NEC insolvency is dealt with mainly by termination reasons R1 to R10: if the other Party goes through one of the listed events, or its equivalent, you may be able to terminate under the Termination Table. Whether you actually can, and whether you should, depends on who has failed and on UK insolvency law.
The clause is at 91.1 of both NEC3 and NEC4. It is a part of the wider picture of NEC disputes and termination. Insolvency is a legal area with strict rules, so treat this as general background and take advice in any real case.
The listed events
| If the other Party is | Reasons |
|---|---|
| An individual | R1 bankruptcy application (NEC3: petition), R2 bankruptcy order, R3 receiver over assets, R4 arrangement with creditors |
| A company or partnership | R5 winding-up order, R6 provisional liquidator, R7 winding-up resolution (other than to amalgamate or reconstruct), R8 administration, R9 receiver or similar over all or a substantial part, R10 arrangement with creditors |
The effect depends on who has failed
| The Contractor is insolvent | The Client is insolvent | |
|---|---|---|
| Who may terminate | The Client | The Contractor, subject to the restriction below |
| Procedures | P1, P2, P3 | P1, P4 |
| Amounts | A1, A3 | A1, A2, A4 |
| Commercial reality | The Client looks to finish the works and recover the extra cost | The Contractor is an unsecured creditor for much of what it's owed, unless protected |
A legal limit for suppliers
Section 233B of the Insolvency Act 1986, added by the Corporate Insolvency and Governance Act 2020, restricts a supplier of goods or services from ending a contract, or doing certain other things, because its customer has entered a relevant insolvency process. There are exclusions and procedures for applying to court.
In NEC terms, a Contractor is usually a supplier to the Client. So it can't assume that it can use R1 to R10 against a Client in such a process, even though the contract seems to allow it. A Client terminating an insolvent Contractor is in a different position, as it's normally the customer, and the same logic applies between a Contractor and its subcontractors. Take legal advice before serving any notice relying on an insolvency reason.
An unpaid Contractor may have other routes, such as R16 for non-payment, or suspending performance under the Construction Act, depending on the facts. Those also need advice, since the restriction also has wording about conditions that arose before the insolvency.
Before the worst happens
| Protection | What it does | Reference |
|---|---|---|
| Parent company guarantee | Another company stands behind the Contractor | Option X4 |
| Performance bond | A third party pays up to a stated amount | Option X13 |
| Retention | The Client holds a stated percentage | Option X16 |
| Project Bank Account | Payments go through a dedicated account | Y(UK)1 |
| Marking of Plant and Materials | Title in off-site goods, as far as the Contractor has it | Clauses 70 and 71 |
| Careful advance payment | Secure it with a bond, if the contract requires one | Option X14 |
A fictional example: Contractor enters administration
A Client is 60% through a medical centre on Option A, with illustrative numbers. The Contractor enters administration. The Client's steps:
- Don't rush. The administrator might want to complete the contract. Talk to them. Consider whether continuing is possible.
- Secure the Site and protect the works, with the administrator's cooperation.
- Serve the notice for R8 if advised, and have the Project Manager certify.
- Apply P2 and P3 as far as they can be used in practice. Check who owns what. Unpaid suppliers may claim goods they say they still own, so the procedures need care.
- Call on any bond or guarantee, following its exact terms and time limits.
- Keep records of the extra cost for A3 and the amount due on termination. The final account may involve insolvency rules on set-off.
Warning signs
- Subcontractors complaining of late payment, or walking off.
- Materials arriving later and on stricter supplier terms.
- Applications for payment that seek more than the work justifies.
- Key staff leaving, or a sudden fall in site activity.
- Requests for early payment or a change to the bank details.
A Project Manager can give an early warning about matters such as these, if they could affect the work. The other side can then meet and discuss what to do. See what should be an early warning.
If the insolvency is further down the chain
If a subcontractor fails, the main contract doesn't change. The Contractor is still responsible for Providing the Works, and there's generally no compensation event. The guide to ending an NEC subcontract covers what it can do.
Related guides
- NEC Disputes and Termination
- Ending an NEC Subcontract
- Payment on Termination
- What Changed in NEC4 Termination
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This guide is general information in our own words, not legal advice. Your contract and its Contract Data always govern. NEC, NEC3 and NEC4 are trade marks of Thomas Telford Ltd; Contract Status is not affiliated with or endorsed by NEC.