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8/3/2019 S&W Credit Crunch
1/46
Shepherd and Wedderburn LLP
Contracting in the Credit Crunch
Seminar by Shepherd and Wedderburn
8/3/2019 S&W Credit Crunch
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Shepherd and Wedderburn LLP
Overview of current market-place
Presentation by Kevin Taylor
8/3/2019 S&W Credit Crunch
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8/3/2019 S&W Credit Crunch
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47 October 2008Contracting in the Credit Crunch
Consequences
Financial grease not available
If finance available more expensive Refocus on risk
The real economy jobs and spending
Insolvency predictions
unwise to bet on imminent recovery John Authers
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57 October 2008Contracting in the Credit Crunch
Know your
Clients
Lenders Procedures e.g. contracts, debt recovery
Insolvency regimes
Rights contract reviews
Tools litigation as a weapon
Options
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67 October 2008Contracting in the Credit Crunch
Silver Linings
SG health spending
Transport projects Olympics and Commonwealth Games
Social housing new and maintenance
FE Sector e.g. Glasgow Colleges 300M
Energy sector O & G, renewables/wind
Demand for housing not gone
Civil engineering only marginal contraction
Sting in the tail lead times
Need to be prepared
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Shepherd and Wedderburn LLP
Client Issues and Funder Requirements
Presentation by Euan McLeod
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87 October 2008Contracting in the Credit Crunch
Introduction
Not all bad news
Market changed for good?
Funders belt, braces and a little bit more
Tension between funder and contractor/consultant
requirements
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97 October 2008Contracting in the Credit Crunch
Client Issues
Deal structure
Value engineering
Mothballing projects
Payment guarantees
Meeting the Banks requirements
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107 October 2008Contracting in the Credit Crunch
Structure
Who is the client?
SPV structure?
Is the employer the same as the proprietor?
Offshore companies?
Procurement routes?
Direct contracting
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117 October 2008Contracting in the Credit Crunch
Legal Value Engineering
No retention
Advance payments
More frequent payments
Payment for offsite materials
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127 October 2008Contracting in the Credit Crunch
Mothballing Projects
Right to terminate Can you terminate? Consequences of termination?
Liabilities Retention Defects
Resurrecting the project
Banks consent
Ongoing obligations security and insurance
Future liability for the works
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137 October 2008Contracting in the Credit Crunch
Payment Guarantees
Who grants it?
Extent of liability capped?
Period of liability?
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147 October 2008Contracting in the Credit Crunch
Issues Arising out of Funding
Review the Facility Letter
Conditions Precedent action list
Typical requirements Approval of construction team Competence Constitution Financial strength
Approval of procurement route Insurance
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157 October 2008Contracting in the Credit Crunch
Typical Deliverables to the Fund
Site investigation & environmental certified copy reports reliance letters
Collateral Warranties (incorporating step-in rights) main contractor warranty main consultants collateral warranties other consultants?
sub-contractors?
Certified true copy building contract & appointments
Certified true copy sub-contracts
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167 October 2008Contracting in the Credit Crunch
Typical Deliverables to the Fund
Report on procurement documentation
Performance Bond/Parent Company Guarantee assignationin security?
Brokers letters for professional indemnity insurance
Assignation in Security of building contract & appointments
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Shepherd and Wedderburn LLP
Standard Protections Contractors andConsultants
Presentation by Juliet Haldane
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187 October 2008Contracting in the Credit Crunch
Agenda
What protections do standard T&Cs already provide to
Contractors and Consultants? Payment
Suspension
Termination
How can these existing protections be further strengthened?
