As any subcontractor will agree, payments unreasonably withheld cause serious cash flow problems. In certain circumstances, this can be enough to push a business into insolvency. And when clients get wind of such a situation, they could try to turn it to their advantage.
Faced with such a prospect it might be tempting, or seemingly unavoidable, to accept a substantially reduced payment in order to stay afloat. However, recent cases show that such unethical main contractor behaviour can very easily backfire, as the case between Imperial Chemical Industries (ICI) and Merit Merrell Technology (MMT) clearly demonstrates.
By way of summarising the events, ICI claimed that the quality of MMT’s workmanship was extremely poor and that this represented a repudiation of the contract. As a result, they served notice to terminate the contract.
The twist in the tale comes when, during a trial to decide a liability issue, the court finds that ICI had deliberately tried to force MMT into insolvency as a way of cutting costs on the project. The claim of poor workmanship was found to be based on evidence that was extremely thin, to the extent of being virtually non-existent. In other words, ICI were simply trying to find an excuse to stop payments and used false claims to substantiate a cost cutting decision which had already been made.
Despite MMT winning an adjudication for £7m, the time taken for this to be enforced in a Court of Law put an unbearable pressure on the business and resulted in MMT proposing a Company Voluntary Agreement (CVA) to its creditors. This is a decision not to be taken lightly, especially given the inevitable damage to their commercial reputation. To make matters worse, they were essentially forced to settle for reduced sums from existing debtors in an attempt avoid insolvency. Sadly, in February 2017, MMT felt they had no choice but to go into voluntary liquidation.
What followed was a claim by ICI to recoup the £7m paid in the previous adjudication. Unsurprisingly, MMT counterclaimed based on the significant financial losses incurred as a result of ICI’s spurious claim over faulty workmanship.
The result? MMT were awarded just over £2m, of which £1.3m was to cover reduced payments they were forced to accept from another client (Murphy) who, seemingly opportunistically, reduced the value of its final account on the basis that any adjudication award to MMT would be stayed on financial grounds.
This case matters because…
The court’s decision clearly shows that attempting to take commercial advantage of a subcontractor’s financial difficulties by withholding rightly due sums is entirely indefensible. Of course, a ruling which speaks to the motivation of the parties, and not simply the validity of the claim, could cause complications if a main contractor has a rightful claim against a financially struggling subcontractor.
What you can do…
When faced with a cash flow crisis, accepting a reduced valuation of accounts can seem the only way to stay solvent. Yet this case proves that such a course of action may in fact make matters worse, with opportunistic clients seeking to take advantage of your current financial and commercial pressures.
There is another way. With the right advice and the right action, such unethical behaviour can be successfully challenged. Remember, you have a choice whether to accept the commercial risk of accepting reduced sums or fight and win what is rightfully yours.