27/01/2009

Contractors – this is not a wind up

By the time you finish reading this, what are the chances that another sub-contractor will have become a victim of the credit crunch?

In this downturn, even those sub-contractors with a deserved reputation for being well-managed and in good financial condition can fall victim to sudden changes in circumstances beyond their control.

In this climate, some cash-strapped sub-contractors are adopting very aggressive approaches to secure funds from contractors. Forget adjudication. Some sub-contractors are heading straight to the insolvency courts and presenting winding-up petitions against contractors as a means of forcing them to put their hands in their pockets.

Outrageous? Yes. Are the courts prepared to allow this? Sometimes, yes. This may surprise you, but there are some judges who will say that, in circumstances where a sub-contractor has not received payment for an interim payment and no withholding notice has been served, jumping straight to the presentation of a winding up petition is not an abuse of the court process.

For most in the construction sector, this is a step too far. Adjudication was introduced precisely to deal with this situation and, despite its rough and ready reputation, the process does at least allow for a structured debate of the issues. Allowing sub-contractors the option of side-stepping this procedure is worrying. How many of them will be tempted to push their luck and go down the winding up road in the hope that this teases out at least some sort of nuisance payment from a contractor?

Contractors can take the following practical steps to deal with this situation:

  • Ensure that those individuals within your organisation who are responsible for the serving of withholding notices know exactly when withholding notices have to be served
  • Plan for the possibility that the key individual might be ill or away from the office when the notice has to be served. Decide who will be responsible in those circumstances and make sure that he or she has information to produce a proper and valid withholding notice and that he or she has enough day to day knowledge to know when to serve it
  • Maintain good files so that you can, at short notice, quickly access documents which support the grounds and amounts you are withholding from a sub-contractor
  • If a sub-contractor indicates that winding up proceedings are being contemplated against you, do not wait for that threat to materialise before acting. You need to secure the sub-contractor’s immediate and unequivocal written confirmation that the threat is withdrawn. You should make it clear that if the sub-contractor is not prepared to give you this assurance, you will apply for an injunction to stop the sub-contractor from even starting the action and that you will hold the sub-contractor responsible for all legal costs incurred
  • If you have been served with a winding up petition, you must act very quickly. Within a short period, the petition might be advertised and this could lead to your bank accounts being frozen. However, so long as you can demonstrate that the sub-contractor’s claim is genuinely disputed you can apply immediately to the court and obtain a court order to stop the petition from being advertised. This will not only protect your position; it will also mean that you are not forced to pay the sub-contractor any monies to which he is not entitled.

If you would like to discuss any of the issues raised in this e-brief please contact a member of our construction team on 0113 227 0100 or email construction@gordonsllp.com