Local Democracy, Economic Development and Construction Bill [Lords]

New clause 12 addresses the Secretary of State's power to disapply the operation of part 2 of the Housing Grants, Construction and Regeneration Act 1996 from certain types of construction contracts. I am grateful to the Opposition who have had discussions about the need for the amendments, for which I thank them. While the Bill has been going through Parliament, we have been approached by a number of stakeholders from the industry and its customers concerned about the nature of the Secretary of State's power to exclude contracts from the provisions of the 1996 Act. At the moment, that Act contains an all-or-nothing power—in other words, the Secretary of State can disapply from certain types of contract all the provisions in part 2 of that Act. We would like to substitute a new power enabling the Secretary of State to disapply any—not necessarily all—of the provisions in part 2. That approach would allow us to ensure that many of the valuable features of the 1996 Act, as amended by this Bill, continue to apply—for instance, the right to stage payments, the right to adjudication and the right to suspend performance in cases of non-payment—while giving us the flexibility to deal with specific issues of direct concern. The legislation could also respond proportionately to future contractual innovation. Amendment 23 simply references the repeal of the existing disapplication power, because we are replacing it with this provision. Amendments 21 and 22 concern pre-dispute agreements regarding adjudication costs. As alluded to in Committee, we reconsidered that issue. Clause 137 inserts new section 108A into the 1996 Act, preventing parties to construction contracts from entering into agreements before a dispute has arisen about who should pick up the costs of an adjudication. As a consequence of this broad and simple prohibition, pre-dispute agreements between parties, to the effect that an adjudicator can allocate fees and expenses as part of his decision, will also be caught. Allowing the parties to agree in their construction contract that the adjudicator has this power is current good practice, which we would like to preserve. Amendment 22 achieves that by carving out such agreements from the general prohibition. Hon. Members raised a number of issues and tabled further amendments concerning the construction contract provision that directly reflect the points raised during previous stages of the Bill. The first issue concerned the statutory payment notice framework and is the subject of amendments 9, 10, 20 and 11. The hon. Members for North Cornwall (Dan Rogerson) and for Falmouth and Camborne (Julia Goldsworthy) seek to introduce two changes, creating a situation in which only a payee can issue the statutory payment notice, and introducing a statutory period within which a notice amending the amount in the payment notice can be issued. It might help if I set out what changes the Bill makes to the 1996 Act statutory payment framework. The framework is of particular interest to small firms in construction supply chains and has been a matter of much correspondence and debate. The Bill takes a number of steps to tighten up the statutory payment framework to ensure greater clarity and certainty of cash flow, and requires that the amount in the payment notice as, and if, revised, be paid on, or before, the final payment date—in other words, pay now and argue later. The 1996 Act did not achieve that. If the parties agree in contract, the payee is allowed to issue the statutory payment notice under the 1996 Act. Under that Act, only the payer could issue the statutory notice. When the parties agree that the payer should issue the statutory notice and he fails to do so, we give the payee the right to issue the notice. The 1996 Act was silent on what might happen when the notice was not issued. The changes address the failure of the 1996 Act's payment notice framework to determine what will be paid. There is broad agreement in the industry that the amendments have the effect of crystallising what will either be paid or in dispute at the final date for payment, which we think is an important step forward. However, today's amendments take that a step further. Under the 1996 Act only the payer can issue the statutory payment notice. The Bill removes that restriction and allows the payer, the payee or a third party to issue the notice. The change is permissive, allowing a broad range of commercial practices to continue unburdened by legislation, rather than adopting the more restrictive approach proposed in amendments 9, 10, 11 and 20. Currently, some forms of contract provide, for instance, for an architect to certify the value of the work and issue the payment notice. It is wholly reasonable for an inexperienced customer of the industry who is commissioning a complex construction project—a large factory extension on a difficult site, for example—to require his or her architect to value the work and issue the statutory payment notice, rather than handing that right to his contractor. Amendment 11 seeks the introduction of a statutory period within which a counter-notice can be issued. We considered that proposal and asked about it more widely around the industry. The general conclusion was that although the proposal might provide the payee with greater certainty about what would be paid, it would do so at the expense of extending payment periods and reducing the amount of cash flowing. A number of issues have been raised in connection with insolvency and new clauses 3 and 5, as well as amendments 5, 6, 7 and 16. New clause 3 would enable firms working under construction contracts to demand security of the payments due to them. New clause 5 and amendments 5, 6 and 7 would remove the 1996 Act's insolvency exception to the prohibition of pay-when-paid clauses. Another effect of amendment 11 would be to remove the provision that we have included to deal with any uncertainty surrounding the Melville Dundas court decision. All the proposals rest against the same core principle. That principle is simple and clear: the insolvency regime applies to all businesses, regardless of the sector in which they operate. Without that consistency across business, it is hard to see how the insolvency regime can operate in an equitable way. In their own way, each of the amendments seeks to create a different position for firms covered by the 1996 Act from those that are not. We feel that it would be wrong for legislation to distinguish between business sectors where there is an insolvency. New clause 7, tabled by the hon. Member for Shrewsbury and Atcham (Daniel Kawczynski), applies to single mandatory adjudication schemes and would ensure that the statutory adjudication provisions applied to all construction contracts offered under the 1996 Act. The Act intentionally covers a wide range of contracts between very many types of organisations in construction supply chains. Whatever we introduce must work in a broad range of commercial relationships—for instance, a client's relationship with his or her architect or with the main contractor, as well as the main contractor's relationship with his or her subcontractor. Given this, we continue to believe that the flexibility for adjudication procedures inherent in the 1996 Act represents the right approach. I therefore ask hon. Members to withdraw their amendments, and to accept new clause 12 and amendments 21, 22 and 23.