Article by Keith Redenbach and Daniel Vicano
There is no doubting that the Global Financial Crisis (GFC) has had a major effect in the construction industry worldwide. While significant infrastructure spending has recently been allocated by the Federal Government, the Australian construction industry is not immune from the global economic downturn.
In fact, recent figures released by ASIC show that the number of insolvency appointments for the month ended 31 March 2009 totalled 1590 nationally. This is a significant increase of about 33% on the 1193 insolvency appointments recorded for the same time last year. A number of these insolvency appointments have been related to the construction industry and the insolvency of a Principal or Contractor during the course of the project, can often spell disaster for the other party.
As a result, there are a number of steps that can be taken by both Principals and Contractors to not only minimise the risk of insolvency of the other party, but also to reduce the damage caused once insolvency arises during the project.
Lessons for Principals
The Principal on a project may consider the following steps:
- Inserting effective insolvency clauses into the Contract – The Australian Standard forms of contract can be amended to create greater rights for the Principal in the event of a Contractor becoming insolvent.
- Putting collateral warranties into the Contract – Such warranties may allow Principals to pursue subcontractors directly for a breach of a warranty under the Contract.
- Introducing milestone payments into the Contract – Milestone payments create an incentive for Contractors to achieve milestones in order to obtain payment.
- Obtain sufficient security from the Contractor – In these times, Principals often seek additional security from the Contractor to cover the risk of insolvency.
Lessons for Contractors
The Contractor on a project may consider the following steps:
- Obtain security from the Principal – A Contractor may seek to obtain security from the Principal on projects where there are high risks involved.
- Principal Guarantor – A Contractor could seek to have the Principal enter into a Deed of Guarantee where the Guarantor would guarantee the Principal's obligations under the project in the event of insolvency.
- Reduce times for payment – Contractors can obtain better cash flow on a project by reducing the certification and payment process under the Contract.
- Use the security of payment legislation – Contractors have increasingly utilised the security of payment legislation against Principals to obtain a fast track payment where the Principal refuses to pay the full amount.
Overall Lessons
Overall, the prevention is the best cure and an effective Contract at the commencement of the project can avoid heartaches later on. More importantly, Principals and Contractors should be aware of who they are dealing with by making the appropriate enquiries prior to entering into a contract.
The above steps are not exhaustive and it is recommended that contracting parties seek legal advice so that all options can be considered.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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