Carillion, the UK’s second largest construction company, entered compulsory liquidation on 15 January 2018, with estimated debts of £1.5bn and a pension deficient of c£800m, following three profit warnings in 2017. The company employs 20,000 people in the UK and 43,000 people worldwide. It is thought that some 30,000 companies may be affected by the liquidation.

With so much news coverage, it is difficult to ignore the ‘Carillion effect’. It’s hard to see how anything good can have come from Carillion’s collapse, but perhaps one positive effect is its prompt to many businesses to take a look to see if they have their own house in order.

In January this year, construction giant Carillion entered into liquidation. In a sense its demise was sudden – the firm entered straight into liquidation rather than the more familiar administration procedure, meaning it had no meaningful assets that gave any prospect of the business, or any part of it, continuing as a going concern. But in another sense it was expected: a large failure of this type had been expected by industry watchers for some time.

The insolvency of Carillion has placed into sharp relief the difficulties faced by those both up and down the contractual chain for a construction project when one part of that chain becomes insolvent and the ultimate supplier of goods and materials on site has not been paid.

Carillion was perhaps best known for its public sector work. However, the insolvency of the UK’s second-largest construction company will inevitably have significant implications for the private sector.

Main contractor Carillion’s entry into liquidation has resulted in many employers seeking to establish relationships with subcontractors, under which they will be paid directly in order to stay on site and finish the relevant project. On the face of it, this seems like an attractive solution, and may leave some employers wondering why they didn’t procure their projects by construction management in the first place. However, establishing direct relations is not without risks, and requires safeguards for employers and subcontractors alike.

A recent TCC decision has concluded that the contractor insolvency provisions of the JCT form continue to apply after a termination by the contractor for repudiation. This conclusion may give rise to surprising results and potentially allow an employer to claim from the contractor additional amounts incurred in completing the works with a third party even after termination for the employer’s own default and/or repudiation.

It is fair to say that the insolvency of Carillion has sent shockwaves through the construction industry. While this may be the catalyst for change, insolvency has unfortunately been a risk which has been realised all too often. Looking at the current position, we set out the top ten issues that employers, professionals and the supply chain should consider in the event of main contractor insolvency.

Summary: This Expert Insight looks at the case of Ziggurat (Claremont Place) v HCC International Insurance Company PLC [2017] and considers the implications of the case for the surety industry generally, particularly in the context of construction insolvency.

Since the case of Perar BV v. General Surety and Guarantee in 1994, there has been some confusion and misunderstanding as to the implications of this case and whether insolvency amounts to a breach of contract, or more importantly, if it needs to be, when claiming on a performance bond.

This was recently discussed in the case of Ziggurat (Claremont Place) LLP v HCC International Company Plc just before Christmas.

Background