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What to do if a client winds up insolvent

Construction has traditionally been a high risk industry for insolvency, but most case law and guidance focuses on insolvent contractors.

There is little for contractors facing an insolvent employer. For example, although now out of date, JCT only has a practice note for employers in the event of the insolvency of the contractor. 

With weekly stories of developers being put into administration, there will be numerous contractors considering their next move. Under a standard JCT 2005 contract:

  1. The employer should immediately inform the contractor. 
  2. The contractor may terminate the contract, and his contractual obligations are suspended; as are rights to payment and release of retention.
  3. The contractor should remove from the site any temporary buildings, plant, tools and equipment it owns. 
  4. Even where the contractor has terminated its own employment it must still provide the employer with two copies (without charge) of any design documents.
  5. The contractor should prepare an account setting out:
  • the total value of work completed at termination
  • loss and expense claims
  • removal costs
  • costs of materials or goods paid for or on which payment is due; and
  • direct loss and/or damage suffered because of termination.

In reality, the contractor is unlikely to receive what he is owed and will join the list of unsecured creditors. Even if money does become available, he may only receive a proportion of what he is owed. However, the story need not end there. 

The administrators may decide to continue with the works, or at least make the development wind and water tight, to preserve its value, but due to pre-existing claims and liabilities the administrator will wish to renegotiate a new contract.

This may seem inequitable where the contractor has outstanding payments, but there may be some leverage when negotiating the new contract sum, particularly if the administrator is looking to provide seamless warranties covering both sets of works.

Before signing a new deal, contractors should remember the administrator is only an agent of the employer, and not personally liable for the employer’s obligations, therefore contractors should prioritise financial protection. The contractor should consider negotiating a combination of payment guarantees, advance payments, and payment on delivery of goods.

Also in any new or amended contract, the contractor’s right to terminate on grounds of insolvency will have gone, usually at the insistence of the administrator.

Disputes can also be complex since proceedings against companies in administration can only go ahead with administrator or court consent.

A final word of caution. Contractors should not be overly bullish in negotiations as the administrator may have other options. In the current market there will be other contractors prepared to pick up this type of work.  

Claire Donnelly is a senior associate in the construction and engineering practice of UK law firm Dundas & Wilson.

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