Construction Contracts, COVID-19 and the Corporate Insolvency and Governance Bill

Coronavirus is like a stormy sea - it’s unpredictable and devastating, and tackling it calls for drastic measures.

The Corporate Insolvency and Governance Bill, which is fast-tracking its way through Parliament, seeks to introduce Section 233B into the Insolvency Act 1986. It will have a significant impact on the standard form termination provisions insofar as a contractor is concerned.

A building contract is a contract for goods and services. Under the standard form building contracts produced by the Joint Contracts Tribunal and in Scotland the Scottish Building Contract Committee, under clause 8.7.3 if the contractor becomes insolvent (administration, appointment of a receiver or winding-up), the employer may by notice terminate the building contract.

Irrespective of whether the employer decides to serve a termination notice, on contractor insolvency three provisions are triggered: the contractor’s obligations to carry on with the works are suspended; the employer can take immediate measures to secure the site and protect the works and materials; and no further sums shall become due to the contractor.

At that point, the only money that a contractor might be paid is the balance due on certified sums where the employer is entitled not to pay in accordance with a Pay Less Notice. Where the insolvency occurs after the last date when the employer could have issued a Pay Less Notice that relevant sum does not need to be paid.

Beyond that the contractor has a long wait for any further payment based on a reconciliation statement: up to 3 months following making good in the case where the project is built out by others; or up to 8 months from the date of termination if the project is shelved. I heard these provisions described as a safe haven for the employer in the stormy sea of contractor insolvency.

If the employer itself becomes insolvent, under clause 8.10 the contractor may by notice terminate the building contract, and he is relieved of his obligations to continue with the works from the date of the insolvency, irrespective of whether or not he serves a termination notice. Like contractor insolvency, there is a reconciliation of the account, but this time the contractor gets his chance to claim his direct loss and damage caused by the insolvency.

The newly-introduced Sub-Section 233B (3) will prevent automatic termination of a contract; and will prevent the contractor from terminating if the employer becomes subject to the insolvency procedures set out in Section 233B (these include administration, voluntary arrangement or liquidation). Sub-Section 233B (4) also prevents the contractor terminating based on an event of default which arose prior to the insolvency and where the right to terminate arises before the insolvency.

There are key exceptions to these restrictions. If an employer falls into administration or liquidation, if the administrator or liquidator consents, the building contract can be terminated; in any other form of insolvency, termination can occur if the insolvent company itself consents to the termination; or if the court is satisfied that the continuation of the contract would cause the contractor hardship.

Sub-Section 233(B) (7) prevents a supplier making payment of sums due prior to the insolvency a condition to their continuing performance. So in terms of a building contract, the contractor would have to keep working whatever sums are outstanding.

While Section 233(B) would operate to exclude a contractor’s right to terminate based on pre-insolvency events of default, post-insolvency events of default could still lead to termination. So, it is likely that any administrator or liquidator would require to pay for work already carried out, failing which a post-insolvency right to terminate could arise.

The guidance to the Bill justifies the new clause on the basis it will “help companies trade through a restructuring or insolvency procedure, maximising the opportunities for rescue of the company or the sale of its business as a going concern.”

The clear concern for contractors, as a supplier of goods and services, is how this Bill will affect their safe haven against employer insolvency under clause 8.10 of the standard form. These changes are not identified as temporary, and will apply equally to sub-contracts.

However, the Bill does contain a temporary exclusion from the operation of section 233 (B) where the affected supplier is considered a ‘small entity’ at the time the employer company became insolvent.

Navigating your way through insolvency is difficult at the best of times, this Bill may make this journey more difficult.