Rosie Winterton (Minister of State (Yorkshire and the Humber), Department for Communities and Local Government; Doncaster Central, Labour)

I beg to move, That the clause be read a Second time.

John Bercow (Speaker)

With this it will be convenient to discuss the following:

New clause 3— Insolvency protection—

'(1) The Housing Grants, Construction and Regeneration Act 1996 (c.53) is amended as follows.

(2) After section 113 insert—

"113A Insolvency protection

(1) A party to a construction contract may at any time request the other party to provide adequate security including bank guarantees and bonds in respect of payments of the contract price, including the price of any varied or additional works.

(2) Where a party fails to provide the adequate security as requested under subsection (1), the party making the request has the right to suspend any or all of his obligations under the construction contract with the party in default.

(3) The right may not be exercised without first giving to the party in default at least seven days' notice of intention to suspend performance, stating that performance will be suspended unless, in the meantime, the security requested under subsection (1) is provided.

(4) The right to suspend performance ceases when the party in the default makes available the security requested under subsection (1).

(5) The consequences of the exercise of the right of the suspension under subsection (2) are as set out in subsections (3A) and (4) in section 112."'.

New clause 5— Prohibition of conditional payment provisions—

'(1) The Housing Grants, Construction and Regeneration Act 1996 (c. 53) is amended as follows.

(2) Section 113 is omitted.'.

New clause 7— Right to refer disputes to adjudication and conduct of the adjudication—

'In the Housing Grants, Construction and Regeneration Act 1996 (c. 53), for section 108 (right to refer disputes to adjudication) substitute—

"108 Right to refer disputes to adjudication and conduct of the adjudication

(1) A party to a construction contract has the right to refer a dispute arising under the contract for adjudication.

(2) For this purpose "disputes" includes any difference.

(3) The adjudication shall be conducted solely in accordance with the adjudication provisions of the Scheme for Construction Contracts.

(4) Any contractual provision between the parties to a construction contract which adds to, omits, varies or excludes the provisions of the Scheme is ineffective.

(5) It is immaterial whether or not the contractual provision is contained in the construction contract.'.

Government amendments 21 and 22.

Amendment 1, in clause 137, page 82, line 13, at end insert—

'( ) In the absence of an agreement under subsection (1) the adjudicator shall be entitled to the payment of such reasonable amount as he may determine by way of fees and expenses reasonably incurred by him.

( ) The parties shall be jointly and severally liable for any sum which remains outstanding following the making of any determination on how the payment shall be apportioned.'.

Amendment 5, in clause 138, page 82, line 24, at end insert—

'(c) the issue of any notice, certificate, the making of any decision or on the occurrence of any event under another contract.'.

Amendment 6, page 82, line 25], leave out 'do not'.

Amendment 7, page 82, line 26, leave out '(but see section 113)'.

Amendment 20, in clause 139, page 83, leave out line 8 to 10.

Amendment 9, in page 83, leave out lines 14 to 30 and insert—

'(2) A notice complies with this subsection if it specifies—

(a) the sum that the payee considers to be or to have been due at the payment due date in respect of the payment, and

(b) the basis on which that sum is calculated.'.

Amendment 10, in page 83, leave out from line 41 to line 23 on page 84.

Amendment 11, in clause 140, page 84, line 31, leave out from beginning to line 46 on page 85 and insert—

'(2) For the purposes of this section , the "notified sum" in relation to any payment provided for by a construction contract means the amount specified in the notice complying with section 110A(2).

(3) Not later than 14 days after the payment due date the payer or a specified person may in accordance with this section give to the payee a notice of the payer's intention to pay less than notified sum.

(4) A notice under subsection (3) must specify—

(a) the sum that the payer considers to be due on the date the notice is served, and

(b) the basis on which that sum is calculated, and

(c) the precise reasons that justify the difference between the notified sum referred to in subsection (1) and the sum in a notice issued under subsection (3).

(5) A notice under subsection (3) may not be given before the notice by reference to which the notified sum is determined.

(6) Where a notice is given under subsection (3), subsection (1) applies only in respect of the sum specified pursuant to subsection (4)(a).

