Prevention is Better than Cure Insolvency in the Building Industry

The consequences of a developer becoming insolvent can be devastating, leading to a chain reaction of insolvency affecting contractors and subcontractors. Further, developers whose contractors have become insolvent face delays and disruption and incur expense while they seek to appoint a replacement contractor to complete their projects.

Contract? What Contract?

Protection
It is essential to agree a written building contract, subcontracts and consultancy agreements between all parties involved in a development at the earliest stage possible. These contracts will provide the necessary protection in the event of one party's insolvency.

The building contract will establish the payment mechanisms for the parties involved and should include a variety of protective measures and self-help remedies to be employed if the project runs into difficulties.

Any changes to the contracts agreed between the parties should also be clearly recorded in writing. At the first sign of trouble, the parties should rely on the relevant terms of the contract.

Performance security
Developers should insist at the pre-contract stage on some form of performance guarantee from the contractor - for example, a performance bond or parent company guarantee. The cost of a performance bond will typically be added to the contract sum by the contractor, whereas a parent guarantee carries no cost to either party. Performance bonds are issued by banks or insurance companies on behalf of contractors and are payable if the contractor fails to perform.

While the level of retention is typically higher in the Caribbean region including the Turks and Caicos Islands than elsewhere, in the current economic climate it is reasonable to insist on a higher level. The retention should be released only after the certificate of making good (or equivalent certificate) has been issued.

Contractors can protect their materials in the event of insolvency by including a retention of title clause in the building contract, which provides that the full legal ownership of any building materials remains with the contractor until payment is made by the developer. This may be effective against a liquidator providing that the materials have not already been incorporated into the works.

During Building Contract

Warning signs
Contractors should be wary of signs of approaching insolvency during the contract process. These include:

• late or non-payment by the developer;
• unexplained failure of the developer to deliver materials;
• a general slowdown in work on the site;
• unexplained out-of-sequence working; and
• suspension of parts of the works where a number of different subcontractors or consultants are working on the site.

Contractors should seek an explanation for any untimely redundancies, changes in workforce or use of consultants during the contract.

For developers, early warning signs that a contractor may be in trouble include:

• reduced site attendance;
• non-delivery of equipment or materials; and
• spurious claims being raised by the contractor.

Self-help remedies
In the Turks and Caicos Islands, no Construction Act is in place to provide contractors with an automatic right of suspension of work for non-payment during the contract period. As such, contractors that suspend work are in danger of being in fundamental breach of the construction contract. This may entitle the developer to terminate the building contract. The contractor should negotiate this right and include a provision for suspension.

The contractor should also include the right to claim demobilization costs and remobilization costs arising from the suspension.

In the event of the contractor failing to perform the contract, the developer should check the bond and closely follow the relevant procedures in order to prevent the bond being avoided in the event of insolvency.

Types of Insolvency

In the Turks and Caicos Islands, neither a governing insolvency act nor individual bankruptcy laws are in place. The statutory provisions relating to insolvency are primarily found in the Companies Ordinance.

A Turks and Caicos Islands company which is unable to pay its debts may be may be wound up by the court. A company is deemed to be unable to pay its debt if served with a statutory demand by a creditor for payment of a debt exceeding US$500 or on production to the court of an unsatisfied court judgment. The court will appoint an official liquidator with broad powers to handle the liquidation.

Post Insolvency

Unlike the protection afforded by the Construction Act in the United Kingdom, there is no equivalent 'pay when paid' statutory provision which allows contractors to pay subcontractors only when they have been paid themselves in the event of the insolvency of the developer. Contractors should therefore, include a 'pay when paid' provision in their contracts with sub-contractors.

Terminating the contract
On the insolvency of a contractor, all payments to the contractor should be suspended until legal advice has been obtained. The developer should not be tempted to take on the responsibility for paying sub-contractors in order to keep the contract works going. Any building contract should always include an automatic, immediate termination clause or assignment of the contract without the consent of the contractor.

In the event of the developer going into liquidation, the contractor should suspend works and exercise its retention of title rights to any equipment or materials on site at the time of the insolvency.

Once a liquidator or receiver has been appointed, it has the power to avoid contractual liabilities. A claim in the insolvency should be made and contact made with the liquidator to ascertain whether any aspects of the building contracts can be salvaged.

Protecting the site
The site should be secured and site information collected and removed. The works should be insured. Where the contractor has already insured the works, a new insurance policy should be taken out to reflect the fact that the contractor is in liquidation.

Comment

During the global recession in which financing is unstable and the market is limited, parties entering into building contracts would be well advised to follow the advice provided in this article. Communication between the parties is key at all stages and parties should seek professional help at the first sign of financial difficulty.

For further information on this topic please contact Susan Barrington-Binns at Misick & Stanbrook by telephone (+1 649 946 4732) or by fax (+1 649 946 4734) or by email .