When Your Building Contractor is Liquidated: What You Should Know

You have taken out a mortgage or invested your savings into building your dream home when the unthinkable happens, your contractor is liquidated, and construction comes to an abrupt halt. Where to from here?

Upon finalisation of the liquidation order, a liquidator will be appointed who ‘steps into the shoes’ of the liquidated contractor. Your contract will not be automatically suspended or terminated and you as an employer cannot compel the contractor’s liquidator to continue with and complete the construction project. The liquidator will elect to abide by or repudiate the relevant contract. Repudiation occurs when a deliberate and clear intention is expressed that one no longer wishes to honour their obligations under the contract and to no longer be bound by the contract.

One can assume that the liquidator will elect to repudiate the construction contract, mostly due to lack of expertise on the part of the liquidator. It is a requirement that the liquidator must make such a decision within a ‘reasonable time.’ What is considered a reasonable period with be determined on a case to case basis considering the content and context of the contract.

Should the liquidator elect to repudiate the contract, the employer will be entitled to terminate the contract. In this instance the principal agent (usually the architect) or engineer will be required to prepare a final account for the project in order to determine any outstanding monies owed to the liquidated contractor. To facilitate this, the principal agent or engineer will conduct a valuation of the constructed works effected by the liquidated contractor.

During the valuation inspection the principal agent or engineer must also quantify the outstanding work and any damages, which will also be included in the final account. Items that could be included under ‘damages’ are penalties as a result of delays in the project, executed work that is defective, any outstanding work and so forth. The quantification will be used in any claim that the employer wishes to lodge against the liquidated contractor’s estate or vice versa.

Upon completion of the valuation, one would then proceed to appoint a contractor to complete the project either by obtaining quotations or putting out a competitive tender. Any potential contractors would usually wish to visit the relevant construction site in order to conduct their own assessments to aid the compilation of their quote or bid.

The quote or bid that is ultimately accepted by the employer may be a useful tool to quantify the additional costs incurred by the employer with regards to the outstanding works. It is important to note that should there be any additional work included in the quotation or bid, the price accepted for the additional work may not be included in the claim against the liquidated estate.

The majority of the claim against the liquidated estate will be for the costs incurred as a result of appointing a new contractor to complete the project. Appointing a new contractor for a project that is underway will always result in additional costs as the site will have to be established again and it is likely that the costs of materials will have increased during the interim period.

It is often the case that the employer will not receive a full pay out from the liquidated estate. A liquidated estate will have limited means to repay any existing creditors and as a result creditors be repaid according to their proportionate share. In terms of Insolvency Law, as an employer, you will be on equal footing with other concurrent creditors, therefore preferential treatment will not be received.

To guard against such events, it is advisable to do due diligence (preferably together with the principal agent) before appointing a contractor when embarking on any construction project.

This article is for general information purposes and should not be used or relied on as legal or other professional advice. No liability can be accepted for any errors or omissions nor for any loss or damage arising from reliance upon any information herein. Contact us for specific and detailed advice.