CIArb submission to Minister Hayes on Construction Contracts Bill

This is the text of a letter sent to Brian Hayes TD, Minister of State for Public Service Reform & the OPW about the Construction Contracts Bill 2010.

Dear Minister Hayes,

We refer to the Construction Contracts Bill 2010 (CCB), the associated Regulatory Impact Analysis (RIA) and the earlier consultation meeting with your offices on 28th June 2011. We have reviewed both documents and wish to contribute further to the discussion regarding this importance piece of legislation.

The Chartered Institute of Arbitrators is a global professional body, with a membership drawn from the broadest range of primary professions, including law, engineering, architecture, surveying, and other branches of the construction industry. We operate according to a governing charter, which, for the purposes of this discussion, includes two principle objectives paraphrased as follows:

q  The promotion of Private Dispute Resolution, in all its varying forms, including mediation, adjudication and arbitration; and

q  The training and encouragement of suitable individuals to become qualified and proficient dispute resolution practitioners.

We also currently provide training in adjudication, in other jurisdictions with similar legislation, and would intend to provide similar tailored courses in this jurisdiction, in the event that the legislation comes into force.

As a consequence of the above we are naturally supportive of adjudication as a Private Dispute Resolution process, and believe that it can be successful in achieving the purpose of the bill, which is described as “…. to help address the issue of non-payment to construction sector contractors, subcontractors and sub-subcontractors  who have completed work on construction projects…”.

We have reviewed both the CCB and the RIA with great interest and we make the following comments, which we hope will assist the final detailing of the legislation.

 Status of Adjudication within the Irish Legal System.

The adjudication process is not intended to produce a final decision, in the manner of an arbitration, for example. Consequently its intended status within the overall dispute resolution framework should be clearly stated in the explanatory memorandum. As an example we consider it unlikely that it is intended that Consumers in small cases would be obliged to engage in an adjudication process, and be denied access to the Small Claims Court. Similarly it may be worthwhile to consider whether very large disputes should be obliged to use the adjudication process, in preference to other options, such as the case management skills of the Commercial Court or the alternative process of arbitration, which while slower than adjudication has the benefit of finality.

A clear statement as to where adjudication is intended to sit within the available legal processes would, in our opinion, greatly facilitate the drafting of the legislation and place the threshold values identified in Section 2 of the Bill in a clearer context.

We are also strongly of the view that any threshold values should be expressed within the terms of the value of the dispute, rather than the value of the contract, in a manner similar to the courts hierarchy.

  1. Adjudicator’s Decision to be Non-Binding

The CCB proposes that the adjudicator’s decision be non-binding, in the event that the decision is referred to arbitration or other legal proceedings. The RIA considers this point further and notes that “as the legislation is currently drafted it favours the payer”.

We are of the view that if the adjudicator’s decision is not binding and payment of an award is not compulsory, then this will significantly undermine the primary purpose of the bill. A mechanism for the swift resolution of payment disputes, must result in payment following the adjudicator’s decision, if it is to be effective.

  1. Public Private Partnership Contracts

Section 2.3 of the CCB proposes to exclude PPP contracts from the legislation. We are not clear why such contracts would be excluded as a group and believe that this should be reconsidered.

  1. Status of Contracts with Public Bodies

The RIA, when analysing the non-binding nature of the adjudicator’s decision under the CCB, suggests that one alternative might be “to have a two pillared approach with differing arrangements for public and private contracts”. The RIA also notes that in this event the conciliation process in the Public Works Contracts, which is described as being similar to adjudication, would apply instead.

The RIA provides some background to this philosophy, noting that there is a need to strike a balance between the resolution of payment disputes and the safeguarding of public monies.

We have a number of significant concerns regarding this potential strategy.

Firstly this suggests a fundamental lack of belief in the adjudication process, and that there is a significant probability that the payer will be wrongly obliged to pay funds, which a later process will overturn.

