Enterprise Bill [HL]

Viscount Eccles Excerpts

Wednesday 28th October 2015 Grand Committee

[Lord Stoneham of Droxford (LD)]

I do not think there is much more to say than was said by the noble Lord, Lord Mendelsohn, in introducing these amendments. Amendment 19 stands in my name and I support all three amendments in the group. They are all about confidentiality and discretion. I am sure the Minister will support them as well because the principal problem is how you get people to complain, or at least raise problems, if they fear that doing so will affect their business and associated relationships in the future. If we want the office of the Small Business Commissioner to work and to enable them to do their job properly, we need to address this important issue. Confidence and discretion must be maintained unless the complainant agrees otherwise.

[Viscount Eccles (Con)]

My Lords, if there are very few complaints, I suppose that everything is operating well in markets. Anonymity and fear might make a very good PhD subject for someone but I do not want to concentrate on the psychology of this issue. We have the example of two and a half years’ operation of an anonymity provision in a similar Act of Parliament: the Groceries Code Adjudicator Act 2013, in which anonymity features quite significantly. I would be most grateful if the Minister brought us up to date on how this concept of anonymity is working, because during the passage of that Act there was a good deal of debate about it and we thought it might prove quite difficult to enforce. How is she getting on with the concept of anonymity?

[Lord O'Neill of Clackmannan (Lab)]

Will the Minister also take account of the fact that one of the big problem areas in relation to payment is the construction industry, which has a dreadful record of blacklisting the people who work in it? We are talking about something not dissimilar here—people simply being erased from future contract applications if they have a record of causing difficulty and asking questions.

I realise that it is not the same issue, but I am talking about an industry—the construction industry—in which there are a lot of problems relating to payment. That people could be discriminated against on the basis of having made complaints is not that different from the case of shop stewards who have energetically defended their members’ health and safety rights on building sites in the recent past.

Thankfully, we are moving away from the blacklisting of workers in the construction industry. However, the people who did the blacklisting are the same people who could well take advantage of those whose anonymity was not quite as dark and complete as we would like it to be. When these complaints come up, you do not need two eyes to work out who has been making them. It is an issue of some sensitivity, and the Government need to be sure that people will not suffer as a result of trying to get a legitimate settlement for a grievance. In some industries there is a record of discriminatory handling of people with justified complaints, which puts their businesses in jeopardy. I therefore hope that the Minister will take account of that in her response.

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[Viscount Eccles]

My Lords, briefly, Amendment 31 seems to introduce a new dimension to the responsibilities of the commissioner, quite apart from the matter of fines, which I would not be in favour of. In the small business sector, lots of businesses are being formed, but lots, I regret to say, are going out of business. That also applies to their customers—the larger businesses. Plenty of them get into trouble from time to time. Repeated failure to pay an invoice may be simply a signal that the invoices are never going to be paid. If one is not careful, the idea that the commissioner should become responsible for credit checks and for a whole host of commercial interventions completely changes the situation.

As I understand it, the commissioner is there to look in particular at the question of late payment as a cultural issue, and to change the culture in a business which appears to have worsened in recent years. I can understand that, but the minute that we start to get into the detailed financial circumstances of individual businesses, the commissioner is in real trouble.

[Baroness Neville-Rolfe]

I thank noble Lords for their comments. I emphasise that the Government consider that a punitive approach involving compulsion or financial penalties in the round is not the right one to take if the commissioner is to contribute to culture change in payment practices. We want the commissioner to develop trust and have credibility with small and large businesses alike. The commissioner therefore couples an approach of building the confidence and capability of small businesses to assert themselves with proportionate powers to disincentivise unfavourable practices. Notably, this will be through the power to publish individual reports which can name respondents and draw attention to themes and issues in the annual report.

Turning to Amendment 20, the commissioner has the power in our clauses as drafted to ask the commissioner or respondent to provide voluntary information or documents relevant to a complaint. The amendment seeks to force a respondent to comply with such a request where it concerns contract terms and gives the commissioner a power of investigation. Diligent businesses will want to engage constructively with the commissioner and will not need to be forced. They will be keen to make sure that their small suppliers are being treated in a fair and reasonable way. That makes good business sense. They are being investigated by the Small Businesses Commissioner. Secondly, they will want to protect their reputation and avoid being named and shamed. Anything more heavy-handed would introduce an adversarial and legalistic element to the process. I was interested to hear from my noble friend Viscount Eccles that he felt that that was the right way to go.

Turning to Amendment 21, the handling of a complaint is primarily a matter for the complainant, the respondent and the commissioner. However, if third parties including Government have material relevant to a complaint, there is nothing in the legislation that prevents them approaching the commissioner with such information.

Turning to Amendment 22, which the noble Lord, Lord Mendelsohn, referred to as his favourite, the commissioner has broad scope to recommend steps which he or she considers could remedy, resolve or mitigate issues in complaints. We intend that the commissioner will support small businesses’ use of alternative dispute resolution. The commissioner could, for example, recommend mediation, which, as the noble Lord said, is generally much more expensive, and hopefully quicker, than a long drawn-out legal case. But it is not considered appropriate for the commissioner to require parties to engage in mediation, directly or indirectly. This includes giving the commissioner power to influence costs in litigation where mediation has been refused. Rather, the Government consider that it is the role of the court to determine costs in legal cases. Legal cases are already expected to be conducted at a proportionate cost, and there are of course mechanisms to keep costs reasonable in the courts.

My Lords, we do not believe it right to make the commissioner’s recommendations legally binding—an issue addressed in Amendments 23 and 31. Requiring a party to provide an outline of costs for litigation would require the party to engage with the process and strategy of litigating—for example, looking into instructing lawyers—whereas our aim, as I have said, is to encourage alternative approaches to litigation. Of course, courts may consider a party’s refusal to mediate to be unreasonable, and can address this when considering court costs.

We also agree that it is important to encourage the two sides to come together. We believe, however, as I said at the start, that a punitive approach to costs is not the right way. Stakeholders told us in our consultation that the gaps in knowledge about alternative dispute resolution was the key issue, and we have obviously respected that feedback. The primary intention is that the commissioner will make recommendations that enable the parties to resolve the dispute, rather than being an arbitrator. In certain cases, the commissioner may be considering lawful, if unfair, acts. To accept these amendments would effectively allow the commissioner to create rules on what is and is not good payment practice—quasi-legislating—and this is not the role of the office as we see it. Rather, the Government believe that it is vital that the commissioner build up a position of trust and influence with all parts of the business community.

As is obvious, I do not really agree with the move to broaden the role of the Small Business Commissioner. As I said on Monday, I believe that focus is what we should go for, but I will of course read carefully our various discussions. However, I am not persuaded that, despite the eloquence of the noble Lords who have spoken—including the noble Lord, Lord Hodgson, who made some points about incentives—we would be right to change these provisions.

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[Lord Aberdare (CB)]

My Lords, I listened with great interest to the debates in Committee on Monday and was very struck by the Minister’s description of the prime focus of this part of the Bill. She made a great point of the intention that the Bill should be very tightly focused. The prime focus was described as being:

“on late payment, particularly when there is an imbalance of power between big business and small business”.—[Official Report, 26/10/15; col. GC 126.]

Amendment 39 falls squarely within that description but regrettably, if not astonishingly, it is not addressed in the Bill, nor do I believe that its aims would be met by the establishment of the Small Business Commissioner as defined.

The amendment is designed to address the specific issue of cash retentions in the construction sector, possibly the most significant payment issue facing the 250,000 or so small businesses in the sector. I will summarise the issue briefly. Retentions are supposedly held back as security for defective work. On average they amount to about 5% of payments due and about half of this is retained well beyond practical completion of a project, on average for a further 12 months but sometimes for very much longer. Some £3 billion of cash is estimated to be held back in the form of retentions at any time. This year alone, small businesses have already lost £30 million as a result of their debtor companies going into liquidation before paying the sums that they owe but have retained.

Small companies generally have little or no say over whether to accept the practice of retentions. They are essentially at the mercy of the larger firms on whose business they depend. Both the noble Lord, Lord Hodgson, and the noble Baroness, Lady Hayter, gave some specific examples on Monday of situations where small firms find themselves under unfair pressure from larger firms. The result is that small firms are deprived of funds that are due to them and are therefore unable to invest in new technology or equipment, unable to recruit new staff or take on apprentices, unable to grow their business and, in the worst cases, unable even to survive. Meanwhile, adding insult to injury, the funds wrongly withheld from them are used to provide working capital and investment resources for the client companies that have failed to pay up.

This is not a new issue. Two Commons committees in 2003 and 2008, the first chaired by the noble Lord, Lord O’Neill of Clackmannan, recommended the ending of retentions, at least in the public sector. The construction sector supply chain charter, and I think I got my tongue round that one, agreed by the Government’s Construction Leadership Council and issued by BIS last year, included the aim of moving to zero retentions by 2025. I have been made aware of even earlier reports from 1993 and as far back as 1963—I think even further back than the noble Lord, Lord Cope’s 40-year experience of late payment issues—recommending that retention should be abolished or at least placed in trust. Quite a few leading contractors in both the public and private sectors manage perfectly well without retentions.

The Bill presents a perfect opportunity finally to address this festering issue. I am not suggesting that retention should be abolished overnight or removed altogether. I am suggesting that the Government could deliver a really good stimulus to the productivity and output of small firms in the construction sector by starting the process of lifting this unfair burden from them now, with a view to having a better system in place by the end of this Parliament rather than having to wait for 2025 or even longer.

My amendment picks up the Minister’s very welcome commitment on Second Reading to commission analysis on the costs and benefits of such practices—cash retentions—to inform future action. First, the amendment sets a time limit for this analysis to be completed within nine months of the Bill passing into law. Secondly, it requires the Government to take action on the findings of the review, again with a time limit of 18 months from completion of the review. That should ensure that new rules are in place by the end of the current Parliament.

I thought of putting down a separate, more detailed amendment to set out a specific approach to ending the most unacceptable aspects of retentions by requiring them to be held in a separate bank account, in trust for the subcontractor to which they are owed. However, for the moment I would be happy to go along with the Minister’s proposed review, so long as it leads to action in the timescale set out in my amendment. I and some of the numerous bodies representing the small construction sector, virtually all of which wish to see this issue addressed, would always be happy to discuss the specific form of such action with the Minister and her officials. I have no reason to doubt the Government’s own desire to see an end to this pernicious practice of retentions in due course. Indeed, I was encouraged by the Minister’s response to the Oral Question today when she said that the Government acknowledge the issue but, given that action on this has been called for since 1963, if not before, “due course” does not seem soon enough.

Amendment 46, in the name of the noble Lord, Lord Stevenson, sets out a process for doing away with retentions in greater detail. I look forward to hearing the noble Lord’s arguments for this process, which I very much welcome as another route toward at long last making some real progress on this issue.

I have no connection with the construction sector, but I have run a number of small firms and am fully aware of the central importance of cash flow and the difficulty of keeping afloat, let alone investing in productivity and growth, if payments for work done are not received in full and in reasonable time. I was quite shocked to learn about the prevalence and impact of this practice of retentions and how long it has gone on without being fixed.

Small firms, which are without the resources of their bigger brethren, and indeed are dependent on them for their survival and success, are often bullied into accepting unfair terms. That is exactly why they need help and protection from government. Although the Small Business Commissioner would be a welcome part of such help, it really does not do what is most needed for small construction firms. The Bill presents a golden opportunity to inject some real spark into the small construction sector by tackling this issue of retentions, so long and so widely recognised as being objectionable, harmful and unjust. I beg to move.

[Viscount Eccles]

Is the noble Lord’s definition of retention moneys any moneys that are retained after a completion certificate has been issued? Is the issue that the works are agreed to have been completed, but we need something in case we have snagging and have to deal with it? Or is it that I am just being kept from my money?

[Lord Aberdare]

That is indeed the most objectionable part: on practical completion of the project, a substantial amount—often 2.5%—is retained, often for a year, two years, three years or even more. I am not attempting in this amendment to tackle the fact that retentions are withheld at each stage of the project, although that in itself would be another challenge.

[Viscount Eccles]

There could be an interesting distinction between practical completion and the issue of a completion certificate under the terms of the contract. Both parties might agree that the work has been finished, but it is probably in the contract that 5%, or whatever it might be will be retained for a period of time, which should be defined in the contract, in order to deal with snagging. I think the noble Lord’s position is that the contract is not written in sufficient detail to cover exactly what it is the parties have agreed.

[Lord Aberdare]

Another issue, beyond what the noble Viscount has said, is that very often there needs to be some limit on when practical completion has been achieved. There are situations where a small firm has been involved at the very beginning of a large project and the larger contractor is arguing that the project has not been completed and is refusing to release the money until a reasonable period down the track of that large project.