On the 19th May, 2010, Independent Senator Feargal Quinn introduced the Construction Contracts Bill (the Bill) to Seanad Eireann (the Senate). The Bill was the result of discussions between the Senator and Mr Sean Gallagher, Chief Executive of Smarthomes, who had contacted Senator Quinn to highlight the problems with payment for sub-contractors in the construction industry. The Bill received Government support and has been taken up by the Department of Finance. It is also backed by the Construction Industry Federation, which had also been considering options for improving cash flow within the industry.
This note sets out a brief commentary on the key provisions contained in the Construction Contracts Bill 2010, as introduced by Senator Quinn. Commentary on the Bill has emphasised the need to ensure the principal provisions contained in the UK Housing Grants, Construction and Regeneration Act 1996 (as amended) (the "HGCR Act") are replicated here in Ireland. A real challenge, however, will be to ensure that the final Bill meets the specific requirements of the Irish construction sector. By way of background, the HGCR Act in the UK was born out of lengthy discussion and consultation, following concerns at the level of insolvency and financial difficulties experienced in the construction industry and the adverse impact, particularly on smaller contractors in this sector. This led to the publication of the Latham Report in the early 1990s, following which the HGCR Act was developed to address specific difficulties identified within the UK construction sector.
The main aim of the Bill is to improve payment practices within the construction industry, by providing for a range of statutory rights for contractors and sub-contractors, supported by the ability to refer disputes to a fast track adjudication process. The Construction Contracts Bill should not, however, be viewed as an alternative to undertaking appropriate due diligence of the project in which contractors are to be involved, the contract terms under which they are to perform work and/or provide services, and of the financial stability of the key players involved. Construction continues to be characterised by a degree of informality, where either no formal contract is entered into or the parties to those contracts do not avail of the contractual rights and remedies that may be available to them. There already exist alternative means by which financial security can be ensured (such as payment and performance bonds, retention bonds etc) and these continue to remain available outside the Bill.
Application of the Bill
The Bill applies to contracts, whether oral or in writing, relating to 'construction operations', which are very broadly defined and will include all construction and engineering works as well as professional construction services. However, the Bill will not apply to a construction contract with a residential occupier or such other construction contracts as may be specifically excluded from its operation by the Minister for Finance.
Key provisions
The Bill places on a statutory footing provisions which are found in many standard form contracts.
Notice of intention to withhold payment
- Section 7 provides for the requirement for notice to be given by the paying party of an intention to withhold payment (in whole or part) from monies otherwise due. This is at the heart of the provisions included in the Bill to achieve a fairer balance within the construction sector and requires the payer to give prior and reasoned notice of any intention to withhold payment from monies otherwise due before any deduction from such payment can be lawfully made.
- The withholding notice must:
(a) be given between three and five days before the due date for payment (the parties can agree the period but in default of agreement, the notice must be given five days before the due date); and
(b) specify the sums which the paying party considers are due together with the basis on which the sums are calculated and the ground or grounds on which sums are withheld (specifying the amount attributable to each ground, where more than one).
Right to suspend for Non-Payment
- Section 9 provides for the right to suspend performance for non payment (unless an effective withholding notice has been given). A party which has not been paid may suspend performance of all or part of its obligations provided prior notice of not less than seven days is given to the defaulting party. The right to suspend ceases when payment is made of the sums due.
- If the right of suspension is properly exercised in accordance
with the Bill, the suspending party will also be entitled to:
(a) a reasonable sum in respect of costs and expenses reasonably incurred in exercising the right of suspension; and
(b) an extension of time, where appropriate, for completion of the works.
Adjudication and Enforcement of Adjudication Decisions
- The Bill, in Section 8, introduces the requirement for adjudication or other fast track dispute resolution procedure, which is binding on the parties. The essence of adjudication is that it provides a procedure which produces a decision within about five to seven weeks of a dispute being referred, which decision is binding in the interim, pending that decision being overturned in arbitration (or litigation) or by agreement of the parties.
- The procedure must allow for:
(a) the referral and appointment of an adjudicator to be made within seven days of one party giving notice of intention to refer a dispute to adjudication; and
(b) the adjudicator to make his decision within 28 days of the referral (or such longer period as parties agree), with ability to extend that period by up to a further 14 days with the consent of the referring party. - In order to be fully effective, some consideration may need to be given to having a dedicated 'adjudication' judge of the High Court to support this new procedure. This judge would deal exclusively with both applications challenging the validity of an adjudicator's decision and/or actions to seek enforcement of same.
The Scheme
A draft Scheme has been prepared which would form part of the Bill and which would apply as the default position where the contract concerned fails to comply with the minimum requirements of the Bill. This follows the structure of the UK HGCR Act and ensures that a safety net of protections is provided for all.
Conclusion
The Bill has been through a period of consultation with various industry stakeholders. There are some additional provisions which could usefully be considered for inclusion in the Bill, such as provisions outlawing conditional payment clauses and to ensure that that there are minimum interim payment periods in all construction contracts. Such provisions should also be tailored to sit with existing legislation, such as the European Communities (Late Payment in Commercial Transactions) Regulations 2002, which already contains provisions setting out maximum payment periods and entitlement to interest on late payment.
We understand that the Department of Finance have prepared a revised draft of the Bill, which on 8th March 2011, passed Committee and Final Stages in the Seanad, with Senators appealing for the incoming Dáil to deal with the Bill as a matter of urgency.
* Arthur Cox have been involved in advising Senator Quinn on the Construction Contracts Bill.
This article contains a general summary of developments and is not a complete or definitive statement of the law. Specific legal advice should be obtained where appropriate.