In a construction contract, where a contractor or sub-contractor is not paid its’ notified sum, then section 112 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “1986 Act”) allows them, on seven days’ written notice, to suspend performance of any or all of its’ obligations under the contract.
This right was strengthened by the Local Democracy, Economic Development and Construction Act 2009 to allow the contractor to claim a reasonable amount in respect of costs and expenses caused by the suspension.
Alongside default interest, the right to suspend is a powerful weapon in the contractor’s armoury to secure prompt payment.
Arguably, this weapon has now been blunted by the Corporate Insolvency and Governance Act 2020 (CIGA).
What does the Act mean for construction contracts?
Under CIGA section 233B ‘suppliers’, which will include a contractor supplying goods and services under a construction contract, will be prevented from terminating a contract for supply or doing any other thing because the employer becomes insolvent. The phrase “or to do any other thing” is undefined and is wide enough to catch a contractor’s right to suspend under the 1986 Act.
Insolvency is defined more broadly under CIGA than under a JCT or SBCC standard form contract. The CIGA’s expanded definition of insolvency includes a corporate moratorium and a voluntary arrangement.
In the context of a construction contract, a moratorium can afford an employer under financial stress certain protections from creditor action for a limited 20 business day period, which is capable of extension, to pursue a rescue plan to recover the company as a going concern.
A voluntary arrangement is similar to a scheme of arrangement with a reorganisation of the company’s share capital as supervised by the court. Therefore, because of this expanded definition of insolvency under CIGA, the contractor’s right to suspend is further narrowed.
What are the implications for the contractor?
In a sense it’s a double hit for a contractor. Firstly, they are no longer permitted to suspend the works if the reason behind non-payment is employer insolvency, and doing so or taking any action equivalent to suspension would render them in breach of contract because of the imported provisions of CIGA.
Secondly, any contract conditions which seek to make continued performance conditional on sums owed being immediately paid, or any cost uplift on works or services during the continuation period required by CIGA, will be struck down by this new Act.
What solutions are available?
An awareness of the impact of CIGA is essential. There are certain limited reliefs available.
For example, if the court is satisfied that the contractor or sub-contractor will suffer undue hardship by continuing services due to the CIGA provisions, termination may be permitted.
In addition, certain exceptions apply for excluded companies, certain types of contract and smaller companies.
While the contractor’s armoury may be blunted, the phrase ‘forewarned is forearmed’ certainly rings true.
Written by
Related News, Insights & Events
Performance Security Part Two: Parent Company Guarantees
We are considering recent trends and what these mean in practice. Part 1 considered performance bonds; here we’ll focus on parent company guarantees (PCGs).
Performance Security Part One: Performance Bonds
Performance security is a topic often put to the bottom of the list in construction contract negotiations but is an important consideration for clients and contractors before commencing a project.
Scotland’s national housing emergency: One year on
One year on, Scotland's housing crisis persists - urgent reforms and investments are still needed.
