Providers need to be alive to the risk of contractors becoming insolvent and how to limit the resulting inevitable disruption.
Carillion’s liquidation – immediate steps to take
It is too early to know how this will all play out. In the meantime, many of our clients will have concerns from this decision and we plan to issue further briefings as this sorry tale unfolds. There will be many operational and legal risks to manage. Obviously, the main practical concerns will be service continuity or completing the works and preserving jobs.
At this stage we would advise clients who have contracts involving Carillion to consider the following:
- To avoid the liquidator later claiming from you for breach of contract, read the payment and termination clauses of your contract and comply with them. You are not relieved from complying with contract terms just because Carillion has indicated that they intend to go into liquidation. The standard forms all have different provisions – for example, the PPC or TPC form of contract terminates automatically if the contractor appoints an administrator and JCT or NEC forms do not, with PFI or PF2 being significantly more complex.
- Find out what other documents you should have – do you have a parent company guarantee or a performance bond? If you are in a construction context, do you have signed collateral warranties from sub-contractors which give you a right to “step-in” to the sub-contracts to finish off the works in the event they are terminated? You need to understand the terms of these documents to assess what rights you have against any other parties (parent company or a bondsman or sub-contractor) and to find out to do next.
- Find a back-up contractor who can step in at short notice, particularly in an FM or services context. In these circumstances, the Public Contracts Regulations 2015 (the procurement rules) allow contracting authorities to appoint their own replacement contractor on a temporary basis whilst the contract is re-procured, or to transfer (novate) contracts to a “rescue” contractor if any contractor attempts to purchase any part of Carillion’s assets, and you are happy to do business with that rescue contractor – you are under no obligation to do so.
- If you have a works contract and no immediate replacement contractor, you will need to arrange insurance and security for the work site.
- Get advice about staff who may have a right to transfer to any replacement contractor or to you, if you are taking the services or works back in-house. Usually, staff still have the right to transfer in the event a contractor ceases trading, although this is not always the case, depending on the precise nature of the works or services, and the circumstances in which the new contractor takes on the work or services.
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