following breakdown of working relations on a construction site. The payments to our partitioning client were made following the Notice of Adjudications.
  • Payment made to our civils sub-contractor client within days of the Adjudicator being appointed. Due to works spanning four sites, and uncertainty as to whether there was a contract, it was necessary to proceed in piecemeal manner.

The above successes in Construction Contracts, Debt Recovery & Adjudication demonstrate that adjudication is an effective tool for debt recovery in the construction industry.

If we had commenced litigation to recover debts then we believe the proceedings would have been defended for the medium term, causing cash flow issues for our clients.

For adjudication to have a successful outcome it is necessary to have an appreciation of the defences likely to be raised. Technical errors can be fatal to the Adjudication.

Debt Recovery Agents

Debt recovery agents typically charge commissions of 25 – 35% of the debt recovered for writing a few letters. Unless these debt recovery agents are in possession of High Court Judgment against the debtor and a Writ of Execution, they have no jurisdiction to do very much at all. Therefor we always advise our clients, whether owing or owed debts to refuse to deal with expensive debt recovery agents.

In our experience, the costs of an adjudication can be considerably lower than the costs charged by debt recovery agents.

Conclusion: Adjudication & Debt Recovery for Construction Contractors

Adjudication is the optimum route to recover bad debts on construction contracts.

Adjudication is fast and relatively cheap. Adjudication can result in a binding award within six weeks of instruction. Our experience is that often debtors simply pay up within a few weeks of an adjudication being commenced.

To discuss matters further, contact Matthew Dillon on 01277 280 760

Matthew Dillon LLB, Solicitor, MCIArb

MJD Solicitors

22 March 2024

This article is for information purposes, does not constitute legal advice and should not be relied upon. For terms and conditions of this article please read https://mjdsolicitors.co.uk/terms-of-use/

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