Michael Ahern (Cork East, Fianna Fail)

I thank Deputy Cregan for raising this matter. The issue raised by the motion has complex legal and policy dimensions. From a legal perspective, it involves the rule of privity of contract. This means only the parties to a contract, those privy to it, have enforceable rights and obligations under the contract. In its recently published report, Privity of Contract and Third Party Rights, the Law Reform Commission of Ireland referred to the problems posed by the privity rule for large-scale construction and civil engineering projects. Such projects typically involve many different parties and interests which are reliant on each other and may suffer a loss if another party involved in the project fails to meet its contractual obligations. It noted the use made of so-called collateral contracts or warranties in the construction sector in order to deal with this issue. These warranties are a contractual promise from one party to a contract to a third party which relates in some way to the terms of the original contract. In the present context, for example, a collateral warranty could take the form of a contract term in a contract between the employer and the main contractor stipulating that the employer would make a direct payment to the subcontractor in the event that the main contractor could not or would not do so.

In its recent report, the Law Reform Commission recommended that complex contractual arrangements of this kind entered into to circumvent the privity rule could be simplified by the creation of a general statutory exception to the rule which would allow third parties to enforce contracts entered into for their benefit. It noted that, following legislative reform of this nature in the United Kingdom in 1999, standard form contracts for large-scale construction projects increasingly contained a schedule dealing with the rights of third parties.

While at one level the matter at issue concerns rights and obligations under contract and, as such, can be addressed by means of express provisions in contracts, the public policy dimension must also be fully considered. The implications of any general provision making local authorities or other public bodies the guarantors of the third party liabilities of contractors are far-reaching and would require full and stringent examination. There is a clear risk, for example, that a main contractor safe in the knowledge that a public body would meet his liabilities to subcontractors might not feel impelled to do everything in his power to discharge those liabilities.

The proposal in the motion also raises the issue of the relation between a provision of the kind proposed for the direct payment of subcontractors in the event of the main contractor's inability to pay and the existing, well established requirements of insolvency law. For this reason, clauses in standard form United Kingdom construction contracts giving an employer discretion to operate direct payment provisions in respect of nominated subcontractors do not apply, to my knowledge, where the main contractor is in bankruptcy or liquidation.

While I am sympathetic to the intention behind the proposal, in view of the complex legal and policy issues which it raises it must be considered in the context of the overall management of public works contracts.

On public procurement, following a Government decision in May 2004 to reform construction procurement a new contract for standardised conditions of engagement for construction consultants and a suite of five new forms of construction contracts for public works were developed. These were implemented on a phased basis from 1 January 2007 and 19 February 2007 respectively. A short public works contract, for contracts that have a value of €500,000 or less, was also put in place with effect from 3 March 2008. Supporting guidance notes have also been developed for use with these contracts.

The contracts and guidance notes form part of the capital works management framework, which is being developed to deal with the whole life cycle of project delivery. Improved cost certainty, better value for money and cost effective delivery of public works contracts are at the core of these construction procurement reforms. The reform measures are particularly important if the State is to maximise value for money from the very large expenditure on infrastructure projects under the NDP. The new contracts have introduced fixed price lump sum contracts tendered on a competitive basis, with appropriate rebalancing of risk. In the new contracts, risk can be transferred to those best able to manage and control it. Contracts for all projects must be awarded using either the new public works contracts or the conditions of engagement for consultants from 13 February 2008 or, in the case of the short form contract, from 3 March 2008.

The construction procurement reform programme seeks to change the approach of consultants, contractors and public sector clients to procuring large infrastructure projects by: having more client-focused construction contracts that require a more optimum allocation of risk between contractors and public sector clients; provides the right incentives for construction consultants to ensure that projects stay within budget — fees will be bid competitively on a fixed price basis but without compromising on quality; and ensures that public sector clients provide comprehensive project information at tender stage — it is essential that the scope of projects must be well defined by the client to allow tendering on a fixed price lump sum basis. As I stated, the matter raised by the Deputy involves complex legal and policy issues that require detailed consideration.

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