The importance of due diligence in the construction industry

Construction law solicitor, Sam Bawden, discusses the importance of conducting due diligence.

As someone who specialises in trying to resolve construction disputes, I encounter the following scenario on a daily basis.

Employer A is a limited company. Contractor B carries out work for Employer A. Employer A makes interim payments during the course of the works but, somewhere close to Practical Completion (“PC”), Employer A stops making interim payments. A modest balance remains outstanding at the time PC is achieved. Contractor B requests payment of that sum (plus retention). Employer A alleges that nothing further is due (usually citing alleged defects/outstanding works and Contractor B’s alleged failure to respond to reasonable requests to address those issues, such that Employer A has no alternative but to instruct a third party to complete the works at additional cost).  Consequently, the parties fall out over the final account.

Does this sound familiar?

It is at this stage that the parties often first consider seeking legal advice. It is also at this stage that the parties often consider, not just what their legal rights and obligations are, but also how much it might cost them to enforce those rights and, importantly, what their realistic chances are of actually being able to enforce those rights. All of this helps the parties to consider the relative risks and benefits of Adjudication/litigation to try to resolve the dispute.

Unfortunately for the contractor, all too often, any one or more of the following problems can be identified at this stage:

• Employer A’s registered office is outside the jurisdiction of England and Wales (meaning that (a) any Court proceedings issued will be more complicated procedurally, slower and therefore more expensive and (b) any action to enforce such a judgment will be similarly cumbersome and expensive);
• Employer A has no significant assets (so any Adjudication Decision/money judgment contractor B might obtain against it will probably be worthless); and/or
• The individual directors of Employer A have a long history of dissolved companies to their names (suggesting that they are not averse to allowing their companies to “go under” when times get hard).

Any of the above will increase the risks associated with Adjudication/litigation. They tend to suggest that, by pursuing the alleged debt, Contractor B might simply be throwing “good money after bad.”

However, a small amount of due diligence at the pre-contract stage would enable Contractor B to enter into the contract (or not!) knowing what those risks are.  Depending on the parties relative bargaining powers, full knowledge of the risks might enable Contractor B to renegotiate terms to protect itself against some or all of these risks.

Sadly, there will always be some contractors who fail to perform and there will always be some employers who raise spurious defects claims to try to avoid paying everything that is due.  Therefore, we are unlikely to ever see an end to disputes of this nature. However, taking advice at an early stage will enable the parties to enter proceed with their eyes wide open, potentially having taken some steps to mitigate the risks in the event that a dispute does arise.