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197 October 2008Contracting in the Credit Crunch
Payment
Housing Grants, Construction and Regeneration Act 1996
Instalments
Due Date
Final Date
Withholding notices
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207 October 2008Contracting in the Credit Crunch
Payment
1 day beforeFinal Datefor Payment
28 Daysafter deliveryof Statement
Oncertificationof thestatement
Agreedstage orperiodic
ICE
28 days afterreceivingStatement
56 days afterStatement or42 days afterFinal
Statement
Receipt ofStatement
Schedule ofPayments orquarterly
FIDIC
7 daysbefore Final
Date
14 days afterdue date or
period inContractData
7 days afterassessment
date
Agreedassessment
intervals
NEC
5 daysbefore FinalDate
14 days fromdue date
Receipt ofApplication
Agreedstage orperiodic
SBCC/JCT
WithholdingFinal DateDue DateInstalments
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217 October 2008Contracting in the Credit Crunch
Suspension
Where a sum due under a construction contract is not paid infull by the final date for payment and no effective notice to withhold
payment has been given, the person to whom the sum is due has theright..to suspend performance of his obligations under the contract tothe party by whom payment ought to have been made
Housing Grants, Construction and Regeneration Act 1996
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227 October 2008Contracting in the Credit Crunch
Suspension
Expiry of 21 days from Final DatePLUS 7 days notice of intention tosuspend
ICE
Expiry of 21 days from notice ofintention to suspend
Note also right to suspend for failure
to submit financial arrangements
FIDIC
N/ANEC
Failure to pay continues for 7 daysafter a notice of intention to suspend(with grounds)
SBCC/JCT
Conditions additional to failure topay by Final Date
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237 October 2008Contracting in the Credit Crunch
Termination
Non-payment
Insolvency
Breach of assignation provisions
Common Law material breach
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247 October 2008Contracting in the Credit Crunch
Adjudication
Housing Grants, Construction and Regeneration Act 1996
Right to refer dispute to adjudication
Timetable for securing appointment of adjudicator and referral ofdispute
Decision within 28 days (or 42 by agreement)
Impartial decision which is binding until final determination by courts,arbiter or agreement
Scheme for Construction Contracts
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257 October 2008Contracting in the Credit Crunch
Construction Contracts Bill
Due to be enacted Autumn 2009.
Applicable only to construction contracts entered into after Bill in force
Principle Changes Payment Notices Act avoidance provisions
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267 October 2008Contracting in the Credit Crunch
In Conclusion
Check the conditions under which you are being asked to work
At tender stage, raise any amendments to standard T&Cs
Think cash flow equally applicable in boom times
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Shepherd and Wedderburn LLP
Contractor/Consultant Payment Protections
Presentation by Ian Hughes
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287 October 2008Contracting in the Credit Crunch
Introduction to the Practical Issues
What is the contract?
Who is my employer going to be?
Is the employer credit worthy? How do I get paid?
Payment Protections available to me?
Downward Payment Protections
Insurance?
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297 October 2008Contracting in the Credit Crunch
1
st
Stage Tender Enquiry
Advertised or issued direct to contractors/consultants
Ascertain identity of proposed employer
new or existing?
company number is key not name
partnership (LLP or other?)
offshore entity
Ascertain estimated contract value and cashflow
proposed contract period
maximum exposure two/three/four months
Any initial works/services?
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307 October 2008Contracting in the Credit Crunch
Initial Pre-Construction Services/Works
Initial design phase appointment
Pre-Construction Services Agreement
Carrying out initial designs Planning Building Warrant Stage E?
Carrying out detailed pricing and design reviews
Producing sub-contractor tender documents
Progressing the detailed design
At risk? or Under contract?
Agree initial fee
Agree scope of works/services
Negotiate and agree legals before you start
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317 October 2008Contracting in the Credit Crunch
Credit Check Process
Liaise with Finance Director/Manager
Provide the financial information
FD to carry out credit check
FD liaise with legal director/advisors to agree risk profile
FD instructs as to payment protection measures required
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327 October 2008Contracting in the Credit Crunch
Security Options Available
Payment Guarantee
types available? unlimited guarantee of all sums
capped - at level of maximum exposure?
termination funds
expiry payment of final account stepped at PC
who from ultimate parent company, shareholder?