(7) Subsection (8) applies where in respect of a payment a notice under subsection (3) is given in accordance with this section, but on the matter being referred to adjudication the adjudicator decides that more than the sum specified in the notice should be paid.

(8) In a case where this subsection applies, the decision of the adjudicator referred to in subsection (7) shall be construed as requiring payment of the additional amount not later than—

(a) seven days from the date of the decision, or

(b) the date which, apart from the notice, would have been the final date for payment,

whichever is the later.

(9) Any contractual provision between the parties to a construction contract which seeks to exclude or oust the provisions of this section is ineffective. It is immaterial whether or not the contractual provision is contained in the construction contract.'.

Amendment 16, in page 85, leave out lines 39 and 40.

Government amendment 23.

Rosie Winterton (Minister of State (Yorkshire and the Humber), Department for Communities and Local Government; Doncaster Central, Labour)

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 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.

Stewart Jackson (- Shadow Minister, Communities and Local Government; Peterborough, Conservative)

I congratulate the Minister on wading into the construction contracts in part 8 of the Bill. As we know, there was quite a merry-go-round of Ministers when we considered these matters in Committee in June. Sarah McCarthy-Fry was a game trouper in that regard—she had about two days to prepare for this complex and difficult subject. The Minister for Regional Economic Development and Co-ordination has perhaps had a little longer over the summer break.

We would do well to consider the wider issues that the new clauses and amendments are seeking to address, including the fact that late and disputed payments are a recurring problem in the construction industry. Anecdotally, we know that main contractors are known to hold money back, to the detriment of the small and medium-sized enterprises that are their subcontractors. We believe that the 1996 Act needs updating to tackle the continuing problem of late and unreasonably disputed payments in the sector, and we welcome the decision to legislate on this.

We also support the strengthening of the adjudication system. Indeed, the Minister will know that we have consistently lobbied for that system to be overhauled over the past few years. It is a matter of regret that we are still not in a position, in the dying days of this Government, to meet the undertaking made by previous Ministers to introduce a stand-alone construction Bill that would be subject to a proper debate, rather than having this spatchcock addition to a Bill on local democracy and regional issues. Let us not be too churlish, however; we are debating the issue now.

We support the aims of the clauses on payments, but we want to ensure that they are as simple and fair in their operation as they can reasonably be. There is not a consensus on this matter. Many of the trade organisations and associations—to be fair, the vast majority of them—have supported the changes in the Bill, but a number still have concerns, including the Construction Confederation. However, the specialist engineering contractors have consistently supported the proposals during the Public Bill Committee and Report stages.

We have no opposition in principle to new clause 12, which will place on a more formal footing and a statutory basis the provision for adjudicators in the devolved nations to take corrective action in respect of material inaccuracies and irregularities in contracts. We see that as more of a tidying-up exercise, although I would add the slight caveat that the issue should have been addressed before Report stage. It could have been discussed in Committee, for example. Wales and Scotland have had devolved Governments for quite some time now, but someone obviously did not spot that. Having said that, we had a debate on clause 136 in Committee in June.

There is much merit in new clause 3, tabled by Mr. Llwyd—

Mark Prisk (Shadow Minister (Business and Enterprise), Business; Hertford & Stortford, Conservative)

Very good!

Stewart Jackson (- Shadow Minister, Communities and Local Government; Peterborough, Conservative)

I am not a fluent Welsh speaker, but I do my best.

I think the new clause is important for this reason. Of course we do not want to see undue bureaucracy and paperwork in the contractual relationship between smaller contractors and larger developers, but the situation is pretty critical in respect of how the economic downturn and recession have hit small and medium-sized enterprises. In those circumstances, it is well worth looking at any legislative measures to assist small building firms and contractors to stay in business and to have the peace of mind and security to safeguard their financial viability. I note that the Government did not dismiss the matter out of hand in Committee.

It is well for us to look at the facts. Barclays bank believes that small and medium-sized enterprises have lost more than £1.16 billion in the past year because of non-payment. Over the past year, there has been a more than 50 per cent. increase in insolvencies in the industry—more than double the same figures for the manufacturing sector—and according to PricewaterhouseCoopers, nine construction industry firms a day are going into insolvency.

