In standard building contracts most commonly used in the UK, a party is entitled to terminate the contract if the other party is insolvent (Clause 91 of NEC3 and NEC4 and Clause 8.5 and 8.10 of JCT/SBCC).

The Corporate Insolvency and Governance Act 2020 provides measures for businesses that are designed to provide temporary reliefs during the COVID-19 pandemic, as well as permanent measures for companies in financial difficulty.

One of those measures is the ability for companies – in all sectors - to apply to the courts for a moratorium, which provides temporary breathing space from creditors. Of particular significance to the construction industry is section 14 of the Act, which applies to all contracts for the supply of goods or services.

The effect of this section is that, if the employer under the contract has a moratorium in place and/or is insolvent (described as an 'insolvency event'), then the contract cannot be terminated by the contractor – even if there are provisions for automatic termination on insolvency or which allow the contractor to terminate because of the employer's insolvency.

Further, if a different termination event has arisen before the start of the insolvency event, the entitlement to terminate for that other event cannot be exercised during the insolvency period; ie from the start of the insolvency event until it ends.

Termination can only occur if:

  • the insolvency practitioner acting for the employer consents;
  • the employer consents; or
  • the court grants permission to terminate because to do otherwise would cause hardship to the contractor.

In addition, from the date of the insolvency event, a contractor is not allowed to impose any conditions whereby the continued supply of goods and services depends on the settling of any outstanding payments due before the employer became insolvent.

Parties to construction contracts should note:

  • The protections are only one way – the contractor under a construction contract does not have the same protections.
  • A contractor termination event arising after the insolvency event; eg non-payment, will remain effective and allow the contractor to terminate during the insolvency period.
  • More stringent monitoring of employer solvency is anticipated along with increased requests for payment security.

Contributor

Jane McMonagle

Partner