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The slowdown of the UK’s construction activity in March 2020 was the fastest decline seen since the 2008 financial crisis.
With the UK government having already announced that it will be introducing changes to the insolvency regime in England & Wales, as part of its response to COVID-19, there is a clear indication of what is expected to come. Our general guidance on
managing the increased insolvency risk arising from this period of disruption can be found here.
In the construction industry, as cash flow issues bite, the downturn is likely to result in the insolvency of many sub-contractors which, in turn, will see the risk carried by the contractor. Last month a survey from the Federation of Master Builders
found that two-thirds of SMEs in the UK construction industry will not last more than two months, unless the government gives them cash grants.
Where there has been a sub-contractor insolvency, and the works are ongoing, contractors may have a contractual right to terminate as a result of the sub-contractor’s insolvency. Other options include making calls on any bonds available, or contacting
any guarantor to complete the outstanding works.
It is also commonplace for sub-contractors to provide collateral warranties in favour of employers, or other third parties such as a funder (albeit, a collateral warranty is only as robust as the contract to which it relates).
Concern over the potential for costly and long-running disputes involving construction industry participants has prompted
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Jonathan is a Partner at Simmons & Simmons. He specialises in defending professional indemnity claims against construction professionals (including architects, engineers, and surveyors) and major contractors. He also regularly advises on complex, high value coverage disputes for London market insurers.
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