The introduction of the Corporate Insolvency and Governance Act 2020 (CIGA) in June 2020 was one of the many preventative measures taken by the UK Government in an attempt to safeguard the economy in the wake of the global COVID-19 pandemic.
This article was first published in Business Matters Magazine on 17 November 2020.
The primary purpose of CIGA is to provide breathing space to businesses during the pandemic as well as to support continued trading.
CIGA, which introduced significant changes to contracts for the supply of goods and services, has significant implications for businesses that supply construction and engineering services.
In this column I outline what those implications are, and what construction businesses can do to protect themselves.
What are the changes to contract law introduced by CIGA, and how does it affect construction businesses?
CIGA introduces a new section 233B into the Insolvency Act 1986. This makes two important changes to contracts for the supply of goods and services.
Firstly, suppliers of goods and services are prevented from exercising certain rights of termination against a company that is going through a relevant insolvency procedure. Secondly, suppliers must continue to supply goods and services even if they have not been paid for goods and services already delivered.
How can suppliers protect themselves?
There are several practical issues that parties to construction and engineering contracts will need to consider carefully.
- 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?
- 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 so incorrectly could be hugely damaging and professional advice should always be sought.
- Suppliers may seek to negotiate shorter payment periods.
- 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?
I would urge construction businesses concerned about the impact of CIGA on their cash flow and financial sustainability to seek immediate legal advice.
Refusing to perform could expose firms to potential claims from liquidators – so it’s certainly worth seeking specialist legal advice to ensure you minimise your risk and exposure to future claims.
Read the article in full here.
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