Will the JCT change how its contracts tackle insolvency?

The JCT is due to release a new suite of contracts within the year ahead. Aside from the homeowner’s building contracts released in 2021, this will be the first new suite since 2016. The new contract suite is expected to address several issues that have arisen over the last seven years, including insolvency – a particular concern in the current economic climate. Reports have predicted around 6,000 insolvencies in the construction sector in 2023, which is almost double the amount that occurred last year.

How is insolvency dealt with in the JCT contracts?

Under the 2016 JCT contracts, when the corporate contractor becomes insolvent, both parties have a right to terminate the contract. Ultimately, this is so the contractor can recover its costs and protect its position. For the contractor, it will want to step away from its contract obligations. For the employer, it will usually want to progress the project with someone else as efficiently as possible.

It is in both the employer’s and the contractor’s interests for there to be a right to terminate a JCT contract in all insolvency circumstances, as otherwise they will be tied to a contract that they cannot in practice perform.

Changes to insolvency law

The Corporate Insolvency and Governance Act 2020 introduced two additional insolvency procedures.

• A restructuring plan to help companies struggling with debt obligations, which can be imposed by the court and which is now enshrined in Part 26A Companies Act 2006.
• A freestanding moratorium to give companies breathing space to pursue a rescue or restructuring plan without creditor pressure now found at Part A1 Insolvency Act 1986.

The current definition of “insolvent” in the JCT contracts, however, may not be wide enough to capture the two additional insolvency procedures. This would mean that even if a contractor is technically insolvent, the parties cannot terminate the contract. It may be beneficial, therefore, if the definition in the JCT contracts is expanded to include the two additional insolvency procedures.

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But watch out – the Corporate Insolvency and Governance Act 2020 also introduced new provisions relating to circumstances where the employer goes insolvent, to ensure the continuity of essential supplies. This would prevent the contractor from terminating where the employer is going through a “rescue process”. This is now found at section 233B of the Insolvency Act 1986. So even if the JCT definition of insolvency was expanded to include the new procedures under the Corporate Insolvency and Governance Act 2020, there is a possibility these procedures cannot be relied upon in circumstances of employer insolvency. We will have to wait and see if the JCT considers including this carve-out.

The definition of insolvency in the JCT suite of contracts, however, is not only used in relation to termination rights. The parties also need to consider the impact of expanding the definition of insolvency on any other provisions, as it may not always be beneficial for the wider definition to apply to all circumstances. For example, in the JCT Standard Building Contract with Quantities 2016, the “insolvency” of a named specialist is a relevant event and relevant matter (potentially entitling the contractor to additional time and/or money to complete the works).

What approach will the JCT take?

It will be interesting to see how the JCT decides to address the recent changes in insolvency law, if at all, as they are ultimately designed to be rescue procedures. They may leave the provisions as worded, to be considered on a case-by-case basis.

Parties should always seek legal advice before terminating a contract.

We are expecting the JCT to focus on other beneficial changes when they release the new suite of contracts, future-proofing the contracts to facilitate working practices. For example, there could be new mechanisms linked to net zero/embodied carbon processes, particularly given the public policy focus on these elements. We would also welcome a new option for the all-risks insurance schedule, which expressly recognises the reality on fit-out works where the employer (or landlord/owner) maintains the all-risks insurance of the existing structures and the contractor maintains the all-risks insurance of the works.

Elizabeth Painter is a construction solicitor and Julie Killip is partner specialising in insolvency at RWK Goodman.