Check Against Delivery
I move that this Bill be read a second time.
As the house is aware the Programme for Government contains a commitment to introduce legislation to protect small building subcontractors that have been denied payments from bigger companies. In this regard, I have been working with Senator Quinn to develop the Construction Contracts Bill into a robust piece of legislation.
I want to make it perfectly clear that I regard this Bill as a Private Members Bill. It is a unique piece of legislation for two reasons. Firstly, all stages were passed by the previous Seanad and it is only now before the Dáil. Secondly, the Bill, although significently amended from the original Bill, is most definitely the product of a bipartisan approach. This Bill would not be where it is, were it not for the diligence and initiative of Senator Fergal Quinn. I very much hope that the spirit of cooperation that both he and I have shown in relation to the Bill can be extended in this House.
Construction is a very important sector of the national economy. It is widely acknowledged that well managed and successfully delivered construction projects can improve the delivery of public and private services. However, the economic downturn in the construction sector has highlighted the lack of formal contractual arrangements and bad payment practices in the sector. While there is strong anecdotal evidence of the practice of delayed or non-payment having escalated in recent times, it should be noted that the problem is not new. It is reported that many firms, mainly subcontractors, are experiencing serious difficulty in obtaining payment for work done. It is therefore important that where possible, payment transactions within this sector should be facilitated to ensure prompt payment of the correct amount.
Rationale for Government intervention
The present arrangements in relation to construction contracts and conditions of engagement are (apart from a small number of formal standard forms of contracts and conditions of engagement) far too imprecise and informal and as a result do not offer a cost effective, timely solution for consultants, contractors, subcontractors and suppliers in the supply chain.
The Bill that is before the Dáil seeks to address the issue of non-payment to construction sector contractors, subcontractors and sub-subcontractors who have completed work to the required standard on construction projects. The Bill will address these issues by:
- providing statutory arrangements in relation to payments under construction contracts, including providing for interim payments. This will reduce a payee’s exposure to non-payment; and,
- by introducing a new mechanism for the swift resolution of payment disputes through a process of adjudication.
The Bill does not purport to provide a response to all of the causes or manifestations of non-payment in the construction sector. This is a complex area and a comprehensive response to all of the causes of non-payment in the construction sector will not provided within a single piece of legislation. In particular, it is important to realise that many of the non-payment difficulties are linked to business failures and this Bill will not cut across the normal rules for company liquidation/receivership or Prompt Payment regulations.
Detail of the measures in the Construction Contracts Bill
In setting out the main provisions of the Bill, I am mindful of the fact that the Bill that passed the remaining stages in that Seanad was not as complete as it could have been. In this regard, I sought a Regulatory Impact Assessment of the Construction Contracts Bill to give me the opportunity to look at the issue from first principles as the Bill introduces new rights, obligations and systems which will affect contracts and impose new regulatory requirements between clients, contractors and subcontractors across a broad sweep of construction operations in the State. In this regard, I will shortly set out the main findings of the RIA and give an indication to the areas of the legislation that will be subject to amendment at Committee Stage.
For the information of the House I will now set out the main provisions of the Bill.
Section 1 deals with interpretations and is standard.
Section 2 concerns the scope and application of the Bill. It excludes certain contracts from the definition of “construction contract”.
It ensures that the Bill will not apply to contracts below certain value thresholds.
It also ensures that, in the normal course, the Bill will not apply to an ordinary individual who enters a contract for the building, extension or renovation of his/her home. He/she will not be required to comply with the new rules set out in the Bill. However, this section also tries to ensure that contracts concerning so-called “trophy homes” do come within the scope of the Bill.
Section 3 sets out the rules to govern payments under construction contracts. All construction contracts will have to provide clearly for the amount and timing of payments. If a contract fails to specify these matters, then the terms set out in Schedule will apply.
This section also ensures that “pay-when-paid” clauses will no longer be acceptable in contracts. This means, for example, that sub-contractors or sub-sub-contractors will no longer be dependant on a main contractor getting paid before they are entitled to receive their own payments.
Section 4 details the arrangements for a party to claim payments under a construction contract. It sets out detailed procedures for making a payment claim.
In the event that the amount involved is disputed between the parties, this Section works to ensure that each of the parties is clear about the amount in dispute, and the basis on which that dispute arises. This provides an important clarification which is not readily available to contracting parties at the moment. It then forms the basis for seeking a resolution of any payment dispute, through moving on to the adjudication process provided under the Bill.
Section 5 confers a new statutory right for contracting parties. A party who has not been fully paid – in accordance with the contract and the terms of this Bill – will now have the right to suspend work under the contract for a period of up to 2 weeks. This section sets out the rules under which the suspension of work can occur.
This provision was developed to help to re-balance the power between contracting parties, without unduly hampering the completion of the project. The existence of the right should help ensure that payments are made on time. Where a payment claim is still unpaid following the period of suspension, then the appropriate path is for the parties to move on to adjudication, and seek resolution of the matter through that process.
Sections 6, 7, 8 and 9 are related. These Sections provide for a new process for the adjudication of payment disputes and set out arrangements for this new process. This is a critical aspect of the Bill, and creates an important mechanism by which unpaid parties to construction contracts can get a relatively quick – and cost-effective – resolution of their payment disputes. Therefore these Sections deal with: the right to refer payment disputes to adjudication; the right to suspend work for failure to comply with adjudicator’s decision; the selection of a panel of adjudicators; and the code of practice for adjudication.
Section 6 makes provision for a new system of adjudication. It gives contracting parties the right to refer a payment dispute to adjudication, and sets out the arrangements to be followed. Importantly, it ensures that a construction contract cannot be drafted so as to try to negate or reduce this right to adjudication.
