There is no doubt that the past year has seen some ups and downs in the construction sector. In particular, we have seen an increasing number of Contractors enter insolvency. While this of course has a variety of implications for an Employer, one rather intriguing development which we have recently encountered is in relation to insurance-backed building warranties. Typically, under such policies the insured is the Contractor, and of late, we have experienced numerous occasions when a Contractor has sought a refund from the insurer of the initial premium. Given that it is the Contractor who is the insured under the policy, the insurer has no choice but to refund the monies to the Contractor notwithstanding that, in most cases, it was in fact the Employer who paid the premium (via the Contract Sum). Further, by seeking a refund, the Contractor cancels the policy leaving the Employer and/or its funder in a difficult position. The obvious method by which to avoid this issue is for the Employer to be either the sole insured or, as a minimum, composite insured on such policies.
Other areas to which an Employer should be giving more consideration given the increase in Contractors experiencing financial struggles include seeking advance payment bonds or, where appropriate vesting certificates, for certain payments made in advance under a building contract. While this will likely result in a Contractor seeking to pass costs for such assurances on to the Employer in the form of an increased Contract Sum, depending on the amount of the advanced payments as well as the timeframe before the materials are manufactured and received onsite, such expenditure is likely to outweigh the risk of losing the advanced payment monies in full if there is no security.
Further, Employers and funders (through the latter’s monitoring surveyors) should ensure that any and all collateral warranties are obtained as soon as possible following completion of a building contract, rather than, as we are all used to, leaving such matters to the end of the project. Without completed warranties, upon insolvency of a Contractor, an Employer and/or funder might find it has no method by which to enforce performance by a novated consultant and/or sub-contractor, thereby potentially resulting in increased costs and/or delayed completion of the works.
Finally, it is recommended that both Contractors and Employers stay on top of payments, ensuring that they are following the payment provisions within the building contract and seeking payment as soon as possible. Whilst it may appear that a Contractor’s insolvency is of its own doing, often it is failure by Employers in making timely payments that leads a Contractor down the path of insolvency.
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