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So far this year there have been numerous construction-related bankruptcy filings. The following are some tips to protect yourself from contractor distress and bankruptcy filings.

First, identify events of default or notice events that can indicate a contractor’s distress. Consider including a provision in the contract with the contractor that allows for routine review of timelines and important milestones. If possible, the owner should negotiate for the right to review the contractor’s books and records or for other audit rights, as it will be easier to identify indicators of contractor distress.

Second, try to negotiate an expeditious termination process. This is important because a bankruptcy filing can cause delays on the job site and uncertainty regarding the project. To do this, include provisions in the contract that allow for termination for convenience, after a shortened cure period following notice of a default, or for immediately effective notice of default. A termination of convenience clause allows one or both parties to terminate the agreement without a specific reason for doing so. By shortening the cure period, the more likely the other party will default, which may allow for termination. If as the property owner, you are unable to terminate the contract before bankruptcy, you must be sure to comply with bankruptcy rules and procedures.

Third, if the contractor-debtor has filed for bankruptcy, the owner must request relief from an automatic stay if he or she wishes to terminate the agreement with the contractor-debtor. An automatic stay protects the contractor-debtor and prohibits most collection and enforcement actions against the debtor, unless such actions are otherwise authorized by a bankruptcy court.

Fourth, owners may want to negotiate a requirement in the contract, that if a contractor-debtor files for bankruptcy, the contractor agrees to assume or reject the agreement within a specified period after filing for bankruptcy. Enforceability is not guaranteed but it may strengthen an owner’s argument that the debtor should be compelled to promptly assume or reject its agreement.

Fifth, the contract should specifically state how damages will be calculated. Agreements can include a clearly drafted liquidated damages provision.

Sixth, owners should require contractors be “bonded” so the insurer will pay the owner if the contractor is unable to complete the work.

This is not intended to be legal advice.  You should contact an attorney for advice regarding your specific situation.

Jesslyn Bracco, an intern at J&G, assisted in researching and writing this article.


Gary M. Schuster is Partner at the firm and practices business, non-profit, and arts and entertainment law.
He can be reached at  866-303-9595 toll free or 845-764-9656 and by email.

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