There is no doubting that the Global Financial Crisis
(GFC) has had a major effect in the construction
industry worldwide. While significant infrastructure spending has
recently been allocated by the Federal Government, the Australian
construction industry is not immune from the global economic
In fact, recent figures released by ASIC show that the number of
insolvency appointments for the month ended 31 March 2009 totalled
1590 nationally. This is a significant increase of about 33% on the
1193 insolvency appointments recorded for the same time last year.
A number of these insolvency appointments have been related to the
construction industry and the insolvency of a Principal or
Contractor during the course of the project, can often spell
disaster for the other party.
As a result, there are a number of steps that can be taken by
both Principals and Contractors to not only minimise the risk of
insolvency of the other party, but also to reduce the damage caused
once insolvency arises during the project.
Lessons for Principals
The Principal on a project may consider the following steps:
Inserting effective insolvency clauses into the
Contract – The Australian Standard forms of
contract can be amended to create greater rights for the Principal
in the event of a Contractor becoming insolvent.
Putting collateral warranties into the Contract
– Such warranties may allow Principals to pursue
subcontractors directly for a breach of a warranty under the
Introducing milestone payments into the Contract
– Milestone payments create an incentive for
Contractors to achieve milestones in order to obtain payment.
Obtain sufficient security from the Contractor
– In these times, Principals often seek
additional security from the Contractor to cover the risk of
Lessons for Contractors
The Contractor on a project may consider the following
Obtain security from the Principal –
A Contractor may seek to obtain security from the Principal on
projects where there are high risks involved.
Principal Guarantor – A Contractor
could seek to have the Principal enter into a Deed of Guarantee
where the Guarantor would guarantee the Principal's obligations
under the project in the event of insolvency.
Reduce times for payment –
Contractors can obtain better cash flow on a project by reducing
the certification and payment process under the Contract.
Use the security of payment legislation
– Contractors have increasingly utilised the
security of payment legislation against Principals to obtain a fast
track payment where the Principal refuses to pay the full
Overall, the prevention is the best cure and an effective
Contract at the commencement of the project can avoid heartaches
later on. More importantly, Principals and Contractors should be
aware of who they are dealing with by making the appropriate
enquiries prior to entering into a contract.
The above steps are not exhaustive and it is recommended that
contracting parties seek legal advice so that all options can be
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.
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