Local Democracy, Economic Development and Construction Bill [HL]

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. In Grand Committee, the range of amendments that I proposed were designed to clarify the most important Housing Grants, Construction and 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 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, ""purporting to permit that which Section 111 prohibits"." 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 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.