Member Article

The outlook for the year ahead is uncertain with the effects of post-Brexit rules to contend with and COVID-19 continuing to restrict the way we live and work. We look at what the year may have in store for the construction industry.

COVID-19

There is no doubt that the pandemic has caused challenges for the construction industry and is likely to have a significant impact into 2021. After some initial confusion, the government has shown clear support for construction work to continue even during periods of lockdown. Most recently, in a letter to the construction industry, the Secretary of State for Business, Energy and Industrial Strategy has restated the government’s position that the construction sector and its supply chain should continue to operate during this latest national lockdown recognising that the sector is “making a major contribution to economic recovery following COVID-19”. The letter also highlights the guidance available to help ensure the industry can operate safely, including the Construction Leadership Council’s (CLC) Site Operating Procedures which recently published its updated version 7.

Whilst construction projects have largely been able to continue, the impact of the pandemic has nevertheless been significant causing delay, disruption and increased costs to projects. However, our experience to date has been that disputes arising due to the disruption caused by COVID-19 have been relatively infrequent. This may be as a result of parties cooperating to manage and mitigate the immediate effects of the pandemic. However, this year, as projects get close to completion, we may see an increase in disputes where delays have occurred, and parties cannot agree who should bear the prolongation costs.

The perfect storm?

The CLC has stated in its recent report, Claims and disputes in construction, that “2021 may bring the perfect storm of: a negative economic environment; EU Exit; reduced construction market activity; the end of government business support schemes; the introduction of reverse charge VAT; and a significant increase in the number of claims across the supply chain”. The report was published following a recent survey of professionals in the field of construction claims and disputes and contracting parties in the supply chain. One of the report findings was an increase in the level of notifications and claims by contractors and subcontractors due to the pandemic. There was also an increase in the number of claims being rejected because of COVID-19 with initial indications being that parties are more inclined to reach an agreement for extension of time claims than agree financial losses, costs and expenses. This is in line with our experience, but the “truce” may not last (see above).  Post-Brexit, skills shortages compounded by continued disruption caused by the pandemic may lead to further delays, claims and potential disputes on projects.

Cash flow and insolvency

Statistics released by the Insolvency Service show construction was the industry that experienced the highest number of insolvencies in Q3 2020 at 2,381 insolvencies. However, a decrease in insolvencies was seen across most industries, including construction which saw a decrease of 15% compared to the 12 months ending Q2 2020. This may be in some part due to the measures the government has put in place to give businesses breathing space to deal with the financial effects of operating during the pandemic.

The Corporate Insolvency and Governance Act 2020 introduced temporary and permanent measures with the aim of relieving pressure on businesses dealing with the challenges of the pandemic and to enable companies to focus on continuing to trade. Nevertheless, cashflow issues and insolvency risk remain a concern for the industry in 2021. Parties can mitigate this risk by investigating the financial position of contracting parties and ensuring contractually agreed security is provided and collateral warranties are entered into.

Insolvency and adjudication

This year may also see more adjudications being pursued on behalf of companies in liquidation as a result of the Supreme Court decision in Bresco Electrical Services Ltd (In Liquidation) v Michael J Lonsdale (Electrical) Ltd [2020] UKSC 25. In Bresco, the Supreme Court allowed the appeal, deciding that a liquidator was entitled to refer an insolvent company’s claims to adjudication where there were cross-claims between the parties.

However, whilst a liquidator has the green light to resolve an insolvent company’s claims by adjudication, a decision in the insolvent company’s favour will not necessarily be enforced by the court. The Supreme Court stated: “Where there remains a real risk that the summary enforcement of an adjudication decision will deprive the respondent of its right to have recourse to the company’s claim as security (pro tanto) for its cross-claim, then the court will be astute to refuse summary judgment”. This was further emphasised in the case of John Doyle Construction Ltd (in liquidation) v Erith Contractors Ltd [2020] EWHC 2451 (TCC) where it was held that enforcement of an adjudication decision by a company in liquidation will depend on several factors including whether the decision resolves the overall financial disputes between the parties and whether the liquidator can offer appropriate undertakings to ring-fence the enforcement proceeds and/or offer other appropriate security.

Whilst there remain challenges for a company in liquidation to enforce a decision in its favour, these could be overcome in appropriate cases where sufficient security is provided. In addition, even where an adjudication award cannot be enforced immediately there may be some tactical advantage for the company in liquidation to obtain an award in its favour, for example, to better its negotiating position.

Supreme Court considers Triple Point Technology Inc

Delays to construction projects are an inevitable consequence of the disruption caused by COVID-19 and this disruption is likely to continue throughout the early part of 2021 and perhaps beyond. Contractual clauses dealing with delay will remain an important risk management tool for the parties. Therefore, the Supreme Court’s decision dealing with the appeal of the judgment in Triple Point Technology Inc v PTT Public Co Ltd [2019] EWCA Civ 230 is likely to be received with interest. The main issue in the case was how a liquidated damages clause should be applied where a contractor does not achieve completion. In the Court of Appeal, Sir Rupert Jackson stated that “much will turn on the precise wording of the liquidated damages clause in question”. However, in this case, where the clause was focused on delay between the contractual completion date and the date when completion was actually achieved, it was held that it “has no application in a situation where the contractor never hands over completed work to the employer”. The decision of the Court of Appeal was discussed widely, and the decision of the Supreme Court may offer clarification on this important issue.

Building safety

The draft Building Safety Bill was published last year and is expected to be finalised and progress through Parliament this year. The draft Bill provides a new framework for the regulation of building safety in the UK with the key aim of improving building and fire safety, including fundamental changes for high-rise residential buildings. It is unclear how quickly the Bill is likely to progress through Parliament. However, the finalised Bill and secondary legislation (which is yet to be published but is likely to contain much of the detail) will be awaited with interest and will require careful consideration so that the industry can properly prepare for the changes.

And finally...

The VAT Reverse Charge is due to be implemented on 1 March 2021 after the implementation date has been delayed twice (originally from 1 October 2019 and then 1 October 2020). This is a significant change for the industry introducing new rules on the way VAT is collected.

 

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