K3 Insights

Almost every time we hear about a main contractor being liquidated, we also hear subcontractors will be left out of pocket. Why is it that?

After the collapse of Hartner Construction, the Construction Contracts Act 2002 was introduced to put an end to this problem. But come 2013, Mainzeal collapsed and subcontractors were left owing. And the same happened with the collapse s of Ebert and Corbel last year.

Fundamentally, the Act is not working because it prejudices main contractors who generally do not have large balance sheets and are very vulnerable to financial shocks. And when there are disputes, adjudication decisions are not made public – and that needs to change.

Practically speaking, subcontractors will hardly ever be current in terms of payments. Reasons for this include:

offsite work exceeds any deposit received
variations have yet to be assessed
payment arrangements, whether informal or formal, do not match work completed
Subcontractors get paid by main contractors. Main contractors get paid by the owners.

The adjudication process which the Act created is particularly problematic. This process was intended to be an interim dispute mechanism to ensure contractors could get paid and maintain cashflow (i.e. to pay subcontractors). A full claim could be brought later by an owner.

However, in some cases owners are using the adjudication process as a de facto way of bringing an interim claim for damages. Owners are using the process to raise disputes which would be more suited to substantive proceedings. It is not clear why an owner should be able to take advantage of the interim resolution process. The Act was not intended to protect owners. It was intended to ensure money flowed through to subcontractors for the work they had performed.

In fact, a large award against a main contractor can be enough to render it insolvent – and the subcontractors will miss out again.

Furthermore, the costs of the adjudication are generally left to lie where they fall and the adjudicator’s costs are shared even if the contractor is successful, placing another financial burden on the main contractor.

Typically, it is uneconomic for the main contractor to bring a full claim at a later date and the interim procedure becomes the final procedure. This is a problem because the interim procedure is not as robust as, for example, a court or arbitration hearing.

A claimant can take as much time as it likes to prepare a claim but once lodged the defending contractor has very tight timeframes to respond.

While the Act allows for parties or experts to be heard, this is generally not the case and the adjudicator simply relies on the written submissions. The absence of oral argument means the parties cannot be sure the adjudicator has considered or understood the submissions.

The decisions are confidential and in some cases can be completely conflicting. There is no public database of decisions which can be used as guidelines. In a case where the exact same argument was put to two different adjudicators, two different decisions were issued. It would be more efficient if decisions were public and parties could learn from previous decisions and the adjudicators could be more consistent.

This problem of inconsistency is also a function of some adjudicators having a legal background while some don’t. There is no prescribed expertise for adjudicators and this leads to a disparity in their abilities.

There is no ability under the Act to join co-defendants who may have liability to the owner in negligence. The main contractor could end up carrying the liability of subcontractors (and even council) where it was not even directly at fault.

What needs to change:

the Act cannot be used by developers as an interim dispute resolution process.
Adjudicators exercised their powers and parties could be heard more often.
decisions are made public on a government register with parties’ names and identifying features redacted.
all liable parties are subject to the same proceeding and decisions.