On Wednesday, 19th May, 2010, I introduced the Construction Contracts Bill 2010 to the Seanad. (The Bill will improve payment practices and therefore much needed cashflow in the constuction industry, particularly aiding sub-contractors. It will also provide for an alternative dispute resolution mechanism.)

This came about from a contact I got last month from Mr. Seán Gallagher, better known from “Dragon’s Den” but also from Smarthomes, who drew my attention to a problem of which I had not been quite aware. He explained the difficulty that presented and that is where the Bill has come from.

The main purpose of this Bill is to provide for a mechanism whereby prior notice of an intention to withhold sums from payments otherwise due to contractors must be given. Otherwise, payments must be made in full and/or the payee may suspend the provision of works and/or services under the construction contract until payment is made in full.

The Bill will improve payment practices in the construction industry by providing clarity and transparency in the payment of moneys due in construction contracts. This will improve crucial cash-flow to those subcontractors working in the industry, thus helping companies involved in the construction sector to survive and keep people in employment. It also aims to reform dispute procedures in the construction industry to make them less costly and less time-consuming, and to relieve some pressure on the courts system.

Before moving on to the detail of the Bill, I want to outline briefly some of the background to the Bill. It is estimated that over the past two years 200,000 jobs have been lost in construction and its related sectors. A further 100,000 jobs could be at risk in the future because of the reduced level of both public and private investment. It is a devastating situation for those individuals and families whose lives depend on the construction sector.

To give some indication of the duress that construction workers are now under, it was reported earlier this month that self-employed construction workers have been admitted to psychiatric hospitals due to their despair at having no social welfare payments on which to live. Some of these workers, such as carpenters, tilers, plumbers and electricians, do not qualify automatically for unemployment benefit because they had set up their own companies.

We all have seen how construction work on housing and other developments up and down the country is being halted because of the downturn. For example, it was reported last week that construction at Waterford City Council’s €20 million 111 unit project housing scheme on the Carrickphierish Road at Gracedieu was halted due to financial reasons. I was stunned when I got the following figures. Some 500 property and construction companies collapsed during 2009, an average of almost ten industry failures a week or two each working day.

The large developers can rely on NAMA to give them relief when things go wrong, but what about the smaller subcontractors? Subcontractors include those involved in architecture, engineering, plumbing, electrical and mechanical work, kitchen manufacturing, painting, the supply of doors and windows, concrete and timber frame manufacturing, interior design, gardening and ground moving services etc.

The scale of the downturn in the economy and the difficulty in securing credit has left many subcontractors who are involved in the construction industry facing huge cash-flow difficulties that are being compounded by the non-payment of debts. For example, a developer buys a plot of land and gets planning permission to build 200 apartments. He then may set up a separate building company and subcontract the building of the apartments to this company, which will likely have no assets. Alternatively, he may hire a separate building firm to undertake this work. That building firm, in turn, hires subcontractors to carry out the building work on the apartments. In this way, the subcontractors are no longer working for the developer; they are working for the building company.

Customers then buy these apartments and pay the developer rather than the building company. The developer may then spend or invest this money on purchasing another building site elsewhere. However, as he may have spent this money on a new plot of land, he has no money to pay the building company. The building company goes into liquidation and is unable to pay the subcontractors.

The subcontractors and suppliers who supplied the goods and services do not receive payment and because they have already paid their staff and suppliers, they are, in effect, forced out of business. The people who bought the apartments now legally own them through what is known as “right of title”, and ownership of everything in them passes to the new owner as of right, even though the people who made, purchased, supplied and installed the goods have never been paid.

As the developer’s company and the building company are legally set-up as limited liability companies, their liabilities are limited to the assets of his or her company. As many developers set up new and separate companies for each site, there is no redress to the assets of other companies that the developer owns, even when they may have significant assets. The bottom line is that a subcontractor’s livelihood is at risk when a construction contract is halted and they are left in the lurch.

The current legislation offers little or no protection to subcontractors. This Bill addresses this unjust situation because it provides a mechanism where an intention to withhold sums from payments otherwise due must be given. Otherwise, payments must be made in full and/or the payee may suspend the provision of works and/or services under the construction contract until payment is made in full.

This is aimed at achieving a more equal balance in the construction industry. Ideally, this measure would be linked to wider provision in respect of construction contracts including a more rapid and effective means of dispute settlement. However, that aspect could be considered at a later point. The Bill will also reform dispute procedures to make them less costly and less time-consuming. Senator Joe O’Toole will describe the proposal in more detail. It is very evident that disputes about contracts cause delays which have financial and economic costs which hinder opportunities to move forward. Perhaps during an economic downturn there is an even greater shift towards disputes and thus court action, as companies struggle to survive. It is hoped that adjudication will help the many SMEs who cannot afford the costs of going to court which includes the expense of employing legal practitioners.