Third Party Payment Bond
similar to a Performance/Guarantee Bond
types available? 10% only?
expiry not PC! who from UK Bank/Surety, Foreign Surety?
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337 October 2008Contracting in the Credit Crunch
Security Options Available
Advance Payments
specific element
front-end loaded cashflow bond back?
Escrow/Trust Accounts/Agreements
ring fenced funds
full amount for drawdown
rolling fund
termination fund
need to be strictly worded to avoid liquidators hands
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347 October 2008Contracting in the Credit Crunch
Security Options Available
Standard Security over the site
Unlikely to be worthwhile due to funders security
Ranking
Step-in Rights in Collateral Warranties
obligatory or discretionary?
step-in period
payment of outstanding and future sums capped?
beware who you grant step-in rights to!
100 company loss of guarantee/bond
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357 October 2008Contracting in the Credit Crunch
Timing of Security Placement
As soon as possible
Prior to or at contract Letter of Intent or Pre-Construction Services Agreement
Formal Appointment/Building Contract
Include in contract a right to suspend if not delivered
Dont delay late delivery or late payment
Insolvency horse might have bolted!
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367 October 2008Contracting in the Credit Crunch
Protections Down the Chain
Extended payment terms
Include Construction Act compliant pay when paid clause Section 113 HGCRA 1996
Applicable only where third party insolvency arises
Beware Retention Bonds or Retention Free offers
cashflow mismatch
lack of fund for defects
Carry out similar credit check process, as for an employer
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377 October 2008Contracting in the Credit Crunch
Insurance against Insolvency?
very little or nothing available in current market
new Zurich product being introduced into the UK US product which covers sub-contractor default
Third Parties (Rights Against Insurers) Act 1930
Not one for recovering payment of sums due but
may provide protection where a sub-contractor or sub-consultant has become insolvent
Provides a means of access to a defendants insurance
On insolvency insured rights can transfer to claimant
Liquidator etc obliged to provide details of insurances
Most commonly applies re All Risks, PII and PLI policies Policies likely to be on a claimed made basis so act quick.
Insurance?
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387 October 2008Contracting in the Credit Crunch
In Conclusion..
Get the initial facts and details correct
Do the credit checks
Choose your preferred security option
Get your security in place before you start
Insurance unlikely to be the panacea
This is best practice for life not just the Credit Crunch!
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Shepherd and Wedderburn LLP
Credit Control and Debt RecoveryEnforcement of Bonds/Payment Guarantees
Presentation by Douglas Stewart
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407 October 2008Contracting in the Credit Crunch
Overview
Credit Control and Debt Recovery
Reducing exposure to bad debt
Managing and recovering late payments
Enforcement of Bonds/Payment Guarantees
Procedures Pitfalls
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417 October 2008Contracting in the Credit Crunch
Credit Control and Debt Recovery
Ensuring that late payments do not become bad debts
Effective systems to manage credit issues
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427 October 2008Contracting in the Credit Crunch
Credit Control and Debt Recovery
Reducing exposure to bad debt
Credit checks
Payment terms and invoicing procedures
Managing credit levels
Advance payments
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437 October 2008Contracting in the Credit Crunch
Credit Control and Debt Recovery
Managing and recovering late payments
Up front meetings with clients
Credit limits
Separate credit control functions
Demand letters and further procedure
Interest on late payments
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447 October 2008Contracting in the Credit Crunch
Enforcement of Bonds / Payment of Guarantees
Procedures
Insolvency
Establishment of debt due
Equivalent defence
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457 October 2008Contracting in the Credit Crunch
Enforcement of Bonds / Payment of Guarantees
Pitfalls
Review of the terms of the bond or guarantee
Credit checks on bondsman or guarantor
Ensure means of recourse against bondsman or guarantor
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467 October 2008Contracting in the Credit Crunch
Questions?