Sub-Subcontractor payments, Construction & insolvency.
Subcontractor payments upon upstream insolvency are difficult, but not impossible, to secure.
When a subcontractor faces insolvency, it can create a ripple effect throughout the entire supply chain. Sub-subcontractors, who are even further down the chain, may find it challenging to receive payment for work completed. However, it is important for sub-subcontractors to understand their rights and options in this situation.
You can negotiate directly with the main contractor or project owner to try to secure payment for the work you have completed.
Although securing payment as a sub-subcontractor in the event of upstream insolvency is challenging, it is not impossible.
By understanding rights and options, sub-subcontractors can take steps to protect themselves and their business.
The Insolvency of Geoffrey Osborne
The purpose of this note is to explore the what subcontractors to Geoffrey Osborne could have, and possibly still can do, to secure substantial payment.
Osborne was a contractor to local authorities, central government departments, and agencies.
According to Construction News Geoffrey Osborne had “71 live contracts with clients – mostly local authorities and central government departments and agencies”.
Geoffrey Osborne filed for administration in the High Court on 18 April 2024.
For the year ending 30 September 2021, Osborne had a turnover of £325.8 million. However, no accounts had been filed since July 2022. A red flag perhaps?
According to a company statement Osborne:
- “Had suffered significant headwinds common to the entire construction [industry] over the past two years, fuelled by high inflation, the lingering impacts of Covid-19 and Brexit, and a slowdown in public sector procurement”.
- “Despite the management team ensuring the current business is profitable with a good pipeline of work, the business has struggled to secure the necessary investment to continue as a going concern”.
- The “move towards administration is a last resort, it is now the right thing to do while we continue to seek external investment”.
- “Our management team has done everything possible to look after our people and protect suppliers, while seeking to trade through the economic headwinds”.
Consequences for Subcontractor payments on insolvency
The administration Ordered by the High Court will provide Osborne with a short period of time to try to secure their business through external investment.
Insolvency is bad news. Subcontractors can expect no material payment any time soon.
Unlike other contractors who recently entered insolvency, there was no deluge of claims in the High Court (usually adjudication enforcement hearings) in the recent months. But there were warning signs.
We will have to await the statement of affairs to see the full carnage.
The risk to sub-subcontractors of Geoffrey Osborne
Subcontractors’ to Osborne are in immediate firing line to take a hit from the insolvency of Geoffrey Osborne.
This will of course affect the cashflows of subcontractors and potentially their viability.
The real news behind the insolvency of any main contractor is the impact such has upon subcontractors.
The subcontractor, often whose margins are considerably lower that the main contractor, is the real victim of main contractor insolvency.
But what about sub-subcontractors upon Insolvency?
If the subcontractor becomes insolvent as a consequence of the main contractor insolvency, then that is a problem for the sub-subcontractor.
When a main contractor goes bankrupt, it can have a ripple effect on their subcontractors. If the main contractor is unable to pay their subcontractors due to bankruptcy, the subcontractors may also struggle financially and may even be forced to declare bankruptcy themselves.
But something that sub-subcontractors may not be prepared for is the pay when paid provisions in sub-subcontract that bite upon upstream insolvency.
Pay when paid was largely outlawed by the Housing Grants Construction and Regeneration Act 1996 (the Construction Act). But not on the occurrence of insolvency.
The Construction Act in this respect provides:
(1)A provision making payment under a construction contract conditional on the payer receiving payment from a third person is ineffective, unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent.
If a subcontractor to Osborne inserted a clause into a pay when paid clause into the sub-subcontract, then the sub-subcontractor may take a hit consequent to the insolvency of Osborne.
A pay when paid clause as referred to above is not unusual.
When drafting contracts for main contractors and subcontractors, we always insert a pay when paid upon insolvency clause.
It is not a standard clause within the JCT contracts. It is introduced through either a bespoke form of subcontract or by amendments to a JCT contract.
To many main contractors a pay when paid clause is not a concern. But it should be a concern to subcontractors and sub-subcontractors.
A pay when paid clause is not a clause that is easily negotiated away by subcontractors. It is a clause that most main contractors insist upon.
If a pay when paid on insolvency clause cannot be negotiated away, it becomes necessary to manage the risk on a commercial basis.
What can be done when a pay-when paid clause is required?
Due diligence on the employer and main contractor should undertaken. If the company looks like it may be in financial distress, proceed with caution. Were Geoffrey Osborne’s difficulties foreseeable?
Contract clauses should be negotiated so to ensure payment terms are not elongated due to extended final dates for payment beyond the due date.
Contractors should ensure that all practical steps are undertaken so to ensure payment is not delayed and overdue debts are recovered.
Anticipating financial distress and taking the necessary remedial action to recover payment quickly is critical:
- Do not delay in recovering debts.
- Do not use slow or ineffective routes to recover debts
- Take expert advice to pursue bad debts
For a discission on what contractors should do to recover construction debts quickly, refer to our previous blog posts:
https://mjdsolicitors.co.uk/recover-debts-quickly-cheaply/
https://mjdsolicitors.co.uk/adjudication-debt-recovery/
https://mjdsolicitors.co.uk/adjudication-for-low-value-construction-disputes/
If all else fails talk to the client.
If the contractor or subcontractor you are working for goes bankrupt, look for ways to get paid by their employer. You should explore different options to ensure you receive compensation for the construction services you provided.
It is important to be proactive in securing payment from the bankrupt contractor’s employer.
If there is a collateral warranties entered into by a subcontractor, look for step-in provisions that enable the employer to pay you.
MJD Solicitors act frequently for parties who have suffered an upstream insolvency. Sometimes the dire situation can be overcome by the main contractor or employer agreeing to honour the payment obligations of the insolvent party.
The employer or main contractor (as the case may be) will doubtless owe the insolvent party considerable sums through unpaid valuations and retention.
The end party wants the job complete. The end party can pay you direct and offset the losses against what it owes the insolvent party. Upon upstream insolvency you have nothing to lose.
Matthew Dillon LLB, Solicitor, MCIArb
MJD Solicitors
22 April 2024
This article is for information purposes, does not constitute legal advice and should not be relied upon. For terms and conditions of this article please read https://mjdsolicitors.co.uk/terms-of-use/
