In the past five years, insolvency rates in the construction industry have increased more quickly than in other industries across the UK. This article considers the common causes of construction insolvency and how to protect your position if insolvency occurs.

Recent trends

Before ICC Judge Barber In the Insolvency and Companies List

The facts

In Martin v McLaren Construction Ltd [2019 EWHC 2059 (Ch) the Court was asked to decide whether the Respondent had issued a valid Demand Letter against the Applicant prior to issuing a Statutory Demand, and even if it had not, whether the Court should still exercise its discretion to uphold the Statutory Demand pursuant to Rule 10.5(5) of the Insolvency (England and Wales) Rules 2016.

Gurbinder Grewal and Michael Wright in the UK Construction Team explain the knock on effects of insolvencies and the mitigating steps that can be taken. Early warning signs of looming insolvency can be spotted.

Key points

Insolvency is a common issue in the construction industry. While newspaper headlines frequently focus on the top ten to 15 large contractor insolvencies, this is not reflective of how insolvency impacts the industry as a whole.

In all construction projects, there is a long tail of smaller contractors that are adversely impacted by an insolvency event that occurs further up the chain. As a result, when parts of the supply chain fall apart, the tremors can be felt by large sections of the industry.

Over the last few years, the courts have shown themselves to be increasingly unwilling to interfere in the level of liquidated damages set in building contracts. The courts have taken this position predominantly because the agreed level of liquidated damages forms part of the commercial bargain reached between the parties at the outset of the contract. However, employers should still carefully calculate the level of liquidated damages inserted into the contract for the following reasons:

For those institutions carrying out building projects at the moment the recent news that the holding company of Currie & Brown was in administration at the time of its acquisition by Middle East-based consultant Dar Group raised fresh concerns that there may be more victims of this period of economic instability. The insolvency of a consultant can be as harmful to a project as that of the main contractor. Well-drafted documentation is essential to protect an employer, as is ensuring that all requests for payment are justified.

The recent news that the holding company of Currie & Brown was in administration at the time of its acquisition by Middle East-based consultant Dar Group raises fresh concerns that there may be more victims of this period of economic instability.

An English rugby club (an unincorporated association of its members) engaged the services of Barnes Webster & Sons (BWS), a construction company. The club’s treasurer signed the contract, which was witnessed by Davies, the club’s president. The club agreed to pay BWS a fixed price plus additional amounts for certain variations in the work, should they arise. The variations were required, but the club did not pay the £147,000 bill for them that BWS presented. BWS made a demand on Davies personally, which he moved to set aside.

According to the credit insurer, Euler Helmes, there were more insolvencies in construction than in any other sector during the first six months of 2011.

Where an insolvency affects consultants and contractors mid project then clients will be concerned about the possible ramifications for their projects.  What are some of the key considerations for a client in this scenario.