Building services and maintenance contractor Rok was placed into administration in early November. Administrators from PWC are looking for a buyer for the self styled “nation’s local builder”. The move comes just weeks after the administration of its rival Connaught which led to 1,400 redundancies. Rok’s 3,800 employees will be understandably very concerned as will Rok’s customers/employers, many of whom are in the public sector.

The building contracts typically used by contractors like Rok (JCT and NEC) contain special provisions to deal with administration and it is essential that employers seek urgent advice on the steps that need to be taken in order to protect their position. Issues that need attention include:

  • Securing the site if and when the contractor ceases work to ensure that plant, equipment and materials do not “disappear”.
  • Make sure that the insurance cover for the site is in place and notify insurers of the change in circumstances as necessary.
  • Serving withholding notices within the requisite time periods where payment applications have been made and there are grounds to withhold payment.
  • Whether steps should be taken to immediately seek to terminate the contract on the basis of the contractor’s administration or whether it is better to hold off. If you hold off for too long though you could become liable to make payments which could otherwise have been avoided.
  • Are the necessary collateral warranties in place from the contractor’s professional team and sub-contractors?
  • If there is a funder for the project, what do their terms and conditions say about changing contractors and missing warranties?
  • What are the employer’s liabilities under any development agreement following the contractor’s default?
  • Does the employer have a performance bond for the contractor and, if so, what are the requirements to make a claim? Failure to carefully follow these requirements could invalidate the claim and so lose the employer a potentially large sum.

Collapses like Rok’s create a legal minefield for employers with all the potential to make a bad situation considerably worse. When a company goes into administration there is an automatic moratorium on claims against it so that it is “ring fenced” against creditors. There is no moratorium though on the company in administration making claims against its employers for monies and the administrators will want to collect in whatever is owed. This means that if employers don’t act fast to protect their position under the contract they can lose substantial sums of money quite needlessly.

For example:

  1. A contractor serves a payment application for £200,000 on Friday 22 October 2010.
  2. The contract provides that any withholding notice must be served within 21 days, that is by Friday 12 November 2010.
  3. On Friday 5 November 2010 the contractor goes into administration.
  4. The employer was not minded to pay the payment application anyway because of delays and the contractor’s failure to produce the collateral warranties from the sub-contractors.
  5. The administration though is a distraction and the employer is thinking instead about whether or not to terminate the contract. He doesn’t want to immediately in case the contractor is bought by another company and so can complete the works or in case it is possible to have the contract assigned to another contractor who will just take it over and so minimise the disruption to the project.
  6. The 21 days to serve a withholding notice passes.
  7. The employer doesn’t realise though that all is not lost because the contract provides that if he terminates the contract because of the administration within 28 days of the payment application he won’t be immediately liable.
  8. A further week passes without the contract being terminated though and so there is an immediate liability on the employer to pay £200,000 in circumstances were the employer’s contra claims will be for significantly more but in reality will probably be worthless because of the administration.