Enterprise Bill [HL]

Debate between Lord Hodgson of Astley Abbotts and Earl of Kinnoull

Wednesday 28th October 2015 Grand Committee

[The Earl of Kinnoull (CB)]

My Lords, I too support the amendment in the name of the noble Lord, Lord Aberdare. I should declare my interests, and not only those on the register of the House—until earlier this year, I had been for 10 years or so a director of the construction bond insurance companies in the Hiscox group, as well as having been responsible for the bit of Hiscox which dealt with United Kingdom household insurances and which was therefore rebuilding the houses of our clients.

I congratulate the noble Lord on the thinking behind the amendment. This is an interestingly complex area. We have heard about the problem of bad behaviour, but the other problem is the failure of the various parties concerned to understand the credit risks involved in construction contracts. In the JCT standard construction contracts, there are provisions for payments of the retention moneys into trust accounts, which I suspect are never really honoured. That is a big area which should be looked at.

A lot of the business that the construction bond area of Hiscox dealt in was Irish. Ireland had a particularly severe construction dip following the financial crisis and there was quite a bit of evidence of what I would call the domino effect. A head contractor would get into financial difficulties and would drag down a lot of smaller contractors and, because trust accounts were not in place, the smaller contractors lost out. Given the Government’s theme of trying to give every help to the small and the brave, I believe that this could be dealt with. It would not be expensive and could easily benefit small businesses quite a bit.

[Lord Hodgson of Astley Abbotts]

I have a lot of sympathy with the amendment but, unlike my noble friend Lord Cope or the noble Lord, Lord O’Neill, I am interested in what happens at the end of the contract, when retention moneys and liquidated damages wash one into another. The concept of liquidated damages is perfectly fair. It is designed to make the main manufacturer finish on time; if he fails to do so, a penalty is attached. Of course, the main contractor then passes the penalty on in his subcontract. This can mean that the penalty in relation to the value of the work of the subcontractor can be very small indeed, and that the retentions become commensurately large.

For example, take a company bypassing a piece of road with liquidating damages of maybe several thousand pounds a week for delays beyond the contract date, and a subcontractor whose job it is to put up the signage at the end. The chap who does the foundations is a bit late; it is a very wet, cold and rainy winter so the earth-moving is behind; and the spring is late in coming so the tarmac cannot be laid. By the time the small firm that was subcontracted to do the signage comes to do its job, it is very close up against the end of the contract date. Of course that firm is carrying in its contract the liquidating damages sum for the contract as a whole, which has been passed on to it. In these circumstances, retentions can very often be withheld against the completion of the contract as a whole, in case it is argued that the subcontractor played some role or part in the overall delay. The fact that he may have had an incredibly small amount of time to do his work because the people before him were delayed is of course something to be argued about by lawyers, and it is hard for small subcontractors to have sufficient equality of arms.

As we begin to develop this idea, I hope that the issues of liquidating damages and how they impact in contractual terms on small subcontractors can form part of the retention-moneys and withholding-of-sums-due concerns.