Clause
137Adjudication
costs Question
proposed, That the clause stand part of the
Bill. 1.15
pm
Mr.
Raynsford: I rise to make two points. First, I very much
welcome the provisions of the clause. It closes a loophole that has
been used by some parties to try to frustrate the procedures put in
place by the 1996 Act to allow adjudication as a relatively quick and
low-cost means of overcoming disputes. Where parties insist that the
full cost of adjudication is met by the subcontractor, it would provide
a serious deterrent to a subcontractor seeking adjudication. This
particular device has been deployed to discourage the use of
adjudication.
The change
here, which makes it unlawful for any agreement on apportionment of
costs prior to the appointment of an adjudicator, is entirely sensible.
There is, however, an unfortunate by-product. Where there is a need to
apportion the costs in order to ensure that the adjudicator is paid,
that is not necessarily covered under the new provisions. The Royal
Institution of Chartered Surveyors suggests that an amendment should be
made to allow for the adjudicator to propose the apportionment of costs
between the parties and to ensure that the parties are jointly and
severally liable for the adjudicator’s
costs. That
seems an eminently sensible proposal. It was advocated in the other
place by Baroness Hamwee of the Liberal Democrats. I think the
Government undertook to consider it sympathetically, so I am
disappointed that there is no Government amendment today.
I have the
greatest sympathy for my hon. Friend the Minister who has had to pick
up this brief at very short notice and has now been told that she is
going to relinquish it almost immediately. I am sorry to bowl her this
googly, but would she please tell the Committee whether the Government
are sympathetic in principle to the RICS amendment? Would they be
willing to accept such an amendment on Report were I to table one,
which I am minded to
do?
Sarah
McCarthy-Fry: I thank my right hon. Friend for his
comments. The Government are sympathetic to the views, but we have
looked at the situation and we have decided not to legislate at this
time. However, we would be happy to meet the RICS to discuss
its concerns. In the meantime, I commend the clause to the
Committee. Question
put and agreed
to. Clause
137 accordingly ordered to stand part of the
Bill.
Clause
138Determination
of payments
due Question
proposed, That the clause stand part of the
Bill.
Mr.
Jackson: This clause is more contentious and involves the
removal of conditional payment provisions and the pay-when-certified
provisions. There is concern about section 113 of the Housing Grants,
Construction and Regeneration Act 1996, which has been communicated to
all members of the Committee. Section 113 is a pay-when-paid provision
which is used in the event of a main contractor’s client or
customer going into insolvency. In other words, a subcontractor will
not get paid at all in the event that a main contractor does not
receive anything from his client or customer. This is a significant
worry for small and medium-sized enterprises who are concerned that
this clause of the 1996 Act will be used to prevent them being paid in
a timely and reasonable way. The specific point raised by members of
the construction community was that the former Department of Trade and
Industry consulted on removing this exceptional sub-clause—or
clause of the new construction act—four years ago. It gave an
undertaking at the time that it was minded to remove that clause to
assist small and medium-sized enterprises. The Minister’s
predecessor in what was then the DTI indicated that it would be
removed. However, the Department for Environment, Food and Rural
Affairs decided to impose the provision nevertheless, but at the same
time agreed there should be a full review of insolvency law and
practice as applied to the construction industry. That review was never
instigated.
Finally, to
sum up what is quite a complex clause, the question asked by many in
the construction industry is why should small and medium-sized
enterprises act as insurers in respect of both the main
contractor’s insolvency, and the client’s insolvency? We
are looking to receive today undertakings from the Minister that she
understands the difficulties this clause may give rise to. Is there a
review specifically around this and could it be subject to secondary
legislation in the future? If we do not receive sufficient undertakings
and reassurance, we would certainly look to amend this clause on
Report.
Dan
Rogerson: I am following the hon. Gentleman’s
argument and it will not surprise him to know that we have heard
similar concerns. I draw his attention and that of the Committee to new
clause 21, which stands in my name. We will reach that later on in
proceedings, but it seeks to address similar
issues.
