Pursuing contractual claims in the COVID-19 climate

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Since March this year, the Government has introduced a number of measures to help businesses to continue to operate during this time of disruption caused by COVID-19.

One of those measures is the introduction of the Corporate Insolvency and Governance Act 2020 (CIGA) which came in effect over the summer.

What the Act does

  1. It bans winding up petitions from creditors until 31 December 2020 and gives companies at risk of insolvency the option to enter into a moratorium while they consider possible rescue or restructuring solutions until 30 March 2021.

 

  1. It also effectively prohibits suppliers from terminating because of insolvency. Kelly Jordan, our head of restructuring and insolvency, wrote a helpful article on termination clauses on this when the Act was introduced.This prohibition currently applies until 30 March 2021. However, as the application of this law has already been extended once, a further extension isn’t beyond the realms of possibility as the landscape develops.

How does this affect construction?

 

In the construction world, this means that a contractor or sub-contractor cannot simply terminate and walk away from a contract because its client is insolvent. This is something which is otherwise clearly allowed in a number of standard form construction contracts such as JCT.

It is worth noting that such a clause is still valid in the other direction, that is to say, if a supplier becomes insolvent there is nothing to stop an employer or main contractor terminating a building contract or sub-contract.

An obvious question relevant to the construction industry is how can the CIGA be reconciled with the right to suspend for non-payment under S.112 of the ‘Construction Act’, a useful tool for many contractors and sub-contractors seeking to limit exposure in an industry where margins are already notoriously tight. The answer isn’t entirely clear.

Hope for construction suppliers?

 

At first glance it seems that the CIGA prevents the exercise of the right to suspend because it clearly prohibits suppliers from doing ‘anything’ that makes paying outstanding debts a condition of continuing to supply an insolvent party.

However, look more closely and there may be some hope for the suppliers and sub-contractors who are already likely to be suffering most from the economic impact of COVID-19.

This right to suspend performance for non-payment is a statutory right under the Construction Act, meaning it arises automatically irrespective of the terms the parties have agreed in their construction contract.

So, whilst the right to suspend for non-payment is often written into construction contracts, it remains a statutory right which, in theory, should not be affected by the prohibition on contractual rights under CIGA.

Also, the CIGA does not affect a right to suspend for non-payment where the paying party either simply chooses not to pay or is having cashflow problems but is not technically ‘insolvent’ within the definition provided by CIGA.

Whilst this new legislation is intended to help businesses during this difficult time, interpreted narrowly it could have a detrimental impact upon the construction supply chain at a time when it most needs to rely on the full range of benefits provided by the Construction Act.

It remains to be seen how the Courts and (perhaps most relevantly) adjudicators interpret the provisions introduced by CIGA.

In the meantime, it has never been more important for the entire supply chain to work with one another in an attempt to collectively trade through the challenges that COVID-19 continues to create.

For more specialist legal advice please get in touch with Lucilla Waugh on 0191 211 7984 or email [email protected]