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I move on to payment and the new amendments concerning the statutory payment framework. The 1996 Act requires that certain notices are issued in advance of the final date by which payment must be made which communicate the amount, with reasons, of the intended payment. These are what are known as the “payment” and “withholding” notices. Their lack of effectiveness in communicating what would be paid at the final date for payment was the prime reason for the review of the 1996 Act.

The noble Baroness’s Amendment 169B would remove the ability of the payee’s application to stand as the statutory payment notice in default. We think this is founded on a misconception and a concern that a payee’s application will sometimes be a cumulative statement showing the amount up to the date of its issue. The noble Baroness is concerned that, on a cumulative basis, month one could see a £1,000 application. In the event £500 is paid, but £500 is withheld because of a disagreement about unsatisfactory workmanship. Month two sees a £2,000 application—that being the cumulative amount under the contract—of which only £1,000 would be payable if all of the first payment had been made. We believe the noble Baroness fears that the payer could become liable to pay £1,500 in this example if the payer did not again issue a withholding notice for the disputed £500. We do not believe this will be the case. The revised Act is quite clear that a statutory payment notice must, in relation to every payment provided for by the contract, state the sum considered to be due at the payment date in respect of the payment and the basis on which that sum is calculated. In short, any type of cumulative notice would not be adequate to serve as a statutory payment notice if it

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did not adequately differentiate between what was currently payable and what had been paid to date. In such a case the payee would have to issue a separate notice claim setting out what was due and why in respect of the month two payment; that is, £1,000.

Our reason for persisting with the position as set out in the Bill is that in many cases the application will meet the definition and otherwise qualify as a payment notice such that it would be unreasonable in those cases to require the payee to issue a separate notice. Other than in an inadequate cumulative notice scenario, any separate notice would probably be identical to the application and it would inevitably take a little time for the payee to realise that the payer payment notice had not been issued—for example, that it was not stuck in the post—and this would result in an extension of the payment period. Extending payment periods is something we are keen to avoid in this legislation. I therefore hope that the noble Baroness will withdraw the amendment.

Amendment 169C relates to the ability of the payer to revise the amount set out in the statutory payment notice before it becomes payable at the final date for payment. Its purpose, it seems, is to limit the grounds on which the payer may amend that payment notice. I believe that we need to look at what we are doing across all the revised payment framework to understand why we have reached the position we have. We are requiring that the amount set out in the payment notice, as revised, becomes the sum payable at the final date for payment, which is not necessarily the case under the 1996 Act; allowing the payee to issue the payment notice should the parties agree that in their contract—under the 1996 Act only the payer can do so; and introducing a fall-back provision which allows the payee to issue the statutory payment notice in default.

Together these measures put the payee in a considerably stronger position than is currently the case. While what is ultimately payable as a matter of the parties’ contract is unaffected, the payee has certainty that the sum in the notice will become payable at the final date for payment. So allowing the payer to amend the amount payable within a contractually agreed period, on whatever grounds, simply balances that off and gives him or her an appropriate opportunity to ensure that he or she does not overpay. Given that explanation, I hope that the amendment will be withdrawn.

That brings us to suspension. Clause 141 has drawn almost universal support from the industry and very little adverse comment. I apologise to noble Lords as I have moved on to the next amendment, which I did not intend to do. Therefore, I simply ask the noble Baroness to withdraw her amendment.

Baroness Hamwee: My Lords, can the noble Lord answer my question about timing?

Lord Brett: My Lords, I apologise to the House. The noble Baroness is correct that there has been extensive consultation, and that will continue. There will have to be a lead-in time. We are looking at a period of 18 months to allow for extensive consultation

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to continue—a very broad consensus has emerged on the contents of this legislation—to ensure that everyone is satisfied with how the legislation will operate when it is introduced.

Baroness Hamwee: My Lords, our procedural rules do not allow me to test colleagues on whether they have followed the fine detail of the noble Lord’s response, for which I thank him. As regards Amendment 169A, I hope that the Government will consult the industry on the new version given that there will be a relatively short time before the change is made if the Commons accepts the amendment which the Government bring forward. I do not refer to this situation as an example but one sometimes finds that, as regards a lot of consultation, a decision is made to do something at the last minute and the opportunity is not taken to ensure that that responds to the points that have been raised. However, I am grateful for the noble Lord’s response. If there is anything more that he feels it would be helpful to convey in writing on the relevant amendment to reassure the Law Society of Scotland, I hope that he will drop me a note about that, which can be passed on. I beg leave to withdraw the amendment.

