Going bust during the build

Going bust during the build

What happens when a contractor goes bust during the build? William Webb, a barrister at Keating Chambers, examines the legal and practical implications of contractor insolvency.

What are the legal implications if your contractor goes bust during a project?

The legal implications of a main contractor going bust are relatively simple:

  • first, it will stop carrying out any work--this will be a breach of contract between the employer and main contractor
  • second, it will stop paying its sub-contractors--this will be a breach of contract between the main contractor and sub-contractor

Unfortunately, those breach of contract claims may not be worth very much.

How should a contract be structured to protect a developer against contractor insolvency?

There are two or three key structures that can be put in place to protect against contractor insolvency and they are generally standard on most large projects.

One common option is a performance bond so that money can be claimed from a guarantor bank at short notice, often simply on-demand.

A second option is to obtain a parent company guarantee--this is useful where a large contractor is using a regional subsidiary or special purpose vehicle to carry out a project.

A third and very common option is to obtain collateral warranties from as any many different people engaged on a project as possible. This will enable a direct claim to be made against these people in the event of a problem arising. However, these normally don't take effect until conclusion of a project. Thus, they are useful in the event of latent defects, but are of limited use if a main contractor becomes insolvent in the middle of a project.

Unfortunately, none of these options is a magic panacea. There is no way for a developer to completely insulate itself from loss flowing from contractor insolvency which is why the selection of the contractor in the first place is probably the most important step of all.

Does the loss

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About the author:
Eleanor qualified in 1998 into the insolvency team at ASB law. She became a partner in 2005, and went on to head up the Recovery & Insolvency team. Whilst traditionally specialising mainly in contentious corporate insolvency matters, in recent years she has moved into the non contentious arena, in particular specialising in company administrations.