COMMENTARY

Levelling the legal playing field

Legal expenses insurance can help construction businesses protect their cash flows during an economic downturn.

Asia’s construction sector faces challenging times. From a downturn in the general economic situation across the region to an increasing regulatory burden, the pressures are building. Construction frequently bears the brunt of worsening conditions. Against that backdrop, it is vital that construction companies consider how recent developments in the legal sector could affect their operations.

With fewer projects available, it is increasingly imperative to ensure the quick and financially sustainable resolution of disputes. For many, collection of payments may mean the difference between success and failure. The overall default rates in Asia are enviably low, but the time it takes for payments to be made is troubling. The period from invoice to collection may have a severe impact on a company’s sustainability. A full order book may not be enough to weather the declining market. Cash flow is key, and access to the legal system is the last resort to enforce it.

Legal expenses disproportionately affect small and medium-sized enterprises (SMEs). Multinational companies have the luxury of being able to set aside a budget for dealing with legal issues in-house, probably alongside the ability to purchase the regular services of a law firm on a retained basis. The retainer covers the cost of general advice, drafting letters and similar day-to-day matters. However, it is unlikely to cover the cost of disputes. Larger businesses typically set aside a budget for legal expenditure and dispute resolution, but few SMEs are able to afford a similar retainer or in-house counsel.

When there are fewer construction projects available, the pressures for small and medium-sized companies increase

This threatens small businesses’ operations, since they do not have the ability to enforce their legal rights through the courts or the adjudication system. This leaves their access to justice severely restricted. SMEs are often subcontractors, and therefore can be forced to walk away from disputes even when they stand a good chance of winning. That can put them in a precarious cash-flow position. 

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