Once an employer / developer, main contractor or sub-contractor has become insolvent, management of the project by whichever entity becomes responsible is paramount. This article will look at the management of a project from an insolvency office holder's perspective, however, our construction specialist lawyers at Trowers & Hamlins LLP have vast experience advising a wide range of clients in relation to insolvency in construction (lenders, developers, employers, main contractors, sub-contractors and construction professionals).
Below we set out some headline considerations for an office holder involved with a project affected by the insolvency of a developer / employer or main contractor.
IP appointed to developer / employer
Termination: It is likely that if a developer / employer has become insolvent, then the main contractor (and any other entity directly appointed by the developer / employer) will have a contractual right to terminate. If a main contractor terminates its engagement as a result of the developer / employer's insolvency, the office holder should first check the termination notice has been validly produced and served. On the assumption that it was, then it may be the case that the developer / employer becomes responsible for the site.
Insurance: Depending on the terms of the main contract, the main contractor may have been responsible for obtaining and maintaining insurance for the site. In any case (i.e. even if the developer was responsible), any office holder appointed to the developer / employer, reviewing existing insurance policies to ensure they are not invalidated by the insolvency and/or taking out new policies in the event the pre-existing one was invalidated or that the main contractor's policy has ended is crucial.
Security (+ goods, materials and plant): If the main contractor terminates the contract as a result of the developer / employer's insolvency, when the office holder is appointed and upon termination of the main contractor's contract, the office holder should take immediate steps to ensure the site is safe and secure. This might involve appointing a security company to maintain a presence on site until a new main contractor is appointed, physically changing the locks and ensuring goods, plant and materials are all secure. Vesting certificates should be reviewed to confirm who owns goods, plant and/or materials.
CDM and H&S: The outgoing main contractor likely maintained responsibility for health and safety on site as well as responsibility for compliance with the Construction (Design and Management) Regulations 2015. This responsibility, upon termination of the building contract, will pass to the developer / employer (and potentially office holders appointed to it). Office holders should seek specialist advice to ensure compliance with the CDM Regulations and H&S Regulations – breaches of the regulations could result in fines and/or imprisonment.
Engaging with existing professional team: If the project is to continue (i.e. the office holders is going to procure the completion of the project) then the office holders should seek to engage with the pre-existing professional teams (either by way of new contracts if they have been terminated or by way of novation of the existing contracts / appointments) to ensure continuity and avoid delays.
Obtaining information from outgoing contractor: If the main contractor has terminated its engagement as a result of the developer / employer's insolvency, then there will be vast amounts of information that the main contractor, as part of its obligations under the contract, will have been responsible for obtaining / managing. Office holders should seek to engage with the outgoing contractor to ensure all design information, O&M information, copies of sub-contractor contracts, consultant appointments, for example, have been handed over.
Collateral warranties: Office holders should review whether the outgoing main contractor procured the completion of collateral warranties and check whether the developer / employer has step in rights to procure the completion of the project in the event of the main contractor's termination.
Lenders: Similarly to the process of reviewing collateral warranties in favour of the developer / employer, office holders should check whether a collateral warranty was given to the lender (if there is one) by the main contractor and the terms of any funding agreement. The lender may have step-in rights allowing it to procure the completion of the works and may wish to do so in co-operation with the office holders.
Incoming contractors: Subject to the position as to the project's lender and the collateral warranties, the office holders will want to consider how best to manage the project going forward, which will possibly include the appointment of a new main contractor. This process should be managed carefully and works scopes defined carefully so that any defects issues arising at a later date can be easily reviewed and attributed to that contractor whom carried out those works.
IP appointed to main contractor
Termination: On the main contractor's insolvency entering the public domain, it is highly likely that contracts with the main contractor will be terminated by the other parties (employers, sub-contractors, professionals etc). Office holders should check the validity of those terminations and note the contractual consequences (the entity may be prohibited from recovering any sums that might be due to the contractor until such time as the works have been completed by others).
Site: Termination of the main contract may require the main contractor to do certain things – for example, the JCT Design and Build 2016 edition (unamended) requires the main contractor to remove or procure the removal temporary buildings, plant, tools, equipment, goods and materials belonging to the contractor, provide the employer with copies of design documents, and if required assign any agreement for the supply of materials, goods or contracts for the execution of work. If the building contract has been terminated, non-compliance is unlikely to result in a breach but it does run the risk that the employer will claim losses in the final account arising from the non-compliance so it is in the office holder's interest (to the extent it is required to do so) to provide information requested by the employer.
Direct payments: If a main contractor has become insolvent during the currency of a project, it is likely that sub-contractors and suppliers will contact the main contractor's employer directly seeking payment of unpaid invoices / payment for goods supplied and delivered to site (they may have retention of title clauses they wish to enforce). Office holders should expect to be contacted by sub-contractors/suppliers and/or the main contractor's employer seeking agreement to direct payments being made between the employer and the sub-contractor/suppliers.
Delay: Office holders should keep in mind that as part of a final account process, the insolvent main contractor's contract may entitle the employer to make certain withholdings / deductions from monies that might be due to it (see the final account process below). As such, in circumstances where the employer may be entitled to make certain deductions from monies otherwise due to the insolvent contractor, office holders should do all that they can to expedite matters on behalf of the insolvent main contractor so as to limit any unnecessary delays which may be caused and for which the employer may be entitled to deduct liquidated damages.
Handover of information: In the same way an employer might seek to deduct sums otherwise due for liquidated damages, it may also seek to claim losses from the insolvent main contractor as a result of failure to hand over certain information such as, design documents, O&Ms (to the extent they exist), executed collateral warranties etc. The office holders should review the terms of the terminated building contract and note the main contractor's obligations upon termination in relation to the provision of documentation and information to help mitigate any claims by the employer arising from the same.
Final account: The main contractor's contract will likely include provisions confirming that the main contractor will be due no further sums until the works have been completed by others. Office holders should review the provisions of the main contract to confirm the position and be prepared for the employer to seek to make various deductions from sums that would otherwise have been due to the main contractor.
Collateral warranties: It is very likely that as part of its obligations under the contract, the main contractor will have been required to procure the completion of certain collateral warranties. If this has not been done prior to the point of the main contractor's insolvency.
Lenders: Office holders should review the provisions of a collateral warranty given to the lender (if any) and the terms of the main funding agreement to be aware of any step-in rights and thus be prepared to cooperate with the lenders and the employer.
Incoming contractors: The office holders should check whether the works under the contract are to be suspended and that the contractor would be required to maintain materials on site in advance of a replacement contractor taking over. The contractor should be careful to document what works it has undertaken and the extent to which these works may be considered defective.
In a similar vein to the above points to note, those faced with insolvency issues as part of a construction project will similarly be required to manage those issues above to ensure the project has the best chances of reaching completion successfully.
In relation to each of the above recommendations, please contact us if you require further information or advice as to the ongoing management of a project following an insolvency.
