How to protect yourself against Construction Company insolvencies.

Entering into a contract to build a new home for a fixed price would seem, at least on the surface, to be the easiest and most stress-free way to get yourself a brand-new home. However, recent trends have shown a number of cases where building companies have collapsed under the strain of paying subcontractors and suppliers, and if you don’t have the right protections built into your contract, then you can be left with nothing more than a concrete slab and timber frame, and a sizeable dent in your wallet.

There have been multiple construction companies becoming insolvent in the past year, including Privium, Hotondo Homes in Hobart and most recently ProBuild. We expect there to be a large number of other construction related insolvencies in 2022, potentially leaving thousands of unfinished projects and a significant number of individuals affected including tradespeople, suppliers, subcontractors and owners.

In these circumstances, it is essential that you properly understands your rights and obtain prompt advice in relation to your position and what remedies you may have available.  In the current environment, it is recommended that anyone involved in the construction industry or about to enter into a contract with a builder should seek legal advice on their contractual documents to ensure that they have the best possible protection from potential insolvency impacting their project.
Is Ipso Facto a thing of the past?
Construction contracts commonly contain what are referred to as ipso facto clauses, which are designed to allow clients or the principal to terminate a contract when the builder or contractor suffers an insolvency event.

However, recent amendments to the Corporations Act 2001 (Cth) meant that any new contracts signed would allow companies to benefit from certain protections from the enforcement of ipso facto clauses should those companies be placed into voluntary administration or receivership.

This moratorium is designed to preserve value in companies under administration where possible and to allow the effective administration or restructuring of companies that can be saved.

But this also means that owners may not be able to terminate contracts with insolvent builders, and may find themselves locked into contracts while no work happens. It also means that subcontractors and suppliers may be locked out of sites and not able to recover moneys owed to them.

Understandably, this can cause significant stress and uncertainty, expose homeowners to significant increased costs, and expose subcontractors and suppliers to considerable losses for unpaid debts owed to them.
What about a deposit?
A customer should always be careful paying a deposit before a contract is signed.

In NSW, a builder should supply their clients with Home Owners Warranty Insurance for every contract over $20,000. This insurance protects clients from circumstances where the builder becomes insolvent.

But as has been reported recently in the media, many homeowners have paid deposits before contracts are entered into and insurance obtained.

In those cases, it is unfortunately the case that these customers will likely be unsecured creditors for those deposits and will not have the benefit of insurance coverage.
Is there anything more homeowners can do prior to signing a contract to protect themselves?
Given recent events, it is clearly wise to carefully review and seek legal advice on any construction contract prior to signing. Many construction companies will use a completely standardised contract, but such standard contracts may not provide adequate protection.

Careful consideration should be given to contractual clauses governing ownership and use of plans and construction documents and the power to terminate for performance based defaults, rather than simply relying on an act of insolvency.
Is there anything sub-contractors and suppliers can do to protect themselves?
All sub-contractors and suppliers should seek a legal review of their contractual arrangements.
Important matters to concentrate on are:
  • the right to suspend works
  • security registrations under the Personal Property Securities Act 2009 (including ensuring that all securities are properly registered and enforceable)
  • ensuring that all retention moneys or other securities held under a contract remain intact, and
  • ensuring that invoices are paid within acceptable timeframes.
What if my builder or head contractor does become insolvent?
In short, seek advice at the earliest opportunity.

Although rights might be limited when a company does go into administration, at least initially, by seeking advice you may be able to take steps to protect yourself and investigate alternate options sooner, or enter into negotiations with an administrator to reach a beneficial resolution.

Hicksons’ specialist lawyers are experts in construction law and insolvency law and are uniquely placed to assist you should you be a customer, subcontractor or supplier to a builder. It is important to review and seek advice on all contracts before they are entered into, but equally important to seek advice early when you are impacted by the insolvency of a major partner.

Post by Hicksons' Partner, Lachlan Wilson and Solicitor, Jack Meek.

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