David Heathcoat-Amory (Wells, Conservative)

I am glad to hear my hon. Friend speaking in this way. Is he also aware that subcontractors often find it difficult to get credit insurance against that eventuality, so they are subject to the market strength exerted by the superior contractor? When the ultimate client goes bust, being subject to pay-when-paid contracts puts them in a very difficult position in what is already a recession. Will my hon. Friend lead on to some policy changes that he might support, perhaps when in government, in order to remedy the situation?

Stewart Jackson (- Shadow Minister, Communities and Local Government; Peterborough, Conservative)

My right hon. Friend pre-empts my remarks intended for later when Julia Goldsworthy speaks to her amendments that deal with the pay-when-paid arrangements. No doubt the Minister will also make some comments about them. If we are talking about "real help now", to use a hackneyed phrase of this Government, we certainly need it now to secure the future of these small companies.

We do not want to fetter the discretion of either party to the contract, as we want them to have a mutually beneficial and trusting contractual relationship to get the job done and get paid. We know that in the real world—with cash-flow problems and our friendly bank managers on the case—that does not always happen, which is why we need to safeguard the vital contribution of SMEs to the industry. I do not generally pray in aid Hazel Blears, but she did say on Second Reading:

"I think that it is very important that small businesses in the construction supply chain, in particular, have as much protection as they can."—[ Hansard, 1 June 2009; Vol. 493, c. 37.]

I think that we would all agree with that.

Mark Prisk (Shadow Minister (Business and Enterprise), Business; Hertford & Stortford, Conservative)

I shall not detain my hon. Friend long. He is absolutely right to suggest that, in addition to the Bill, we need a clear sense of purpose and direction from the Minister—my hon. Friend has just quoted a previous Minister. That is crucial if we are to get the right collaborative and positive approach that the industry needs after going through such a difficult period last year. Does my hon. Friend agree that drawing that out of the Minister—we hope that she will respond—is perhaps as important as the details of the legislation before us?

Stewart Jackson (- Shadow Minister, Communities and Local Government; Peterborough, Conservative)

As usual, my hon. Friend, the shadow construction Minister, makes an apposite point. There was a good degree of consensus in Committee, under the present and previous Ministers, but as they say, kind words butter no parsnips. We shall find out the Government's intentions today and discover whether they are keen to assist in a practical way when it comes to new clause 3. No doubt the hon. Member for Meirionnydd Nant Conwy will make his case in his usual cogent and powerful way.

Let us move on to new clause 7, which was tabled by my hon. Friend Daniel Kawczynski over the summer. The then Minister made some pertinent points about single statutory adjudication, and seemed minded to accept the strong case for it. She said:

"On the wider point about a single statutory adjudication scheme, it would introduce greater clarity and simplicity but it would also represent a much more significant intervention into freedom of contract". ——[ Official Report, Local Democracy, Economic Development and Construction Public Bill Committee, 18 June 2009; c. 237.]

I am not sure that that case was made very strongly with evidence, and I do not think that the Minister convinced the Committee as a whole or her own side in particular.

As I mentioned on that occasion, on 3 March, in the Grand Committee—which was specifically discussing a single scheme for adjudication—Lord Brett said:

"That would not be unreasonable. Therefore, we have made an offer to the industry that we will conduct a thorough review of the existing adjudication scheme set out in secondary legislation when we make amendments".—[ Official Report, House of Lords, 3 March 2009; Vol. 708, c. GC293.]

That leads me to press the Minister on the specific subject of single statutory adjudication. When will the review take place, and what are its terms of reference? Given that we are in a crisis period involving disputes between larger and smaller parties in the construction industry, when will we see the results of the review? Will it feed through into—possibly—secondary legislation? If the Minister is not minded to assuage my concerns and those of my hon. Friend the Member for Shrewsbury and Atcham today, will she at least tell us whether the review is forthcoming, and what it will say?

