Samuel Okoronkwo

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In Construction, What Legal Steps Should You Take if Your Contractor Goes Bankrupt?

In this article, I will be explaining the legal steps you should take if your contractor goes bankrupt.


If your contractor becomes insolvent, several steps must be implemented…


  • Funding agreements

First and foremost, if there is a Funding Agreement in place, the funder must be immediately informed of the contractor’s situation. Most funding agreements contain obligations requiring the parties to provide news of insolvency promptly to the funder. 


  • Contractual arrangement with the contractor

The employer should promptly check the termination clauses in the contract with the contractor. Insolvency of the contractor will most likely trigger the termination of the agreement. The employer should verify that termination for insolvency is available under the contract and clearly verify under the definitions in the contract what types of insolvency event gives rise, if any, to the right to terminate.


The employer should also verify what type of notice is provided in the contract to terminate the agreement and how that notice should be correctly served to the contractor. The consequence of failing to comply precisely with the contract requirements could be that the termination is found to be invalid and to constitute a repudiatory breach of contract by the employer. Therefore entitling the contractor to terminate and potentially make claims against the employer.


  • Site protection

The employer should immediately secure the site and the materials on it. The employer must also ascertain what has been paid for in full, what is partly paid for and what are the contractor or sub-contractor assets on-site; this is fundamental to guarantee the site’s protection.


Ideally, the locks on the site should be changed, a new security contract should be prepared, and an audit of the plant, equipment, goods and material on site should be made to prevent unauthorised removals of material from the site.


  • Insurance

Where the contractor was obliged to insure the works and the site under its insurance policy, this obligation is likely to cease or not be complied with once the contractor becomes insolvent. So, it is important to check how the site and any incomplete works are insured.


  • Payment

Under JCT Contracts (Joint Contracts Tribunal), sums which have already become due at the point of insolvency are still payable. However, sums will not be payable if the final date for serving a pay less notice has already passed when the contractor becomes insolvent. It is particularly important, therefore, to ensure that a pay less notice is served if insolvency occurs prior to the final date for serving a pay less notice.


  • Valuation of the works

The employer must prepare a detailed valuation of the works. This valuation will be necessary to:

  • Ascertain the works to be completed; including any defects not yet rectified
  • Revise any works programme
  • Calculate the costs to finalise the works, whether extra funding will be required to finalise them and any disputes about the works already existing


  • Claims against the contractor

As a final point, the employer should take legal advice as to whether it has any claims against the main contractor and whether these are commercially worth pursuing.


At Mercantile Barristers, our members have a wealth of experience in the construction industry. 


Our key members hold industry professional qualifications and have practised for several years with leading construction consultancies. They have also worked with construction and development firms in the UK, handling the procurement; management; and delivery of complex high-value projects across the UK and internationally.


Remember, if you are faced with a construction dispute, Mercantile Barristers will be happy to assist. Do use the enquiry form below to contact us to discuss your matter further.

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