16 January 2018

Insolvency Q&A

I entered into a building contract with a contractor who has just entered into an insolvency procedure mid-way through the carrying out of the works. What should I do now?

As we have seen from yesterday's news that Carillion have entered into liquidation, contractor insolvency has a significant impact on developers, their funders, future occupiers and the whole of the contractor's supply chain. Whilst every building contract and every project is different, here are our top ten practical and legal questions that you will need to consider with your professional team and legal advisors in the days and weeks following the receipt of notice that your contractor has entered into an insolvency procedure.

1. Whose responsibility is it to secure the site?

If site security is the contractor's responsibility, you should take immediate steps to make sure the site is properly secured to prevent trespassers and sub-contractors who might seek access to the site to remove materials.

2. Who is responsible for maintaining the all risks insurance with respect to the works?

If it is the contractor’s responsibility to maintain the all risks insurance policy, you should investigate whether you need to take out your own insurance policy to ensure that the works are protected and that any insurance obligations owed to third parties under (for example) a funding agreement or an agreement for lease, are discharged. Under the JCT form of contract, a contractor’s obligation to insure falls away on termination of the contract.

3. What information do I need to be able to complete the works?

The professional team should compile a list of all information that is required to enable completion of the works. This might include obtaining contact details and sub-contracts for all sub-contractors and suppliers; obtaining copies of any drawings, specifications or other documents relating to the works and ascertaining the position with respect to the signature and issue of collateral warranties.

4. Do any third parties need to be notified?

You should notify any interested third parties (e.g. any bank, fund or tenant) of the contractor's insolvency and consider the provisions of the relevant agreement. Going forward, they may need to approve your strategy for the re-commencement and completion of the works.

5. Are there any unpaid sub-contractors?

You may be contacted by sub-contractors who demand payment in respect of unpaid invoices and threaten to remove materials from the site in the event of non-payment. These claims will need to be considered on a case-by-case basis to ascertain (amongst other things) whether the goods or materials have been incorporated into the works, at which point they will belong to you as the employer, even where the sub-contract contains a retention of title provision. Subject to compliance with insolvency legislation, you should also consider whether there are commercial reasons for making payments to certain sub-contractors, even where you have already made payment to the contractor (in effect, paying twice).

6. Have any payments fallen due to the contractor, which have not yet been paid?

If so, you should consider whether there are any contractual grounds for issuing a pay less notice to withhold part or all of that payment from the contractor.

7. Can I terminate the building contract?

You should consider whether you have grounds to terminate the contractor's employment pursuant to the building contract and whether the permission of any third party is required before you do so. Following termination, there will be an accounting process in which you will be required to establish your losses as a result of the termination, so you should keep a detailed record of all of the costs you incur as a result of the contractor’s insolvency. This information will also be useful in the event of any claim against a parent company guarantee or a performance bond, as highlighted below.

8. Can I bring a claim under a parent company guarantee?

Has the contractor's parent company provided a parent company guarantee and if so, does the guarantee require the parent company to step in to perform the contractor's outstanding obligations? You should investigate the financial position of the guarantor before you appoint them to complete the outstanding works. You should also consider whether you might have a claim against the guarantor in respect of the contractor’s failure to fulfil its obligations under the building contract and put the guarantor on notice of any potential claim.

9. Did the contractor provide a performance bond?

You should consider whether you could make a claim on the performance bond and put the bondsman on notice of the potential claim. The bondsman is likely to want to have a say about the strategy for the re-commencement of the development.

10. What are my options going forward in respect of the completion of the works?

This is perhaps the most complicated question and will necessitate a detailed consideration of various factors, including:

(a) the stage the works had reached when the contractor became insolvent and the complexity of any remaining works;

(b) obligations owed to third parties, including with respect to timing of completion of the works and the procurement strategy; and

(c) the ability to find a replacement contractor who is willing to complete the works and the cost and basis on which such a contractor is prepared to do so.

We have acted for a number of developers whose contractors have entered into insolvency procedures during the works and have advised on a number of different procurement routes for the remaining works, including the direct appointment of sub-contractors to complete the works and schemes where a replacement contractor has been appointed.

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