Help! My subcontractor is out of business and my project is half-finished

Once again you have succeeded! After a tough process of negotiation, you have won a large new construction project. You hear from the developer that the lots are selling well and you think: this is going to be a success! Because the project is very large, you (naturally) commission several subcontractors so that the project quickly takes shape. You always owe a portion of the subcontract price when a term is completed.

The first few months are actually going very well, almost all the lots are sold and you expect the entire project to be completed before the construction period, but then one of the subcontractors goes bankrupt during the sixth term and that picture seems to go up in smoke.

The part of the project that the subcontractor was supposed to complete is not finished and it looks like it will not be finished either. The trustee of the subcontractor has told you that he will not honor the agreement. So you will have to look for another contractor to finish the project. However, the receiver does claim payment for the agreed extra work and the work that has already been done within the sixth period. You defend against this claim by arguing that the full term is not due and payable because the work within that term has not been completed.

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Can the trustee claim payment from you?

The Supreme Court issued two rulings on that situation last Friday, Dec. 2, 2016. Do you owe the trustee anything or were those activities performed free of charge? The answer is that that work was not performed free of charge. The trustee has means to demand payment from you for the portion of unfinished additional work performed as well as unfinished construction installments.

To determine how much you should pay the bankruptcy trustee, you can distinguish between three scenarios. In the first scenario, the bankrupt subcontractor did all the work before it was declared bankrupt, in the second scenario, it did nothing before it was declared bankrupt, and in the third scenario, the bankrupt company only did some of the work (for example, when a term is not fully completed).

If the subcontractor has carried out all the work, then you must (in principle) pay the full contract price, possibly with a discount for the omission of certain guarantees, defects and possible extra costs. If no work has been performed, the receiver cannot claim that you have to pay him, unless he declares that he will actually perform the work (or have it performed). You can then demand security from the trustee for that performance. This follows from article 37 Bankruptcy Act.

But what now if the further development of the project of final ceases because the trustee does not honor the agreement?

You may dissolve the subcontract (in part) in that case. If you dissolve the subcontract, the trustee can claim payment for the work that has already been done. By law, the parties should undo what has been done. Since it is not favorable - or perhaps impossible because of, for example, natrekking - to tear down what has been built again, that obligation should then be valued; the work that has been done. Note that this is also the case if a building term has not yet been fully completed and the term is therefore not yet formally due and payable in full.

Intermediate conclusion: the trustee has a claim.

However, there are quite a few conceivable circumstances in which the trustee's claim does not have to be paid or not paid in full, or at least that you can pay by set-off.

In fact, it is quite conceivable that you will suffer direct damage as a result of the subcontractor being declared bankrupt, such as the cost of a more expensive other subcontractor who will have to restart the work, survey and complete the work, damage caused by delay or forfeiture of warranties. Article 37a Bankruptcy Code provides that damages arising from dissolution of the contract have the status of an unsecured claim. You can then offset these damages against what you still owe the trustee under Article 53 Bankruptcy Code. Inventory for proof of damages is difficult, but necessary: it is up to you to substantiate the claim for damages.

Would you like to know more about this or are you dealing with a trustee demanding payment from you? We would be happy to help.

Christian Gäbler
Erik Jansen