Amendment 169ZA withdrawn.

Clause 137 : Adjudication costs

Amendment 169A not moved.

Amendment 169AA

Moved by Lord Borrie

169AA: After Clause 138, insert the following new Clause—

“Conditional payment provisions: insolvency of third party payer

In the Housing Grants, Construction and Regeneration Act 1996 (c. 53), in section 113 (prohibition of conditional payment provisions), omit the following—

(a) in subsection (1), “unless that third person, or any other person payment by whom is under the contract (directly or indirectly) a condition of payment by that third person, is insolvent”,

(b) subsection (2),

(c) subsection (3),

(d) subsection (4), and

(e) subsection (5).”

Lord Borrie: My Lords, I move Amendment 169AA and speak to the other amendments with which it is grouped, which stand in my name. In Grand Committee, I moved and spoke to a larger number of amendments to Part 8 dealing with construction contracts. The noble Baroness, Lady Hamwee, also referred to Part 8. The noble Baroness will agree with me that Part 8 is a discrete part of the Bill, bearing little or no relationship to any of the other parts of the Bill to which the House has devoted a great deal of time in debate.

8 pm

In Grand Committee, the range of amendments that I proposed were designed to clarify the most important Housing Grants, Construction and

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Regeneration Act 1996 provisions for the adjudication of disputes between the various parties to a construction contract and to try to achieve greater fairness—a most important matter—for the small and medium-sized enterprises that are typically the subcontractors in construction contracts. They are the plumbers, the glaziers, the heating and electrical contractors and others, with quite a small number of employees in each case.

At this Report stage, I have sought to narrow down my amendments to those which concern insolvency. Other broader amendments to Part 8 may well be introduced by my honourable friends in another place, but I am concentrating on insolvency, which is hardly inappropriate at this time of recession, when only too many firms, not only in the construction industry, are faced with that difficult problem, either for themselves or from people who may owe them money.

The risks and consequences of insolvency are currently a major problem for small and medium-sized enterprises in all industries. A couple of weeks ago, the Sunday Times said that 120 small firms go bust every day and that thousands more are teetering on the brink of bankruptcy. The construction industry may have more than its fair share of problems. A subcontractor’s cash flow will come to an abrupt halt if there is insolvency somewhere along the supply chain and he does not get paid. According to PricewaterhouseCoopers, there are now eight insolvencies every day in UK construction.

My three amendments are meant to alleviate this problem only to some small degree, but I hope that they will contribute. First, on Amendment 169AA, the 1996 Act imposed an excellent general prohibition on payments in the construction industry being made conditional on the receipt of payments from others. Unfortunately, the 1996 Act provided an exception whereby, for example, a main contractor may legally refuse payments to his supply chain subcontractors if an insolvent client or customer ceases to pay, even though the work undertaken by the subcontractors had been fully performed in all respects. My amendment seeks to remove that exception, which I will describe as an injustice. It so happens that it will bring our law into line with that of Australia and New Zealand.

At the earlier stage of the Bill in Grand Committee, the Government sought to argue that the 1996 exception was a compromise, but in truth it was inserted by the Department of the Environment, which was then the responsible department for the construction industry, with a threat to withdraw the whole legislation on construction if the exception was not agreed to. It is true in theory that a subcontractor can take out credit insurance against the main contractor becoming insolvent; though he cannot do so in relation to the risk of the client’s insolvency. Today, not only in the construction industry, insurance is increasingly difficult to obtain and is virtually unobtainable across whole areas of industry because of the recession.

The amendment to which I wish to speak, as distinct from move, Amendment 169CA, arises—I will put as little technical stuff in here as possible—from a decision of this House in its judicial capacity in 2007 in the case of Melville Dundas v Wimpey. It was a majority decision of three to two judges or Law Lords, and it

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involved a major residential development contract in Glasgow. The majority judgment was to the effect that a payer could avoid his obligation to make payment, even though the final date for payment under the contract had passed, on the ground that the payee had subsequently gone into insolvency, provided that there was a clause in the building construction contract providing for that eventuality. According to the majority of the Law Lords, the contractual clause can override Section 111 of the 1996 Act, under which the payer would have been bound to make payment after the final date for payment of the sum due under the contract unless he had given an effective notice of intention to withhold payment.

