CAN A CONTRACTING PARTY CANCEL THE CONTRACT INTHE EVENT OF THE INSOLVENCY OF THE OTHER PARTY?

Many building contracts and subcontracts contain provisions which purport to give the right to one contracting party to cancel the contract in the event of the insolvency or voluntary or compulsory liquidation of the other.

A number of commentators however have pointed out that the provisions of the Insolvency Act appear to make this right unenforceable. The Act gives the appointed trustee the right to carry on the business of the insolvent and it is therefore the trustee who has the choice whether or not to proceed.

As stated by McKenzie in The Law of Building and Engineering Contracts and Arbitration, fourth edition at page 41, "...the trustee has the right to decide whether to abide by the contract or not. If the trustee elects to hold the other contracting party to his obligations under the contract; he must tender complete performance of all the insolvent's obligations. If the trustee intends to abide by the contract he should give timeous notice to the other party failing which the latter may treat it as being at an end".

Similarly, Finsen in The Building Contract, A Commentary on the JBCC Agreements at page 185 states "...where an agreement provides that either party may cancel on the insolvency of the other, it is doubtful whether such provision would be valid, because it will probably be held to be contrary to the provisions of the Insolvency Act and to the right of the liquidator to decide whether or not to proceed with the contract".

If such provision in contracts should indeed be invalid in the light of the insolvency provisions, and this seems reasonably certain, its retention as one of the terms of performance of the contract would appear to be objectionable on the grounds that it creates confusion in the minds of the parties as to the legal rights of each. It is also objectionable on the grounds that a party, although the innocent party, and believing that it has the right to do so, might wrongfully repudiate the contract and in so doing give rise to a substantial claim for damages by the other party.

In practice it is highly probable that a party facing insolvency would inevitably find itself in breach of some other material terms of the contract which would provide the other party with the necessary grounds for cancellation e.g. failure by the contractor or subcontractor to proceed with due diligence, regularity and expedition or failure by the employer to make payment.

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