Step-in rights in construction contracts
Step-in rights enable one party (the beneficiary) to ‘step in’ to the shoes of another party in relation to the rights and obligations of a contract, typically, if there has been a serious breach of contract.
Step-in rights can be used to enable a project to continue with one party being replaced by another. For example if the client becomes insolvent, the funder would be able to step into their position, complete the project and so potentially recover the money owed to them. This requires that the right is permitted through all relevant agreements, so that members of the project team cannot refuse to continue if the party is replaced. As a consequence, step-in rights frequently appear in collateral warranties, for example between funders and contractors or consultants, or, to protect against the contractor (or a ‘prime’ consultant) becoming insolvent, between clients and sub-contractors or sub-consultants.
Typically, step-in rights will require notice periods, so that, for example, if the contractor or consultants are not paid by the client, they must give notice to the funder before terminating the contract, allowing the funder time to decide whether to step into the client’s position. Such agreements may include provisions for the funder to pay costs during this notice period, whether the step-in right is exercised or not.
It is important to note that this is a right not an obligation. For example, the funder is not automatically liable for amounts owed by the developer, they will generally only step into their position and so accept their rights and obligations if they issue a step-in notice to that effect. Where step-in rights are included under third-party rights (which can only impose rights, not obligations) they must be conditional upon also accepting the associated obligations.
As the beneficiary of step-in rights may lack the necessary expertise to take on the role of the other party, step-in rights may include provisions for the beneficiary to nominate another party to take on their role, sometimes with a guarantee from the beneficiary. For example, a funder may wish to dispose of the development, or to appoint a new developer to complete the project.
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