Contractor protection against employer insolvency
It is essential for contractors to learn from the lessons such as the Carillion collapse and review their existing business model, to protect against employer insolvency.
There are three stages to consider, firstly when negotiating a building contract, secondly during a project and finally when the employer goes insolvent. How much agreement can be reached may depend not only on the bargaining power of the parties, but also on the third parties involved – for example a bank providing the employer with development finance.
There are a number of Payment Provisions a contractor should consider requesting in the building contract, to include an escrow account, weighted stage payments, advance payment, a project bank account and direct payment by a funder.
If the employer becomes insolvent, any Retention Monies may be difficult to recover, so consider a Retention Bond or Retention Trust Account.
There should be specific clauses allowing termination on insolvency, and the definition of insolvency should be wide. Insolvency is not automatically a repudiatory breach of contract at common law.
The contractor should make provisions in its own sub-contracts, supply contracts and professional appointments. A “pay when paid” clause limited to employer insolvency could be included in such agreements because the Construction Act 1996 Section 110(1B) confirms that pay when paid clauses in cases of upstream insolvency are excepted from the prohibition on conditional payment clauses.
To ensure there is a properly drafted Retention of Title Clause. This reserves the contractor’s rights over materials used in the project but is generally ineffective once the materials are fixed.
Parent company guarantees and payment security bonds can also be considered.
During the Project
Look out for early warning signs of employer insolvency, such as rumours, redundancies, unexpected or unexplained omissions from the project, suspension of the project, filing accounts at Companies House late and failing
to maintain insurance.
The contractor should also ensure regular and complete invoicing, strict compliance with the building contract and consider starting an adjudication before the employer’s insolvency. This could make the difference between securing payment before insolvency and ending up in a queue of unsecured creditors.
Once the Employer is Insolvent
Ensure that it is not just a rumour. Ensure that plant equipment and materials are secured and review payment obligations with sub-contractors, consultants and suppliers. Notify relevant parties of any retention of title clause and carefully identify all goods and materials on site not incorporated into the project. Do not terminate the contract without considering the situation carefully, as other parties such as a funder may wish to complete the project using the contractor by novating the original contract or entering into a new arrangement with a contractor.