The insolvency of any party to a construction contract can be disastrous for the project. It can cause significant additional costs, together with delays to completion, and deprive parties of remedies in respect of defects in the works.
This note focuses on the effect of the contractor's insolvency and the rights available, principally to the employer, but also to other parties when such an event occurs.
An employer faced with an insolvent contractor will need, firstly, to determine whether the employer is entitled to terminate the contractor's employment under the contract. Insolvency itself does not create an automatic entitlement to terminate unless set out in the termination provisions of the contract. Under the public works contracts, the definition of an insolvency event giving rise to the employer's right to terminate is extremely broad. The events of "ceasing to trade" or "threatening to cease to trade" are considered insolvency events but are not under the IEI/RIAI standard forms. Under the IEI contract, there is no express right to forfeit the contract on the grounds of the contractor's entry into examinership. This can be contrasted with the RIAI and public works contracts which all provide an express optional right to terminate on examinership. Furthermore, the RIAI contract does not provide for the employer's right to terminate on foot of a creditors' meeting/scheme of arrangement, whereas such an entitlement can be found in most of the other standard forms (including FIDIC forms).
The timing of and entitlement to payment is of paramount concern to all parties on the insolvency of the contractor. Pursuant to all of the Irish standard forms, including the public works contracts, if a contractor is due any monies, on its insolvency, it must wait until the works have been completed by the employer and a balance undertaken between sums owed to it and the completion costs incurred by the employer. Under the IEI contract, the contractor must further await the expiration of the defects liability period before it becomes entitled to any sums which may be due. In reality, however, and depending upon when the insolvency event occurs, the employer will most likely be the party with the net balance due in its favour, representing the additional costs of finishing out the project with a replacement contractor.
Bond/ Parent Company Guarantee
A bond or parent company guarantee is a means by which an...