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Carillion: What does it Mean for Subcontractors and Suppliers - What Next?

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On 15th January 2018 it was announced that the six Companies associated with Carillion were in compulsory liquidation. That means the irreversible end of the road for Carillion and for those it owes money to. Unless there are special circumstances all contracts are terminated and the creditors face getting nothing of what is owed.

The collapse of Carillion, yet again illustrates the absurdity and inadequacy of the insolvency law in the UK, which allows those such as Carillion to avoid payment of millions after taking valuable goods and services from suppliers, never mind the ability to plunder pension and retention funds that are morally not theirs to take and spend. The law fails employees, subcontractors and suppliers alike, in practice, in my experience, the world takes an uncaring view that if you let them take your goods and services without paying it is your own fault. Not good, but will it ever change? If you use the analogy of saying it is the same as taking from a shop without paying, it would be theft wouldn’t it? A crime, shoplifting, a bullion heist? What is the difference between this and an insolvency situation? Well it seems it is somehow legal, given the sheer scale of this misery, perhaps this might prompt a review of the law, but I doubt it. As for the casualties caught up in the mess it is about survival and some serious thought on the avenues available should be considered. Arbicon can assist in finding the options that may be available for anyone caught up this mess that you may not have thought about.

Rights and Remedies for Subcontractors and Suppliers

So, having established no money is due, what Rights and Remedies are there for those caught in this disaster? The casualty should first consider:

What contractual rights exist?

Termination & Retention of Title to Goods, Plant & Equipment

In all cases the first point to make is all contracts with Carillion were terminated by the liquidation on 15th January 2018.

The termination is immediate by statute, the contract may refer to termination stating what happens or it may not mention insolvency at all; whatever the case in any event the contract is terminated.

Entitlement to the value of the goods and services supplied at the 15th January 2018 is due and this is logged on the creditors proof of debt form. The value should be properly ascertained with records including photographs and evidence of delivery at 15th January 2018. The valuation will however be academic if there is no creditor dividend paid, unless the directors are held personally liable, payment is unlikely. Records and evidence is important, (as at 15th January 2018), where there are unfixed materials, plant and equipment on site, which will require proof that such do not belong to Carillion. Retention of title until paid rights or third-party hirer/leasing ownership, needs to be demonstrated together with proof that payment has not been made. The Carillion sites have all been locked down and any attempt to force retrieval by breaking in is a criminal offence, the way forward is to contact the official receiver and quickly!

In the case of goods, problems may also occur where title to the goods passes on delivery to site, through an overlooked contract clause; a type of clause Carillion might deploy to retain the goods without paying on insolvency. In such a situation a dispute might arise over a conflict in terms if the supplier believes he retains title due to non-payment. You see how getting the contract right is important from the outset? The answer will depend on the circumstances and Arbicon can help and advise on such conflicts.

Illegal Terms, "Pay when Paid on Insolvency" & the Rights of Sub/Sub Contractors

In many bespoke or amended terms handed down to subcontractors and suppliers by main contractors like Carillion, there are often terms that are illegal. Such terms although set out in plain English will be illegal due to non-compliance with a Statute. Examples of Statutes are the Construction Acts, which outlaw “pay when paid” clauses or any clause that prevents payment. In the case of “pay when paid”, the only clause that is exempted from this concept is what is known as an “Insolvency of the Employer” clause. What happens here is the Contractor writes into the subcontract a clause that exempts him from paying the subcontractor if the Employer goes bust. In the case of Carillion, the subcontractor writes into the sub/sub contract this clause and no further payment is due to the sub/sub-contractor for monies not paid by Carillion. The risk of non-payment goes down like a baton to the bottom of the food chain. If you are a subcontractor and you do not have such a clause in your terms, then it is dire double consequences for the subcontractor as the sub/sub-contractor can sue you for payment even if you have not been paid by Carillion.

The standard forms of contract (JCT, etc) do not include "Insolvency of the Employer" clauses, such a clause will always be an amendment. If you are either a subcontractor or sub/sub-contractor Arbicon can assist in negotiating payment or adjudication proceedings!

Is there a Joint Venture?

