Contractor insolvency: a checklist
Today’s announcement that Carillion are being moved to liquidation brings into focus the effect of liquidation in a construction context. While not intended to serve as a complete guide in each and every case, the pointers below should be considered if you are an employer in the unfortunate position of facing contractor liquidation.
Before entering into contracts
• Do consider whether performance bonds or guarantees should be procured. The availability of these will depend on a number of circumstances including the negotiating power of the parties, the value of the contract and its length.
• Consider the importance of third party warranties (e.g. from sub contractors) and ensure that where possible the form and content of any warranty package is agreed as well as the timing for procuring third party warranties.
During the currency of a contract
• Understand the type of insolvency the contractor is facing. The effect of administration (for example) is different to liquidation.
• Check the contract. Contracts will usually contain provisions regarding the effect of contractor insolvency. Ensure that you are familiar with them and understand their effect. In particular understand the effect of insolvency on your obligation to make payments.
• Secure the site. The contractor will have possession of the site but if they have been moved to liquidation security of the site may not be maintained. If the contract permits you to secure the site then you should do so. Upon securing the site, immediately review the insurance and security arrangements for the site and any materials.
• Speak with the liquidator. It may be there are plans as part of an orderly winding up for a replacement to put in place arrangements to fulfil a contract. If there are then consider the logistics of this under the contract (e.g. if the contract is to be passed to a third party who will complete the works what, contractually, needs to be put into place to give effect to that, and what would the effect be of such arrangements on past contractual obligations).
• Do not reach agreement with the directors or other representatives directly. The movement of a company to insolvency shifts the decision making powers away from the officers of a company.
• Do not strike deals directly with sub contractors without first taking legal advice. You may inadvertently be assuming responsibility for sub contracts which you may not have full particulars of.
• Notify funders. If you have a funder in place they may well dictate what you can and cannot do.
• Make contact with any guarantor / bondsman to notify them of the insolvency and your rights under the guarantee or bond.
• If necessary, take steps to terminate the building contract. For example, issuing a termination notice.
After completion of the works
• Check your warranty package. The value of your direct contractual relationship with the contractor may be uncertain and that brings into sharp focus the importance of warranties that you have in place and the scope of valuable protection against defects.
• Check any guarantee or bond. It may be that the protection of any performance bond will have ended after practical completion but check the terms.
• Re-inspect the works. The insolvency of a contractor should serve as a trigger to ensure that the works are not defective. While contractor insolvency may result in the loss of a viable remedy against the contractor it may not be so in each and every case (it depends on the financial position of the contractor and the type of insolvency situation at play). Of course third parties may also retain liability in respect of works (whether under a warranty, bond or guarantee).
The above is not intended to be a complete list of do’s and don’t’s but should hopefully provide employers with some tips on how to address actual or potential contractor insolvency.