UK: You’re The Weakest Link – Goodbye!

Last Updated: 5 September 2012
Article by Scott McKinnell

Insolvency on construction projects can be fatal. Projects are based on linked contractual arrangements and as the saying goes you are only as strong as your weakest link. One party's insolvency can have knock on effects down the chain as it has an impact on the contractual performance of others. With MJN Colston, one of the industry's oldest specialist contractors recently entering administration, those in the industry need to ensure they are prepared if a member of their supply chain looks like becoming the weakest link.

Scott McKinnell considers what steps can be taken to minimise the effect of insolvency and to ensure the supply chain is as strong as the building being constructed.

It has never been more important to consider the possibility of contractor, sub-contractor or supply chain insolvency from the outset of a construction project than in today's economic climate. You want the best players on the team.  Whilst it's tempting to go with a flashy new upstart who seems to promise everything, employers appointing contractors and contractors appointing subcontractors should ensure they properly protect themselves.

First steps

It is essential to carry out financial checks on those that you will be entering into contract with beforehand. Steps should be taken to gather evidence of the contractor's financial standing through, for example, credit rating reports. Employers and main contractors should also consider obtaining parent company guarantees or requiring contractor's to take out some form of bond or subcontractor bond.

One such bond is a default performance bond. Provided by a third party and taken out by the contractor in favour of employer, these bonds require the third party to pay out a sum of money when the employer can prove that the contractor is in default of its obligations under the contract and that it has suffered loss as a result of the contractor's breach. Such bonds are only as useful as the paper they are written on, however, if they do not cover the breach complained of. Care should be taken to draft the bond to protect the employer from the contractor's insolvency which is often not classed as a "breach" by the contractor under the contract.

Alternatively, an employer or main contractor could require an on-demand or unconditional bond. Although rarer in the UK an employer can call on the bond at any time without having to prove that the contractor is in breach of its obligations. The liability of the third party bondsman in this instance is independent to the liability of the contractor.

Also consider what happens where an insolvent contractor's or supplier's work is defective? An employer will be merely an unsecured creditor for the purposes of defects. Taking out a latent defects insurance policy is one solution to this problem so long as such a policy is available and not prohibitively expensive. Indeed any premium payable by the employer might be a legitimate cost which could be set off against amounts otherwise due to the contractor or subcontractor.

If significant subcontractors or suppliers are involved in the project it is prudent for the same steps to be taken for these and for an employer to insist on collateral warranties from them. Collateral warranties should include "step in" rights which allow the employer to step into the contractor's position under the relevant subcontract. This gives the employer direct rights of recourse against the subcontractor if the contractor goes insolvent and cannot pursue the subcontractor himself.

Employers and contractors should also considering including express rights to copy and use the contractor's design documents and to require copies of such documents on demand. If a contractor goes insolvent this could help minimise delays in completing the project.

What if it all goes wrong?

When informed of a contractor's insolvency, an employer should act swiftly but not rashly. If adequate thought has been given to such a scenario from the outset an employer need only look to its contract for the best course of action to follow.

In the absence of an express term the contractor's insolvency is not automatically considered a breach of contract. It is usual, therefore, for building contracts to provide that on the contractor's insolvency, the contract is either automatically terminated or the employer has the option to terminate. Termination is not often a clear cut decision and whether or not to terminate will undoubtedly come down to commercial considerations (governed of course by the procedures of the contract) and how long, costly or possible it may be to get a replacement to perform the tasks that the insolvent contractor was doing or self deliver them.

Securing the chain

Securing and protecting the site and materials on an insolvency will also be of paramount importance. Projects can quickly fall apart where an unpaid subcontractor or supplier or other creditor seizes materials on site or in other premises in place of their debts. The employer will own all materials incorporated into or affixed to the works but if title in other materials has not passed to the employer he may find himself liable to the owner for wrongful interference or conversion if he tries to take possession of such materials.

Off-site materials can cause even greater problems for an employer. An employer or contractor may be required to pay for goods and materials in advance which are to be kept at the supplier or subcontractor's warehouse until they are used. Employers or contractors should ensure they take measures to protect their investments in such goods. Requiring a vesting certificate from a contractor on payment for such goods is one way of proving ownership of goods in the event that the contractor goes insolvent before the goods are delivered. A vesting certificate confirms that title to the materials vests unconditionally in the employer upon full payment by him and can be used to identify goods and materials as properly belonging to the employer at a later date.

However, some supply arrangements contain "retention of title" clauses which entitle the supplier to retain ownership of the materials until full payment by the contractor is received. If the employer has paid the contractor but the contractor has yet to pay the supplier, the protection of an employer's vesting certificate may be more theoretical than practical. Perhaps the most effective protection is to require an off-site material bond from the contractor. Essentially an on demand bond, an employer could call on the bond and be paid a sum equal to the value already paid for such materials. Alternatively, an employer could register a floating charge over plant, equipment and unfixed materials to avoid a contractor's insolvency practitioner having a claim over them. This should be done as soon as possible, before the warning signs of insolvency, or there is a risk that it could be avoided under insolvency law.

Is an employer still required to pay?

Under some standard form contracts, and now confirmed in statute, an employer can withhold payment of sums due to a contractor in the event of the contractor's insolvency. This is the case whether or not the employer serves a pay-less notice on the contractor but an employer should not withhold payment pre-emptively as this would amount to a repudiatory breach by the employer entitling the contractor to terminate the contract instead.

Even if not paying the contractor, an employer might want to retain subcontractors on the works to minimise delays. Employers should consider entering into direct contracts with subcontractors. Subcontractors are, however, likely to require the employer to pay any outstanding sums due for work done which the insolvent contractor is yet to pay. In this case, or indeed with any contractual right to make a direct payment to a subcontractor, employers should be wary of having a double liability to pay the contractor in addition to the subcontractor and infringing insolvency laws. Some employers might make a commercial decision in this regard and much will depend on the nature of the project and how necessary it is to do a deal to see that the works are completed. Seeking an agreement from the relevant subcontractor that he will repay any amounts paid if such payments are subsequently found to be unlawful might be a useful protection for an employer.

Conclusion

Whilst insolvency might regrettably be the end of the line for some contractors, it doesn't have to be for your construction project. Careful planning and preparation from the outset by including the necessary clauses in your contract, obtaining bonds and collateral warranties, carrying out financial checks and securing charges over off-site goods and materials will all help to minimise the repercussions of contractor insolvency. Be alert for warning signs such as a slow-down in the progression of the works, an increase in the number of defects in the work, subcontractors not being paid and plant and equipment "disappearing" from site. Don't make any arrangements with insolvency practitioners before obtaining legal advice and always consult your contract before taking action. An employer shouldn't be afraid of saying goodbye to his weakest link. The chain may well be stronger as a result.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions