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Construction lawyers gear up to handle downturn fallout

Construction lawyers are reporting a dramatic upsurge in contentious work as a result of the economic downturn.

With payment disputes rife, short-term prospects for house builders uncertain and an increasing number of subcontractors going out of business, legal firms are planning to recruit additional staff to deal with the growing caseload.

One major law firm said income in its construction division was up 50 per cent over the past five months compared with the same period last year.

While non-contentious work has dropped off - or at least levelled - for many law firms, instructions from clients relating to potential disputes have climbed steadily.

Issues relating to problems such as defects and delays have continued to emerge, but it is payment disputes that have been keeping the solicitors’ order books full, according to one source who described his department as “extremely busy”.

It is predicted disputes will soar in 2009 as developers and contractors break contracts and tussle over payment.

One source revealed: “We don’t anticipate this level of inquiry will drop off.”

Other legal experts said they wanted their teams to be geared up for when the recession hits contractors hard.

One said: “The contentious guys are putting in the hours at the moment. Construction divisions will be looking to boost their numbers because that’s the sector which will be hit by the economy.

“A lot of banks are looking to recruit in-house lawyers too.”

It is expected that financial institutions will continue to keep a close eye on projects that they became involved in before the downturn with a view to possibly withdrawing funding.

Steven Williams, of Nabarro’s construction division, said: “There are many issues where banks are reluctant to continue lending to a project.”

He added: “We are seeing all the usual subcontractor issues, as well as key subcontractors disappearing and causing project delays.”

Taylor Wessing associate Alistair Day said contractors were keeping a close eye on subcontractors facing difficult times. Subcontractors are, in turn, watching for problems relating to developers and payment periods.

This year, some of the UK’s biggest house builders have been involved in disputes over payment delays.

Mr Day said: “People are looking at project security and there are some clouds gathering in terms of contentious matters - it has been quite a big increase in instructions.

“It all stems from people watching their cashflow very carefully.”
Karen Spencer, head of construction at law firm Halliwells, said: “One source of instructions flows largely, but not exclusively, from the slowing down of payments to subcontractors and suppliers to the industry.

“This may result from deliberate decisions by the payers to improve their cashflow and working capital. In some cases, the subcontractors and suppliers may be standing for this type of treatment - others are not.”

In the UK, Addleshaw Goddard legal director Joe Wilkinson said the construction industry was much better placed to deal with contentious disputes than it was during the last recession.

This is primarily due to reforms at the Technology and Construction Court and the introduction of adjudication following the Construction Act a decade ago.

He said: “I think the complexity of the problems will stillbe there but the solutions will be much better for the industry.”

VICTIMS OF THE CREDIT CRUNCH

A series of legal disputes are expected to stem from the string of firms which have, or will, go bust.

In the second quarter of 2008, insolvencies in the construction sector jumped 35 per cent year on year.

PricewaterhouseCoopers research found there were 499 insolvent construction companies during the period.

Since then, many more companies have fallen victim to the credit crunch.

According to new research by business recovery specialist Begbies Traynor, the number of firms facing severe financial difficulties has increased 547 per cent compared with this time last year.

A raft of contractors have had to shut down this month, including the former Irish arm of piling giant Roger Bullivant and Kent-based John Jarvis Construction, as well as its sister plastering company Cartwrights.