Termination isn't automatic and shouldn't be your first step. In a contractor insolvency, the Client can usually terminate under reasons R1 to R10, but its first jobs are to secure the Site, find out what the insolvency practitioner intends, and protect the money through any pay less deadline and bond.
What decides your route is the type of insolvency event, whether the appointed practitioner wants to continue, and how far you've secured the job. This is a legal area, so bring in solicitors on day one. The clause numbers below are NEC4 ECC, and R1 to R10 are at 91.1 in NEC3 as well.
Deadlines first
- Pay less notice. Look at any certificate with a final date coming up. Under Option Y(UK)2, a notice has to be given at least seven days before the final date. Miss it and the notified sum may stay payable, subject to the points below.
- Bond and guarantee. Read the exact terms and notice periods of any performance bond (X13) or parent company guarantee (X4) today.
- Insurance. Tell your broker. Confirm that the works remain covered, particularly if the Contractor's insurance was protecting them.
- Health and safety. If the Contractor was principal contractor, an appointment gap needs to be closed. Take advice on your own legal duties.
The first fortnight
- Establish the event. Get documents showing what has actually happened: a court order, an appointment notice or a resolution. A rumour or a walk-off isn't an R event.
- Contact the insolvency practitioner. Ask if the business will carry on, and whether it wants to complete this contract.
- Secure and record the Site. Get a dated photo survey, a stock list and an independent measure of the work. Agree access with the practitioner.
- Identify title. Check what has passed to the Client under clauses 70 and 71, including marked off-site goods. Suppliers may claim goods they say they still own.
- List subcontractors and suppliers, including who's on site, who's owed money, and whom you need to keep.
- Serve a notice if advised, giving the reason. The Project Manager then certifies.
What the Termination Table gives you
| Procedure or amount | Effect | In practice |
|---|---|---|
| P1 | You may finish the works and use Plant and Materials you have title to | Title is the question to settle first |
| P2 | You may instruct the Contractor to leave, remove things and assign the benefit of subcontracts | Each subcontract's terms and the insolvency affect what can pass. Don't assume it's automatic |
| P3 | You may use the Contractor's own Equipment to complete | Much of it may be hired or subject to finance |
| A1 | The normal amount due, and other listed items, with retention added back and unpaid advance payment deducted | The sum may well go the other way once A3 is applied |
| A3 | Takes off the forecast extra cost of completing | Keep a clear record, and prepare for it to be tested. Insolvency set-off rules may apply |
The certified sum unpaid at termination is covered by clause 90.3, as qualified by Y(UK)2 where that applies. In the NEC4 subcontract's Y2.4, the payer still pays unless it gave a valid pay less notice, or the insolvency reason happened after the last date it could. So that notice date matters. See the amount due on termination.
What decides the choice
| Facts | Usual direction |
|---|---|
| Administrator wants to finish and can fund it | Consider continuing, with protections and revised payment terms |
| Liquidation, or nobody on site | Terminate, then re-procure |
| Early stage, little work done | Terminate and re-tender the balance, subject to any public procurement rules |
| Nearly finished | Direct deals with key subcontractors may be quickest |
A note on the supplier restriction
Section 233B of the Insolvency Act 1986 limits a supplier from ending a contract because its customer has entered a relevant process. The Client is normally the customer here, so that restriction doesn't usually stop it. Confirm this with your lawyers, as there may be unusual facts. Insolvency and NEC contracts explains the background.
What the other side will say
A practitioner may ask you to pay for work done, or say you've no right to the Equipment. Unpaid subcontractors may ask you to pay them directly in return for finishing, and any such payment can raise questions under insolvency rules, unless a project bank account or a similar arrangement already covers it. Don't agree to anything on site without advice.
The overall route for other reasons is in a client's termination options, and the NEC questions hub has related answers.
Related guides
- NEC Questions Answered: Real Situations on Site
- The Client Is in Breach but No Event Fits: Is There a Remedy?
- Can We Still Refer a Dispute After the Time Limit?
- Should We Go to Adjudication or Keep Negotiating?
- The Client Wants to End the Contract: What Are the Options?
- Can a Contractor Terminate an NEC Contract?
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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.