This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
Suspension of obligations for non-payment is a key tool in a contractor’s armoury, and one that is being used more and more often. How might a bank respond?
See below for some practical ways that a bank can immediately protect its position in the event that a contractor suspends under the Housing Grants, Construction and Regeneration Act 1996:
a) Check whether the contractor has validly suspended its works and that circumstances actually exist that entitle it to suspend. Has a valid withholding notice been issued by the borrower? Have any other non-payment notices been served previously by the contractor? (This might also give an indication of the financial health of the borrower).
b) Check exactly what has been paid and what hasn’t. Get your project monitor to compare payments with the cash flow and make sure you are fully up-to-date with progress on site.
c) Check whether there are any cost overruns and whether any cost overrun guarantees kick in.
d) There may be insurance policies which require notification of any suspension so make sure the insurers are notified if this is the case in order to avoid potentially invalidating them.
e) Consider site security. There may have been sub-contractors which have not themselves been paid in full and they may resort to a ‘self-help’ method of recovering what is due to them.
f) Make sure you are fully up to speed with the financial status of the borrower. There is a reason why the contractor has not been paid. Are you sure you know exactly what it is?
g) Pass on any notices which have been served on the bank to your legal advisers as soon as possible (remember, timeframes in situations of non-payment are short!).
Needless to say, the number of borrowers running into financial difficulties on their developments has escalated in the past few years. When things have gone wrong, the banks have had to learn a lot (very quickly) about what the best way to deal with these situations is. The more prepared banks can be and the better awareness they have of their developments and their borrower’s financial health, the stronger the position they will be in to assist when things get tough.
