Legalaid

When the contractor goes bust

We are a developer for an new office block being built under a JCT98 standard contract. Liquidators have been appointed to the main contractor and we have the following questions:

• What can we do to mitigate loss?

You must find a new contractor in order to complete the office block as close to the original deadline as possible and so avoid increases in financing costs, to say nothing of the postponement of any rental income. However, a new contractor is likely to charge significantly more owing to the time pressure for completing the works and to take advantage of the fact that the employer has little choice but to finish the project quickly. If the replacement contractor is to be responsible for the contractor’s work to date, an additional premium will be payable.

Your contract gives you the right to recover the difference between your original contractor’s costs and the cost of employing a new contractor, but you are unlikely to be able to do this. You could consider retaining key subcontractors to finish the works, as they will already be familiar with them. If sufficient subcontractors will co-operate, you could consider managing the project yourself – if you have the necessary expertise.

You are responsible for ensuring that health and safety regulations are still being complied with on site and that the works, materials and site are protected from outside interference until a replacement contractor is found.

• What arrangements should be made to cover insurance till the project is complete?

The JCT98 provides for either the contractor or the employer to take out a joint names policy for all risks. If the policy ends when the contractor becomes insolvent, you should notify the insurer immediately and either obtain a reinstatement of the policy or a further policy. You must ensure that there is valid insurance until a new contractor takes over responsibility.

• How do we terminate the contractor’s employment?

The contract will be automatically terminated once a liquidator is appointed. As such, there is no need for you to take specific action.

• The project is some weeks behind schedule. Do LAD (liquidated and ascertained damages) clauses survive determination?

In principle, the LAD clauses remain intact and enforceable. However, if the works are then completed by an alternative contractor it is unlikely that you will be able to claim liquidated damages from your insolvent contractor up to the date of completion as they no longer have the power to stop damages from running. However, the terms of your original contract may allow you to recover liquidated damages even if the contract is completed by another person.

In practice, if the contractor is insolvent then the survival of the clauses is likely to provide you with little comfort – unless you need to set off LADs against money you owe the contractor.

• What can I do when subcontractors and suppliers claim they have the right to remove materials from the site and the building?

All “fixed” materials (that is, those that are annexed to the land) belong automatically to the landowner (who may not necessarily be the employer). Any supplier of goods which qualify as “fixed” becomes an unsecured creditor of the insolvent contractor company.

Your contract states that you only own the goods when you pay the contractor. When the subcontractor has supplied materials to the contractor for which the subcontractor has not yet been paid, it has the right to remove them – so long as it has written proof that it supplied them (this is laid down in section 25 of the Sale of Goods Act 1979).

• What if subcontractors refuse to complete their work unless they are paid what they are owed by the main contractor?

Many forms of building contract permit the employer to pay a subcontractor direct if the contractor does not pay them. For this to happen, proper notices must be given to the contractor under the contract; however, the right to make direct payment must be exercised before insolvency. Otherwise, the employer must seek the liquidator’s consent before making a direct payment to a third party, as the contractor’s creditors must each be treated equally. If an agreement to pay directly is in place before insolvency then you must pay.

• The remaining works are the internal finishings and all the services; these were to be carried out by the subcontractors. What procurement path should we choose to complete the project?

If you can manage the project without appointing a main contractor one solution would be to assign the subcontracts to yourself. However, you cannot do this under the JCT98 if a provisional liquidator has been appointed. But, according to the contract, the subcontractors’ obligations to the contractor end with its insolvency, so a second option would be for you to employ the existing subcontractors and suppliers directly, or employ other persons to carry out and complete the works. But you will need to negotiate this with the liquidator and the subcontractors.