Baker & McKenzie's Top 10 Hints if Your Client is in Financial Distress

1. Suspend work where possible. Your contract may entitle you to suspend works on the actual or threatened insolvency of your client. Security of Payment legislation also allows contractors and suppliers to suspend work in certain circumstances when amounts remain unpaid. Before suspending consider your rights and obligations carefully, including those under tripartite agreements with the client's financier, which may limit your ability to suspend work.

2. Recover your bank guarantees. If you are entitled to have bank guarantees or other security returned (for instance, on practical completion), demand this immediately. Consider pursuing declarations or injunctions to resist a call on your security if you are concerned that the client is about to do so in circumstances where it is not entitled. Use rights under Security of Payment legislation to recover security where possible.

3. Submit claims. Have you submitted all contractual notices, claims and other correspondence to which you are entitled under your contract? Do you have any outstanding extension of time, variation or other payment claims? How much are you owed by the client? Claims should be pursued and resolved.

4. Utilize the 'Security of Payment' legislation applicable in your state to recover amounts which are due and payable by the client but remain unpaid. The legislation in New South Wales and Victoria allows an unpaid contractor or consultant to exercise a lien in respect of unpaid amounts over unfixed goods and materials. In New South Wales, Victoria and Queensland, it allows claims for amounts held, for example, as security, which the contractor or consultant claims are due for release, and suspension rights where amounts remain unpaid.

5. Collate evidence of works performed and any loss or damage suffered as a result of the client's insolvency. This may be critical if the client attempts to call on your security or to set off against amounts owed to you, as you will need to rebut allegations of defective and incomplete works or services. It will also be critical for the preparation of your proof of debt in the client's liquidation.

6. Take back unfixed goods, materials and equipment which remain unpaid. Where ownership rights have not yet passed to your client under the terms of the contract, remove from site all unfixed goods, materials and equipment and assert any retention of title rights in unpaid goods. This lessens the risk that the goods are taken and sold by the client's liquidator to realise assets for the benefit of unsecured creditors.

7. Secure the site. Consider taking possession of or locking the site, subject to your rights to do so under your contract. This is beneficial for leverage purposes and also to ensure that the site remains safe and secure during any suspension period, given you may still owe OHS and other duties in relation to the site which may otherwise present a safety hazard. This remedy should only be exercised after taking legal advice.

8. Retention of documents and contract materials. Where entitled to do so, retain contract materials, plans, manuals and other contract documents until you have been paid for them. Your contract may state that intellectual property rights do not pass to the client until the client has paid all outstanding amounts. Aim to include this provision in your contracts.

9. Did the client provide security? In some circumstances, the client may have provided security or a parent company guarantee in order to secure its payment obligations to you. Consider calling on this security in relation to any outstanding amounts.

10. Prepare a strategy to deal with the insolvency of your client, having regard to your rights and obligations under the contract (including in relation to your subcontractors). If considering suspension of work, ensure that you comply strictly with procedures in your contract or with statutory rights under Security of Payment legislation so that your justified claims are not countered by allegations of contract repudiation for ceasing work.

Carefully consider potential self-help and suspension actions in the context of any applicable third party arrangements, such as tripartite agreements with the client's financier, which may otherwise limit your remedies.

It may be beneficial to open a dialogue with the financier, administrator or liquidator of the client if they need you to stay to complete the project, and in doing so you may be able to negotiate the payment of all or part of the client's debt to you.