The Bill seeks to put that majority judgment of the House of Lords in its judicial capacity into statutory form and thereby to entrench the majority judgment in statute. The minority of two Law Lords gave what many in the construction industry feel were very strong dissenting judgments. They said that Section 111 of the 1996 Act should prevail over any contrary contractual provisions, and the purpose of my amendment is to do just that; to ensure that Section 111, requiring payments of a notified sum due, takes precedence over any contrary contractual clause.

Unless that is achieved, the payer may well be tempted, and indeed encouraged, not to discharge payment at the final date of payment, which is what he is supposed to do, whenever he suspects that the payee may be in a weak financial position. Where the payer suspects that the payee is in a precarious cash flow position, the payer will not pay—or will be tempted not to pay—and instead will wait and see if the payee goes into insolvency, thereby increasing the possibility and probability that such insolvency will occur. In other words, it is as if the majority judgment of the House of Lords in its judicial capacity has actually encouraged people to behave in that way.

The majority judgment in that case left the law in a most unsatisfactory position, which the Bill as it stands would entrench. I found the minority judgment of the noble and learned Lord, Lord Neuberger, particularly persuasive. He made the point that Section 111 of the 1996 Act prohibits an employer from withholding payment after the final date for the payment of the sum due under the contract unless he is given effective notice to withhold payment. The noble and learned Lord, Lord Neuberger, went on to say that, in so far as the contract permits the withholding of payment after the final date of payment without any withholding notice being given because of the payee’s later insolvency, the contract, in the words of the noble and learned Lord, Lord Neuberger, would be,

That seems to be a most powerful point made by that noble and learned Lord.

The second of my three amendments renders ineffective:

“Any contractual provision ... which seeks to exclude or oust the provisions”

of Section 111 of the 1996 Act. My final amendment, Amendment 169E, concerns insolvency, as do all my amendments. The incidence of insolvency in the construction industry has been greater than in any

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other—four times that in the financial services sector. There is, therefore—and I need to make this point, because I know some of the arguments of Her Majesty's Government—a special case for a separate regime providing protection against insolvency in the construction industry. In many other countries in Europe, North America and Australia there are, although they differ, specific statutory provisions protecting firms in the construction industry from insolvency. I make this point for the benefit of my friends in the Opposition: the Conservative spokesman and progenitor of the 1996 Act, Sir Michael Latham, not only favoured such a provision in his pre-Act report of 1994, but in his review of 2004.

Many people abroad and distinguished people such as Sir Michael Latham in this country have considered the matter and believe that there should be special provision. The 1996 Act already gives a special statutory right in construction to suspend work in the event of non-payment on the due date. If they do not pay you, you stop work. Most importantly, the payment or credit period is frequently very lengthy in the construction industry. The period allowed before payment is required may be three months after you finish the work. It would be helpful—and this is what my amendment seeks—to give the payee a pre-emptive strike; that is to request a security, charge or bank guarantee at any time and to exercise his right to suspend his obligations under the contract to stop work if that security is not forthcoming.

The Government say that compelling the payer to provide security will be expensive. Of course you have to pay to get a bank guarantee, a charge or whatever, but have the Government fully considered how expensive it is for the payee to finance the provision of plant, equipment, work and materials over the perhaps increasingly lengthy payment or credit periods that are common in the construction industry?

The Government response to amendments of this kind and others in Grand Committee was that there was no case for special provision to be made for insolvencies in the construction industry. However, the whole of the adjudication procedure first introduced in the 1996 is peculiar to the construction industry, and the Government wish to preserve—although I do not—the surviving payment obligation, the “only when paid” provision that my Amendment 169AA would abolish. The Government are not being consistent on this matter. The Conservative Government in their 1996 Act made special provision for the construction industry. There is a case for that; it has been done in other countries in the world, and all that I suggest in these amendments is that some special provisions be made for the construction industry, particularly in the field of insolvency, which is now so important.

8.15 pm

Baroness Hamwee: My Lords, perhaps I may say a word about Amendment 169E. The noble Lord referred to the right to suspend the credit period. That is a very different remedy, if that is the right term in this context, from the arrangement in the proposed new section. I readily acknowledge that I have little experience of construction contracts; I have a bit, but not very

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much. For a party to a contract of any kind to be able at any time unilaterally to change its terms—which is how I read the right to “request” security, although the proposed new subsection (2) turns it into a requirement—when that was not a term that was negotiated when the contract was being put into place, I find interesting. As a point of principle, bluntly, I am against that, although I do not for a moment want to minimise the problems in the industry that the noble Lord described. I am far from convinced that this is a proper proposal to put into legislation.