We believe that this concern is misplaced. An adjudicator will only award money, where the payer has obtained the benefit of the payees productivity, and has not honoured a contractual obligation. It is probable that a later arbitration or legal process will overturn some adjudication decisions. However it should not be expected that this would be the norm, or even a regular occurrence.

We believe that if the adjudication process is to be introduced into Irish law, then it should be trusted to deliver the correct decision.

Secondly the public works conciliation process, referred to in the RIA, where payment of a conciliator’s award is dependent upon the production of a bond, does not apply to all Public Bodies construction contracts. As an example consultancy contracts, smaller works contracts and PPP contracts do not currently have this conciliation procedure. Such contracts could thus be inadvertently excluded from any adjudication or conciliation process. If an alternative process is to be proposed, then it should be incorporated into the legislation, otherwise there will inevitably be contracts formed with public bodies, which having differing or no provision for an adjudication process.

Thirdly we are strongly of the view that there should be consistency throughout a chain of contracts. Consequently if a different procedure is to apply to “Public Works Contracts”, then that procedure should also apply to all associated sub-contracts. Failure to legislate for such a consistent approach could quite easily have unintended and unforeseen consequences, which would undermine the effectiveness of the legislation. As an example one possibility, as the legislation is currently drafted, might be to shift the current cash flow burden from sub-contractors to main contractors. Such a scenario could potentially favour larger  and better resourced contractors, when competing for public works contracts, at the expense of small and medium enterprises (SME’s), which would be contrary to current Irish and EU policy.

In addition the need for consistency throughout the chain of contracts further reinforces our view that any alternative process should be included within the legislation.

Finally, having considered the issue in its totality, particularly:

q     the need to have a single process covering a complete chain of contracts, from the contract with the primary client, down to the smallest oral sub-contracts;

q     the desirability for a single adjudication process within the law, in the absence of any compelling reason for treating different types of contracting parties differently; and

q     the certain impracticalities that would arise in the resolution of sub-contract disputes, in the event that adjudication awards were to be backed up by a bond.

We are of the view that the only practicable and sustainable solution is to have a common procedure, which would apply to all contracts, whether with Public Bodies or not.

  1. Definition of Irish Construction Contracts

Section 2(5)(a) states that the legislation will apply to construction contracts, even if Irish law does not otherwise apply to the contract. However it is not clear in the legislation as to how an Irish Construction Contract is to be defined, whether by the identity of the parties, the locations of the businesses, or the location of the construction works.

The legislation, as currently drafted, would oblige the courts to establish this definition, for example whether an Irish Sub-Contractor working for an Irish Main Contractor on a French construction site, would be subject to this act, or not.

We believe that this issue should be clarified within the legislation.

  1. Payment Conditional on an Act by a Third Party

Section 3(5) does not appear to be compatible with many model contract forms used in the construction industry, whereby payment is conditional on the amount being certified by an engineer, architect, project manager or similar.

  1. Entitlement to Suspend

Section 5(3)(b) of the legislation limits the entitlement of a party, who has not been paid, to suspend work for a maximum period of fourteen days, We are not clear as to why the entitlement to suspend should be limited in this way. However there may be merit in including a requirement that a party suspending the work, is obliged to refer the dispute to adjudication at the same time.

  1. Data Collection & Review

We would support the proposal, in Section 6 of the RIA, that provision should be made for the collection, analysis and publication of data. Although we would recommend that any data should be collected in an anonymised and summarised form.

  1. Inclusion of Supplies

The RIA notes that some of the consultees requested that adjudication also be extended to include contracts for the supply of materials, particularly where those materials are either bespoke supplies, or alternatively have been incorporated into the works.

We do not see any reason why such contracts could not be included within the scope of the legislation.

Finally we would like to thank you for the opportunity to contribute to the development of this welcome piece of legislation and trust that you will find our submission of interest. We would also seek to be involved in the preparation of the Code of Practice for Adjudicators proposed under Section 9, in due course.

We are available to discuss these matters in greater detail if desired,

Yours sincerely,

Pat Brady,  

Chairman.

CIArb Irish Branch