I will be brief, because other Members wish to speak and important aspects of other clauses require proper debate. We applaud the changes that the Government have made in amendments 21 and 22: they have listened to the views expressed, across a wide spectrum, in Committee in June. I will not steal the thunder of the hon. Members for North Cornwall (Dan Rogerson) and for Falmouth and Camborne, but their amendments have considerable merit. We are inclined to support them at this stage, but the Minister may well surprise us and accept them, and we look forward with interest to hearing what she will have to say.

The construction sector is in crisis. The Government must do all they can to assist an industry which has probably been hit harder than any other industry in the country as a result of the recession. We look to the Minister to give the necessary leadership, to note the consensus across all parties and out there in the construction world, and to accept the amendments.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat)

I commend the Minister on the way in which she has handled being dropped into this compost heap of a Bill at short notice, and probably into the most complicated part of it. We have no particular problem with the Government amendments, the purpose of which is largely to tidy up and to deal with the devolution question. However, we do not think that the Government have approached this issue with the right perspective.

It is important to remember that 90 per cent. of the work force employed in the construction sector are employees of businesses consisting of six or fewer people. At present, the larger organisations have the whip hand. We fear that the views of the much smaller businesses that constitute the majority of the industry are not being heard, and are not being reflected in the Bill. That is why we have raised the issue of the balance of power between payee and payer in amendment 20 and consequential amendments 9, 10, 11 and 16, and the whole subject of conditional payments. Mr. Llwyd will raise similar issues involving insolvency. Although we agree that there is a wrong to right in the existing system, and I understand the Minister when she says that we need a tightening of the provisions, clarity and certainty, we feel that our amendments would achieve greater fairness, reduce complexity and minimise the amount of regulation that will be necessary.

Our amendments would reduce the verbiage in clauses 139 and 140 by more than 50 per cent. They are supported by the Federation of Small Businesses, the Specialist Engineering Contractors Group and Unite, the union. Although the Government proposals try to redress the balance and to create equality between the payee and payer, we are saying that, in effect, it is always the payer who has the greater power and that the arrangements will still leave the payer with the greater power, because the bargaining power of the payee is unequal. Our proposal is based on contracts legislation in New Zealand and other legislation in Australia, and we think that there is a precedent for pursuing that line. I hope that the Minister will heed the words of Mr. Jackson, which are echoed on the Liberal Democrat Benches. We feel that there is consensus on the issue and that there is a need to move forward.

Stewart Jackson (- Shadow Minister, Communities and Local Government; Peterborough, Conservative)

Is the hon. Lady aware that a number of Ministers over the past few years have promised to look specifically at international experience of the scheme, particularly single adjudication, and that that does not seem to appear in the Bill or in secondary legislation?

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat)

I was aware of that, and it leads me to another concern. Although there has been consultation on all issues, it is much easier for the very large organisations to engage in that consultation and very difficult for the smaller organisations, which make up the majority of the industry. We are also concerned that a lot of the consultation took place before the catastrophe that has hit the construction industry. The world has moved on dramatically and the Government's approach has not reflected those changes.

On the conditional payments provisions and the so-called "pay when paid" clauses, I listened carefully to the Minister, and I have heard her say on more than one occasion that she is taking that position because insolvency provision has to apply equally across all business, but she has not explained how banning "pay when paid" clauses on the insolvency of a third party is in conflict with insolvency laws. My understanding is that the original purpose of the legislation was to ban all "paid when paid" clauses, without exemptions. I understand that that has been adopted in New Zealand, Australia and Singapore. We have not had a decent explanation of exactly why the provision crept in. The conclusion that Liberal Democrats draw is that it had to do with some major lobbying, rather than inconsistency in law. I bring the Minister back to the issue of perspective. We are worried that insolvencies further up the line could generate more insolvencies down the line. There is a danger of a domino effect in the current economic situation.

Colin Breed (South East Cornwall, Liberal Democrat)

A number of smaller firms sometimes find that they are working perfectly satisfactorily and are then hit by a large bad debt. Their security of payment has completely gone. They then have to lay off people who have been working jolly hard, because something further up the line has been visited upon them and they do not have the capacity to sustain it. We will lose a lot of jobs in the construction industry in very small firms, not because they have not been trying to work properly, but because people up the line who have owed them substantial sums have failed. That domino effect will have a major impact on small businesses.