Sarah
McCarthy-Fry: I was getting a little confused there, I
must admit. I dug out my notes for new clause 21 because I
believe it addresses exactly that. Perhaps, Mr. Illsley, it
would be better to wait until we get to new clause 21 before I deal
with those points.
Question
put and agreed to..
Clause 138
accordingly ordered to stand part of the
Bill.
Clause
139Notices
relating to
payment
Dan
Rogerson: I beg to move amendment 169, in
clause 139, page 83, leave out lines 8 to
10.
The
Chairman: With this it will be convenient to discuss the
following: amendment 170, in clause 139, page 83, leave
out lines 14 to
24. Amendment
171, in
clause 139, page 83, line 30, leave
out from ‘subsection’ to
‘(3)(a)’. Amendment
172, in clause 139, page 83, leave out
line 33 to line 23 on page
84.
Dan
Rogerson: I would not claim to be an expert on the niche
of contract negotiations in the construction sector and I think that
will become patently obvious to the Committee as we continue our
discussions about this part of the Bill. However, there is a particular
issue that was raised with me for which I am grateful to the Federation
of Small Businesses, an organisation that does a great deal of work on
behalf of its members but also in trying to improve legislation and
Government decision making. Among smaller contractors who are
effectively at the end of the supply chain, there is concern that they
are put at risk by some of the issues in the clauses as they stand. The
current economic circumstances heighten that. One of the issues
considered by our amendments—I will be interested in
what the Minister has to say about the points raised by the
FSB—is the issue of what is effectively an invoice, the payment
notice, being sent by the person who is paying the bill, who is the
person who holds all the cards. Also, a supplementary notice can be
issued, changing the proposed amount for payment. There needs to be a
process to resolve such issues, as the right hon. Member for Greenwich
and Woolwich rightly
said. A
concern is that a problem occurring in a higher tier of contract
negotiations could impact very much on the people at the bottom, the
people who are carrying out the work and, arguably, taking the most
risk. The amendments remove the payer’s option to issue that
initial notice and address the question of whether a supplementary
notice can be issued altering the amount later in the process. I hope
to hear a little more from the Minister about why the Bill as it stands
is the solution that has been arrived at by the Government. How does
she feel that smaller contractors in particular can be protected from
losses?
Mr.
Jackson: I would like to support the comments of the hon.
Gentleman and to give a little perspective to the issues raised. In
particular, clauses 139 and 140 have failed to win the support of
significant parts of the construction industry, but also beyond it.
Their effect will be to enable a payer to issue notices effectively
telling the payee how much he is going to receive, which is a novel
approach to cash flow. While that in itself is unusual, there is a
further twist—the payer can reduce the amount of his original
notice, as has been
said. The
provisions were described by the RICS as “extremely
complicated”
and “unlikely
to be understood by users in the
industry”— never
mind Members of Parliament. The Chartered Institute of Building said
that
“the Bill is
overly complicated and unworkable in relation to the revised payment
provisions, which may result in higher administration costs, delayed
payments and unintentionally more
adjudication.” The
Federation of Small Businesses and the Specialist Engineering
Contractors Group have made similar points. The point raised by the SEC
Group was about how a small business can manage its cash flow, put up a
good case to its bank when borrowing money, or be sure of paying its
employees when faced with that particular scenario. It is the most
difficult part of the part 8 construction contracts. Depending on the
Minister’s answer, we are minded to support the Liberal Democrat
amendments. Barry
Gardiner (Brent, North) (Lab): I have been contacted about
the clause by three young constituents who told me that they normally
assume an application for payment, but the provisions of the clause as
they understand them will, in effect, enable their customer to dictate
what they will be paid. The clause enables that customer to issue an
initial notice of due payment, but then to reduce that by issuing a
subsequent notice, which notice can only be challenged by legal
proceedings. As my constituents have done the work, they naturally
consider that they have the right to issue a notice of due payment,
which would be paid. On the other hand, they accept that if the
customer raises a subsequent notice that reduces the amount that my
constituents have requested, they can accept that the amount in that
notice will be the sum that will be paid, provided that there is some
justification for a lesser amount. The customer should ensure that his
notice is issued within an appropriately short period. Under the
current proposals, he could issue his second notice weeks or months
after the due date for payment. That would obviously have a great
impact on cash flow.