Lord Berkeley: My Lords, I support the amendments in the name of my noble friend. I spent some 20 or 30 years in the construction industry in the days when clients tended to pay and contractors had big companies with lots of assets. They tended to pay their subcontractors within a reasonable time. There were problems, and Sir Michael Latham, as my noble friend said, is probably responsible for more improvements to the industry than anyone else. He has done awfully well.

The noble Baroness said that the amendment of my noble friend Lord Borrie could involve a party changing a contract unilaterally, but when you are faced with doing work and not being paid for three months, it is quite a problem. Someone has to work out an equitable balance between the risk and reward. For me, clients are paying later and later; sometimes the companies responsible for commissioning contracts and subcontracts are themselves £100 companies which may be doing the management, but can do nothing to help the chain, and you get more and more sub-sub-sub-subcontractors. Without going into the detail, my noble friend has raised some important issues in these amendments, and if he is persuaded to withdraw them, I hope that it will be on the basis that further discussions will take place between him and Ministers.

Lord Brett: My Lords, I suspect that we agree on many of the issues raised by the three amendments but not on how to address them. To summarise, they would delete the insolvency exception to the prohibition of the so-called “pay when paid” clause, overturn the decision of this House in its judicial capacity in respect of the Melville Dundas v George Wimpey case, and introduce a statutory right for a construction firm working under a contract covered by the 1996 Act to receive adequate security in respect of the contract. My noble friend pointed out that the construction industry is unique in that the “pay when paid” clauses are prohibited by statute. The exception is for insolvency, as he said, and it is there for a good reason. It continues to allow construction firms the same protection from the risks of insolvency as exists in other industries.

The decision of the House of Lords in respect of the Melville Dundas v George Wimpey case was indeed technical and there was a 3:2 split judgment, but its effect is that a creditor under a construction contract, as Wimpey had become, should not be disadvantaged compared with a creditor under any other form of commercial relationship.

Finally, my noble friend suggests that we introduce an amendment which provides a statutory right for a firm in a construction supply chain to receive adequate

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security in respect of the contract. Where no security is forthcoming, he suggests that the payee may suspend performance until it is. In such a case, of course, a payer would have to pay an additional sum reflecting the extra costs which the payee incurred in stopping the work. That appears to us to come pretty close to a double jeopardy. Disregarding that point, by making it a statutory right for a payee in a construction supply chain to demand such security, we would create a very uneven playing field between firms in the construction industry and businesses in other industries which have no such statutory right.

That brings me to the heart of the issue so far as concerns the Government. Our objection to the amendments is not technical or one of detail; it is on the grounds of broad principle. SMEs exist throughout construction supply chains. We accept that the construction industry faces difficulties in the current economic downturn, but so do other sectors and specific firms in sectors which are perhaps less immediately impacted upon. However, importantly, a great number of the industry’s customers are themselves small businesses. Manufacturing or retail businesses seeking to extend premises are but one example.

It is a feature of UK insolvency law that it applies uniformly, and it is important that we do not create the position where the insolvency regime as regards parties to a construction contract is radically different from that which applies more generally across the economy. The clauses in this part of the Bill work to respect that principle, as I briefly outlined earlier. Each of the amendments put forward by my noble friend seeks to a greater or lesser degree to create a different position for the construction industry.

We accept that the issue is important but we believe that the only correct way of dealing with it is on a pan-economic basis. In the other place earlier today, we made a number of very relevant announcements. A number of specific measures are being introduced to help businesses across the economy by supporting their cash-flow situation. We announced that HMRC will continue its business support service for as long as it is needed and that the service is to be expanded to allow businesses expecting to make losses to offset those against tax bills due on profits from the previous years which they are unable to pay.

The 2008 Pre-Budget Report announced that the rate of corporation tax for small companies would remain at 21 per cent for 2009-10 to help small businesses during the rest of the recession. We also announced a top-up trade credit insurance scheme to help UK businesses to maintain their finances. The scheme will be available to the 14,000 businesses across the economy that already use trade credit insurance and will mitigate disruption to the supply chain and cash flow of the 250,000 companies with which they do business if their credit limits are reduced.

We will also work to ensure that the regulations and procedures for dealing with troubled companies work to facilitate company rescues where appropriate. It was announced in the Budget that the Insolvency Service will consult on providing for new funding for companies in company voluntary administration—CVAs—or for administration to provide absolute priority

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status to allow firms in difficulties to access the funding that they need to get back on track. Extending to medium and larger companies the moratorium on creditor action against small companies trying to agree a CVA will also give them breathing space to reach agreement with creditors.

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