John Cregan (Limerick West, Fianna Fail)
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I am pleased to have an opportunity to raise on the Adjournment my request that the Government afford some form of protection in law for suppliers and sub-contractors to main contractors which are awarded local authority contracts. Unfortunately, some main contractors go into liquidation during the course of contracts. I have observed too many of these cases in my county and local authority area in recent years. In a number of contracts, the main contractor has been unable to complete the works he has been contracted to carry out, leaving a trail of disaster and many suppliers and sub-contractors facing financial ruin.

I had hoped this matter would be discussed by a Minister from the Department of the Environment, Heritage and Local Government because it is an issue for local authorities and the Department. I do not cast aspersions on the Department of Enterprise, Trade and Employment and thank my good friend, the Minister of State, Deputy Michael Ahern, for coming to the House to respond. Nevertheless, I do not believe the issue I raise is a company law raise. That is, however, a matter for another day.

In each of the cases to which I refer, I understand the main contractor was awarded a contract based on submitting the lowest tender. I am not sure it is always appropriate for local authorities to accept the lowest tender. In the case of the most recent incident involving the provision of a sewerage scheme for Feenagh, I understand a six-figure sum separated the selected contract from the second lowest tender. This should have set alarm bells ringing, although I accept public officials do not have a crystal ball and cannot foresee such eventualities. Ultimately, in such cases, the losers are suppliers and subcontractors.

In the case of the sewerage scheme in Feenagh, the community has shown tremendous spirit and a local voluntary group is now responsible for the provision of local housing units. I understand this group has entered into a partnership with Limerick County Council to provide a sewerage scheme for the new houses and the village generally. This will benefit the village in the future. However, we now have a half completed job. Landowners and householders who were prepared to give right of way and access through their back gardens or land to a contractor on the assumption that normality would resume in the spring, with fences mended and farmers able to leave their cattle outside, have been disappointed. The county council will now be required to re-advertise to have the works completed.

I have a simple solution to this problem. When a local authority awards a contract to a main contractor it demands a list of his or her suppliers and subcontractors. Before each stage payment is made to the main contractor, a simple telephone call is made to each supplier or subcontractor asking whether he or she is paid up to date. If not, questions must be asked of the main contractor.

Human nature being what it is, if a subcontractor feels that the main contractor is under financial pressure he or she will wonder whether to pull back or stop supplying the product. A subcontractor who pulls back may get nothing so he or she may continue, making a bad situation worse and involving more money. When the main contractor goes into liquidation and returns to wherever he or she came from, the county council has the benefit of the bond that was put in place on the first day, but the supplier, subcontractor, landowner and, in this case, household, have no come-back. It is high time we afford some protection to these people, many of whom work on a very small scale and could face financial ruin because a main contractor took on a commitment when, from the beginning, he or she was unable and did not have the proper resources to do.

I question the lowest tender bid rule. Is there undercutting? Are people offering a very low price to get the contract and then high-tailing it half way through? I appeal to the Government to take this on board. Company law is fine where we have protection for late payments, but this is not about late payment, it is no payment. When a company goes into liquidation no payment is made so there is no compensation. People on all sides of this House have stood for the rights of workers, immigrant workers and everybody else, and that is correct. I commend them on it, but tonight I call for rights for suppliers to main contractors. There is an obligation on the State though our local authorities to put some protection in place to prevent what has happened a number of times in my county. I appeal to the Department of the Environment, Heritage and Local Government to do so. My county is not unique; I am sure this has happened on a number of occasions all over the country. I will proceed by way of a parliamentary question to the Minister asking him to ask each local authority how many main contractors have gone to the wall during construction of various projects and how many of those had made the lowest tender.

Michael Ahern (Cork East, Fianna Fail)
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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.