Section 7 provides that if an adjudicator’s award is not paid in full within 7 days of the adjudication decision, then the unpaid party has a right to suspend work under the construction contract and sets out the rules governing this arrangement.
Section 8 sets out arrangements for the creation of a panel from which an adjudicator can be appointed to deal with a payment dispute.
Section 9 gives the Minister for Public Expenditure and Reform the power to prepare and publish a code of practice which would govern the conduct of adjudications.
Section 10 provides that parties to the contract may agree on a method to deliver any notices referred to in the Bill. In the event that they do not agree, the Bill allows for delivery by a postal service provider. This type of Section is a common feature of legislation that provides for the delivery of notices.
Section 11 provides for the short title and commencement arrangements for the Bill. It provides that the Act may be cited as the Construction Contracts Act 2012 and that it will come in effect on such day as the Minister may by order appoint.
Finally, The SCHEDULE to the Bill works together with Section 3. The Schedule set out default arrangements for contract payment terms. These will be minimum standards for sub-contracts. This is a major innovation which should especially help sub-contractors.
Concerns raised in relation to the current version of the Bill
In order to address the concerns that have been raised in relation to the current draft of this Bill, the Senator and I arranged to meet with stakeholders in the construction sector on 28June 2011 to discuss the Bill. I also want to recognise the very helpful contributions of both main opposition spokespeople, Deputies Fleming and McDonald, in respect of the Regulatory Impact Assessment (RIA). This consultation highlighted a number of matters relating to the Bill that required further consideration. These have been taken into account now in the RIA on the Bill which was completed late last year and is available on my Department’s website: www.per.gov.ie/reports.
I should also say that this RIA was the first published by the new government. There is a commitment in the Programme for Government that all RIA’s be published.
The RIA examined issues relating to payment practices in the construction sector and assessed the need for legislative intervention. The RIA found that there are problems with construction contracts. The two main issues are:
- that the majority of construction contracts are carried out on an informal basis with no written contract in place. There are no minimum standards in relation to payment and the timing of such payment. The sector is small which means that where there is a contract that the bulk of the power rests with the main contractor.
- In cases where work is carried out on an informal basis; the subcontractor has no way of securing payment where there is a dispute. In the minority of cases where formal contracts are in place the route to resolve such disputes (arbitration or the courts) are costly and time consuming.
In addition, the Regulatory Impact Assessment examined the main proposals to amend the Bill that were raised during the Seanad debate and subsequent consultation. It found that there were merits to considering amending the Bill in a number of respects:
- Thresholds –- Private contracts below €200,000 and public contracts below €50,000 do not come within the scope of the Bill as passed by the Seanad. The Regulatory Impact Assessment examinedUK experience of adjudication which showed that the majority of disputes that used such processes were for contracts valued between £10,000 and £50,000. Therefore the RIA concluded that these thresholds were too high and should be reviewed or removed.
- Adjudication awards – The Bill provides that an adjudication award is binding, except where either party refers the case to arbitration or to the courts. A key consideration in developing proposals is the need to strike a balance between ensuring the efficient operation of the construction sector inIreland, both in terms of cash flow and resolution of payment disputes and the safeguarding of public monies. The Regulatory Impact Assessment found that as the Bill is currently drafted, the balance would appear to favour the payer. To resolve this issue officials from the Department of Public Expenditure and Reform are developing a number of options aimed at making adjudication binding for both public and private sector contracts whilst at the same time protecting the taxpayer.
- Suppliers – The RIA found that the inclusion of all suppliers would significantly broaden the scope of the Bill as supplies make up a significant proportion of a construction contract. Thus the arrangements to include numerous suppliers could create an unduly onerous process which could create a barrier to entry for smaller enterprises. It concluded that supplies that are made specifically for a contract (bespoke supplies) could be included in the legislation but recognised that it may be difficult to interpret what is or what is not bespoke.
To summarise, the RIA concluded that the best option was to proceed with the current Bill but to amend it to bring lower value contracts and bespoke supplies within its scope; and to make the adjudicators award binding. In general, it concluded that any such amendments should be formulated in such a manner that would protect the taxpayer.
Conclusion – Issues to be addressed at Committee Stage
Since the publication of the Regulatory Impact Assessment, I have had the opportunity to develop proposals aimed at resolving these and other issues. Whilst I am not proposing any amendments today, I want to signal to the House my intention to bring forward specific committee stage amendments dealing with the following areas:
Thresholds: In order to ensure that the legislation applies to majority of Construction Contracts it is my intention to bring forward amendments to broaden the scope of the legislation by reducing or removing the current monetary thresholds contained in the Bill.
Supplies: Having examined similar legislation in other jurisdictions I can see the merit in broadening the scope of the legislation to include bespoke construction supply contracts. However, I would stress that it will be difficult to define what is meant by bespoke supplies;
Adjudication: This issue of making adjudication awards binding for both the public and private sectors is a complex issue. We have to get the balance right between giving this legislation the necessary enforcement provisions, whilst ensuring that the application of the legislation is equitable and the taxpayer is safeguarded.
Suspension: The two-week time limit preventing contractors from withdrawing services in the event of non payment, were work has been carried out to a satisfactory standard, seems insufficient and therefore will need to be amended.
I am aware of a number of other technical issues that have been raised in relation to this Bill. These are being examined and where necessary amendments will be brought forward at Committee Stage.
In terms of the overall legislation, it is essential that the solution to this issue is balanced so as to avoid imposing unnecessary regulatory or cost burdens on parties in dispute, the State or others.
I wish to point out that I am very grateful to Senator Feargal Quinn for his commitment to this piece of legislation and look forward to working closely with him to ensure that we can develop a robust piece of legislation to tackle this issue.
Finally, I will, of course, also give consideration to any constructive suggestions put forward during second and subsequent stages.