Cash management – what you can do if your main contractor collapses
The liquidation of Carillion has highlighted the importance of cash resources in the construction industry. Suppliers should be reviewing their contracts to find out where they stand, should one of their major contractor clients collapse, says Michael Woolley.
When any major contractor collapses, the situation creates a major headache for its clients, but it is “life-threatening” for those on the downstream side of the supply chain such as subcontractors, consultants and suppliers.
If you are such a supplier, the first step is to review your contracts. They will be the starting point, both up and down the chain, for assessing what will happen. Below is a brief look at some of the key points.
Termination. As a matter of general law, the insolvency of a main contractor would not be a breach of contract or a ground for termination. Many contracts deal with this aspect specifically and may provide that termination is automatic or happens on the giving of notice.
If the contract does not deal with it, failure to pay sums that are due by the final date for payment may be sufficient breach to give grounds for termination. Many parties will, however, have entered into contractual arrangements (commonly in warranties) prohibiting immediate termination so as to allow others (commonly funders and employers) to step in and take over the contract.
Suspension. As a supplier, you are likely to have a right, subject to notice, to suspend work because of non-payment. If you can suspend, this may give you time to consider your position and that of your own suppliers.
Payment. It is unlikely that a contractor going into liquidation will pay suppliers on time for work done before this. Insolvency represents an exception to the general rule under the Construction Act prohibiting “pay when paid” clauses.
If the liquidated contractor does not pay, then, subject to the incorporation of suitable clauses and the giving of suitable notice, the supplier may not have to pay down the chain.
Ongoing work. In the event that the liquidator of a stricken contractor wishes to continue at least some of its contracts, that will require the support of subcontractors. There may be good commercial reasons to carry on with the subcontract (for example risk of liability down the chain).
Care will need to be taken negotiating with the special managers appointed (in Carillion’s case, PWC) to ensure that payment for post-liquidation work will be made. The right to payment as an “expense of the liquidation” affords some priority over unsecured creditors, but is not a guarantee of payment.
Insurance. Main contractors commonly take out all risks insurance to protect parties, including subcontractors, from perils such as fire, flood and storm and this provides a code for such risks. Going forwards, particular care will need to be taken to see that such cover remains in place.
Even if these points are addressed, other issues commonly arise in the circumstances of “up chain” liquidation. These commonly relate to any “property” rights a supplier may have.
Retention of title. A supplier whose materials have not been paid for may be entitled to recover them. Construction has always been a difficult area in this respect, one of the reasons being the need to pass title up the chain to gain payment for unfixed materials (whether on or off site). One point to watch for is the risk that materials not yet used in the project will become incorporated.
Intellectual property. Designers and design and build contractors may have intellectual property rights in their designs which may allow them to prevent use in circumstances where they have not been paid. Contracts and warranties, however, commonly give licences to other parties which will defeat a claim to prevent use of the designs. Some licences are conditional upon payment, some are not. Check your contract.
Claims. Claims for which Carillion was insured will likely continue to be dealt with by its insurers, though any excess owed by the liquidated contractor may be irrecoverable. Contractual claims (such as those for delay or disruption) will either have to be agreed or proven and then may form part of a claim in the liquidation.
Set-off. In liquidation, where there are mutual debts, these are usually set off against each other. Again, contract wording may have an effect.
Michael Woolley is a partner at law firm Hill Dickinson