Having summarised the changes introduced by the Corporate Insolvency and Governance Act 2020 (CIGA), we now look at how these affect contractual rights to terminate under construction and engineering contracts.
We also consider what actions the supply chain can take to mitigate the impact of CIGA.
Section 233B(3) Insolvency Act 1986 says the following:
A provision of a contract for the supply of goods or services to the company ceases to have effect when the company becomes subject to the relevant insolvency procedure if and to the extent that, under the provision -
(a) the contract or the supply would terminate, or any other thing would take place, because the company becomes subject to the relevant insolvency procedure, or
(b) the supplier would be entitled to terminate the contract or the supply, or to do any other thing, because the company becomes subject to the relevant insolvency procedure.
It should be noted that Section 233B applies in circumstances where the company enters into a relevant insolvency procedure; but it has no application in the event of the supplier’s insolvency.
Standard form construction and engineering contracts such as the JCT or NEC suite of contracts contain express termination provisions, including rights to terminate in the event of insolvency. As an example, clause 8.10 in the unamended JCT Design and Build 2016 permits the contractor to terminate the contract on the employer’s Insolvency (as defined in the JCT). Section 233B(3) of the Insolvency Act has the effect of preventing the contractor exercising its right under clause 8.10. This change, of course, poses a considerable risk for the contractor (supplier).
Additionally, section 233B(4) Insolvency Act 1986 says:
(a) under a provision of a contract for the supply of goods or services to the company the supplier is entitled to terminate the contract or the supply because of an event occurring before the start of the insolvency period, and
(b) the entitlement arises before the start of that period,
the entitlement may not be exercised during that period.
Clauses 8.9 (default by employer) and 8.11 (default by either party) of the JCT Design and Build 2016 set out the circumstances in which the contractor may terminate the contract. Once the employer enters in to an insolvency procedure, the contractor loses any entitlement it may have had to terminate the contract, which occurred before commencement of the insolvency period.
Neither is the contractor able to rely on any contractual right to suspend works for non-payment although, importantly, this does not affect the contractor’s statutory right to suspend works for non-payment contained in section 112 of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (“Construction Act“). The protection afforded by the Construction Act is therefore a vital part of the contractor’s ability to cut its losses.
Where section 233B(3) and (4) apply, the supplier may terminate the contract in limited circumstances. Section 233B(5) Insolvency Act 1986 sets out:
Where a provision of a contract ceases to have effect under subsection (3) or an entitlement under a provision of a contract is not exercisable under subsection (4), the supplier may terminate the contract if -
(a) in a case where the company has become subject to a relevant insolvency procedure as specified in subsection (2)(b), (c), (e) or (f), the office-holder consents to the termination of the contract,
(b) in any other case, the company consents to the termination of the contract, or
(c) the court is satisfied that the continuation of the contract would cause the supplier hardship and grants permission for the termination of the contract.
However, the additional costs of seeking a court order to terminate a contract which is already causing hardship, will provide little comfort to a contractors who may find itself tied into a contract that continues to drain its resources.
Requirement to continue the supply of goods and services
Finally, section 233B(7) Insolvency Act 1986 (as amended by CIGA) provides:
The supplier shall not make it a condition of any supply of goods and services after the time when the company becomes subject to the relevant insolvency procedure, or do anything which has the effect of making it a condition of such a supply, that any outstanding charges in respect of a supply made to the company before that time are paid.
This means that the supplier will need to continue providing goods and services even if it has not been paid for those already provided at the point the company enters into a relevant insolvency procedure. However, in the context of construction and engineering contracts, if the company defaults on payment during the insolvency period, this highlights the protection afforded to the supplier through its statutory right to suspend works under section 112 of the Construction Act.
This article is Part 2 of our three part series of construction articles and CIGA.
- Part 1: Construction contracts: changes introduced by the Corporate Insolvency and Governance Act
- Part 2: Construction contracts: rights to terminate and the Corporate Insolvency and Governance Act 2020
- Part 3: Construction contracts: how can the supply chain mitigate the effect of the Corporate Insolvency and Governance Act 2020?
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