REUTERS | Ilya Naymushin

Sub-contractor insolvency – what lengths would you go to?

Over the past few months, a number of large construction companies have been making headlines for facing severe financial difficulties. However, sub-contractor insolvency can also cause considerable problems for other parties on construction projects who have contractual relations with that party.

In Multiplex Construction Europe Ltd v Dunne, the main contractor (Multiplex) took steps to try to secure the solvency of its sub-contractor (DBCE), by advancing DBCE £4 million so it could see the project to completion. The fact that Multiplex advanced such a significant sum demonstrates the enormity of sub-contractor insolvency, as does the willingness of DBCE’s owner to stand as surety in his personal capacity for the sums advanced.

The case is a timely reminder of the care that parties should take when entering into suretyship agreements, particularly when such agreements are capable of amounting to a contract of indemnity, and the consequences that thereby follow for the surety.

Multiplex Construction Europe Ltd v Dunne

DBCE had a number of different sub-contracts with Multiplex for building and civil engineering sub-contract works at a variety of major construction projects. DBCE encountered financial difficulties, which led to the execution of the Advance Payment Deed (APD) between Multiplex and DBCE, and also Mr Dunne and the parent company, DGL “as the Guarantor”.

The effect of the APD was that Multiplex advanced £3 million to DBCE (which was later increased to £4 million), while DGL and Mr Dunne provided an alternative route to recovery by Multiplex of that sum in circumstances where DBCE did not or could not repay that money back to Multiplex itself.

The APD contained the following clause:

“The Guarantor irrevocably and unconditionally guarantees, warrants and undertakes jointly and severally to the Contractor that should the Sub-Contractor suffer an event of insolvency (including but not limited to administration, administrative receivership, liquidation, ceasing or threatening to ceasing carrying on its business in the normal course or otherwise) or otherwise not be able to pay back the Advance Payment to the Contractor immediately upon receipt of a written demand from the Contractor, the Guarantor shall immediately be liable to the Contractor for the payment of the Advance Payment and shall indemnify and hold harmless the Contractor against any loss, damage, demands, charges, payments, liability, proceedings, claims, costs and expenses suffered or incurred by the Contractor arising therefrom or in connection therewith.”

In the event, DBCE (and DGL) were placed into administration and Multiplex sought recovery from Mr Dunne of the £4 million it had paid.

Multiplex argued that the APD was a contract of indemnity such that it had the right to claim the £4 million from Mr Dunne personally, while Mr Dunne claimed that the APD was a contract of guarantee, which only gave rise to secondary obligations.

If Multiplex was right, Mr Dunne had to pay £4 million forthwith (as a primary obligor). If Mr Dunne was right, Multiplex would have had to establish the losses it suffered as a result of DBCE’s insolvency before seeking recovery from Mr Dunne.

Court’s decision

The court’s decision turned on the meaning of clause 3.1 and, in particular, the statement that Mr Dunne “irrevocably and unconditionally guarantees, warrants and undertakes jointly and severally to” Multiplex that should such an event of insolvency occur, he would “immediately be liable to the Contractor for the payment of the Advance Payment”.

The court found that the commercial context and the words themselves made it clear that the APD was a contract of indemnity and, in particular, that the use of the word “immediately” was important “if not crucial” to construing the clause.  It stated that:

“It simply would not be possible to repay the Advance Payment ‘immediately’ if any sort of accounting had to be done with DBCE; not only that, it would be contrary to the commercial purpose were Mr Dunne’s liability to Multiplex to be a secondary one, with the primary obligation being upon DBCE.”

The court determined that the commercial purpose of the provision was that parties agreed that in providing substantial cash flow assistance, Multiplex was to be given the assurance that this sum would be repaid immediately by Mr Dunne if DBCE was to become insolvent. The use of “indemnify and hold harmless” was further evidence that there was a primary liability on Mr Dunne’s part, and the heading “guarantee” was not determinative of the nature of the obligation.

As there was no ambiguity in the words used, the court did not consider that the contra proferentum rule arose, but made the obiter comment that the rule would not have much, if any, application in the circumstances of this case. In the court’s opinion, the statement in Persimmon Homes v Arup that “the rule now has a very limited role” in the context of construing an exemption clause, was equally applicable to contracts of suretyship entered into in a commercial context between parties of equal bargaining power.

Significance of this decision

This case serves as a useful reminder for individuals to ensure that they review with care any surety agreements they decide to enter into, particularly without taking legal advice (as was the case with Mr Dunne).

In Multiplex, the contractor decided to enter into the APD at the point at which DBCE started to have financial difficulties, rather than relying on the underlying terms of the sub-contract in the event of DBCE’s insolvency. Of course, it is not clear from the judgment the precise terms upon which DBCE had contracted with Multiplex and it may be that the APD provided the best means of seeing the project through to completion by trying to keep DBCE afloat (particularly given the sub-contractor was engaged across nine different projects).

That said, prevention is better than cure. Given the contractor carries the risk of sub-contractor insolvency, contractors are advised to:

  • Carry out appropriate final due diligence on the sub-contractor.
  • Ensure that the sub-contract defines insolvency broadly and contains provisions to allow an alternative sub-contractor to complete the works (and to set off costs).
  • Make sure it has a parent company guarantee or performance bond in place.
Keating Chambers Brenna Conroy

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