By Keith Emmerson, associate, dispute resolution, at Gillespie Macandrew
THERE are some sad inevitabilities in life: ageing; Scotland failing to qualify out of their group at a major football tournament; and construction companies entering insolvency. As construction lawyers, we are often asked: “Do you deal in insolvency?” The short answer is – YES.
The construction industry is a bellwether for the state of the wider economy. Competition is fierce and margins are tight meaning that, unfortunately, the industry is prone to insolvency. At the time of writing, Hadden Construction Limited, a well-established Scottish contractor, has just announced its entry into administration.
The fragility of the industry makes it even more important to pay attention to your construction contracts, as failing to comply strictly with their terms is likely to affect the ability to mitigate any losses arising from insolvency (whether for the insolvent contractor or the employer).
By law (and with limited exceptions), construction contracts are required to have specific payment provisions, which set out the requirements for:
- The dates on which payments are due.
- Notice from payer and/or payee setting out the sum considered due at the due date and the basis of calculation.
- Issuing of ‘pay less notices’ where the payer intends to pay less than the amount in the payment notice, and the basis of calculation.
- The final date for payment to be made.
Strict adherence to these notice provisions is crucial to the proper administration of the contract. Failure to serve a timeous and compliant notice may result in the employer being obliged to make a payment which they do not consider is due or justified, with the prospects of recovering this being significantly diminished having to make a claim through the administrator or liquidator.
Equally, the contractor and its appointed insolvency practitioners may not be able to recover payment that would otherwise be due if they have not complied with their end of the notice requirements. This means that the parties must be aware of the following factors in serving the relevant notices:
- The notice must be served on the other party in accordance with the terms of the contract. This may provide for service by a specific method, for example, by recorded delivery post, or by email to a specific email address.
- The notice must contain certain required information. As a minimum, the legislation requires that such a notice sets out the sum that is considered to be due, and the basis on which it is calculated. The contract itself may have more specific requirements, so this must be carefully monitored.
- The notice must be issued at the correct time. A payment notice issued by a Contractor may not be due if it is served before a valid due date in terms of the contract. On the flipside, if the employer fails to serve a valid pay-less notice on time, then payment to the Contractor will be become due.
Compliance with notice requirements is good practice for both parties in all construction contracts, but may become critical in the event of insolvency. For the contractor and its insolvency practitioners, it may be the difference between a creditor being able to make a recovery in the insolvency or not; for the employer, it may be the difference between having an established claim in the insolvency or having to raise an action against the insolvent contractor. This may be time consuming, costly and ultimately fruitless in the event that there is no money left to settle a claim even if it successful.
The upshot of all this is simple – take notice of your notices! And if you are in any doubt, we are here to give you the advice you need.