Julia Goldsworthy (Falmouth & Camborne, Liberal Democrat)

My hon. Friend makes an important point. We have to remember that, in the construction industry in particular, so many of the costs are sunk: once the companies have built the building, they cannot recover the costs. It is difficult enough for them to manage the potential insolvency of their payer, let alone a third party. If we look at it from their point of view, how on earth are they supposed to get credit insurance to deal with such issues? They are being placed in an impossible position. It is an important issue that needs to be addressed. It ties into the point raised by Mr. Llwyd.

A precedent has been established by the House of Lords. It raises concerns and encourages businesses to go against the provisions set out in the Bill. Basically, it encourages them to withhold payment in order to hedge against the risk that they will then become insolvent. It is important that the proposal is incorporated into the Bill. I am minded to support the hon. Gentleman, but we are also minded to press some of our amendments to a vote should the Minister feel that it is not appropriate for the Government to co-operate.

Colin Breed (South East Cornwall, Liberal Democrat)

One problem banks now have is the provision of much needed cash flow support through overdrafts and loans. Because of the weaknesses in the system, there is a feeling that if they support small firms they could end up being owed an awful lot of money by a failed company.

Elfyn Llwyd (Parliamentary Leader; Meirionnydd Nant Conwy, Plaid Cymru)

In speaking to new clause 3, I must acknowledge the huge assistance that I have received from Professor Rudi Klein, who is chief executive of the Specialist Engineering Contractors Group. I should also mention that the Unite union is fully in favour of the contents of the new clause. The point of the provision is to address the gross inequality, to which reference has been made in several speeches, between the main contractor and a small or medium-sized enterprise further down the line. Julia Goldsworthy referred to the fact that those building firms typically have five or six employees, and having to lose out on several hundred thousand pounds without any redress is often a death knell to them. As has been made clear, the building industry has probably been the worst hit industry in this recession. That is no surprise, because it is always the first to be hit, but it has been particularly badly hit. The Governments in this place and in Cardiff—I am sure the same is happening in Scotland—are bringing forward Government contracts to try to perk things up, and that is all to the good.

New clause 3 seeks to make a slight variation on the whole issue of insolvency protection. It states:

"A party to a construction contract may at any time request the other party to provide adequate security including bank guarantees and bonds in respect of payments of the contract price, including the price of any varied or additional works...Where a party fails to provide the adequate security as requested...the party making the request has the right to suspend any or all of his obligations under the construction contract with the party in default...The right may not be exercised without first giving to the party in default at least seven days' notice of intention to suspend performance, stating that performance will be suspended unless, in the meantime, the security requested...is provided...The right to suspend performance ceases when the party in the default makes available the security requested under subsection (1)"—

and so on.

We all know of various tales of woe of smaller small and medium-sized enterprises in the building industry hitting the wall not because of anything that they have done but because of the inequality between themselves and the main contractor, which I would describe as the inequality of arms par excellence. Let me cite one example. Two sister companies—Pierse Contracting and Pierse Contracting Southern Ltd—recently went into insolvency. Both continued to commission construction work and engage subcontractors over the past 12 months, when they were clearly insolvent. Just over a year ago, the net worth of each company was between minus £400,000 and minus £500,000. In the past year, the former company had 29 unsatisfied county court judgments against it and the latter had 43. Companies in Pierse Group—the holding company—regularly moved whatever assets they had between themselves and businesses in Ireland.

Both Pierse Contracting and Pierse Contracting Southern Ltd were engaged by public sector bodies as main contractors. Such bodies included authorities in Wales and in England, and one was the Cheshire police authority. Pierse Contracting was the main contractor for the tactical training centre at Winsford in Cheshire—a project to the value of £10.7 million. As a result of Pierse Contracting's insolvency, a number of subcontractors have been put in peril, including one that has lost more than £600,000. This situation, I regret to say, is not unusual within the industry—nor is it new. Firms are engaging supply chains to carry out work when their liabilities exceed their assets—in other words, when they are insolvent. Often work is commissioned by developers that are £100 companies with no assets to speak of.

