Trouble in the supply chain? Sub-contractor insolvency and insurance

Trouble in the supply chain? Sub-contractor insolvency and insurance

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.

What contractual protection might exist under the construction contact?

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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About the author:

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.

Jonathan has experience of a wide variety of construction disputes involving iconic buildings, sports grounds, schools, hospitals, large residential schemes, commercial/retail and waste to energy facilities. 
His caseload routinely involves mediations and litigation (generally in the Technology and Construction Court), and he also has arbitration and adjudication experience.
Jonathan has undertaken a year-long client secondment at a major international Insurer, which provided him with invaluable first-hand experience of the insurance market.