Dealing with an Insolvent Contractor

When dealing with insolvency, it is vital for an employer to approach this in the correct manner to limit the impact upon the project, to protect its workers and to mitigate any losses suffered as a result. Employers should first be aware that Clause 8 of the standard JCT 2011 Design and Build Contract deals with termination in case of insolvency.

Insolvency itself is defined under the contract and before any decision on termination is made employers should be advised to check whether the contractor is, in fact, insolvent to eradicate any risk of repudiatory breach of the contract. If insolvency is determined, notice of the contractor’s employment may be terminated by the employer through written notice. 

It is worth noting nonetheless that from the date the contractor becomes insolvent (before notice of termination is given) the contractor’s obligations to continue works are suspended and consequently the employers’ payment obligations over such works. Works can still continue through an agreement between the parties referred to as ‘novation’ to a third party who assumes the obligations of the insolvent contractor.

At this stage, an employer should be advised to take reasonable measures to make sure the work itself, the site or any site materials are protected and remain on site. This should include consideration for security and insurance arrangements given the contractors ‘all-risk' insurance policy will cease after the termination of their employment. Once the contractor’s employment is terminated, employers can employ others to carry out and complete the work, this can include the insolvent contractor's subcontractors if direct agreements are entered into with them. 

Employers can at this stage take possession of the site and the works but should be advised to maintain communication with key suppliers to discuss terms regarding the continued use of materials or buildings. 

Nevertheless, employers should be made aware of their position in rectifying or making good of defects left by the now-insolvent former contractor. Employers should consider the preparation of a statement of account to tally their total expenses reasonably incurred in protecting the site and materials and for any potential loss or damage caused of which the contractor could be liable. If the sum paid to the contractor weighed against the sums paid by the employers in completing the works is greater than that which would have been payable under the original contract the difference may be pursued as a debt against the contractor. 

Given the above, security measures such as parent company guarantees, performance bonds and collateral warranties, should be given consideration as terms of any contract before signing as a means to best protect the employer. 

To ensure that the appropriate steps are taken it is advisable that employers seek independent legal advice as to their position to limit as much as possible the plethora of implications to the business an insolvent contractor can cause.