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Mr. Stewart Jackson (Peterborough) (Con): I congratulate the Minister on wading into the construction contracts in part 8 of the Bill. As we know, there was quite a merry-go-round of Ministers when we considered these matters in Committee in June. The hon. Member for Portsmouth, North (Sarah McCarthy-Fry) was a game trouper in that regard-she had about two days to prepare for this complex and difficult subject. The Minister for Regional Economic Development and Co-ordination has perhaps had a little longer over the summer break.
We would do well to consider the wider issues that the new clauses and amendments are seeking to address, including the fact that late and disputed payments are a recurring problem in the construction industry. Anecdotally, we know that main contractors are known to hold money back, to the detriment of the small and medium-sized enterprises that are their subcontractors. We believe that the 1996 Act needs updating to tackle the continuing problem of late and unreasonably disputed payments in the sector, and we welcome the decision to legislate on this.
We also support the strengthening of the adjudication system. Indeed, the Minister will know that we have consistently lobbied for that system to be overhauled over the past few years. It is a matter of regret that we are still not in a position, in the dying days of this Government, to meet the undertaking made by previous Ministers to introduce a stand-alone construction Bill that would be subject to a proper debate, rather than having this spatchcock addition to a Bill on local democracy and regional issues. Let us not be too churlish, however; we are debating the issue now.
We support the aims of the clauses on payments, but we want to ensure that they are as simple and fair in their operation as they can reasonably be. There is not a consensus on this matter. Many of the trade organisations and associations-to be fair, the vast majority of them-have supported the changes in the Bill, but a number still have concerns, including the Construction Confederation. However, the specialist engineering contractors have consistently supported the proposals during the Public Bill Committee and Report stages.
We have no opposition in principle to new clause 12, which will place on a more formal footing and a statutory basis the provision for adjudicators in the devolved nations to take corrective action in respect of material inaccuracies and irregularities in contracts. We see that as more of a tidying-up exercise, although I would add the slight caveat that the issue should have been addressed before Report stage. It could have been discussed in Committee, for example. Wales and Scotland have had devolved Governments for quite some time now, but someone obviously did not spot that. Having said that, we had a debate on clause 136 in Committee in June.
There is much merit in new clause 3, tabled by the hon. Member for Meirionnydd Nant Conwy (Mr. Llwyd)-
Mr. Mark Prisk (Hertford and Stortford) (Con): Very good!
Mr. Jackson: I am not a fluent Welsh speaker, but I do my best.
I think the new clause is important for this reason. Of course we do not want to see undue bureaucracy and paperwork in the contractual relationship between smaller contractors and larger developers, but the situation is pretty critical in respect of how the economic downturn and recession have hit small and medium-sized enterprises. In those circumstances, it is well worth looking at any legislative measures to assist small building firms and contractors to stay in business and to have the peace of mind and security to safeguard their financial viability. I note that the Government did not dismiss the matter out of hand in Committee.
It is well for us to look at the facts. Barclays bank believes that small and medium-sized enterprises have lost more than £1.16 billion in the past year because of non-payment. Over the past year, there has been a more than 50 per cent. increase in insolvencies in the industry-more than double the same figures for the manufacturing sector-and according to PricewaterhouseCoopers, nine construction industry firms a day are going into insolvency.
Mr. David Heathcoat-Amory (Wells) (Con): I am glad to hear my hon. Friend speaking in this way. Is he also aware that subcontractors often find it difficult to get credit insurance against that eventuality, so they are subject to the market strength exerted by the superior contractor? When the ultimate client goes bust, being subject to pay-when-paid contracts puts them in a very difficult position in what is already a recession. Will my hon. Friend lead on to some policy changes that he might support, perhaps when in government, in order to remedy the situation?
Mr. Jackson: My right hon. Friend pre-empts my remarks intended for later when the hon. Member for Falmouth and Camborne (Julia Goldsworthy) speaks to her amendments that deal with the pay-when-paid arrangements. No doubt the Minister will also make some comments about them. If we are talking about "real help now", to use a hackneyed phrase of this Government, we certainly need it now to secure the future of these small companies.
We do not want to fetter the discretion of either party to the contract, as we want them to have a mutually beneficial and trusting contractual relationship to get the job done and get paid. We know that in the real world-with cash-flow problems and our friendly bank managers on the case-that does not always happen, which is why we need to safeguard the vital contribution of SMEs to the industry. I do not generally pray in aid the right hon. Member for Salford (Hazel Blears), but she did say on Second Reading:
"I think that it is very important that small businesses in the construction supply chain, in particular, have as much protection as they can."-[ Official Report, 1 June 2009; Vol. 493, c. 37.]
I think that we would all agree with that.
Mr. Prisk: I shall not detain my hon. Friend long. He is absolutely right to suggest that, in addition to the Bill, we need a clear sense of purpose and direction from the Minister-my hon. Friend has just quoted a previous Minister. That is crucial if we are to get the right collaborative and positive approach that the industry needs after going through such a difficult period last year. Does my hon. Friend agree that drawing that out of the Minister-we hope that she will respond-is perhaps as important as the details of the legislation before us?
