Following the temporary restrictions on winding-up petitions brought in under the Corporate Insolvency and Governance Act 2020 being lifted, as Jatinder Garcha sets out, we are left with a contracting market still working its way through the ripples of Brexit, Covid-19, labour and material shortages, price fluctuations and just about the toughest Professional Indemnity insurance market we have seen.
With the prospect of insolvency related terminations of building contracts taking place over the coming months, this article considers some of the implications of taking over and completing a half done construction project.
Patience is golden
Seeing your completion date drift further and further away is frustrating and can trigger knee-jerk reactions. Employers need to be very careful not to instruct another contractor to undertake works that are already contracted to the existing contractor under a live building contract.1
All of the formalities and notice requirements for terminating the building contract must first be met before instructing a third party to undertake such works – failure to do so will almost certainly put the employer on the wrong end of a repudiatory breach of contract argument from the existing contractor.
Mitigation of losses
Employers are under a duty to minimise their losses and avoid taking unreasonable steps that increase their losses. There is a good argument that early engagement of a third party to assess procurement options and assist in supply chain management for completing the project would fall under this heading. Such appointments do, however, need to be carefully worded.
Performance security can soften the blow of what is often an expensive transition.
A 3 to 5% retention will usually be held by the employer and, increasingly, the JCT's fiduciary obligations in respect of retention are deleted, meaning this sits in the employer's back pocket.
Performance bonds should be checked carefully and typically provide security for up to 10% of the contract sum. The go-to bond in the UK market is the Association of British Insurers' form. This is a default bond giving the employer an entitlement to recover damages only once the contractor becomes liable under the building contract. In cases of contractor insolvency, the employer's losses are unlikely to be ascertained until the works are completed, meaning recovery can be delayed. As a result, we have seen an increase in clauses being inserted into the JCT whereby, on termination for insolvency, the employer is able to forecast its likely losses and recover them immediately as a debt on the basis it will repay back to the contractor any overcharge once the project is completed. This provides a quick means for the employer to get its hands on money to complete the project.
Under the JCT, contractor insolvency is a termination right but not an automatic breach of contract. Bespoke amendments are, therefore, made to the ABI form of bond so that any debt or other sum payable under the building contract following insolvency is recoverable under the bond.
Parent Company Guarantees ("PCG") can provide added security against subsidiary companies. The drafting of the PCG needs to be checked carefully; the preference for an employer (but not the guarantor) is always for the PCG to be drafted as a primary obligation independent of the building contract. This allows the employer to claim directly against the guarantor without first having to pursue the contractor.
Supply chain engagement
In an insolvency scenario, often the supply chain will not have been paid by the contractor and will be owed money. Appointing the supply chain usually becomes more of a commercial horse trade to get the job done. That said, collateral warranties should be checked to ensure the extent of any "step-in" rights, allowing the employer to step in and pay any sums due to the sub-contractor and complete the project under the terms of the sub-contract. This has the potential to preserve existing warranties and guarantees; however, the danger is always that the employer is stepping into a contract riddled with claims.
The standard provisions of the JCT allow for the employer to request the assignment of the benefit of any contract for the execution of work and/or goods and materials, so far as they are capable of being assignable.2
However, standard provisions of this nature have come under increased scrutiny following a decision where the Court3 held that the assignment of a sub-contract from the contractor to the employer on termination of the main building contract transferred the benefit of all accrued and future rights, leaving the contractor with no contractual claim against the sub- contractor. Going forwards, contractors will be wary of such provisions and will, no doubt, look to expressly qualify the basis on which such assignments take place, i.e. only the future benefit of the sub-contract is to be assigned.
Appointing the incoming contractor
It can be tempting to want to appoint the incoming contractor on the same terms to finish off the same job. The big question is always what, if any, liability is the incoming contractor expected to take for the existing contractor's works? This discussion is often linked to the engagement of the existing supply chain and the extent to which the incoming contractor is getting their full warranty for works undertaken to date. As is always the case in construction, taking on additional risk comes at a premium.
It is always advisable for a full condition survey of the site to be undertaken at the time of termination. Not only can this assist the employer in its claims following insolvency, often the condition survey can be used as a contractual 'benchmark' with the incoming contractor. Where the incoming contractor is not willing to warrant all of the works (including latent defects) done before it, a common compromise is that it takes on liability for what was reasonably foreseeable to a competent contractor based on a site inspection and the condition surveys provided to it.
Alternative procurement options?
When a procurement route has not worked once, it is surprising how often a party will be willing to try it again. Design and build procurement by its nature seeks to allocate enhanced risk to the contractor and comes at a premium.
Depending on the nature and the status of the project, a construction management procurement route can be an effective option for completing the project. Here, the key sub-contract packages can be taken on as Trade Contracts directly by the employer that are then managed by the construction manager. This option can come with big cost and time savings when taking over a complicated and part-completed project, even though the employer takes on more risk directly and obtains less price certainty than through a design and build approach.
1. Sweatfield v Hathaway Roofing (1997) CILL 1235
2. See for example JCT Design & Build Contract 2016 Clause 126.96.36.199
3. Energy Works (Hull) Ltd v MW High Tech Projects UK Ltd and others  EWHC 2537 (TCC)
This article is taken from Fenwick Elliott's 2021/2022 Annual Review. To read further articles go to Fenwick Elliott Annual Review 2021/2022
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.