So you think you know all about sub-contractor insolvency and guarantees?

23 February, 2018

With the demise of Carillion and a number of other large construction companies, issues around contractor insolvency are once again in the press.  However, sub-contractor insolvency can also cause severe headaches on construction projects.

In Multiplex Construction Europe Ltd v Dunne, the main contractor recovered a £4 million advance payment made to its sub-contractor under a personal guarantee provided by the managing director of the sub-contractor’s parent company.

Facts

Multiplex employed DBCE (a concrete frame sub-contractor) on major construction projects.  When DBCE encountered financial difficulties, Multiplex advanced £3 million to DBCE.  The terms were set out in an advance payment deed which also stipulated that DBCE’s parent company and the director, Mr Dunne, were jointly and severally liable as the guarantor.

The key provisions were that:

  • the guarantor guaranteed that, should the sub-contractor suffer an event of insolvency, the guarantor shall immediately be liable to the contractor for repayment of the advance payment and shall indemnify the contractor against any loss suffered.
  • the guarantor’s obligations were independent of any other security which the contractor might hold and the guarantor’s liability shall in no way be discharged, lessened or affected by any act or event that might otherwise do so.

The original agreement was subsequently amended so the advance payment increased to £4 million and became a payment on account of sums that would become due to DBCE in the future for its work on different sub-contracts.  Five months later, DBCE and its parent company went into administration.

The key finding of the court was that Mr Dunn’s obligation was “primary”, similar to an indemnity and could be enforceable on satisfaction of some event or requirement which here was an event or, or akin to, insolvency (the term “Insolvency” had been defined broadly).

The commercial context, and the words used, were critical to this finding – Mr Dunne had guaranteed that he would “immediately” be liable to the contractor to repay the advance payment if DBCE became insolvent.  That would not be possible if any accounting had to be done with DBCE first, so the word “immediately” was very important.

Further, it would be contrary to the provision’s commercial purpose if this was not the case.  The parties had agreed that Multiplex, providing substantial cash-flow, needed assurance that the sum would be repaid immediately by the director and the parent company (on a joint and several basis) if DBCE, to whom that sum was advanced, were to become insolvent, which it had.

Finally, consideration of the contra preferentem rule, requiring any ambiguity in the interpretation of a contract or clause to be resolved against the party who put it forward and sought to rely on it, did not arise as there was no ambiguity.  Interestingly, the court went on to say that, in any event, that rule had a very limited role in relation to the interpretation of commercial contracts, including contracts of suretyship, negotiated between parties of equal bargaining power.

Significance

The case surely serves as a useful reminder for individuals to ensure that they review with care any surety or guarantee contracts they decide to enter into, particularly without legal advice, as was the case with Mr Dunne.

More broadly, given that contractors carry the risk of sub-contractor insolvency, contractors should carry out appropriate financial checks on their proposed sub-contractors, ensure the sub-contract defines “Insolvency” broadly and also allows alternative sub-contractors to complete the works (and set off costs) and, for major packages, ensure it has performance bonds or parent company guarantees in place.