Construction Contract Bill-Developments 14 May 2013

Construction Contracts Bill - Developments

The Government amendments to the Construction Contracts Bill were (finally) published last Tuesday.  They will be debated at the Public Expenditure and Reform Committee tomorrow, Wednesday 15 May 2013.  The amendments give the surest indication yet as to the likely text of the final bill when it is enacted.

The amendments will be discussed at the pre-arranged Quigg Golden free seminars in Cork (16 May), Dublin (22 May) and Galway (5 June).  Further details on the seminars are available on  http://www.quigggolden.com/seminars/cork-dublin-galway-challenges-pwc-anatomy-procurement-challenge

Impact of the Government amendments

The Bill, which was introduced by Senator Feargal Quinn and is now adopted by the Government, has the objective of improving cashflow in the construction sector.  It uses two mechanisms:

1. Payment notices; and
    
2. A rapid dispute-resolution system – adjudication.

The Government proposes that the Bill will now apply to construction contracts with a value in excess of €10,000.  The original draft of the Bill differentiated between government and private contracts and had a number of differing financial thresholds.  These differences and thresholds will be removed, with the exception of the new €10,000 threshold.

One of the Bill’s most significant innovations is the provision for a 28 day adjudication system. The initial draft proposed that an adjudicator’s decision would not be binding if the dispute was referred to arbitration or litigation. This will be now amended to provide that an adjudicator’s decision will be binding until the dispute is finally resolved by arbitration or litigation.

The Bill originally sought to outlaw “pay-when-paid” clauses.  It is now proposed to water down this protection to allow a kind of “pay-if-certified” clause at Section 3 (5).

The Bill also contains requirements for a paying party, who intends to pay les than the amount claimed by the claiming party, to provide a notice to the claiming party setting out its intention to pay less, and the reasons for doing so – a “pay less notice” of sorts. However, the amendments do not provide a remedy where the paying party fails to provide a “pay less notice”, meaning that this section of the Bill will be largely ineffective.

Positive developments – but problems remain

The Government amendments to the Bill show a real intent to ensure that the Bill meets its objective of improving cashflow in the construction sector.

One of the main tools to achieve this is the introduction of the “payment claims” and “pay less notices” discussed above. Experience in Great Britain and Northern Ireland shows that, while adjudication remains relatively rare, the equivalent payment notice provisions have had a daily impact in the sector.  The Bill contains detailed notice provisions but the amendments fail to provide any remedy where they are not applied.  If that situation is allowed to remain, the provisions will be largely meaningless.

A further issue arises with a proposed government amendment to weaken the effect of the prohibition on “pay-when-paid” provisions to be found in many subcontracts.  The amendment provides that payment can be delayed if waiting on a third party to operate a mechanism for determining the amount due.  This allows a kind of “pay-if-certified” clause.  There is no explicit limitation on the time a certifier might take.  Indeed, there is nothing to prevent a clause being inserted into a contract which thwarts the impact of the legislation, for example by specifying a certifier who would deliberately not perform his duties under the contract.

In addition, the precise jurisdiction of the Bill remains undefined.  While Section 2 (5) states that the provisions will apply even where an attempt is made to oust them by contract, there is no statement that the Bill applies to construction works which take place in the State, similar to that in Section 3 (6) of the Construction Contracts (Northern Ireland) Order 1997.

The remaining financial threshold of €10,000 remains problematic as presently drafted.  There are principled objections to having any threshold at all.  However, the relatively low threshold will assuage many of those concerns, but, as presently drafted, the amended text will be sure to attract High Court litigation.  The text excludes contracts from the application of the Bill “if the value of the contract is not more than €10,000”.  There are a number of scenarios which demonstrate this lack of clarity in the drafting.  Take for example an architect’s initial design contract for, say, €5,000.  This value may, through variations in scope, increase to be worth many times that amount.  Would this contract be caught by the definition?  Or what of a subcontract for €50,000 where a main contractor raises a contra charge, set off or abatement  in excess of €40,000.  Would this bring the value of the contract below €10,00 and therefore mean that the dispute could not be adjudicated upon?

Finally, the amendments helpfully seek to remove a situation where a contractor’s statutory right to suspend work for non-payment is limited to two weeks.  However, the amendment as currently drafted would replace that with a situation where the suspension would end on issue of a notice of adjudication by either party.

The Government amendments represent a significant move forward but there remain some points of ambiguity which should be rectified if the Bill is to be as effective as possible, before the Bill is enacted.