Every Clause Counts: Navigating Insolvency in Construction Contracts
A construction lawyer’s checklist for insolvency-proof agreements
Every clause in your construction contract counts when insolvency strikes in the supply chain.
The key provisions which give insolvency protection (not just performance) include much more than just the payment clauses:
Performance bonds and parent company guarantees: to ensure that alternative sources of cash are available when needed
Advance payment bonds/guarantees: to ensure that any money paid in advance can be recovered in the case of insolvency
Retention monies: so that defects can be repaired at the end, even if the repairer is not around to do it
Warranties: to ensure that subcontractors and suppliers will come and fix their parts of the project
Ownership of materials/equipment: to ensure that things brought on site to do work can be kept at work until the job is complete, even if their owner runs out of cash
Direct payment rights: so that payments can skip over the insolvent parts of the supply chain and reach down to those doing the work
Variations: so that works can be omitted for reasons relating to failure to perform them expeditiously or adequately, and allow it to be awarded to others who are keen and able to do the work
Step in rights: so that contracts can be novated, assigned or taken over as appropriate to take the defaulting party out of the picture
Termination rights: so that the insolvent party can be told to get out of the way and allow the project to continue
Insolvency risks require careful consideration when drafting so that your contract can help manage risk, enhance recovery, and reach a resolution for the project. Insolvency is a real project risk, and your contract should have a thought-out response.
If your contracts aren’t built to withstand insolvency, let’s talk.