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Insolvency within the supply chain in the construction industry and what to do about it - Part Four

Posted: 12 Aug 2020

Part Four

 

Introduction

This week in our series on insolvency within the supply chain in the construction industry, we look at what practical and legal steps an Employer (or a Main Contractor in relation to its subcontractors further down the supply chain) can take once the contract has been signed to minimise the impact of any potential insolvency in the supply chain.

References to “Contractor” can also be read to include references to “Subcontractor” in the context of a relationship between a Main Contractor and its subcontractors.

Practical Steps

Some of the practical steps that an Employer can take after contract signature include:

  • Look out for warning signs:
    • Keep an ear out for ongoing rumours regarding the Contractor’s financial position;
    • Look out for official announcements to shareholders or the stock market (if a plc);
    • Is the Contractor in culpable delay?;
    • Has the Contractor continued to maintain labour resource at an appropriate level for the works being undertaken?;
    • Be aware of any redundancies or inexplicable removal of personnel from the project by the Contractor;
    • Have there been any noticeable issues with the supply of plant and materials required for the works to be undertaken by the Contractor?
    • Undertake a credit search on a regular basis and get automatic updates.
  • Operate an “open door” approach to Contractors who may give early warnings if they are having difficulty getting paid;
  • Consider whether there are any key members of the Contractor’s staff who should be retained due to their knowledge;
  • If the Contractor gets into culpable delay during the project, consider the deduction of preliminaries for the extent of the delay, or reduce preliminaries on a pro rata basis to meet the delayed completion date.
Contractual steps

Once the contract is up and running and there are warning signs of an imminent insolvency, the Employer may want to consider whether it would be appropriate to instigate an adjudication to sort out any disputes for the following reasons:

  • Adjudication can be a powerful tool to maximise cash recovery in an imminent insolvency situation;
  • Disputes are resolved quickly and the Contractor, should it be required to pay sums to the Employer (or vice versa), will have very little recourse to overturn the decision of the adjudicator unless effected through a further binding dispute resolution process, such as through the courts or arbitration;
  • The short timescales of the process mitigate against a detailed and forensic review of the underlying claims if they are substantial.
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However, it is crucial that such action is taken at the right time, as adjudication is of little use once an insolvency practitioner is appointed.

The Contractor should also be required to comply with any contractual requirements regarding the provision of financial information and accounts.

Conclusion

Although Employers will hopefully have carried out a thorough due diligence exercise on any potential Contractors and taken the recommended practical steps prior to entering into a contract with a Contractor and inserted the relevant contractual protections, there are still some things that Employers or Main Contractors can do post contract signature as set out above that will assist further in minimising the impact of any insolvency.

Please note that this article does not constitute advice. For advice on insolvency in the construction supply chain and further information on any of the issues addressed in this article, please contact Elizabeth Vago, Construction, Engineering, Infrastructure and Energy partner, at Spencer West LLP elizabeth.vago@spencer-west.com.


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