27 Jun 2017

When large principals and construction contractors become insolvent, there will, by definition, be insufficient money to pay all suppliers of labour, materials and professional services all the way down the contractual chain. In other words, some contractor and suppliers will either have to miss out or be paid less than they had bargained for in return for their supplies.

There is always a lot of argument about precisely how the money that is available is going to be divided up. In recent times, these arguments have become more frequent and sophisticated, particularly as they deal with the interaction between complex provisions in state and federal statutes and in contracts which affect, often in conflicting ways, who gets paid how much, when, and in what order of priority.  These provisions cover:

(a)  progress payments, liquidated damages, defect remediation and compensation both before and after practical completion of construction works;

(b)  each party’s right to set off their payment obligations against the other party’s;

(c)  rapid adjudication of pay disputes;

(d)  risk and loss shifting measures such as bank guarantees and performance bonds;

(e)  the effect of registering, and conversely, failure or delay in registration, of security interests underr the Personal Property Securities Act; and

(f)   the effect of key insolvency and personal property security provisions in the Corporations Act.

Recently, contractors, principals and lawyers alike have received helpful guidance from the courts as to how these laws interact with and supersede one another in any particular case. Perhaps the most comprehensive and most recent consideration of these questions appears in the WA Supreme Court decision of Hamersley Iron Pty Ltd v Forge Group Power Pty Ltd (In Liquidation) (Receivers and Managers Appointed) [2017] WASC 152.

We consider this decision to have important implications for contractors, owners and construction-related professionals at all stages of construction projects and at all points in the contractual chain. In light of this, contractors would be well advised to partner with a specialist law firm like HHG Legal Group that has the skill and expertise to devise and implement a plan to maximise payments in the event of head contractor/principal insolvency.

To maximise their prospects of payment, contractors need more than just a crisis management plan that kicks in at the point of insolvency.  Contractors need a plan that can be clearly and easily built into a contractor’s back-to-back engagement and procurement practices and will apply throughout the life of any project: i.e. before, during and after enforcement of a contractor’s payment rights.

For expert advice in this highly complex and technical area, contact HHG Legal Group’s specialist team of construction and insolvency lawyers.

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