Contracting in the Credit Crunch

Seminar by Shepherd and Wedderburn

Shepherd and Wedderburn LLP

Overview of current market-place

Presentation by Kevin Taylor

Shepherd and Wedderburn LLP

Contracting in the Credit Crunch

Macro

Unparalleled financial times IMF est. $1 trillion losses Recession how deep and long? Sector

Commercial work at record low Housebuilding turmoil New Order Index 2nd lowest ever Scotland

Lower highs/higher lows? HBoS effect?

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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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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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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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Client Issues and Funder Requirements

Presentation by Euan McLeod

Shepherd and Wedderburn LLP

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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7 October 2008

Client Issues

Deal structure

Value engineering

Mothballing projects

Payment guarantees

Meeting the Banks requirements

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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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Legal Value Engineering

No retention

Advance payments

More frequent payments

Payment for offsite materials

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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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Payment Guarantees

Who grants it? Extent of liability capped? Period of liability?

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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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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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Typical Deliverables to the Fund

Report on procurement documentation Performance Bond/Parent Company Guarantee assignation in security? Brokers letters for professional indemnity insurance Assignation in Security of building contract & appointments

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Standard Protections Contractors and Consultants

Presentation by Juliet Haldane

Shepherd and Wedderburn LLP

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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Payment

Housing Grants, Construction and Regeneration Act 1996

Instalments Due Date Final Date Withholding notices

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Payment
Instalments Due Date Final Date Withholding

SBCC/JCT

Agreed stage periodic

or

Receipt of Application 7 days after assessment date

14 days from due date 14 days after due date or period in Contract Data 56 days after Statement or 42 days after Final Statement 28 Days after delivery of Statement

5 days before Final Date 7 days before Final Date

NEC

Agreed assessment intervals

FIDIC

Schedule of Payments or quarterly

Receipt of Statement

28 days after receiving Statement

ICE

Agreed stage periodic

or

On certification of the statement

1 day before Final Date for Payment

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Suspension

Where a sum due under a construction contract is not paid in full 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 the right..to suspend performance of his obligations under the contract to the party by whom payment ought to have been made

Housing Grants, Construction and Regeneration Act 1996

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Suspension
Conditions additional to failure to pay by Final Date SBCC/JCT Failure to pay continues for 7 days after a notice of intention to suspend (with grounds) N/A

NEC

FIDIC

Expiry of 21 days from notice of intention to suspend

ICE

Note also right to suspend for failure to submit financial arrangements Expiry of 21 days from Final Date PLUS 7 days notice of intention to suspend

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Termination

Non-payment

Insolvency

Breach of assignation provisions

Common Law material breach

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Adjudication

Housing Grants, Construction and Regeneration Act 1996

Right to refer dispute to adjudication Timetable for securing appointment of adjudicator and referral of dispute 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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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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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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Contractor/Consultant Payment Protections

Presentation by Ian Hughes

Shepherd and Wedderburn LLP

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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1st 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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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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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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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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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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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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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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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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Insurance?
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 subconsultant 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.

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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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Credit Control and Debt Recovery Enforcement of Bonds/Payment Guarantees

Presentation by Douglas Stewart

Shepherd and Wedderburn LLP

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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Credit Control and Debt Recovery

Ensuring that late payments do not become bad debts Effective systems to manage credit issues

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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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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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Enforcement of Bonds / Payment of Guarantees

Procedures

Insolvency Establishment of debt due Equivalent defence

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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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Questions?

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