Heavy Ballast

With the fall of Ballast, many subcontractors lost significant sums of money. In view of the way the UK construction industry works, this it is hardly surprising.

Few successful commercial organisations outside construction are prepared to allow credit to its customers in such large amounts as are commonly suffered by specialist subcontractors. Most purchases we make require payment before delivery or the provision of reliable evidence of an ability to pay. The construction industry however operates along different lines.

In what other industry would a specialist firm be prepared to undertake the sort of payment risks as those in construction? Once a subcontract has been entered into, or a letter of intent is received, orders for materials are placed, which include terms usually providing for payment before the specialist is paid. Design work is undertaken, involving salaries or consultants' fees, again before any payment.

These financial commitments occur long before site work starts. Once on site, at least one month's work is undertaken before the first application for payment is made, with a wait of four to six weeks and often longer before any payment is due. Whether the money arrives, and how much is received compared to the sum applied for, depends upon the financial position of the employer and main contractor.

The Construction Act, which was designed to improve cash flow in the construction industry, made no inroads into this problem. Clearly some action needs to be taken, but it is of little use the specialist anticipating the arrival of the cavalry to provide assistance, it is more a question of self-help.

Specialist success
The recent case of Brican Fabrications v Merchant City Developments (2003) provides a good example of how a subcontractor can protect its financial position. Merchant, the defender, was engaged in a project to refurbish and develop the former Candleriggs Market building in Glasgow. It entered into a main contract with Circle to undertake the work.

An essential part of the project was the steel fabrication, in respect of which Circle favoured Brican to undertake the work. Brican, while pleased to be considered, was reluctant to enter into a subcontract as it was not satisfied with Circle's financial credentials. From the information available, Circle's credit rating was only £20 000 – insufficient in Brican's view.

There were no other steel fabricators in contention and as the failure of Circle to appoint a subcontract was likely to lead to a delay, which would involve Merchant in loss of rent, something had to be done.

A deal was struck whereby Merchant undertook to pay Brican direct monies they would be due under the subcontract with Circle. No formal agreement was drawn up but the terms were agreed at a meeting held on 6 October 1998 and in subsequent letters and faxes. All parties appeared happy with this arrangement.

Specialists need to protect themselves and ensure that their payments are secure

In December 1998 Circle and Brican entered into a subcontract that made no mention of the direct payment arrangement but contained the usual terms. Nonetheless work got underway and the direct payment terms were implemented to the satisfaction of all. Six payments were made to Brican in this way without any apparent hitch.

The situation began to go astray when a Provision Liquidator was appointed to Circle and the company wound up in August 1999. By this time Brican had completed its work and prepared the final account.

The total value of work undertaken by Brican came to £120 146. Deducting money paid left a balance of £37 118 plus vat. Brican considered that in accordance with the direct payment agreement this sum should be paid by Merchant.

It was argued by Merchant that the purpose of the agreement was to allow it to deduct from the payment due to Circle the portion owed to Brican to ensure it received prompt payment. If Merchant's interpretation of the direct payment agreement was correct, then following the insolvency of Circle the obligation to pay Brican direct came to an end.

It was Brican's case that under the agreement Merchant undertook an obligation to pay for all work performed under the subcontracts, including the balance due on the final account.

A difficulty for the Inner House of Court of Session was that the terms in the subcontract differed from those in the direct payment agreement. The Inner House however considered that the terms of the subcontract could not be seen as intending to supersede the earlier direct payment agreement and ordered that Merchant pay Brican the balance on the final account.

Lessons to be learned
Brican got it right in making financial provisions to protect itself before agreeing to enter into a subcontract with Circle. In view of the financial problems Ballast has had in recent years it is unlikely that its credit rating would have been very attractive. This should have sent out a distinct signal to any subcontractor asked to submit a tender to Ballast.

The existence of a profitable parent company like Ballast Nedam should not have lulled any subcontractor into a sense of false security. Companies are now financially organised so a loss-making subsidiary can easily be shut down without causing permanent harm to the parent. Any firm prepared to allow credit in excess of the rating is putting itself at risk financially.