Determining Owner’s Rights When the General Contractor Is in Bankruptcy

An owner of property under construction just learned that its general contractor commenced a Chapter 11 bankruptcy case. What are the owner’s rights?

The contract with the general contractor provides that a bankruptcy filing constitutes a default under the contract. Can the owner rely on that provision and terminate the contract due to the general contractor's bankruptcy filing? In most circumstances, the answer is no, as doing so without prior bankruptcy court approval may violate the automatic stay. A termination provision tied to a bankruptcy filing is referred to as an ipso facto clause. To terminate the contract, the property owner should make an expedited application to the bankruptcy court and set forth the harm (i.e., damages) being suffered by the owner as a result of the general contractor's delays and other defaults under the contract.

Reprinted with permission from the February 7, 2022, issue of Construction Executive. © 2022 Construction Executive. All Rights Reserved.