Benjamin Connor Kuits

COMMENT | Carillion collapse: Where does this leave private sector contracts?

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After the collapse of construction and facilities management giant Carillion earlier this week, the Government announced it would provide funding to maintain public services due to be carried out by the contractor. However, it is clear that this is not a rescue mission, writes Kuits Solicitors’ head of construction, Ben Connor.

The impact of a construction company the size of Carillion entering into compulsory liquidation is hugely significant for the construction industry and will continue to send shockwaves through the sector. The concern is that the fallout from this is not only likely to have an instant impact, but also a more long lasting effect on the economy, particularly with Brexit and all of its associated uncertainty on the horizon.

The North West is by no means immune from such a fallout given the number of local major developments Carillion has been involved with, such as the University of Manchester Fallowfield campus redevelopment, Angel Gardens and Airport City.

The concern is not just for part-built developments, but also for recently completed projects such as One St. Peter’s Square, for which the owners and occupiers have lost their warranty protection from the main contractor.  Without doubt the employees of Carillion face an uncertain future and there is understandable concern and sympathy for all those affected.

There is already speculation as to the “next Carillion”. Could this insolvency be the first of many, leaving the cranes that currently dominate the Manchester skyline to gather dust?  In my view, such a domino effect is unlikely. Details are slowly but surely emerging that paint an unfortunate picture as to the efficiency, policies, accounting and working practices of Carillion.

There will no doubt be more awkward questions to answer for those at the helm of the company and in Government.  Such a high profile insolvency feels ominous, but there may be light at the end of the tunnel for contractors and the industry as a whole.

Carillion were prolific in the public sector. Notwithstanding contradictory statements, it is becoming increasingly clear that the liquidation is not any kind of rescue mission. But, in my view, the abandoned public sector work will hit the taxpayer, and not the industry, the hardest. The insolvency feels like a hurdle as opposed to a complete block to the Government’s marquee developments.

Conversely, each private sector contract will turn on its particular set of facts and contractual position.  Whilst developers may feel the pinch (particularly if the rumours as to Carillion’s tender pricing are to be believed) it is not my view that projects will stall to a great extent, leaving obvious opportunities for rival contractors.

What is certain, however, is that a multitude of issues are now likely to arise for those who are party to private sector contracts with Carillion with key issues relating to project continuity and payment. The following practical and technical questions are also likely to arise.

Termination of existing contracts: Whilst each contract will be drafted on its own terms, a common position within the industry is for insolvency to be a trigger event for contract termination.  This can be a vital step for developers, particularly where a project has not yet reached completion.  If the correct procedures are followed, termination for reason of insolvency can allow payments against the remainder of the contract sum and, in certain cases, even payment of outstanding invoices to be ‘put on hold’ until the full impact of the insolvency can be assessed and realised for the project in question.  Termination may also allow the developer to receive all design information and related data produced to date by the contractor, which can be vital in ensuring the successful completion of the project.

Enforcement of security such as performance bonds, guarantees and collateral warranties:  Each of these are mechanisms designed to ease the impact of losing a main contractor to circumstances such as insolvency.  Their use will have been decided prior to the termination event but it is essential that the documentation in place is thoroughly reviewed.  A complete understanding of all contractual documents in play will allow the party affected by the insolvency to properly assess its options going forward.

Need for defects liability insurance:  With the main contractor insolvent (particularly if the building contract has design and build obligations) the main method of recourse for a developer should defects arise with the project has been lost.  Whilst insurance arrangements such as latent defects policies can be prohibitively expensive, they are an option that should be explored.  With such a policy in place, the gap in protection left by the building contractor’s insolvency can be filled to an extent.

Insurance position:  It should be assessed which party had contractual responsibility for insurance arrangements at the site and for the build.  Steps should be taken if this responsibility sat with the contractor.

Site security position:  To both protect the assets on site and to ensure the safety of the public, any developer should take immediate steps to ensure the safety and security of the site and its surroundings.

Ownership of materials on-site: Contractual terms will need to be assessed to establish the ownership position for materials on site (being both those materials that have now formed part of the building works and the contractor’s equipment, such as scaffolding or machinery).

Financial obligations:  Both developers and sub-contractors must act quickly to establish the financial position of the project.  For the developer, Pay Less notices must be considered to protect any outstanding payments and the termination of the contractor’s employment pursuant to the building contract must be considered as noted above.

Relationship between the employer/developer and the contractor’s sub-contractors:  With the insolvency of the main contractor, the relationship between the developer and the sub-contractors on the project becomes vital (particularly where such sub-contractors hold a design or material responsibility).  Both parties may view working together (with the developer essentially ‘stepping in’ to the role of contractor) as the sensible way forward but care must be taken should this route be chosen.  It is essential to assess and understand the contractual position before such a decision is made or there could be negative financial consequences for both a developer and for a sub-contractor.

If you are party to a contract with Carillion plc, or any other insolvent construction company, we have a team of experienced construction and insolvency lawyers led by our head of construction, Ben Connor, and supported by specialist insolvency solicitor Vanessa Stuart.

We will be able to advise you on your position and provide strategic and commercial advice on how to move forward. Contact Ben Connor on 0161 838 7820 / benjaminconnor@kuits.com for more information.

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