Carillion Fallout: What Can Be Done To Protect Your Clients’ Businesses?

After the news that Galliford Try is feeling the pinch following Carillion’s collapse earlier in the year, our Dispute Resolution team look at some ways to protect clients involved in construction contracts, both at the stage of contracting and in the event of the insolvency of a contractor.

Things to advise your clients when contracting:

Employers should:

1. Ensure that their contract allows a right to step in and take over a contract where a contractor has failed; and
2. Ensure that their contract allows for termination on the insolvency of a contractor.

Sub-Contractors should:

1. Include a retention of title clause in their contracts;
2. In larger contracts, seek security for payment when a contractor becomes insolvent, such as bonds or guarantees and
3. Where possible, seek up-front payment and, at the very least, have a streamlined process for payment that is followed up and actioned quickly in every instance of late payment.

Things to advise your clients after the insolvency of a contractor:

Any business affected by the collapse of Carillion can make use of the HMRC’s Business Payment Support Service.  This service can allow a little more flexibility than is usually afforded by HMRC when recovering tax liabilities.  It can also provide workers and their families with support through the tax credits system.  Details of this service are available here.

Further, efforts have been made by MPs and Ministers with the UK’s main banks to try to ensure that support will be lent to small businesses affected by Carillion’s liquidation.  RBS announced their own fund to support such businesses.  There is an expectation that these, and all, banks in the UK, should recognise the difficulties faced by small businesses and afford more flexibility in repayment terms.  If any of your clients has been affected, you may want to advise them to contact their funders as soon as possible to discuss the impact of Carillion’s collapse and to discuss repayment terms.

More generally, Employers should be advised to:

1. Suspend or terminate as soon as possible;
2. Exercise their step-in rights or rights under collateral warranties if that is desirable;
3. Withhold payments as far as possible within contractual terms to take account of the further costs to be incurred as a result of the insolvency;
4. Consider whether they have to tell their funders or other investors and whether this triggers any default provisions with them, and be sure to check any insurance policies; and
5. Compile a thorough record of the works as they are at the time of insolvency.

Sub-Contractors should be advised to:

1. Try to negotiate directly with the employer to find out if it is possible to continue work on the project;
2. Consider the exercise of any rights to suspend or terminate the contract if no further payment is likely;
3. As with employers, consider whether they have to tell their funders or other investors and whether this triggers any default provisions with them, and be sure to check any insurance policies; and
4. Check the retention of title clauses in their contract and the contract of any sub-suppliers to be aware of any rights they may have against the insolvent company or that may be brought against them.

If you would like to discuss any of these issues, please contact the Dispute Resolution Team.

Disclaimer 
The matter in this publication is based on our current understanding of the law.  The information provides only an overview of the law in force at the date hereof and has been produced for general information purposes only. Professional advice should always be sought before taking any action in reliance of the information. Accordingly, Davidson Chalmers LLP does not take any responsibility for losses incurred by any person through acting or failing to act on the basis of anything contained in this publication.