Building relationships

Supply Management,  May 22, 2008  by Choat, Rupert

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[CONSTRUCTION]

Rupert Choat looks at the impact of housebuilders' unilateral price reductions and the options available to suppliers who want to take action against them

The housebuilders who imposed price reductions on their suppliers earlier this year (News, 31 January) will no doubt have first weighed up the pros and cons. But the reality is that legal rights and duties have little relevance in deciding whether to impose or fight these reductions.

Many suppliers will take payer-imposed price reductions on the chin, preferring not to endanger future work streams. This goes against the longer-term view of relationships that is seen by many as the way ahead for the UK construction industry where parties see beyond forcing the lowest price. The Strategic Forum for Construction (a group of industry bodies including the Construction Industry Council and Construction Products Association) takes this longer-term view. It developed the 2012 Construction Commitments, which state: "Procurement decisions will be transparent, made on best value rather than lower cost."

Lowering prices could be counter-productive because it may lead to disputes as suppliers try to turn a profit through making claims. Although currently it appears price reductions are restricted to the housebuilding sector, where there is less of a claims culture.

There is an array of options suppliers could threaten and ultimately take: suspending the works (if they are ongoing), terminating (after giving any necessary notices), adjudication, court proceedings and statutory demand. The latter is a simple notice and costs little, but threatens the payer with expensive winding up proceedings if payment isn't made.

Adjudication was the route that supplier Southern Glass Services took in its muchpublicised action (News, 13 March). The case itself said nothing new and doesn't set a legal precedent. It is interesting, however, because it demonstrates that adjudication proceedings don't yet have the level of confidentiality that is one of the benefits of its close relative, arbitration.

Even if suppliers expressly agree to price reductions they might later attempt to set the agreement aside for lack of "consideration" or on grounds of duress, but neither would be a straightforward case for them to pursue.

From the payer's perspective, at worst those few suppliers who challenge them should recover no more than the amount they were otherwise owed plus interest (which may not exceed the value to the payer of retaining the money in the interim). Most suppliers allow payers this shortterm gain but not without pain in the form of media reports and the resulting impact on reputation.

However, some shareholders see price reductions as no different from supermarkets squeezing their suppliers. They see it as the sharing of a downturn that everyone wants to survive. One housebuilder a few weeks ago expressed regret for the way it had undertaken its price reductions - rather than for making them at all.

We may have seen an end to reductions for the immediate future, or at least the reporting of them, since as they become more common the impact on reputation is reduced. However there is a longer-term price of all this - loss of trust - a cost that is hard to estimate.

Rupert Cheat, partner and solicitor advocate, and Aidan Steensma, solicitor, CMS Cameron McKenna (www.cms-cmck.com)

Copyright Chartered Institute of Purchasing & Supply May 22, 2008
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