Mr. Jackson: As usual, my hon. Friend, the shadow construction Minister, makes an apposite point. There was a good degree of consensus in Committee, under the present and previous Ministers, but as they say, kind words butter no parsnips. We shall find out the Government's intentions today and discover whether they are keen to assist in a practical way when it comes to new clause 3. No doubt the hon. Member for Meirionnydd Nant Conwy will make his case in his usual cogent and powerful way.
Let us move on to new clause 7, which was tabled by my hon. Friend the Member for Shrewsbury and Atcham (Daniel Kawczynski) over the summer. The then Minister made some pertinent points about single statutory adjudication, and seemed minded to accept the strong case for it. She said:
"On the wider point about a single statutory adjudication scheme, it would introduce greater clarity and simplicity but it would also represent a much more significant intervention into freedom of contract". --[ Official Report, Local Democracy, Economic Development and Construction Public Bill Committee, 18 June 2009; c. 237.]
I am not sure that that case was made very strongly with evidence, and I do not think that the Minister convinced the Committee as a whole or her own side in particular.
As I mentioned on that occasion, on 3 March, in the Grand Committee-which was specifically discussing a single scheme for adjudication-Lord Brett said:
"That would not be unreasonable. Therefore, we have made an offer to the industry that we will conduct a thorough review of the existing adjudication scheme set out in secondary legislation when we make amendments".-[ Official Report, House of Lords, 3 March 2009; Vol. 708, c. GC293.]
That leads me to press the Minister on the specific subject of single statutory adjudication. When will the review take place, and what are its terms of reference? Given that we are in a crisis period involving disputes between larger and smaller parties in the construction industry, when will we see the results of the review? Will it feed through into-possibly-secondary legislation? If the Minister is not minded to assuage my concerns and those of my hon. Friend the Member for Shrewsbury and Atcham today, will she at least tell us whether the review is forthcoming, and what it will say?
I will be brief, because other Members wish to speak and important aspects of other clauses require proper debate. We applaud the changes that the Government have made in amendments 21 and 22: they have listened to the views expressed, across a wide spectrum, in Committee in June. I will not steal the thunder of the hon. Members for North Cornwall (Dan Rogerson) and for Falmouth and Camborne, but their amendments have considerable merit. We are inclined to support them at this stage, but the Minister may well surprise us and accept them, and we look forward with interest to hearing what she will have to say.
The construction sector is in crisis. The Government must do all they can to assist an industry which has probably been hit harder than any other industry in the country as a result of the recession. We look to the Minister to give the necessary leadership, to note the consensus across all parties and out there in the construction world, and to accept the amendments.
Julia Goldsworthy (Falmouth and Camborne) (LD): I commend the Minister on the way in which she has handled being dropped into this compost heap of a Bill at short notice, and probably into the most complicated part of it. We have no particular problem with the Government amendments, the purpose of which is largely to tidy up and to deal with the devolution question. However, we do not think that the Government have approached this issue with the right perspective.
It is important to remember that 90 per cent. of the work force employed in the construction sector are employees of businesses consisting of six or fewer people.
At present, the larger organisations have the whip hand. We fear that the views of the much smaller businesses that constitute the majority of the industry are not being heard, and are not being reflected in the Bill. That is why we have raised the issue of the balance of power between payee and payer in amendment 20 and consequential amendments 9, 10, 11 and 16, and the whole subject of conditional payments. The hon. Member for Meirionnydd Nant Conwy (Mr. Llwyd) will raise similar issues involving insolvency. Although we agree that there is a wrong to right in the existing system, and I understand the Minister when she says that we need a tightening of the provisions, clarity and certainty, we feel that our amendments would achieve greater fairness, reduce complexity and minimise the amount of regulation that will be necessary.
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Our amendments would reduce the verbiage in clauses 139 and 140 by more than 50 per cent. They are supported by the Federation of Small Businesses, the Specialist Engineering Contractors Group and Unite, the union. Although the Government proposals try to redress the balance and to create equality between the payee and payer, we are saying that, in effect, it is always the payer who has the greater power and that the arrangements will still leave the payer with the greater power, because the bargaining power of the payee is unequal. Our proposal is based on contracts legislation in New Zealand and other legislation in Australia, and we think that there is a precedent for pursuing that line. I hope that the Minister will heed the words of the hon. Member for Peterborough (Mr. Jackson), which are echoed on the Liberal Democrat Benches. We feel that there is consensus on the issue and that there is a need to move forward.
Mr. Stewart Jackson: Is the hon. Lady aware that a number of Ministers over the past few years have promised to look specifically at international experience of the scheme, particularly single adjudication, and that that does not seem to appear in the Bill or in secondary legislation?
Julia Goldsworthy: I was aware of that, and it leads me to another concern. Although there has been consultation on all issues, it is much easier for the very large organisations to engage in that consultation and very difficult for the smaller organisations, which make up the majority of the industry. We are also concerned that a lot of the consultation took place before the catastrophe that has hit the construction industry. The world has moved on dramatically and the Government's approach has not reflected those changes.
