LEGAL PROTECTIONS FOR CONTRACTORS: WHAT TO DO WHEN A DEVELOPER BECOMES INSOLVENT
Ameli Inyangu & Partners Advocates - AIP
Nimble and Personal Legal Services
In the construction industry, contractors often face the risk of delayed payments or even non-payment if a developer becomes insolvent. This can severely impact cash flow and the overall financial health of a contractor’s business. However, there are proactive steps that contractors can take to protect themselves against such risks. Here’s a guide on how contractors can legally safeguard themselves from the insolvency of a developer:
1. Conduct Credit and Reference Checks
Before entering into a contract, conduct thorough credit and reference checks to assess the financial stability of the developer. Understanding their financial health can provide valuable insights into whether they are likely to meet their obligations under the contract.
Why It Matters: Identifying potential financial risks early on helps you make informed decisions about whether to proceed with the project or negotiate better terms to mitigate risks.
2. Include 'Pay When Paid' Clauses
When drafting contracts with subcontractors, consider including "pay when paid" clauses. This means that you are only obligated to pay your subcontractors when you have received payment from the developer.
Benefit: This clause protects you from having to make payments out of pocket if the developer becomes insolvent and fails to pay you.
3. Use Retention of Title Clauses
Incorporate retention of title clauses in your contracts. These clauses allow you to retain ownership of materials and goods supplied to the project until full payment is received.
How It Helps: If the developer becomes insolvent, you have the right to reclaim your materials or goods, minimizing potential losses.
4. Incorporate Termination or Suspension Clauses
Include clauses in your contract that permit the suspension of work or termination of the contract if the developer becomes insolvent. This provides you with an option to cease further performance to avoid incurring additional expenses.
Key Advantage: You gain the flexibility to halt work and protect yourself from mounting unpaid invoices in case of the developer’s insolvency.
5. Maintain Detailed Records of Losses
Maintain comprehensive records of all losses incurred due to insolvency, such as equipment and materials held at the construction site. These records are crucial if you need to prove your claim in insolvency proceedings or seek compensation for losses.
Tip: Accurate documentation enhances your chances of recovering some of your losses from the developer's estate.
6. Initiate Adjudication Before Insolvency
If you suspect that the developer is facing financial difficulties, consider initiating adjudication to secure payment before they become formally insolvent. Adjudication can help you recover outstanding payments quickly, allowing you to avoid becoming an unsecured creditor.
Why It’s Effective: Acting promptly can improve your chances of being paid before other creditors and reduce your financial exposure.
CONCLUSION
Dealing with the insolvency of a developer can be challenging, but taking proactive steps can significantly reduce your financial risks. By incorporating protective clauses in your contracts and maintaining diligent records, contractors can enhance their legal position and minimize potential losses.
For expert guidance on construction contracts and legal matters, reach out to us at Ameli Inyangu & Partners Advocates. Our experienced team is ready to assist you in safeguarding your interests.
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