The Madness of King George, Sub-Contracting and Killer Clauses Part 2

It is no secret that Sub-Contractor and supplier prices are rising faster than Main Contract prices. Contractors are being squeezed at both ends and margin erosion and liquidity issues will force a number of Contractors to either change their working practices or fail. If you are a Sub-Contractor, you can expect a tough ride over the next couple of years as Contractors resort to “every trick in the book” and some new ones to try and deprive you of your cash in order to deal with these problems.
They say that desperate folk resort to desperate measures and a number of Contractors are resorting to introducing some frighteningly onerous provisions in order to shift the see-saw of legal risk so far in their favour that I would have to conclude that only those Sub-Contractors with a death wish would agree to them.
Below is an example of a very subtle killer clause we have seen just this week. We define a killer clause as provision in a contract that is so onerous, we would be unable to support a Sub-Contractor’s application for funding by an Asset Based Lender or Clearing Bank because the chances of abuse, failure and exploitation by the Contractor who is proposing such terms are so high that we judge them to be a foregone conclusion. Any Sub-Contractor who is stupid enough to agree to such provisions is courting disaster and is likely to fail as a result at any time and is not one we would ever support for funding.
To save embarrassment, I have deliberately failed to disclose the identity of the Contractor, whose terms these are.
 “Further, in the event of the Sub-Contractor becoming insolvent (whether liquidation, receivership or otherwise) the Sub-Contractor further
a)       assigns to the Main Contractor the benefit of all and any rights arising under any other sub-contract entered into between the Sub-Contractor and the Main Contractor (or any other main contractor which is an affiliate, subsidiary or parent of the Main Contractor as such terms are defined in the Companies Act 2006) including the balance of any retention or further sums due under any such contract, and
b)       agrees that the Main Contractor is entitled to cross set off any other sums due to the Sub-Contractor under any other sub-contract entered into by the Sub-Contractor and Main Contractor (or any other main contractor which is an affiliate, subsidiary or parent of the Main Contractor as such terms are defined in the Companies Act 2006) towards any loss and expense and/or damage the Main Contractor may suffer as a consequence of the insolvency of the Sub-Contractor under this Sub-Contract, and
c)        grants to the Main Contractor a lien over any of its plant and machinery and materials on site at the date of insolvency
and further irrevocably appoints the Main Contractor as its attorney and authorises the Main Contractor to do such acts and execute such documents necessary to render such rights effective within 7 days of any written request from the Main Contractor”  
Now call me old fashioned but in Viking times such a provision might appear in an agreement between rival clans planning to rape, steal and plunder! Why would a Sub-Contractor agree to such a ridiculously onerous clause that might just tempt an unscrupulous contract administrator to hasten a Sub-Contractor’s downfall in order to take advantage of such a provision?
And before anybody tells me that such occurrences only happen in movies about Wall Street, let me tell you that we see the results of Sub-Contractors who have signed up to such provisions in our insolvency team on a weekly basis and the results are not pretty. It really is all rough and tumble out there at the moment!
So, if you are thinking of signing up to a Sub-Contract incorporating a provision like the one above, can I suggest that you give serious thought to pursuing an alternative career, perhaps as a vendor of fruit and vegetables at your local market. It would be a lot less risky and might save you losing your house. 
And finally, …… please don’t say that you can’t afford to take advice before you sign up to these sorts of provisions. The reality is you simply can’t afford not to take advice! If you are going to sign up to a killer clause it may be a good idea to make sure your corporate will is in place. You are sure to need it, as well as advice from a good insolvency practitioner, at some point in the very near future. Now what was all that King George madness about …….?
Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations.