Contractors can help protect themselves by including a ‘warranty of ability to pay’ clause in their construction contracts. This requires the principal to provide evidence that they have the financial resources to meet their contractual obligations. It also provides contractual assurance about the principal’s financial position and may give the contractor standing as a debtor if the principal goes into receivership, helping them recover some payment if the project collapses.
How can contractors protect themselves from financial loss if a principal becomes insolvent during a construction project?
Our Commercial Team Explains
Construction project cost blowouts are nothing of a recent phenomenon, especially given the construction boom Perth is currently experiencing. However they do pose significant financial risk to contractors where the principal cannot cover the expenses and goes into receivership. In these circumstances, contractors yet to achieve practical completion and without security measures taken to protect their interests are left high and dry without access to what liquidators recover.
Accordingly, it is imperative that contractors take measures to ensure they are protected from these courses of events. One key measure often incorporated into standard construction contracts is the inclusion of a ‘warranty of ability to pay’ clause.
What is a ‘warranty of ability to pay’ clause?
A provision of this kind is inserted into a contract between the principal and contractor to ensure the principal has the requisite financial resources necessary to perform the obligations set out in the contract.
How will this help the contractor?
A warranty in this form will firstly require the principal to provide evidence that the means to carry the work out in accordance with the rest of the contract is available and accessible. Secondly, the warranty provides contractual assurance from the principal that finances are sound which importantly gives the contractor standing as a debtor if the principal goes into receivership. This will ensure the contractor receives some payment if the project collapses.