Construction contracts: how can the supply chain mitigate the effect of the Corporate Insolvency and Governance Act 2020?

3rd November 2020

Potentially, the Corporate Insolvency and Governance Act 2020 (CIGA) is a piece of legislation that could wreak significant harm on the construction industry supply chain.

We look at how the supply chain can mitigate the changes introduced by CIGA, having already examined how this affects contractual rights to terminate.

Whilst it aims to achieve continued trading (through securing supply chains) during the COVID-19 pandemic, it is difficult to ignore the possible consequences this may have on cash flow and the strain that this may place on suppliers. For many years now, the Construction and Engineering sector has had the benefit of the Construction Act.  One of the main objectives of the Act was to improve cash flow (once famously described by Lord Denning as ‘the life blood of the industry’) through the construction supply chain with the aim of reducing the number of insolvencies in the sector.

The Construction Act sought to achieve this by introducing processes such as adjudication, rights to interim payments and the right to suspend works. It seems that the practical effect of the changes introduced by CIGA are now in direct conflict with the processes provided by the Construction Act (continuing a growing trend of conflict between insolvency and construction legislation). The effect this will have on the construction and engineering sector as a whole remains to be seen but it is clear that suppliers will need to be even more on their guard than ever.

Points for the supply chain to consider

In this context, there are several practical issues that parties to construction and engineering contracts will need to consider carefully:

  1. Is the definition of Insolvency (whether as set out in the standard contracts or in a bespoke form) suitable – or even correct – in light of CIGA?
  2. The timing of exercising a right to terminate is even more important than ever. A party must not attempt to exercise a right to terminate before that right has crystallised under the relevant contract. The consequences of doing incorrectly could be hugely damaging and professional advice should always be sought;
  3. Suppliers may seek to negotiate shorter payment periods; and
  4. Might this more precarious landscape prompt wider use of mechanisms such as project bank accounts to provide greater levels of comfort for the supply chain?

This article is Part 3 of our three part series of construction articles and CIGA.

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