2020-05-15
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Main contractor insolvency – contract quick guide

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Posted by Michael Hiscock on 18 January 2020

Michael Hiscock - Construction Lawyer
Michael Hiscock Partner - Head of Construction

In light of the recent Carillion demise, this guide provides a starting point on common forms of contract for both employers and subcontractors looking at how insolvency affects the construction supply chain from both directions. The table below is a quick reference for the processes in the main contract and subcontracts for the scenario where the main building contractor has gone bust.

Of course every contract is different, whether it is bespoke amendments to a JCT format, or a PFI pass down agreement, or something else, so you must always check the contract to see what it actually says.

Also, people often forget to check the notice provisions in a contract – so if you have to serve a notice, check if there is a particular procedure that you must follow to achieve valid service.

There are also issues surrounding redundancies, corporate insolvency processes, cancelling goods purchase and hire contracts, refinancing, corporate restructuring etc, all of which Wright Hassall is able to cover.

If you are a subcontractor, check the collateral warranties to see if you can persuade a bank or purchaser to step in and pay you to finish the job.

If you are an employer operating under an unamended JCT format, retentions should be held on trust in a separate bank account, so don’t assume you can automatically claim that money.

And finally, don’t forget that a liquidator will appoint claims consultants / QS firms to maximise recovery for shareholders, so final account claims can still be tested in the normal way.     

Type of contract Contractor insolvency - employer action Contractor insolvency - subcontractor action

JCT Design and Build 2011

JCT Design and Build 2016

JCT Standard without Quantities 2011

JCT Standard without Quantities 2016

JCT Intermediate 2011

JCT Intermediate 2016

JCT Minor Works 2011

JCT Minor Works 2016

Terminate the contractor’s employment at any time.

Works obligations are suspended from the date of insolvency.

Protect and secure the site.

Whether or not termination occurs, payment stops.

Choose to stop, or terminate and employ third party to finish job.

After completion, prepare a final account within 3 months, including direct loss caused by insolvency.

Final account covers cost to finish the job including direct loss caused by situation, payment already made to the contractor, original cost of job.

Any balance is payable either way (if there is no money to claim, lodge a proof of debt).

 

JCT Design and Build Subcontract 2011

JCT Design and Build Subcontract 2016

JCT Standard Building Subcontract 201

JCT Standard Building Subcontract 2016

JCT Intermediate Subcontract 2011

JCT Intermediate Subcontract 2016

 

Subcontract works immediately suspended.

Subcontractor can serve notice to terminate after 3 weeks from the date of insolvency.

If employment is terminated no interim payments - remove tools and submit final account.

Final account covers work properly executed plus demobilisation costs plus direct loss caused by situation plus goods already purchased.

Sums due are payable within 28 days (if there is no money in the insolvent company, lodge a proof of debt with the liquidator).

JCT Minor Works Subcontract 2011

JCT Minor Works Subcontract 2016

Works suspended immediately upon insolvency.

Pay third parties to finish the works.

Issue a final account within 13 weeks of termination showing value of work properly executed and direct loss and damage arising.

The subcontractor may terminate its employment and is entitled to leave site and recover the amount of any resultant loss, damage or expanse which would not have been incurred if the subcontract works had finished. (if there is no money in the insolvent company to claim lodge a proof of debt)

NEC3 Engineering and Construction Contract

NEC4 Engineering and Construction Contract

The employer may terminate for any reason under NEC3 (right under NEC4 is only exercisable if the relevant secondary option has been chosen)

 

Under both NEC3 and NEC4, if the contractor is insolvent, the employer may

-terminate,

-pay a third party to complete the works

-instruct the contract to assign the benefit of subcontracts

use any equipment that remains on site and release it when no longer required

The amount due is:

-amount due for completed work assessed in accordance with the applicable Option, plus any defined costs for plant and materials

minus

-a deduction of the forecast of the additional cost to the employer of completing the whole of the works.

 
NEC3 Engineering and Construction Subcontract   The subcontractor may only terminate for a specific reason. If the subcontractor terminates for contractor insolvency, the subcontractor leaves site, removes its equipment, and claims (i) amounts due assessed as per the relevant Option plus (ii) defined cost of plant and materials, plus retentions, plus the direct fee percentage applied to the difference between the price for work done to dates and the total price for the subcontract works.
FIDIC Yellow Book Design Build)

Immediate termination of contractor’s employment and expulsion of contractor from site.

Contractor must use best efforts to assign benefit of subcontracts and protect site.

Employer may engage third party to complete works

The Engineer must determine the proper value of the works at the date of termination.

The Employer may withhold any further payments until all costs and losses to finish the works are established and then recover those from the contractor. (or lodge a proof of debt for the same).

 
FIDIC Silver Book (EPC Turnkey) Same as Yellow Book except Employer determines value of works at termination, not engineer.  
IET MF/1 rev 6

Purchaser my give immediate notice of termination, expel the contractor from site, engage a third party to complete the work and have free use of Contractor equipment to do so.

The purchaser may also give the liquidator/administrator the option of completing the contract if they can provide a valuable guarantee from a third party.

As soon as reasonably practicable after termination, the Engineer must value the part of the works complete prior to termination and assess all sums due to the contractor at the date of termination.

If the cost to complete exceeds the termination value, the difference is recoverable.

 

About the author

Michael Hiscock

Partner - Head of Construction

Michael is a specialist in construction and engineering procurement, advising on a wide variety of works contracts.

Michael Hiscock

Michael is a specialist in construction and engineering procurement, advising on a wide variety of works contracts.

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