Carillion was perhaps best known for its public sector work. However, the insolvency of the UK’s second-largest construction company will inevitably have significant implications for the private sector.
The immediate concern is for the financial stability of subcontractors, as the consequences of the insolvency ripple through Carillion’s supply chain. Affected subcontractors might typically expect to lose payment for as much as three or four months’ work in progress, which could be catastrophic if they have a significant commercial exposure to Carillion. While some may be able to manage their losses, others will inevitably face insolvency themselves. The Association of British Insurers has suggested that few companies would have taken out trade credit insurance.
Termination of contracts
Depending on how far works had progressed prior to Carillion’s demise, developers may be able to find a new main contractor, or alternatively choose to exercise any contractual rights to ‘step-in’ to individual subcontracts in order to complete the outstanding works. Retaining the subcontractors can be mutually beneficial, as the developer achieves continuity while the subcontractors may recover some of their debts.
Nearly all construction contracts will permit the developer to terminate the contractor’s employment with immediate effect in the event of formal insolvency. Any additional costs incurred in completing the works using other contractors could then be set-off against sums which would otherwise be due to Carillion. Termination of the main contract is likely to trigger automatic termination under the subcontracts; those subcontractors will also be entitled to suspend work in the event of non-payment.
If a viable alternative contractor can be found, then Carillion’s rights and obligations under the existing contract could instead be ‘novated’ (i.e. transferred) to the new contractor with the agreement of all parties.
Ownership of materials
Following insolvency, disputes will often arise concerning ownership of materials on site, as unpaid suppliers may be tempted to "take the law into their own hands" and attempt to recover their goods – especially unfixed goods – from sites. Some suppliers will attempt to enforce retention of title clauses, which seek to provide that the suppliers retain ownership of materials until payment is made. Such contract terms can be effective, at least until the relevant materials are incorporated into the building. However, private sector clients have some protection under section 25 of the Sale of Goods Act 1979, which provides that a purchaser acting in good faith without notice of a retention of title clause may acquire good title. So if a client has already paid Carillion for materials already delivered to site, regardless as to whether they have been incorporated into the building works or not, they may well have strong title claims. This is a particular complex area, as there are obvious “clashes of rights” here between the client who paid Carillion for such materials, and suppliers who were not paid by Carillion and may have tried to protect their position by retention of title drafting in their own subcontracts.
It is notable that payment delays have been identified as a possible causal factor in the insolvency. In turn, it has been said that Carillion routinely took 120 days to pay its own subcontractors, despite being a signatory to the prompt payment code. The Government is currently considering its response to a recent consultation on the practice of cash retentions in the construction industry, as this practice is perceived as a barrier to investment, productivity improvements and growth.
In the meantime, Carillion’s demise is simply the latest and most high profile example of the high insolvency rates that continue to characterise the UK construction market.