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Clifford Chance

Clifford Chance

Construction Insights

Close but no Ciga-r?

The recently enacted Corporate Insolvency and Governance Act 2020 ("CIGA") introduces sweeping changes to UK insolvency law. Some of these changes have significant implications for common construction project procedures – in particular around the enforceability of key remedies in multiparty contracts, including step-in rights. In this blog, I look at three of them.

Background

In addition to the new moratorium and payment holiday for eligible companies, one of the key changes introduced by CIGA is that, subject to certain exemptions, 'supplier' termination rights (and certain other remedies) are made ineffective to the extent they arise because of the purchaser's insolvency. Most contractors would be 'suppliers' for these purposes, but this could also catch most developers to the extent they themselves are supplying construction goods/services to third parties (e.g. under development agreements – although PPP contracts are excluded).

Termination rights which have arisen (but not been exercised) prior to the purchaser's insolvency are suspended while the purchaser is under an insolvency procedure.

These provisions (subject to stated exemptions) apply to any company which can be wound up in the UK. However, the impact on multipartite arrangements generally is not clear.

1. Step-in

Construction projects commonly provide for stakeholders to have a right to step-in on or novate contracts when there is a supplier termination right arising in the supply contract (including insolvency). Project funders, including forward funders, will often have such rights in relation to construction contracts and developers will also often secure this right with key subcontractors. These rights are either contained in separate direct agreements or collateral warranties, or in specific 'third party rights' clauses within the supply contracts themselves.

The extent to which step-in rights will remain fully effective has been made unclear as a result of CIGA. This is because CIGA prevents a contractual right for a 'supplier' to terminate a 'supply contract' for counterparty insolvency taking effect - so the supplier cannot issue a notice to trigger the step-in/novation mechanism as a result.

Confusingly though if the same insolvency is a default event in the agreement between the beneficiary of the step-in right and the insolvent party (which it usually will be), it appears that the beneficiary of a direct agreement or collateral warranty will still be able to trigger a step-in process itself in the same circumstances.

However, with a third party right process, even the service of a notice by a beneficiary (and thus any step-in process) may be prohibited as a result of CIGA if triggered by the purchaser's insolvency.

The same underlying insolvency therefore potentially triggers significantly different outcomes depending on how it is documented Even the policy outcome here is unclear as there is a tension between CIGA's stated intention of seeking to allow struggling companies a better chance of being rescued, and the well-established route for rescuing projects and supply chains by allowing stakeholders to cut struggling companies out of project structures via step-in.

Additionally, the UK industry has fought hard to have third party rights accepted instead of collateral warranties in the right circumstances. CIGA may represent a stumbling block.

2. IP Escrows

Projects involving proprietary IP (e.g. renewable power projects using wind or concentrated solar power, as well as new nuclear projects), often see critical IP placed into escrow for release in limited circumstances. The most important of these is typically the insolvency of the IP owner.

The escrow agreement is usually a tripartite agreement between project developer, IP owner and escrow agent, with the agent supplying services to each of the others.

CIGA suggests that an escrow release triggered by depositor insolvency may cease to be effective, requiring these contracts to be restructured.

3. More than one Purchaser party

Where a supplier supplies to two parties under a single contract, one of whom is exempt from CIGA and the other of whom is not, it is not clear whether or to what extent the supplier would be permitted to terminate the supply contract where one or both of those counterparties is insolvent.

Those involved on construction projects at any level need to understand the potential impacts of CIGA and the various potential workarounds and it goes without saying that we are ready and able to help on that front. Our insolvency and restructuring team has produced a general briefing on CIGA which can be found here: UK Corporate Insolvency and Governance Act: Different Stakeholder Perspectives.

This blog is an opinion piece only and does not constitute legal advice.