Of course, another issue is important. Why are public sector bodies engaging insolvent main contractors and therefore putting them in a position to inflict substantial financial damage on the rest of the industry? In a letter dated 17 May 2004, the then Chief Secretary to the Treasury said that

"the primary problem facing suppliers is the uncertainty over when and indeed if payments are made".

He went on to say that

"the difficulties caused to suppliers"—

in the construction industry—

"in the event of insolvency higher up the supply chain requires analysis. Regardless of the payment or contractual arrangements in place, it is important that suppliers receive fair treatment."

Given the fact that insolvencies up the supply chain are now causing severe distress to many small and medium-sized enterprises, which do not have the ability to protect themselves against insolvency risk or even to manage the risk through credit insurance or bank borrowing, it is now time for the House to legislate on the matter. Construction SMEs are now losing almost £1.16 million a year because of non-payment, according to the recent Barclays local business annual late payments report. The incidence of insolvencies in the construction industry is four times greater than in other industries.

During the Bill's passage through the other place, no less an expert than Lord Borrie QC introduced an amendment to help firms faced with the Pierse Contracting scenario. In effect, my new clause 3 reintroduces those amendments, and I believe that it is straightforward and self-evident. Firms in the construction industry already have a statutory right to suspend contracts for non-payment, and the proposal is that that right should be extended to cover circumstances in which a procurer of construction works is unable, on request, to provide security such as a bank guarantee or payment bond. Where such security cannot be provided, and there is evidence of the payer's inability to pay, the payee would be able to suspend the contract.

Let me dispose of some of the arguments against the new clause. First, if the payer were to fail, fewer assets would be available to satisfy other creditors. As I have said, the sub-contractor already has a statutory right to suspend a contract for non-payment. If that happened and then the payer subsequently discharged the payment, there would still be fewer assets left for creditors in the event of the payer becoming insolvent. Failure by the payer to provide a bank guarantee or payment bond indicates that he does not have the funds to discharge payment when it falls due.

Moreover, why should the payee continue to provide valuable work and materials when he knows that he is unlikely to be paid for them? New clause 3 would simply extend the use of the statutory right of suspension as a pre-emptive strike, as it were. Non-construction creditors are likely to have more effective ways—such as the retention of title clauses, for example—to deal with insolvency risk: why should construction firms be expected to continue working to benefit their creditors? If the new clause were to help 1,000 small and medium-sized enterprises in the construction supply chains from going into insolvency, thereby saving a substantial number of jobs, it would have served its purpose.

Moreover, payment security would help small firms seeking funding from their banks. The new clause would help to address the problem posed by the banks' current reluctance to lend to SMEs. It has been said that compelling the payer to provide security would be expensive, and that ring-fencing any of the payer's funds could increase the risk of the payer's insolvency. However, if the payer cannot provide a form of security that shows his ability to pay, he should not commission the work.

It is extremely expensive for the payee to finance the provision of plant, equipment, work and materials over the lengthy credit periods that are now common in the industry. A period of 60 to 90 days is becoming the norm, and the fact that the payee—usually an SME—is expected to finance such a long period increases the risk that he will become insolvent. That risk is further increased by the possibility that the payer could also become insolvent.

In some sectors of the industry, such as lift installation and structural steel work, 80 per cent. of the value of a contract—that is, for lifts or steel—is supplied to a site without any payment being made. The payment process does not begin until the goods are on site, and there is no deposit on order. In addition, the payee is normally expected to provide security for performance, through instruments such as performance bonds and retentions—the practice by which 5 per cent. of payment is withheld until work is completed.

The Government believe that, in contrast with other industries, construction firms should get preferential treatment over unsecured creditors, but that argument is relevant only if the payer becomes insolvent and the security mechanism kicks in. On the other hand, if the payee goes into insolvency, the payer is likely to have at least eight weeks of the payee's moneys in the amount withheld in retentions, the performance bond and a parent company guarantee. Therefore, other unsecured creditors currently get preferential treatment over construction creditors, as they can take advantage of the funds intended for the insolvent's supply chain. An administrator for the main contractor is usually called in when that contractor has been put in funds for onward transmission to the supply chain. It is widely accepted that payees in the construction industry do not have the ability to protect themselves against payer insolvency—for example, retention of title clauses are of little use. Once goods and materials have been used in a construction, title is lost. Furthermore, because of the current economic crisis, credit insurance has been withdrawn from thousands of firms.