With regard
to subsection (1)(a) of proposed clause 110A, it seems quite
sensible, pace the amendment, to provide that a specified person might
give notice rather than the payer. There are cases in which a
designated architect would specify whether the work had drawn to a
completion at a particular phase of the contract. I do not entirely
support the amendment, but I would like clarification on the
substantive point that I believe it is trying to
address.
1.30
pm
Sarah
McCarthy-Fry: I understand that the amendments would
create a position in which only a payee could issue the statutory
payment notice. Under the 1996 Act, only the payer can issue the
statutory payment notice. The Bill removes that restriction, allowing
the payer, the payee or a third party—for example, an architect
working for a customer—to issue the notice, and we leave it to
the parties to agree in contract who should do so. The reason for that
is that the provision is permissive, allowing a broad range of
commercial practices to continue unburdened by legislation. We do not
prevent the payee-led process suggested—far from it. We
expressly allow it and, similarly, we allow others to use processes
that reflect their own commercial logic as they see fit.
It is
suggested that the legislation is over-complex. Part of its complexity
is due to the fact that is drafted to catch a number of scenarios. For
example, we allow the payer, a third party or the payee to issue the
payment notice; the contract will simply require that one of them
can perform that function. A payer will be entirely clear whether he or
she is issuing the statutory payment notice, whether a third party is
doing so, or whether he or she should rely on the payee to make an
application to determine the sum due. The
underlying process is simple. A payment notice is served setting out
the sum considered to be due. That sum can be revised. The sum becomes
payable. That is the process that will be incorporated into contracts.
Contracts will clearly set out who is responsible for issuing the
payment notice.
Mr.
Jackson: I thank the Minister for her generosity in giving
way. We all want to see equality between the various players in the
construction industry, both small and large. Will the Minister give an
undertaking to consider taking up the idea of the statutory trust fund,
perhaps in secondary legislation, once the Bill is enacted? It works
successfully in New Zealand, Canada, the United States and throughout
Europe; it brings a lot more equality and less bureaucracy and it is
easily
understood.
Sarah
McCarthy-Fry: The Government are always happy to consider
other approaches if they turn out to be practical, and we always
consider examples from other countries if they are applicable
here.
I should
point out that the payee’s invoice has no status under current
legislation. The clause will give it much greater weight in determining
what is payable. Invoices can be payment notices if the parties agree
on payee payment notices in their contract. That is a significant step
forward, as it crystallises the amount that should be paid. Moreover,
even if the parties agree upon payer payment notices, the Bill will
allow the payee to issue a payment notice if the payer neglects to do
so.
Permitting
only the payer to issue the counter-notice is the quid pro quo. We want
to strike a balance between the interests of payers and those of
payees. Given the lack of widespread industry support for payee
counter-notices, and the fact that payee counter-notices could oblige
payers to pay more than was owed, we could not accept payee
counter-notices.
Officials
discussed with industry stakeholders proposals for imposing a deadline
before which the counter-notice must be issued, but the feeling was
overwhelmingly against such a move. Many of those asked said that
payers would simply extend the payment period to mitigate the risk of
overpaying and/or issue conservative valuations of the work
undertaken.
Although we
would gain greater certainty about what would be paid, we would do so
at the expense of extending payment periods and reducing the amount of
cash flow, and the objective of the legislation was to keep the cash
flowing. In any case, a counter-notice must be served before the final
date for payment, and the new sum set out in the counter-notice must be
paid before the final date of payment. It is not as though the payer
can indefinitely delay serving such a notice as a means of indefinitely
delaying payment to a payee. With that, I hope that the hon. Gentleman
will withdraw his amendment.
| 
