Court ruling could threaten builders’ solvency

DCM Editorial Summary: This story has been independently rewritten and summarised for DCM readers to highlight key developments relevant to the region. Original reporting by Irish Times, click this post to read the original article.

A High Court ruling on arbitration in construction payments disputes puts builders at increased risk of insolvency unless the Oireachtas changes the law, experts warn.

Lawyers say that the court’s ruling in a recent case dealing with the Construction Contracts Act, 2013, could allow clients to stall payments to builders.

That could hit cash flows where there are disputes, forcing companies into insolvency, particularly if the economy slows, they predict.

Judge Garrett Simons’ ruling in Tenderbids Ltd and Electrical Waste Management Ltd allows someone to ignore contractors’ or subcontractors’ pay claims if they disagree with them.

Previously, parties to building contracts understood that the customer automatically had to pay if they did not respond within 21 days to say they disagreed with the amount.

They could still dispute the figure subsequently under a principle known as “pay now, argue later”.

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However, Simons ruled that this was not the case. “The act does not provide for such a default direction to pay,” he said.

Solicitor Stephen McKenna, associate director at HF Construction Ireland, pointed out that as a result of the 2013 act, customers were less likely to ignore builders’ bills.

That “good practice” could now “go out the window”, he added.

“My biggest fear is that during the next downturn this will inevitably force a raft of unnecessary insolvencies, setting the industry and the economy back decades, and lead to another flight of skills abroad,” McKenna warned.

The lawyer argued that only amending the act would fully resolve the problem. “It falls on the Oireachtas to plug this gap, and rapidly,” he said.

Dermot Durack, his colleague at HF, which specialises in construction and procurement, agreed that the Act needed to be amended if it was to fulfil its aim, which was to regulate payments in building contracts.

Under UK law, where someone fails to respond to a bill or request for payment from a builder, the default payment rule applies.

However, Simons noted in his ruling that there was nothing in the Irish Act that made it possible to ascertain the consequences of failing to respond when a builder sought payment.

He added that in the absence of guidance from the Oireachtas, the court would effectively be legislating if it decided on one consequence over the other.

Builders and subcontractors generally bill for work at stages through a contract. In the past, disputes between contractors and subcontractors over this process often dragged on for long periods, costing the parties money.

The Oireachtas passed the Construction Contracts Act, 2013, to solve this problem, which in some cases threatened businesses’ solvency.

The late Feargal Quinn, founder of the Superquinn grocery chain, who was a senator at the time, proposed the legislation, making it one of the few Private Members’ Bills to make it into law.

In a 2021 case, Simons ruled that adjudicators’ decisions in building contract disputes were binding, clarifying the law.

The Tenderbids ruling stemmed from an application to enforce an adjudicator’s decision relating to a €1.4 million payment sought under a €7 million contract to build a metal waste recycling plant at Rathcoole in Co Dublin.