With the news of increased insolvencies in the Construction Sector, what protections, as Employer, can I put in my contract?

Morton Fraser Legal Director Julie  Scott-Gilroy
Julie Scott-Gilroy
Legal Director
03 April 2023
Real Estate

With insolvencies expected to increase in the UK’s construction industry this year, as higher interest rates, inflation and an anticipated domestic recession dampen demand for housing and new commercial projects, we are often asked what protections an Employer can put in place in their contract to assist in the event of their contractor going into insolvency.

These issues should be considered at the time of entering into contracts and we have set out below some useful provisions which may assist should an insolvency occur during a project. These are:

  • A clause enabling the employer to "step-in" to sub-contracts in the event of the insolvency of the main contractor to ensure the project progresses smoothly.
  • Ensure you are aware of any retention of title clauses in respect of materials supplied from sub-contractors which may be triggered in the event of the contractor's insolvency or failure to make payment even if you have made payment to the contractor for these already. Whilst it is possible to challenge the validity and operation of such clauses in certain circumstances it is helpful to have a clear picture as to potential risks to the supply chain.  If possible, you should seek to stipulate the position on materials within the contract to avoid any ambiguity.
  • Secure a performance bond. A performance bond is a financial guarantee to one party in a contract against the failure of the other party to meet its obligations.  Whilst it is preferable for the bond to expressly state that it will be triggered in the event of an insolvency, there is authority that such a bond will respond in an insolvency situation as the contractor’s failure to pay the debt due on completion of the works by a third party amounts to a breach.

There will always be risks when a contractor goes insolvent, however, the best protection is to have a detailed written contract in place at the outset.  This can be used as rule book for the relationship between the parties throughout the works.

This blog concludes our five week series looking at inflation and challenges faced by the construction industry.  If you haven’t read our previous blog in this series, you can read it here

Should you require assistance with any aspect of a construction contract, we have a large and experienced construction team who would be happy to discuss this with you.

We are currently considering topics for our next blog series, if there is a topic that would be of interest to you, please do not hesitate to contact our team.


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