On the conditional payments provisions and the so-called "pay when paid" clauses, I listened carefully to the Minister, and I have heard her say on more than one occasion that she is taking that position because insolvency provision has to apply equally across all business, but she has not explained how banning pay-when-paid clauses on the insolvency of a third party is in conflict with insolvency laws. My understanding is that the original purpose of the legislation was to ban all pay- when-paid clauses, without exemptions. I understand that that has
been adopted in New Zealand, Australia and Singapore. We have not had a decent explanation of exactly why the provision crept in. The conclusion that Liberal Democrats draw is that it had to do with some major lobbying, rather than inconsistency in law. I bring the Minister back to the issue of perspective. We are worried that insolvencies further up the line could generate more insolvencies down the line. There is a danger of a domino effect in the current economic situation.
Mr. Colin Breed (South-East Cornwall) (LD): A number of smaller firms sometimes find that they are working perfectly satisfactorily and are then hit by a large bad debt. Their security of payment has completely gone. They then have to lay off people who have been working jolly hard, because something further up the line has been visited upon them and they do not have the capacity to sustain it. We will lose a lot of jobs in the construction industry in very small firms, not because they have not been trying to work properly, but because people up the line who have owed them substantial sums have failed. That domino effect will have a major impact on small businesses.
Julia Goldsworthy: My hon. Friend makes an important point. We have to remember that, in the construction industry in particular, so many of the costs are sunk: once the companies have built the building, they cannot recover the costs. It is difficult enough for them to manage the potential insolvency of their payer, let alone a third party. If we look at it from their point of view, how on earth are they supposed to get credit insurance to deal with such issues? They are being placed in an impossible position. It is an important issue that needs to be addressed. It ties into the point raised by the hon. Member for Meirionnydd Nant Conwy (Mr. Llwyd).
A precedent has been established by the House of Lords. It raises concerns and encourages businesses to go against the provisions set out in the Bill. Basically, it encourages them to withhold payment in order to hedge against the risk that they will then become insolvent. It is important that the proposal is incorporated into the Bill. I am minded to support the hon. Gentleman, but we are also minded to press some of our amendments to a vote should the Minister feel that it is not appropriate for the Government to co-operate.
Mr. Nick Raynsford (Greenwich and Woolwich) (Lab): First, may I draw attention to my interests as declared in the Register of Members' Interests?
The Housing Grants, Construction and Regeneration Act 1996, which was the basis of the provisions being amended by part 8 of the Bill, was an important measure that addressed real concerns within the construction industry about the litigious characteristics of the industry, the tendency for different parties to fight each other, and the considerable problems of payment that existed within the industry as it operated in the 1980s and 1990s.
The motive for the 1996 Act was the Latham report. It was the work of Sir Michael Latham, a distinguished former Member of this House, and it commanded all-party support. I was very pleased, as Opposition spokesman on construction at that time, to give full support to Sir Michael's proposals and to the legislation that flowed from them. I was even more fortunate, as a
Minister in the early days of the current Government, to be in a position to introduce in the late 1990s the provisions of the 1996 Act, together with the scheme for construction contracts which was developed under the powers in that Act. That was a further reinforcement of the bipartisan approach towards improvements in the culture of payment and the reduction in litigation in the construction industry.
Those proposals were not, of course, a total panacea. There remain problems and weaknesses in procedures that have not yet been tackled. There is obvious unhappiness on the part of some parties to construction contracts that payment is not always made when it should be, and that the stronger party can often use its muscle to try to impose unreasonable conditions, but for all that there has been an advance. The amount of litigation has been reduced, and the use of the adjudication procedure is now much more widespread. There is general agreement that the provisions of the 1996 Act have been beneficial.
However, there is still a need for further improvement, and this Bill carries forward proposals that were the subject of intense debate within the construction industry over several years but which should add further improvements to the provisions of the 1996 Act. Inevitably, this is a compromise. There is a range of different points of view within the industry. It is highly fragmented and it is almost impossible to anticipate a situation where a package of reforms would satisfy all parties and be unanimously agreed. However, the compromise the Government have proposed is a sensible and practical one that achieves significant improvements, both in terms of the adjudication procedure and some of the elements relating to payment procedures, and I welcome its provisions.
There will still be problems, and issues of cash flow affecting smaller firms-particularly small and specialist constructors-will remain very difficult. In the current economic climate cash flow for smaller firms down the supply chain remains a critical issue.
Mr. Breed: One problem banks now have is the provision of much needed cash flow support through overdrafts and loans. Because of the weaknesses in the system, there is a feeling that if they support small firms they could end up being owed an awful lot of money by a failed company.
Mr. Raynsford: There are of course a number of different aspects to the issue of cash flow, and the hon. Gentleman rightly identifies one of them as the availability of finance from the banks, which remains a difficulty. There is also the problem of cash flow resulting from payment by a contractor to a subcontractor down the supply chain. That causes a lot of concern among smaller and specialist contractors, and the payment and adjudication provisions in the Bill may help to improve it in some respects.
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