If the contract with Carillion involved a joint venture with a third party, payment should be recoverable from that third party together with the survival of the contract depending on how the contract is written. Arbicon can check the contract for you if you are being advised no payment is due. Don’t believe everything you hear! Joint and several liability terms and Termination clause terms need to be checked. Plus, if you have a clause that says payment by the joint partner will not be forthcoming if Carillion go bust, this could be void. Again, we need to see the papers.

Are there completed Collateral Warranties, Bonds, Guarantors and Step in Rights?

Is there a form of guarantee in place legally to protect the subcontractor from the Carillion insolvency? Many subcontractors will either not consider this nor manage to obtain any such measures from most main contractors. One of the problems inherent in construction contracts is the imbalance of power between main contractor and subcontractor, however if effort is made ground can be gained against the main contractor before a contract is signed. Arbicon are experts in this kind of negotiation.

The solvency and risk of insolvency of the party being contracted with is paramount and a check that needs to be done, if a firm is made of straw how are you going to get paid? Carillion is a fine example that it does not matter how big a firm is, if they are made of straw a guarantee is needed. Warranties, Bonds and Guarantors are all examples of ways to obtain a guarantee. It works both ways in contracts.

There may be “Step in Rights”, again this normally requires scrutiny pre-contract. In the Carillion situation, such an option can be a lifeline if the Employer “steps in” to take over the contract, however such action is often optional for the Employer, thus it may depend on how essential or specialist the subcontractor is and thus what value their input is to the melee. When agreeing to these rights it is helpful for the subcontractor to include obligations to compel stepping in and that arrears are paid at the outset of the step in. Collateral Warranties are a means for this. If this is possible again the negotiation on the status of works done at 15th January 2018 will need to be measured and valued, again call Arbicon.

Negotiating Continuance of Work?

Whatever the position, The Carillion contract is terminated, thus beware of continuing work and of any obligations on termination. If you are negotiating continuance with a third party just beware and clear - who is going to pay and for what? Be sure of what contract rights carry on or come into play. If there is an assignment of the works, understand what the terms are and check to see if such a proposal is not void - don’t listen to bad advice call Arbicon.

Retention Recovery?

Retention money should belong to the subcontractor and there is a campaign to make it so in construction contracts at statute level as the law is not sympathetic to the creditor on this. There is no current automatic right to the retention funds unless there are express contractual terms making it so. The proposals heading to parliament include making contractors set retention money aside in a similar way to a Landlord and Tenant deposit scheme. We shall see, however at present without terms, main contractors such as Carillion can use the retention for their own cash flow. In order to protect it from the liquidator, the contract terms must be precise and make clear that the retention money is fiduciary and paid into a separate bank account and clearly in the name of the creditor. Without this contractual separation, the retention money is lost with any other money in the liquidation pot.

Summary of Points & Tips

  • Termination from 15th January 2018
  • Get the Contract Checked - Obtain an Arbicon Overview
  • Check for illegal terms - Obtain an Arbicon Overview
  • Measure and Value the Account at 15th January 2018 - Send in the QS Expert
  • Retention of Title - Unfixed Goods & Plant/Equipment - Get it back!
  • Pay when Paid Illegal
  • Insolvency of the Employer Clause - Sub/Sub Contractors can be paid if no clause exists
  • Joint Venture - Check if another party is liable to pay. Ask Arbicon.
  • Protect with guarantees and workable “step in rights” or bonds
  • Negotiate - But work out what to negotiate first. Arbicon can help prepare and mediate.
  • If continuing with works or supplies make sure you will be paid, by who and when! Check!
  • Retention - This is lost unless fiduciary. Ask Arbicon on how to evaluate.
  • Watch out for other PFI contractors going bust when they get profit warnings
  • Sub/Sub-contractors - There is a right to payment let Arbicon check the legal position
  • Get Arbicon to check your contract rights and advise you on a strategy

So top tip: Let Arbicon evaluate your position with your Carillion problem before it is too late!

To review or discuss any commercial or disputed matter with an Arbicon Consultant call us on 01733 233737 or 0207 406 1494 for an initial free consultation.