The culture of “pay when paid” that threatened many sub-contractors in the last recession is rearing its head again, according to experts at DTM Legal.

Although the practice was outlawed in 1996, the Act left the notable exception of an “insolvent” customer and now coupled with the option of “self certified” insolvency, many sub-contractors remain exposed to this potential loophole.

Traditionally, when a company entered administration and became “insolvent”, it required a court order. However, now with two types of administration only requiring self-certification, many contractors have found themselves at the blunt end of recent case law when courts have ruled against them after strictly interpreting the relevant contractual provisions.

Jim Morris, Head of the Construction Law Team at DTM Legal, comments; “We are seeing more and more cases of companies being left exposed when a main contractor declares themselves insolvent. This action can deliver a devastating knock on effect to other associated businesses.

“As it is hard to be fully aware of a contractor’s or supplier’s financial viability, it is critical that businesses ensure they are adequately protected when entering into agreements.”

Morris concludes: “It is ironic that the legislation intended to outlaw ‘pay when paid’ has in fact increased its use albeit only in circumstances of insolvency.”