Is the act bankrupting us?

Rumour has it that some of the major subcontracting organisations are trying to persuade the government to consider the introduction of mandatory trust funds as part of its review of the Construction Act.

My immediate reaction on hearing this news was to question whether such a move was realistic. The introduction of trust funds would involve issues of considerable legal complexity and may even require the reform of key areas of insolvency law. It is also likely to be just as hard to persuade clients’ representatives to buy into the concept as it was in the run-up to the drafting of the Construction Act. Moreover, now that the act is really working, with something like 1500 adjudicator nominations made, one has to ask whether such a step is necessary to achieve the desired objectives.

But is the number of adjudications taking place an appropriate way of measuring whether the legislation is achieving its stated objectives? One of these objectives was to deal with the age-old problem of cash flow in the industry, which, as Lord Denning once stated, is its very life-blood. By freeing up cash in the short and medium terms, the measures introduced by the legislation, so conventional wisdom dictated, would reverse the process whereby the producers within the industry get driven into insolvency because others further up the contractual chain are sitting on their money, often without any justification.

After two years, one would surely expect to see some noticeable improvement, particularly since order books have been full. However, from where I sit, there appears to be a considerably greater number of small and medium-sized firms going into receivership and/or liquidation now than at any time in the past few years. One explanation for that perception may be that I have spent so much time over the past two years involved in the adjudication and enforcement process. From a cash flow point of view, this is a bit like spending the two years working in the intensive care unit of a hospital.

I have not seen any recent statistics to back up my impressions, but I would not like to bet against the fact that the incidence of insolvency in the industry is on the rise. Might it be the case that the act has, in fact, contributed to the rising number of insolvencies as a result of the inevitable pressure that it brings to bear on companies that might, given time, pull round?

From where I sit, there appears to be considerably more small and medium-sized firms going into receivership and/or liquidation now than at any time over the past few years

Parties still flagrantly refuse to obey adjudicators’ awards. I have experienced a number of situations where we have enforced an award only to see the defaulting party self-destruct as soon as judgment is given against it. I know of one case where, having slugged their way through adjudication and enforcement, both parties almost immediately went into liquidation.

There is no easy answer to the bad debt problem. Where a party has a significant bad debt on a project, there are only two real options. Taking necessary action to recover that debt, whatever that may be, is one, even though the man on the other side is talking about putting the company into liquidation. The other is simply to wash one’s hands of what may be a significant and indisputable debt – but that way you are a certain loser. Anyway, is the man on the other side bluffing about winding up his company?

Against this background, the decision of Judge Dyson in Herschel Engineering Ltd vs Breen Property Ltd is not good news for users of adjudication. In that case, the judge indicated that, had there been any real doubt about the claimant’s ability to pay the money back if it lost in the ongoing county court proceedings, he would have stayed execution of his judgment in favour of the claimant until the county court made its decision.

That decision arguably turned on its own very special facts, particularly the fact that the adjudication was commenced by the claimant after it had started county court proceedings for recovery of the same debt. Nevertheless, it does cast something of a question mark over the usefulness of adjudication for companies that are themselves suffering commercial stress through cash flow problems. But isn’t that just the sort of company the legislation was supposed to help?

One thing is for sure. In these tough times, it is becoming ever more necessary for parties faced with bad debts to make an informed decision at the outset about the best method of getting the money back. Certainly, every effort should be taken to find out about the financial position of the defaulting party. Dun & Bradstreet is an obvious source of information. Engaging an enquiry agent can also be useful. Frequently, to maintain cash flow, adjudication will be the appropriate remedy. However, it is important to remember that it is only an interim process. In some circumstances, one might be better advised to go straight to arbitration or litigation.