In the 1994 report, "Constructing the Team"—referred to by Mr. Raynsford—which led to the Construction Act 1996, Sir Michael Latham fully acknowledged the problem of lack of protection against payer insolvency. He recommended statutory trust funds, but that proposal was not carried through in the Act. He repeated his recommendation in a report in September 2004 and the then Minister agreed to look at the problem.

Throughout Europe, north America and Australia, the problem is acknowledged in construction-specific legislation, offering payee protection against payer insolvency. The Miller Acts in the United States, which apply at federal, state and local authority level, require main contractors to give payment bonds to their subcontractors. Canada and the States have a system of liens, or charges, that can be placed on the building by those who are owed money.

France has legislation to require payers to provide bank guarantees and to pay subcontractors directly if a middleman goes into insolvency. German legislation requires all procurers of construction work to provide adequate security. Swiss legislation enables construction firms to place a charge on the property within three months of the date that payment became due.

At present, millions of pounds-worth of construction works are being procured by firms with little or no assets—as I said, £100 development companies often procure multi-million pound projects. The majority of main contracting companies do not have the wherewithal to pay their supply chains unless or until they receive cash from their employers or clients. Once the cash is received they hold on to it for as long as they can, until they themselves go into insolvency and the cash is instead handed over to the secured creditors. It is, therefore, not surprising that the number of insolvencies in the construction industry is far greater than in other industries.

There is concern that the new clause would mean that the construction industry was treated differently in respect of creditors, but as I have explained they are already treated differently, to their detriment. Section 159 of the Companies Act 1989 provides an exemption from the rules for distribution of an insolvent's assets. The exemption applies to schemes operated by investment exchanges and finance clearing houses in relation to the settlement of debts arising under market contracts. That appears to be an exception.

Our new clause reinforces the provisions in part 8. There is little point in improving cash flow arrangements for the construction industry unless the cash is there in the first place. Over the long term, the proposal would bring about a better resourced and, therefore, a more efficient industry. The construction industry is key to efforts to recover from our current financial problems.

I have some further notes, but time is pressing and I think I have made my case. I hope to press new clause 3 to a Division in due course.

Rosie Winterton (Minister of State (Yorkshire and the Humber), Department for Communities and Local Government; Doncaster Central, Labour)

This has been a wide-ranging debate, which is a reflection of its importance to hon. Members. Obviously, many of us are concerned about the construction industry at the moment, and the Government have certainly tried to introduce a number of measures to give it assistance in what are inevitably difficult times.

The debate has demonstrated that, as my right hon. Friend Mr. Raynsford has said, this is a difficult area, and different parts of the industry inevitably hold strong views about the provisions before us and those in the 1996 Act. As a result, in the course of discussion with parties in the House and with parts of the industry, the Government have looked at the different sides of the argument and put forward elements of compromise in the Bill.

The debate has shown that there can be a polarisation of ideas—for example, between smaller and larger firms—and the different and complex types of contract. We are trying to make the system simpler and to ensure that protections are in place, because of the importance of the industry and those who work in it, and because of the importance to national, regional and local economies of making sure that we get the legislation right.

Stewart Jackson (- Shadow Minister, Communities and Local Government; Peterborough, Conservative)

Surely the right hon. Lady accepts that it would have been better to introduce these proposals in less difficult and more economically benign times. Mr. Raynsford has mentioned the Latham review. We have had two substantive and detailed public consultations, detailed papers by the then Department of Trade and Industry, and the policy of the Welsh Assembly, yet only now, years after the Latham review, are the Government bringing forward the proposals, tacked on to another Bill and not as part of a substantive construction Bill. Is that not a fair point?

