Help! My subcontractor is bankrupt: do I have to pay the trustee?

Can a trustee claim payment for work performed when that claim was not yet due and payable at the time of the bankruptcy? In recent years, this discussion has been held many times. The Supreme Court recently answered that question: yes, the trustee has a claim and you must pay it.

A common situation in recent years has been this: a subcontractor goes bankrupt and has not yet completed his work. For example, he has only completed 60 percent of the work that entitles him to payment of installment 6. The trustee informs him that he will not fulfill the contract but does claim payment of 60 percent of installment 6. After all, that work has been done and must be paid, is the trustee's simple reasoning.

Can the trustee then claim payment?

Installments need not be paid until the agreed amount of work has been done. Only then is the installment due. Thus, the contractor does not have to pay anything yet if the subcontractor of installment 6 has only performed 60 percent. In bankruptcy, this is compounded by the fact that the trustee can no longer claim performance if he will not fulfill the contract. And claiming payment is nothing more than claiming performance.

In short, the defenses against the trustee's claim were there for the taking. The trustee has no claim due and he can no longer claim performance. Of course, if these defenses succeed, the result is that the contractor does not have to pay for work that has been performed (namely 60 percent of term 6).

The Supreme Court decided otherwise

There were good legal arguments for both the trustee's and the contractor's positions in this story. Therefore, the Supreme Court had to come in to decide.

Read here the Supreme Court ruling

All claims due on the date of bankruptcy must simply be paid. The fact that the trustee could no longer claim performance does not change that. If there is no claim due (term 6 has not yet been completed), payment can still be claimed for the work that has already been carried out (60 percent). In other words, payment for work performed must simply be made.

Settlement of damages

For the record, there are still quite a few conceivable circumstances whereby the trustee's claim does not have to be paid in full or at all. The contractor often suffers damages due to the bankruptcy of the subcontractor. Think of the cost of a more expensive other subcontractor who has to restart the work, damage caused by delay, or forfeiture of warranties. These damages can still be offset against the trustee's claim.