Under most construction contracts, the contractor takes on the ground conditions risk. However, a recent case has demonstrated that the risk can fall on the employer.
Long running concerns over the future of Interserve – the largest public sector focused contractor and outsourcing firm – took a new twist on 15 March 2019 when shareholders voted 59% against a debt-for-equity rescue package that would have seen the firm’s debts cut from £650m to £275m.
As a result, Interserve plc (the parent company) was placed into administration and the rest of Interserve group transferred to a new parent company, Montana 1 Limited (“Montana One”), which is likely to be renamed as an “Interserve” company soon.
Following only fourteen months after the collapse of Carillion, social housing providers will be concerned about the effect on delivery of construction projects and facilities management contracts with Interserve group companies. While the outcome of the administration is not yet certain, there are several steps which employers can take to protect themselves:
- First, make sure you know where your contracts and security documents (parent company guarantees, performance bonds, and collateral warranties) are held. These documents are key to working out what rights you do and don’t have.
- Second, review any contracts with Interserve for a “change of control” clause. These clauses may prohibit a change in the ultimate parent company from Interserve from to Montana One, or even allow you to exit contract completely.
- Third, review the security documents to ascertain whether you have a parent company guarantee (“PCG”) from Interserve plc. PCGs granted by Interserve plc are likely to be worthless, as Interserve plc is unlikely to have the financial capability of standing behind any claims made under the PCG. It is not yet clear what Montana One’s financial standing is. Trading in shares of Montana One is expected to commence as early as 20 March 2019, and this may give some indication as to the viability of the new parent company.
- Fourth, review the selection questionnaire used at tender stage. If the selection questionnaire requires a PCG, then the contractor no longer has sufficient financial standing to operate the contract. This may give rise to a right to terminate the contract.
- Similarly, check whether your contract has a clause which compels the contractor to maintain the level of financial standing required in the procurement process. If the contractor no longer meets this level, you may be able to terminate the contract.
More widely, there is growing concern that so many contracts are going to a few large contractors which inevitably causes widespread disruption if they fail. The challenge to social housing providers going forward is how to ensure best value in the provision of works and services in a way that is compliant with public procurement law and also spreads the risk more evenly. This is a topic for another e-briefing!
For more information
If you have any concerns about a contract with Interserve, or with any other contractor, or would like to review your procurement strategies, please do not hesitate to contact Kieran Binnie or Richard Brooks.
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