The Bill contains ten main sections. Section 3 of the Bill defines construction contracts for purposes of the Bill. This also applies to contracts which are written or oral, or partially written and partially oral. There is also provision as to the territorial application of the Bill. Section 4 details certain contracts which are excluded from the Bill and, in particular, a construction contract with a residential occupier. There is provision for the Minister to extend the list of exclusions by order. Section 5 of the Bill sets forth the meaning of “construction operations” which would be governed by a “construction contract” for purposes of the Bill. Section 6 provides that the provisions of the Bill shall apply to all construction contracts, whether oral or in writing. Section 7 provides for notice of intention to withhold payment. This is the heart of the provisions included in the Bill to achieve a fairer balance within the construction sector It requires for a payer to give notice of intention to withhold payment to a payee before any deduction from such payment can be made. Section 8 of the Bill aims to encourage the developers or building companies and subcontractor to resolve disputes through adjudication. Senator O’Toole will talk about this aspect separately. Section 9 provides for the right to suspend performance for non-payment. The provisions in this Bill have been widely welcomed by those in the construction industry who have been in contact, including the Construction Industry Federation which represents and serves over 3,000 members covering businesses in all areas of the Irish construction industry. The Bill, if enacted, will provide real and practical benefit to the construction industry in general and to those working in the sector, especially subcontractors, who are usually small and medium-sized enterprises.

This Bill is not designed to jump on the bandwagon of berating developers or blaming them for the situation we now find ourselves in. They are mostly people of professionalism and integrity. The Bill is designed to protect against the increasing numbers of those who do not act in this way. Allowing the situation to continue as it currently stands will allow developers to walk away from developments, leaving those hard pressed subcontractors without payment. People are losing their jobs because of the lack of protection available. This Bill will afford them this vital protection. Any business may lose some trade, but cash flow is crucial as it allows businesses to be sustained in the longer term. That is because money allows overheads and costs to be paid and people to be kept in employment. Allowing people to remain in employment is crucial in these straitened times. Many subcontractors in the construction sector simply cannot continue in business because of the current situation.

I firmly believe this Bill will play a significant part in updating how construction contracts are made, thus helping to keep people in employment. We need to update our out-dated legislation in this area. While I look forward to a full debate on the Bill, I also look forward and hope for its early enactment. I am sure it is capable of being improved and I am sure other provisions could be added to it on Committee Stage. I urge the Minister of State to recognise the need for this legislation. Many subcontractors and contractors need such a Bill. I urge the Minister of State to accept Second Stage because the Bill is something the country is crying out for.

For the text of the full debate, please click here.

In response to that debate, I said: I thank the Minister of State for his comments. It does not seem like tautology for me to say his contribution and the others we heard have been very constructive — a good word to use on the Construction Contracts Bill. I have been very impressed by the contributions and found them useful. Senator Boyle said there is a need for this Bill and I believe there is.

The Minister of State said his comments were not intended as a criticism and I understand that. He also said he was sympathetic to the aims of the Bill. Everybody who spoke has been sympathetic to it. Senator MacSharry said he did not disagree with any of it, but felt some additions would benefit the Bill and make it more effective. I accept improvements can be made to any legislation and I hope this legislation will be improved. Senator Alex White said the problem was not confined to the construction industry. However, it is pertinent to the construction industry. In any other business, if someone sells somebody something and payment is not made, the person can go and repossess the item. However, that cannot be done if a person has supplied piping or wiring that has already been embedded in the product. Senator White also spoke about the adjudication and dispute resolution and Senator O’Toole mentioned the experience in France. Senators Norris and MacSharry spoke about the British experience of adjudication, where there have been 18,000 cases, only 300 of which ended up in court. What a success that is. We can do more in that regard.

One of the difficulties I had with introducing this Bill was the concern that it would create more red tape for Irish business and industry. More red tape inhibits entrepreneurship, which is something on which we will have to rely to a large extent in the future. Hopefully, this will not happen. I was impressed by Senator Corrigan’s contribution. She suggested that when people buy a house, the house should have a clean bill of health and should come with some sort of bond that would guarantee all bills had been paid, including construction bills. We should look at that issue.

I have a concern with regard to the five-month period mentioned by the Minister of State. I have introduced two Bills in the past, one of which was accepted, the passports for sale Bill. The Minister at the time, not unlike today, said he could not vote against it because he could not disagree with anything in it. The Bill was not amended, but the Minister later introduced his own Bill and improved on mine. I would like to think this Bill will be retained and that a new one will not be created. Another concern relates to the second Bill I introduced, which had to do with presumed consent for organ transplants. The Minister said at the time that he thought he agreed with most of it, but would like to consult on it. That was in September 2008, which is the reason for my concern. I have found that the difference between my experience in business and in the public sector is the lack of urgency. I am concerned by the lack of urgency. I am concerned that the period of time between now and 19 October could develop into a talking shop.

I urge the Minister of State to ensure that does not happen. The Bill should not become a discussion issue but become something that will achieve what we set out to do. I understand that Committee Stage for this Bill will take place on Tuesday, 19 October. I want to ensure this House holds to that. I understand that is the case and hope it happens. In the meantime, the Department officials will consult with the various bodies. I know that consultation will include the Construction Industry Federation, which has 37 separate association members. The federation has been very helpful to me in drawing up this Bill. Mr. Patrick McGovern of Arthur Cox and company has also helped me a great deal and so too has my assistant Anne O Broin. I mentioned earlier that Seán Gallagher initiated this idea and had the experience to contact us to suggest it should be done.

I appreciate the efforts of all of those who have been involved in this work. I particularly appreciate the involvement and contributions of Members here. I appreciate their input and the thought put into their contributions with the clear aim of improving the Bill. The Bill can and will be improved over the next few months. We need to keep up the sense of urgency because the Bill will not be retrospective. We will not be able to go back and do anything about anything that goes wrong during the next five months waiting period. The Bill will only apply in the future. Therefore, let us ensure we do not delay it. I am happy to accept the amendment and appreciate the work that has been put into the debate.