Construction insolvency and standard forms of contract

During times of economic hardship, there will always be some services and sectors that thrive. Unfortunately, in regards to the construction industry, the sector that is currently experiencing a boom time perhaps more than any other is the one dealing with insolvency. As more and more companies operating in the building market struggle to stay afloat, insolvency practitioners are experiencing an abundance of insolvency-related instructions arising from the beleaguered construction industry.

For investors in the industry, this can be highly frustrating. However, by taking time out to investigate the form of contract and researching the appropriate terms and conditions appertaining to the contractor’s insolvency, the recovery of debts can be maximised.

Once an insolvency practitioner begins to investigate a claim, first and foremost, they should dedicate some time to investigating what particular forms of contract the various projects are under. They will need to become familiar with the relevant clauses appertaining to insolvency and thoroughly examine set-off claims. Doing this sort of background preparation can be time consuming, but will pay handsome dividends in the long run.

For the purposes of this article, the contracts referred to will be those that have been executed using the Joint Contract Tribunal (JCT) Intermediate Form of Contract 2005 edition (IFC 2005). This is commonly-used form of contract used by the construction industry when a contractor is undertaking works for an agreed lump sum.

Terminating employment, but not the contract
The IFC 2005 contains a useful definition of insolvency in section 8. By this definition, if a contractor is insolvent, under clause 8.5.1 as the employer, you can give notice to the contractor to terminate their employment under the contract. However, it is important to note that the employer can only give notice providing the works have not achieved practical completion. It is also important to realise that, in issuing the notification, it is the contractor’s employment that is terminated, not the contract, which remains in place.

Although, more often than not, it is the employer who will terminate the employment of a contractor, it is good practice for the insolvency practitioner to inform the employer of the contractor’s insolvency as soon as possible. Doing this has two purposes: it satisfies clause 8.5.2 of the IFC and also enables the insolvency practitioner who is overseeing the insolvent contractor’s affairs to make initial beneficial offers post the insolvency. These could include completing the works or assisting with procurement information, all of which will minimise set-off against monies owed.

Completing the works
If as an employer you have has terminated the contractor’s employment, you then have the option whether to complete the works or not. If you decide not to complete, then clause 8.8.1 requires you to notify the contractor in writing within six months from the date of termination. In addition, you are required to send a statement of account within a reasonable period of issuing such notice. This statement is extremely important to the insolvency practitioner, as it provides the employer’s view of the monies due or owed. However, before this statement is accepted, it should be examined by a quantity surveyor. This part of the process can sometimes be omitted which is an error. Without a proper examination from a suitably qualified professional, the accepted statement may be misleading or even incorrect, as often only the trained and experienced eye can detect anomalies.

Where an employer elects to complete a project, under clause 8.7.4, an account will still be due (set out in a certificate) but only within a reasonable time after completion of the works and the making good of any defects. It is therefore vitally important that the insolvency practitioner is aware of all incomplete projects at the time of the insolvency and that the progress and completion of such projects is carefully monitored henceforth.

Statement of accounts
Experience shows that employers can sometimes be reluctant to issue a statement of the account; this is because the valid cost of completing a project is often not enough to completely set-off against the insolvent company’s account. However, as an essential part of the process, the insolvency practitioner will need to ensure that employers, or their agents obtain the relevant proof of cost, so that the documentation can then be checked by an experienced and qualified quantity surveyor.

By examining all of the insolvent contractor’s contracts, abstracting the pertinent information relating to time, progress and payment rules, together with engaging appropriately qualified and experienced contractual professionals to assist in the examination of the costings, the insolvency practitioner can ensure that returns for creditors can be made to their fullest and that the best outcome in a difficult situation is achieved.

Despite some tentative whispers of recovery, things look unpromising for those allied to the construction industry for the foreseeable future. Development investment is floundering and projects at any current stage of development are increasingly facing stagnation. As the nature of our economy has always been cyclical – and will continue to be so – even when the economic tide turns for the better, the issue of insolvency is one that won’t go away. So it pays to be prepared for the worst a situation can be: ensure that the proper process is followed, that paper work is in order and qualified professionals are sought for this complicated matter. Being open with information and helping the correct people get the figures they need very much works for everyone’s benefit in the long term.

Michael Gerard is Managing Director of chartered building consultants and quantity surveyors
Michael Gerard & Co. Visit: michael-gerard.co.uk