s&w credit crunch

8/3/2019 S&W Credit Crunch

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Shepherd and Wedderburn LLP

Contracting in the Credit Crunch

Seminar by Shepherd and Wedderburn


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Overview of current market-place

Presentation by Kevin Taylor


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47 October 2008Contracting in the Credit Crunch

Consequences

Financial grease not available

If finance available more expensive Refocus on risk

The real economy jobs and spending

Insolvency predictions

unwise to bet on imminent recovery John Authers


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Know your

Clients

Lenders Procedures e.g. contracts, debt recovery

Insolvency regimes

Rights contract reviews

Tools litigation as a weapon

Options


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Silver Linings

SG health spending

Transport projects Olympics and Commonwealth Games

Social housing new and maintenance

FE Sector e.g. Glasgow Colleges 300M

Energy sector O & G, renewables/wind

Demand for housing not gone

Civil engineering only marginal contraction

Sting in the tail lead times

Need to be prepared


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Client Issues and Funder Requirements

Presentation by Euan McLeod


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Introduction

Not all bad news

Market changed for good?

Funders belt, braces and a little bit more

Tension between funder and contractor/consultant

requirements


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Client Issues

Deal structure

Value engineering

Mothballing projects

Payment guarantees

Meeting the Banks requirements


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Structure

Who is the client?

SPV structure?

Is the employer the same as the proprietor?

Offshore companies?

Procurement routes?

Direct contracting


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Legal Value Engineering

No retention

Advance payments

More frequent payments

Payment for offsite materials


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Mothballing Projects

Right to terminate Can you terminate? Consequences of termination?

Liabilities Retention Defects

Resurrecting the project

Banks consent

Ongoing obligations security and insurance

Future liability for the works


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Payment Guarantees

Who grants it?

Extent of liability capped?

Period of liability?


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Issues Arising out of Funding

Review the Facility Letter

Conditions Precedent action list

Typical requirements Approval of construction team Competence Constitution Financial strength

Approval of procurement route Insurance


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Typical Deliverables to the Fund

Site investigation & environmental certified copy reports reliance letters

Collateral Warranties (incorporating step-in rights) main contractor warranty main consultants collateral warranties other consultants?

sub-contractors?

Certified true copy building contract & appointments

Certified true copy sub-contracts


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Typical Deliverables to the Fund

Report on procurement documentation

Performance Bond/Parent Company Guarantee assignationin security?

Brokers letters for professional indemnity insurance

Assignation in Security of building contract & appointments


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Standard Protections Contractors andConsultants

Presentation by Juliet Haldane


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Agenda

What protections do standard T&Cs already provide to

Contractors and Consultants? Payment

Suspension

Termination

How can these existing protections be further strengthened?


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Payment

Housing Grants, Construction and Regeneration Act 1996

Instalments

Due Date

Final Date

Withholding notices


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Payment

1 day beforeFinal Datefor Payment

28 Daysafter deliveryof Statement

Oncertificationof thestatement

Agreedstage orperiodic

ICE

28 days afterreceivingStatement

56 days afterStatement or42 days afterFinal

Statement

Receipt ofStatement

Schedule ofPayments orquarterly

FIDIC

7 daysbefore Final

Date

14 days afterdue date or

period inContractData

7 days afterassessment

date

Agreedassessment

intervals

NEC

5 daysbefore FinalDate

14 days fromdue date

Receipt ofApplication

Agreedstage orperiodic

SBCC/JCT

WithholdingFinal DateDue DateInstalments


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Suspension

Where a sum due under a construction contract is not paid infull by the final date for payment and no effective notice to withhold

payment has been given, the person to whom the sum is due has theright..to suspend performance of his obligations under the contract tothe party by whom payment ought to have been made



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Suspension

Expiry of 21 days from Final DatePLUS 7 days notice of intention tosuspend

ICE

Expiry of 21 days from notice ofintention to suspend

Note also right to suspend for failure

to submit financial arrangements

FIDIC

N/ANEC

Failure to pay continues for 7 daysafter a notice of intention to suspend(with grounds)

SBCC/JCT

Conditions additional to failure topay by Final Date


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Termination

Non-payment

Insolvency

Breach of assignation provisions

Common Law material breach


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Adjudication


Right to refer dispute to adjudication

Timetable for securing appointment of adjudicator and referral ofdispute

Decision within 28 days (or 42 by agreement)

Impartial decision which is binding until final determination by courts,arbiter or agreement

Scheme for Construction Contracts


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Construction Contracts Bill

Due to be enacted Autumn 2009.