Rosie Winterton (Minister of State (Yorkshire and the Humber), Department for Communities and Local Government; Doncaster Central, Labour)

What is important is that we get this right, and there have been a number of discussions about how to do that. We should look on the bright side and say, "Here we are, debating these proposals today." I am pleased that a number of proposals have support from Opposition parties, even though there is a desire on the part of some right hon. and hon. Members to go further than we have and to put forward different ideas. The important thing is that we have the Bill before us today, and I hope that means the Opposition will support the overall direction of the Bill on Third Reading.

Having addressed the importance of the debate and the attempt to find a solution to some of the issues that have been raised, I shall move on to some of the points that have been made in the debate. Mr. Jackson asked about the single statutory adjudication review. I assure him that the secondary legislation will be reviewed in the light of the responses to the consultation. We hope to consult early in the new year. Of course, the statutory scheme will continue to apply where parties make inadequate provision in their contract for adjudication. We will deal with that in secondary legislation.

Only this morning, I was discussing with officials the fact that the ideas advanced by my right hon. Friend the Member for Greenwich and Woolwich were the inspiration for amendment 22. But, I want to assure him that there will not be a lacuna. We will allow a particular type of pre-dispute agreement, regarding costs—a clause in the parties' construction contract to the effect that an adjudicator will be able to allocate his own costs as part of his decision.

I shall now address new clause 3. As Mr. Llwyd has said, the new clause would introduce to the 1996 Act a provision enabling firms to request security regarding payments from the payer. That would give the payee under a construction contract the statutory right to demand adequate security from the payer in the form of a charge or a bank guarantee in respect of the payer's payments under the contract. If no security were forthcoming, the payee would be entitled to suspend performance until it was. Moreover, the payer would have to pay the payee an additional sum reflecting the extra costs that the payee incurred in stopping work.

Consequently, if the main contractor were to fail, his other creditors—quite possibly not construction firms—would be in a much weaker position. Depending on the type of security, there would be fewer assets available to satisfy claims. Any trading partner of the contractor would be able to request such security during the normal course of business, but that partner would not be able to demand it. The ability to demand security would put the construction sub-contractor in an unjustifiably stronger position.

Elfyn Llwyd (Parliamentary Leader; Meirionnydd Nant Conwy, Plaid Cymru)

Surely the point is that the sub-contractor would have delivered materials to the site, used employees to build a building and done everything that he could, up to a point. The sub-contractor would not be able to recover all that, so they would be in a very weak position—far weaker than any normal party to any normal contract. That is the point, with respect.

Rosie Winterton (Minister of State (Yorkshire and the Humber), Department for Communities and Local Government; Doncaster Central, Labour)

As I have said, the case that the hon. Gentleman highlights would put other creditors in a weaker position. Other trading partners of the contractor would be able to request such security during the normal course of business, but they would not be able to demand it, which is why the new clause would not be the right approach. In addition and practically, compelling the payer to provide security would be expensive—perhaps prohibitively so. For example, a bank would charge for a guarantee, and, if the nature of any security were such that funds had to be ring-fenced so that the payer was unable to use them for day-to-day operations, the payer would be more likely to fail anyway.

New clause 5 would repeal section 113 of the Housing Grants, Construction and Regeneration Act 1996. The new clause would, it appears, allow the parties to a construction contract to rely on all types of pay-when-paid clause. However, amendments 5, 6, 7 and 16 would continue to prevent the parties from relying on pay-when-paid clauses, and because of that new clause 5 would remove the insolvency exceptions. We need to be careful that we do not create a different situation for construction insolvencies from those involving other businesses, and preventing construction firms from using pay-when-paid clauses in insolvency cases would clearly do that.

I thank the Opposition for their support for the Government amendments. I again emphasise that the Bill must provide a balance between the needs of all parts of the construction industry. For that reason, I ask Opposition Members to withdraw their amendments and to support the Government amendments.

Question put and agreed to.

New clause 12 accordingly read a Second time, and added to the Bill.

Elfyn Llwyd (Parliamentary Leader; Meirionnydd Nant Conwy, Plaid Cymru)

On a point of order, Mr. Deputy Speaker. I apologise for interrupting, but I indicated that I wanted to press new clause 3 to a vote.

Alan Haselhurst (Deputy Speaker)

I will invite the hon. Gentleman to do that at the appropriate time, when we reach it—it will not be forgotten.