Building Contractor Insolvency: help beyond the routine checklist

If your contractor falls into insolvency, there are a number of immediate actions that an employer ought to address. These include checking: payment terms; performance bonds or parent company guarantees; site security; step-in rights; design rights; and the termination provisions under the contract. Here are three additional things, often overlooked, an employer should consider when its contractor becomes insolvent:

1.Don’t abandon hope of a recovery - is there relevant insurance?

If the contractor insures the works, the policy is taken out in ‘joint names’ giving the employer the status of an insured party with rights to make a direct claim under the policy. However, in a design and build contract or a contract with a contractor’s designed portion, the contractor may also maintain professional indemnity insurance (PII). Under this PII policy the employer will not enjoy the benefits of being a joint insured. In August 2016, the Third Parties (Rights Against Insurers) Act 2010 came fully into force. By using transferred rights under the 2010 Act and suing the insurers directly, an employer could recover full losses (subject to the terms of the insurance policy) instead of being restricted to a pro rata dividend from the insolvent estate. Under the 2010 Act an employer can bring a single claim against the insurers to establish both liability under the policy and the claim for quantum itself. The 2010 Act gives an employer rights to demand information, with a 28 day response period, from the insolvent contractor and its insurers (that could even include the insurance broker). In the context of PII, this is particularly useful as it can allow the employer to establish whether the claim has been notified and whether the insurers accept the claim falls within the policy terms.

2. Don’t forget off - site materials

If payments for off-site materials have already been made, check any contracts for purchase for off-site materials. A typical Scots law building contract includes sale of goods provisions and service obligations. Title to the goods (construction materials) only transfers when the goods are delivered to site and incorporated into the works. This differs from the English law approach, where title can pass without the delivery and incorporation requirement, you see this difference reflected in the SBCC and JCT standard form contracts. Purchased materials under these contracts for purchase should be clearly identified, stored separately, insured and capable of being released to the employer without a fight.

3. Don’t delay the final reconciliation

If you complete the works, after contractor insolvency, the obligation to issue a final reconciliation: a clause 8.7.4 certificate/statement (SBCC 2011 & 2016 Editions) still remains. It’s easy to forget – but revisiting this long after the making good of defects, on receipt of a letter from the liquidator or his appointed agent, out of the blue, claiming monies under the contract, can be a logistical and costly challenge. The best advice is to start preparing the clause 8.7.4 certificate/statement as the project moves towards the end of the rectification period, that way you have the professional team on hand and the records readily available.

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