The Carillion Avalanche

There has been a great deal of commentary and analysis hitting the press and social media since we all woke up on the morning of Monday 15th January…

There has been a great deal of commentary and analysis hitting the press and social media since we all woke up on the morning of Monday 15th January to the shock announcement of Carillion’s collapse. We are dealing with a catastrophe with unparalleled wide reaching consequences. This is due in part to the fact that Carillion holds about 450 governmental contracts, spanning the UK education, justice, defence and transport ministries and has a significant piece of the private sector construction market too. Its liquidation affects our nation’s construction supply chain, government, local authorities, schools, hospitals, caterers, cleaners, roads and rail systems. However, rather than continue the debate and cast aspersions as to why, at the point of liquidation, Carillion had only £29m in cash and owed £1.3bn to the banks, this article offers practical tips to those now bearing the brunt of the contractor’s downfall.

First, clarification of the companies in the Carillion Group that went into compulsory liquidation i.e. Carillion Plc; Carillion Construction Limited; Carillion Services Limited; Planned Maintenance Engineering Limited; Carillion Integrated Services Limited; Carillion Services 2006 Limited and in Scotland, Carillion (AMBS) Limited. Due to the way the Carillion empire is structured, even some of the companies in the group that are not in liquidation are in financial difficulty and the supply chain is paying the price for that. Next, a few words on what compulsory liquidation means in the broadest terms. For those Carillion companies in liquidation, Carillion’s directors retain no power in the company and the liquidator assumes the directors’ powers, becoming the authority that causes the company to act. The liquidator’s duties include carrying on the business of the company as far as is necessary for its beneficial winding up and selling property/executing documents in the name of the company. This will cover the settlement of Carillion’s debts insofar as possible, which will include many of Carillion’s suppliers who have been left with unpaid invoices. Understandably, such suppliers fear that their bills may not be paid as the liquidator will dole out what is left once the secured creditors are paid, which often means that unsecured creditors (the majority of those to whom Carillion owes money) may only get a few pence for every pound they are owed.

If your business is affected, check your contract to see what rights you have in the event of the contractor’s insolvency. You can then consider whether any of the practical advice set out below applies to your specific set of circumstances. You may also have statutory or common law rights.

1. If you are a developer/employer

  1. The contract may allow you to terminate the contractor’s employment due to insolvency and, depending on the specific terms of the contract, further rights on termination such as (i) a right to employ others to complete the works; (ii) a right to make no further payment to the contractor including any sums that had became due prior to the insolvency; (iii) a right (once the works are completed by others) to deduct the additional costs from any sum otherwise due to the contractor; (iv) a right to require the contractor to provide its design documents; (v) a right to require the contractor to assign to you the benefit of any sub-contracts/supply agreements/consultant appointments.
  2. If prior to insolvency the contractor was liable to you for defects/service failures, ask the liquidator for a copy of the contractor’s professional indemnity insurance, which you are usually entitled to under a building/services contract. You may be able to claim your losses from the insurer directly.
  3. If you intend for the project/service to continue:
    1. You may have “step in” rights with a sub contractor or consultant under collateral warranties which would mean that you could step into the shoes of the contractor and allow the project/service to continue with you having contractual rights and obligations going forward. Stepping-in usually requires you to pay all outstanding amounts due to the sub-contractor/consultant.
    2. Similarly, you may have the right on termination of the contractor’s employment to compel the contractor to novate or assign sub contractors and/or consultants to you so that you then have the direct contractual relationships. However, these rights may be difficult to enforce in practice where the contractor is insolvent.
    3. Speak to the supply chain. They will be understandably nervous about payment and whether the project is continuing and early engagement with them may prevent termination or suspension of their contracts (see next section).

2. If you are a sub contractor/supplier

  1. You may be considering terminating your contract to avoid incurring further costs. However if the project is ongoing and you gave a collateral warranty to the developer/employer, you may have to notify the developer/employer (or other beneficiary) of their right to “step in” before you can terminate. The developer/employer etc. have a period of time during which to decide whether to step-in, but they are usually not obliged to do so. If they do, your contract will continue and you would be paid by the employer/developer. This will usually include the person stepping-in paying all outstanding amounts due as well. If you want to avoid incurring further costs during the notice period for the step-in, consider using your rights to suspend works for non-payment, as noted below.
  2. If you have invoices unpaid by the contractor, you may be entitled to exercise a contractual or statutory[2] right of suspension until the liquidator pays you. You may also want to engage directly with the developer/employer in any event as they may be willing to pay you directly to continue working on the project, regardless of any step-in rights.
  3. Where you are a supplier of equipment/materials for incorporation into the building/infrastructure, consider the use of any retention of title clause you may have and whether your materials were supplied clearly marked with your details. Where the value of any such equipment and materials was included in any interim certificate you submitted to the contractor but the contractor failed to pay, you may be able to take back possession of your equipment/materials if you have an ROT clause. Materials that have not been paid for but are incorporated into a building will become the property of the developer/employer, so early action is needed. However if you have made the developer/employer aware of your title in the materials, you may have a claim for conversion if the materials are subsequently incorporated into the project.

3. If you are a Professional Consultant

  1. The points at 2 (a) and (b) in relation to sub contractors may apply equally to professional consultants.

4. If you are a supplier of hire plant and machinery

  1. As with suppliers of equipment and materials, early notification of your title to hired plant and machinery is important. The developer/employer may wish to negotiate the continued use of the plant or machinery directly. If they fail to return it or pay for it, you may have a tortious claim for interference with goods to recover hire costs.

5. If you are a public body

  1. Care will need to be taken to ensure that you continue to comply with your procurement law obligations as you consider your options. However, depending on the nature of the contract entered into with Carillion, most public bodies will be able to appoint a replacement contractor without falling foul of the procurement regulations.
  2. There are however a few restrictions to be aware of:
    1. The selected replacement contractor must be able to fulfil the criteria for qualitative selection which bidders involved in the original procurement had to satisfy. In effect, any new contractor must be able to pass the Selection Questions/Pre Qualification Questions which assess bidders suitability, economic and financial standing and technical and professional ability to deliver the contract.
    2. The new contract must not include any substantial modifications to the original contract. In effect, the terms of engagement with any replacement contractor will need to closely mirror those originally entered into with Carillon.
  3. For more complex contracting arrangements which may have involved the use of special purpose vehicles etc., the position may be more complicated and we recommend that legal advice is sought by the contracting authorities in these instances.

These are very difficult and uncertain times for the many individuals, businesses and public bodies affected by the Carillion collapse. It’s a game changer for the construction industry and public procurement. Once the storm has calmed, lessons will have been learnt and we should move into a new era of increased transparency and fairer procurement and payment processes, for the greater good of an industry scarred.

If you are affected by the issues covered in this article and need legal advice, contact Colette Morgan Ford, Partner on 0161 214 0558 or email colette.morgan-ford@weightmans.com

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