Applicable only to construction contracts entered into after Bill in force

Principle Changes Payment Notices Act avoidance provisions


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In Conclusion

Check the conditions under which you are being asked to work

At tender stage, raise any amendments to standard T&Cs

Think cash flow equally applicable in boom times


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Contractor/Consultant Payment Protections

Presentation by Ian Hughes


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Introduction to the Practical Issues

What is the contract?

Who is my employer going to be?

Is the employer credit worthy? How do I get paid?

Payment Protections available to me?

Downward Payment Protections

Insurance?


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1

st

Stage Tender Enquiry

Advertised or issued direct to contractors/consultants

Ascertain identity of proposed employer

new or existing?

company number is key not name

partnership (LLP or other?)

offshore entity

Ascertain estimated contract value and cashflow

proposed contract period

maximum exposure two/three/four months

Any initial works/services?


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Initial Pre-Construction Services/Works

Initial design phase appointment

Pre-Construction Services Agreement

Carrying out initial designs Planning Building Warrant Stage E?

Carrying out detailed pricing and design reviews

Producing sub-contractor tender documents

Progressing the detailed design

At risk? or Under contract?

Agree initial fee

Agree scope of works/services

Negotiate and agree legals before you start


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Credit Check Process

Liaise with Finance Director/Manager

Provide the financial information

FD to carry out credit check

FD liaise with legal director/advisors to agree risk profile

FD instructs as to payment protection measures required


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Security Options Available

Payment Guarantee

types available? unlimited guarantee of all sums

capped - at level of maximum exposure?

termination funds

expiry payment of final account stepped at PC

who from ultimate parent company, shareholder?

Third Party Payment Bond

similar to a Performance/Guarantee Bond

types available? 10% only?

expiry not PC! who from UK Bank/Surety, Foreign Surety?


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Advance Payments

specific element

front-end loaded cashflow bond back?

Escrow/Trust Accounts/Agreements

ring fenced funds

full amount for drawdown

rolling fund

termination fund

need to be strictly worded to avoid liquidators hands


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Standard Security over the site

Unlikely to be worthwhile due to funders security

Ranking

Step-in Rights in Collateral Warranties

obligatory or discretionary?

step-in period

payment of outstanding and future sums capped?

beware who you grant step-in rights to!

100 company loss of guarantee/bond


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Timing of Security Placement

As soon as possible

Prior to or at contract Letter of Intent or Pre-Construction Services Agreement

Formal Appointment/Building Contract

Include in contract a right to suspend if not delivered

Dont delay late delivery or late payment

Insolvency horse might have bolted!


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Protections Down the Chain

Extended payment terms

Include Construction Act compliant pay when paid clause Section 113 HGCRA 1996

Applicable only where third party insolvency arises

Beware Retention Bonds or Retention Free offers

cashflow mismatch

lack of fund for defects

Carry out similar credit check process, as for an employer


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Insurance against Insolvency?

very little or nothing available in current market

new Zurich product being introduced into the UK US product which covers sub-contractor default

Third Parties (Rights Against Insurers) Act 1930

Not one for recovering payment of sums due but

may provide protection where a sub-contractor or sub-consultant has become insolvent

Provides a means of access to a defendants insurance

On insolvency insured rights can transfer to claimant

Liquidator etc obliged to provide details of insurances

Most commonly applies re All Risks, PII and PLI policies Policies likely to be on a claimed made basis so act quick.

Insurance?


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In Conclusion..

Get the initial facts and details correct

Do the credit checks

Choose your preferred security option

Get your security in place before you start

Insurance unlikely to be the panacea

This is best practice for life not just the Credit Crunch!


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Credit Control and Debt RecoveryEnforcement of Bonds/Payment Guarantees

Presentation by Douglas Stewart


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Overview

Credit Control and Debt Recovery

Reducing exposure to bad debt

Managing and recovering late payments

Enforcement of Bonds/Payment Guarantees

Procedures Pitfalls


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Ensuring that late payments do not become bad debts

Effective systems to manage credit issues


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Reducing exposure to bad debt

Credit checks

Payment terms and invoicing procedures

Managing credit levels

Advance payments


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Managing and recovering late payments

Up front meetings with clients

Credit limits

Separate credit control functions

Demand letters and further procedure

Interest on late payments


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Enforcement of Bonds / Payment of Guarantees

Procedures

Insolvency

Establishment of debt due

Equivalent defence


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Enforcement of Bonds / Payment of Guarantees

Pitfalls

Review of the terms of the bond or guarantee

Credit checks on bondsman or guarantor

Ensure means of recourse against bondsman or guarantor


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Questions?

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