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Forewarned is forearmed in the downturn

As Roman military generals used to say, “praemonitus, praemunitus”. Or as savvy commercial directors and managers should now, more than ever, be thinking, “forewarned is forearmed”.

Those who know that something is coming are better prepared to face it than those who don’t know. In these tricky economic times, the ability for a contractor to identify and protect itself from upstream insolvency is a key part of being forewarned.

There are, of course, many regularly cited ways to minimise the risk of upstream insolvency having an adverse impact on your business.

Contractual safety guards include retention of title clauses, termination provisions, parent company guarantees, retention bonds, retention trust accounts, escrow accounts, project bank accounts, payment security bonds, weighted or advance payments or direct payments from funder to main contractor.

However, when times are tough and the need for protection of payment rises, the bargaining power sometimes shifts away from contractors, making obtaining such protections harder, if not impossible. But even if that is the case, all is not lost.

Standard Construction Act rights such as suspension, pay when paid and adjudication can help a contractor ensure it does not suffer when upstream funds run dry mid-project. In addition, regular and complete applications for payment and strict compliance with contract requirements can ensure large amounts do not become outstanding.

Yet, in reality, such tactics are useless if ignorance reigns. Being forewarned of upstream insolvency is the key for a contractor to minimise its risk of financial exposure.

Before any ink is applied to a contract some simple due diligence on the upstream parties is a very good idea. This means knowing exactly who the legal entities upstream are and their strength of covenant. This can be done by carrying out credit checks and Companies House searches. It is often surprising what such searches reveal.

Once the contract works commence a contractor should continue to monitor the credit status of the upstream parties as considered appropriate.

The frequency and depth of such monitoring will be guided by signs of financial problems such as rumours of financial woes, repeated unjustified delayed payments, redundancies, unexplained personnel changes, unexpected omissions, late filing of company accounts, unsatisfied court judgements or even the adoption of a more strictly contractual approach than previously seen.

Such shrewd but simple commercial tactics would have made Julius Caesar proud: “praemonitus, praemunitus!”.

Laurence Robinson is head of legal for NG Bailey