Guarding against your construction team’s insolvency
Our Construction team is led by partner, Lorna Carter. Lorna specialises is both construction dispute resolution and the drafting of documents for construction works. In particular, we work with a variety of education providers, from schools and academies to universities and colleges and independent schools advising about their construction-related issues.
Recently the impact of the demise of major contractor Carillion has once again hit the headlines and in this briefing, we look at the contractor and other construction team insolvency, its impact and steps to protect again it.
Construction companies do of course become insolvent from time to time in any event. The most notorious in recent years is Carillion which has left some in the education sector at a loss. It was recently reported in Construction News* that Carillion has left a school facing £5m for remedial works in relation to a project worth £2.7m.
Background of case
Carillion carried out the work at Russell Scott Primary in Denton in 2015. Problems were reported by the School soon after completion and £670,000 was spent by them on structural issues alone. An estimate of £5m for the remedials was estimated by the local council, but with the caveat that this might not cover everything needed.
Other Carillion projects
Carillion’s demise has also caused problems with efforts to fix problems with the glass facade on Beetham Tower, also in Greater Manchester. Carillion built what was then the city of Manchester’s tallest tower in 2006. Inspections of the tower in 2014 found some glass facade panels were loose because the sealant used was failing and needed to be remedied. Carillion carried out a temporary fix, but went insolvent before a full resolution was achieved.
The eye-watering sums involved in the School case are a salient reminder to see that any caps on liability or indeed any Professional Indemnity insurance provisions in any building contract or consultants’ appointments reflect the genuinely pre-estimated potential losses as opposed to the project value.
Changes to the current ban against insolvency procedures
On 9 September 2021, the Government announced that the current moratorium on insolvency procedures (including the use of statutory demands and presentation of winding up petitions) under the Corporate Insolvency and Governance Act 2020 (“CIGA”) will be replaced with more limited restrictions until 31 March 2022. The new rules will come into force from 1 October 2021.
This announcement means the temporary measures brought in to support businesses from creditor enforcement action during the pandemic (which we wrote about here) will be phased out from 1 October 2021. You can read our Disputes team’s full update about the changes here.
It is thought that there might be a rash of insolvencies, including within the construction sector; as a result of problems stored up through Covid or more generally, in particular where debts are over £10,000. For example, those who have used the moratorium as a lifeline will find that pulled away.
The materials shortage arising partly as a result of Brexit and partly by the lack of drivers in the haulage industry – itself not helped by IR35, have together with Covid created a bit of a perfect storm. So how else can one protect oneself in relation to the potential insolvency of a protagonist on major project works?
Consideration should be given amongst other things of course to:
- Upfront payments for long lead in items being secured by vesting certificates to see that ownership of off-site goods but not the risk in those goods passes upon payment by the Employer.
- Due to consideration of the insurance provision of the contract/appointment and any caps on liability
- The cost of obtaining a performance bond versus the likelihood of insolvency
- Obtaining the security of the parent company or other guarantees
- The provision of timely pay less notices
- Retention percentage at the appropriate level
- Appropriate due diligence on the contractor and consultants at the outset
There is never going to be a get out of jail card for free for issues such as insolvency as they can and do happen in the most unlikely of cases, so it is a case of minimising the risk by considering the above tips and layering protection as well as a measure of luck.
If you have concerns about the continued viability of a contractor, consultant or other construction team protagonist or you are considering starting a new construction project please do get in touch with our highly experienced Construction team.
*on 8 September 2021 see www.constructionnews.co.uk
This update is for general purposes and guidance only and does not constitute legal or professional advice. You should seek legal advice before relying on its content. This update relates to the prevailing circumstances at the date of its original publication and may not have been updated to reflect subsequent developments. If you have general queries about our updates, please email: firstname.lastname@example.org