Q&As

If a contractor is insolvent, can its sub-contractor claim outstanding payments directly from the employer?

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Published on LexisPSL on 22/01/2015

The following Construction Q&A provides comprehensive and up to date legal information covering:

  • If a contractor is insolvent, can its sub-contractor claim outstanding payments directly from the employer?
  • Collateral warranty
  • Third party rights
  • Employer's agreement to pay sub-contractor directly
  • Negotiations between employer and main contractor's Insolvency Practitioner
  • Has any security been provided by the main contractor?
  • Project bank account
  • Escrow bank account

If a contractor is insolvent, can its sub-contractor claim outstanding payments directly from the employer?

If the main contractor becomes insolvent, its sub-contractor will want to know if it can obtain payment from any other source, in particular from the employer. The sub-contractor's first step should always be to check whether the terms of its sub-contract provide any assistance in such a situation. In doing so, the sub-contractor should also check the terms of the main contract if, as is often the case, it has been incorporated into the sub-contract. If a copy of the main contract was not physically attached to the sub-contract at the time of execution, the terms of the sub-contract may entitle the sub-contractor to ask for a copy from the main contractor.

This Q&A looks at the possible routes by which the sub-contractor may be able to obtain payment in these circumstances.

warranty'>Collateral warranty

If the sub-contractor has provided a collateral warranty to the employer, it may contain 'step-in' rights which allow the employer, in certain circumstances, to take over the role of the main contractor under the sub-contract. This would usually include taking over the obligation to pay the sub-contractor, see Practice Note: Step-in rights in a collateral warranty. It is common for a collateral warranty to specify that step-in rights can be exercised where the main contract is terminated or where

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