Page 31

RCI March 2018

Project1_Layout 1 07/05/2013 CONTRACTS IN FOCUS As the dust starts to settle on Carillion, nobody yet knows how many companies will be affected by the liquidation of the multinational facilities management and construction services company. The true numbers will not become apparent for some time, although few doubt that many thousands of smaller construction companies will lose substantial sums. Most of my clients are small to medium-sized sub-contractors. They are the engine of the construction industry and are responsible for getting the work done. Whilst they are unlikely to have contracted with Carillion directly, many will have contracted with companies that look to the company for payment. Construction contracts are all about passing risk, and unfortunately, the possibility of a highprofile liquidation has been anticipated in many standard form and bespoke contracts. Several sub-contract terms and conditions will include a clause, which says that should the employer, or whoever is responsible for paying the contractor, becomes insolvent, the contractor will only have to pay the sub-contractor if it receives payment for the sub-contractors’ works from its employer. Quite how a sub-contractor is to prove that a contractor has received payment for the works it has undertaken is not explained. The reality is however, that following the liquidation of an employer, the likelihood that a contractor will 028 MARCH 2018 RCIMAG.COM How do you protect a business when faced with a ‘Carillion’ situation? David Jackson, solicitor and founder of the National Legal Consortium, explains all to RCI readers receive any further payments are very slim, and so the question of whether any payments received include sums properly due to a sub-contractor is largely academic. The use of such a clause is the only exception to “pay when paid” clauses, which are otherwise outlawed by section 113 of the Housing Grants Construction and Regeneration Act 1996. If there is no such clause, then the subcontractor is still entitled to payment from the contractor in the event of the employer’s insolvency, although whether the contractor will have the money to pay is another question. It is important to distinguish between claims falling due before the insolvency of the employer, and those arising after the insolvency. The contractor cannot rely on a “pay when paid” clause to refuse to pay sums, due under an application that should have been paid before the employers insolvency. The right to payment had arisen before the employer’s insolvency and is unaffected by the insolvency. Collateral warranty The reality is however, that many small subcontractors will never get paid for their works unless the responsibility for payment is taken up under a collateral warranty. Although sub-contractors often resent, and are suspicious of collateral warranties, they may be a lifeline in the event of an employers’ collapse. Funders with the benefit of a collateral warranty often have “step in rights”, entitling them to assume conduct of a project, and to pay contractors and sub-contractors directly to ensure that the project is finished. If a funder exercises such rights, it will be responsible for the contractor’s or sub-contractor’s costs for the remainder of the project and, depending on the circumstances and the warranty, for all sums that might be due, but have not been paid before the funder assumed conduct of the project. Many people were surprised at the speed of Carillion’s collapse. The company went straight into liquidation and did not enter into administration as many commentators had anticipated. It would have been difficult for any company trading with Carillion to protect itself once the wheels had started to come off. If there is a lesson to be learned, it must be that small sub-contractors have to be careful not to take on too many contracts for any one contractor. I have seen many sub-contractors whose customer base consists of one dominant supplier. If a sub-contractor works for one dominant supplier, it can find it difficult to take steps to obtain payment for fear of offending its paymaster, and any disruption in the relationship can have far reaching effects, often out of proportion to the issues in dispute. If a large contractor fails, as happened to many in 2008, and to Carillion, those sub-contractors who have accepted too much work from the contractor may well fail with them – through no fault of their own. The other issue that the failure of Carillion highlighted was the unfair nature of the terms that the company was imposing on its supply chain. Unfortunately, many contractors and subcontractors are often unaware that they face 105- day terms until they are not paid at the end of 30 days as they originally expected. Similarly, other clauses in contracts effectively render adjudication impotent – so depriving the small contractor of what is often the only practical and affordable method of securing payment in the event that they are not paid. Sub-contractors and contractors should have the densely typed contracts they are presented with by larger employers, reviewed by a construction lawyer before they sign them so that they are aware of the difficulties they face before they commit to a contract. www.nlcuk.net


RCI March 2018
To see the actual publication please follow the link above