Talk before suspending for non payment

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On 26 June 2020, the Corporate Insolvency and Governance Act 2020 (Act) came into force with changes to insolvency law to help businesses manage the economic implications of Covid-19. The new Act’s permanent measure on continuing supply stands out for the construction industry.

The Act prevents suppliers of a company in an insolvency procedure or protected by a company moratorium from relying on contractual terms to stop supply, terminate or vary contract terms/increase prices upon that insolvency. Any contractual term allowing a supplier to terminate on a company’s entry into an insolvency process will be invalid. Suppliers also cannot make continuing supply conditional on payment of outstanding pre-insolvency charges. If the supplier was already entitled to terminate the contract/supply before the company went into an insolvency process, the supplier cannot exercise that right once the company entered the insolvency process.

All this applies, unless the company or an insolvency office holder agrees otherwise, or the court finds (on the supplier’s application) that continuation of the contract would cause the supplier ‘hardship’ (likely in the complex supply chains of the construction industry if obliged to continue supply even where it may owe payments to its sub-suppliers).

So, how does the Act interact with the statutory right to suspend performance for non-payment under section 112 of the Housing Grants, Construction and Regeneration Act 1996, as amended from 2011 by Part 8 of the Local Democracy, Economic Development and Construction Act 2009 (Construction Act)?

The statutory right to suspend is expressly set out in most standard form construction contracts, although the Construction Act implies the right even if not expressly stated (it is not possible to “contract out” of its provisions). It will override express contractual provisions not consistent with it by incorporating the Scheme for Construction Contracts. Therefore, there is a potential inconsistency between section 112 of the Construction Act and the new Act’s continued supply provisions.

So, can a party who has not been paid under a construction contract suspend performance of any/all of its obligations, thus bypassing the new Act and its need to show hardship? The answer is unclear but, in our view, arguably yes, based on the Act restricting the exercise of contractual rather than statutory rights.

We consider that a party relying on a contractual right to suspend performance alone (such as clause 4.11 of the JCT Standard Form of Design and Build Contract) will likely be precluded from exercising that right and the ‘continued supply’ provisions of the Act will prevail.

Alternatively, it could be said this contractual right underpins the statutory right. However, a party exercising its statutory right to suspend under section 112 will likely be permitted to do so given the Act only curtails a party’s right to exercise contractual mechanisms.

If you are considering suspension, remember that the Act’s provisions were introduced to keep projects/the economy moving and to assist businesses struggling with the impact of Covid-19. They are not inconsistent with the underlying intent of the Construction Act. However, before a party suspends for non-payment, communication is key – between the parties as well as with the appointed insolvency practitioner – to try to resolve matters first amicably without venturing into a formal dispute in uncharted territory!

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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