Levelling the legal playing field

Unfortunately, disputes are relatively frequent in the construction sector. They may arise with suppliers over poor materials delivered, or turn on liability for poor workmanship. However, the most common issue that construction companies face is security of payment. When a construction dispute occurs, subcontractors are frequently left unpaid by contractors. More often, the payment is delayed to a dangerous degree. The downturn in economic circumstances has made this issue a greater threat.

In response, several countries have introduced legislation (commonly known as ‘security of payment’) to help improve the situation. It is founded on the ‘pay now, argue later’ principle, and realised through a process of adjudication. The aim of the procedure is to avoid potential lengthy and expensive courtroom litigation. Usually, the entities in dispute—whether they are a subcontractor, main contractor or professional adviser—appoint an independent expert to resolve their differences outside of the courts. The independent adjudicator may be an architect, surveyor or another expert in the field.

To reduce the burden on both parties, a crucial central principle of the process is that each party is responsible for their own costs. This helps to avoid vexatious actions brought in the hope that the other side will be burdened with the entire legal cost. Caveats apply, of course. Though it works differently in different territories, adjudicators can apportion costs to maintain equity. That prevents entities with more funds from using their cash advantage to overwhelm smaller parties.

The adjudication is binding, but can be appealed to a court. Another central principle of security of payment legislation is that the decision is immediately enforceable. This ensures continued cash flow and the completion of contracts. Cost savings are an added benefit: parties are given ample opportunity to resolve their dispute without going to court and incurring large legal fees.

The cost of the adjudication process is nevertheless high, because expert witnesses can charge significant sums for their time and reports. Further, an adjudication does not always avoid legal fees. It is therefore essential for businesses to have the resources to cover not only the adjudication costs, but also legal expenses in the courts if required. Any construction business, but especially smaller subcontractors, that is unable to set aside a large budget for in-house or retained legal services should hand their legal risk to the industry that commonly deals with it—insurance.

A number of insurance products cover lawyers’ fees, which are most often incurred defending liability claims made against insured organisations. Examples include employers’ liability (workers’ compensation), which responds to claims made by employees against the insured company, and public liability insurance, which protects businesses from claims made by members of the general public. As part of the indemnification process, insurers traditionally fund the legal defence, often in the hope that they can reduce or even eliminate liability and the associated damages payment.

Defensive insurance products are common and regularly purchased in Asia. However, they do not cover the costs of enforcing payment or a contractual dispute when the insured party initiates the claim. This leaves businesses that wish to enforce their legal rights exposed to significant legal costs. In Europe, Australia and the US, it is common to purchase a product that will cover pursuit and defence legal fees, alongside other risks. Common liability insurance products do not cover legal pursuit costs.

Legal expenses insurance, recently made available in Asia, addresses this imbalance by covering the costs both of pursuit and defence in a multitude of areas such as contractual disputes, property problems and employment issues. Such policies also include the use of a legal advice line, which allows insureds to gain access to legal advisors as if they were a larger organisation, and therefore provides them with advice and expertise that they otherwise may not be able to afford. Expertise of this nature is of significant value, since it can be a decisive factor in the choice to pursue a claim. In this way, legal expenses insurance provides access to legal knowledge that otherwise may be unavailable.

Few policies allow insured businesses to pursue claims against other parties, but only those that do offer adequate coverage under current legal regimes. If, in the first instance, a construction dispute is to be directed to adjudication, the policy should cover the costs of that adjudication, including the expense of the adjudicator and the cost of hiring expert witnesses. These are not cheap, and are therefore well worth insuring.

If the dispute does go to court, proper coverage should provide for the costs of legal proceedings up to the policy limit. The policy will essentially act as an enabler, allowing businesses that would not have had access to funds to pursue their rightful claims, and to enforce the contractual obligations of partners that might otherwise have delayed or withheld payments. Most importantly, by covering the potential legal costs of a claim, the coverage strengthens the insured’s negotiating position well before they get to court.

