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Rights of Subcontractors

The rush hour commute into Manchester City Centre ground to a halt one morning last month as a disgruntled subcontractor chose to block one of the key routes with plant hire vehicles. The protest was against of non-payment by Dawnus Construction, the main contractor appointed by Manchester City Council to carry of a £15 million road improvement scheme in Manchester and Salford.

The subcontractor, Total Plant Hire (TPL), had supplied plant and machinery to Dawnus for the scheme. When Dawnus failed to pay under the terms of the contract and TPL couldn’t get through to anyone at Dawnus or the Council it took drastic action. Sadly the action was in vain as Dawnus entered Administration that same week. TPL was said to be owed £300,000 by Dawnus. So what can TPL do to recover its money?

Rights of Subcontractors

The relationship between a contractor and a subcontractor will be governed by the terms of any contract between them. If the businesses are operating within the construction industry then it is likely the contract will be in a standard form under the terms of the Construction Act using JCT standard terms.

Subcontractors must take care to consider the terms of contracts carefully and seek advice to ensure they are fully aware of their rights and obligations.

In the event of the main contractor’s insolvency, it is likely that the subcontractor will be an unsecured creditor in a long line of unsecured creditors and the chance of recovering what it is owed are likely to be slim. The Administrators may continue to trade the business if they feel a buyer can be sought or may wind up the business and collect debts. In either scenario, it is rare for there to be enough funds in the Administration to satisfy all creditors so often unsecured creditors will end up recovering little or none of what they are owed.

However, there may be other options open to the subcontractor.

‘Step in Rights’

Another contractor may ‘step-in’ for the insolvent contractor under the terms of the contract. If that occurs they will assume its liabilities under the original contract.

Retention of Title

Does the subcontractor have materials on site that can be seized? If the materials are still in their raw format and have not been incorporated into the project, the subcontractor could claim retention of title and remove the materials. In administration this requires the administrators consent but if they want to use the subcontractors goods generally they will have to pay for them.The terms of the contract would need to be considered first. If the materials could be reclaimed they could then be sold on to mitigate the money lost under the contract.

Negotiate with the Contractor’s Employer

In this case, if TPL’s plant and machinery is integral to finishing the scheme, TPL could seek to negotiate with Manchester City Council or, more likely, the new contractor appointed to complete the project.

Suspension of Works

If TPL had been providing labour as well as machinery, it should consider the terms of the contract to see if it needs to formally suspend the works it had been carrying out to prevent incurring further losses.

The insolvency of a contractor can often have a domino effect and can lead to subcontractors following it into an insolvency process. If the subcontractor is struggling to pay its debts as a result of the lost revenue from the contract, it needs to swiftly seek advice. Our insolvency and litigation teams are experienced in advising on all aspects of contract disputes and insolvency processes.

With Dawnus citing Brexit and the need to target markets outside of the EU as its reasons for failure, it is unlikely to be the only contractor in difficulties. Subcontractors need to ensure contracts are watertight.