Achieving this through insurance premiums is cost-effective for businesses. Most SMEs cannot afford to allocate a separate legal budget, but will nevertheless frequently require legal advice. This need not be expensive. A high-quality legal expenses policy costs roughly the same as five to 10 hours of a reasonably priced lawyer’s work per year, or less than an hour per month, but provides indemnity for significantly more when required.

For example, a relatively small construction company with turnover of SGD5 million would almost inevitably struggle following an order to cover another party’s legal costs of SGD200,000, on top of any actual monetary damages awarded. Legal expenses policies designed for SMEs with earnings up to SGD100 million substitute a legal expenses budget and uncertain potential future costs with a known and predictable insurance premium, and therefore deliver meaningful financial benefits. Not least, it releases the funds from a legal budget to be used elsewhere, safe in the knowledge that a policy will provide for unknown dispute resolution expenditure that may arise.

As with any insurance, there are certain conditions that must be fulfilled before the policy will respond. Many of these focus on ensuring reasonable usage of the policy. One of the cornerstones of any policy, whether generic or specialised for the construction sector, is that the action, pursuing or defending, must have legal merit. No insurer wishes to cover vexatious legal actions or those where legal expenditure will serve no commercial purpose for the insured. The action must have reasonable prospects of success and be able to recover compensation and hopefully costs. In the opinion of the insured’s lawyer, it must be likely that a positive result will be achieved, and damages collected (or defended against). Policies therefore will not cover actions by or against insolvent or bankrupt companies, because compensation or costs would not be recovered.

Costs must also be reasonable and proportionate. Courts and adjudicators will apply this criterion to both parties in a dispute. They may apportion costs, but legal fees excessive to the dispute at hand will not be recovered, even in the case of a successful claim or defence. This provision protects smaller organisations from being overpowered by larger entities, and is a common feature of many legal systems worldwide. Most jurisdictions have a set rate of the recoverability of costs. The insured’s legal fees should be proportionate to these, and to the compensation.

Additionally, as with any other insurance policy, certain exclusions will apply. Most relate to disputes with financial institutions and over financial products, to avoid conflicts of interest, conflicts with other insurance policies or to disputes with the authorities regarding planning permissions. The latter should be resolved before construction starts and as this is a routine element of construction projects, it is not insurable. Overall, however, the exclusions again focus on reasonableness, which applies both to the policy and proceedings it covers.

With difficulties emerging on the economic horizon in the Asian construction sector, it is crucial for businesses to consider ensuring that their full pipeline of business will deliver an orderly and uninterrupted cash flow. Access to justice can be critical not just for the day-to-day income statement, but also for the continued operation of a company. That makes it very important to level the playing field so that all businesses, including SMEs, are able to enforce valid contracts successfully and defend themselves against claims. Insurers can help businesses achieve just that by providing a 360-degree shield that allows for both pursuit and defence. Such coverage ensures access to justice and gives businesses the confidence that when they must negotiate with larger opponents, they will stand on an equal footing.

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MARK WATERS
Mark Waters is a Legal Expenses Underwriter at Antares Asia, the Asian representative of Antares Managing Agency. He joined Antares Asia in 2016 and, since then, has been entrusted with the development and distribution of the Legal Expenses product in a wide range of jurisdictions, including Hong Kong, Malaysia and Singapore. Waters has more than 14 years of underwriting experience and has held a range of senior underwriting positions at Markel International, Abbey Legal Protection and Capita Insurance Services. He has been underwriting legal expenses products throughout his career and is a recognised expert in the legal insurance market in both Asia and the United Kingdom. He is a graduate of Loughborough University and Framlingham College. Antares Managing Agency operates Lloyd’s Syndicate 1274 and has reliable backing from QIC Group, the Middle Eastern insurer rated ‘A/Stable’ from Standard & Poor’s and ‘A/Excellent’ from A.M. Best.