New Zealand: New Zealand Construction Subcontractors Bill - Will It See The End Of "Where is the Money, Honey"?

Last Updated: 21 May 2001
Article by Wei Ling Lim

The advent of MP Laila Harre’s Construction Contractors Protection Bill has been greeted by many in the industry with enthusiasm - some of it guarded, some not.

The proposed Bill navigates a tide of publicity generated by the recent downfall of industry kingpins like Hartner Construction (ably covered in last month’s Trade Talk). But the moves for reform have been gathering momentum for the last two years, with one of the early highlights being the Protecting Construction Industry Contractors report, delivered to the Ministry of Commerce by the Law Commission in November 1999.

At the end of July last year the Ministry of Economic Development and the Associate Minister of Commerce established a working group to undertake further policy considerations based on Law Commission’s recommendations. This group - which included a variety of contractor and subcontractor representatives, as well as other industry representatives - made a number of recommendations to the Ministry.

The key point of the report was that, due to the perceived power imbalance between owners/head-contractors on one side and sub-contractors on the other, payment wasn’t moving through the contractual chain fast enough. Any reforms should focus on solutions that would speed this up, with an emphasis on keeping businesses solvent rather than dealing with priority debts in insolvency.

The industry standard of "pay when paid" clauses - transferring risks of non payment to those further down the chain - was identified as a major hindrance to this objective. Including these clauses in a contract also negated a subbie’s rights to claim a breach of contract for non-payment.

This situation - effectively making head-contractors and sub-contractors unsecured creditors - was further exacerbated by the long term contracts typical in the building trade. The picture was further complicated by the often widespread subbie practice of under-tendering for projects (in order to secure cash flow).

The Working Party’s proposals - based on similar New South Wales and UK legislation - form the nucleus of the new Bill and include recommendations on:

  • Progress payments - every construction contract must now establish an adequate mechanism for determining how much is due under contract and when it must be paid. If it doesn’t, there is a default provision that calls for monthly progress payments.
  • Pay when paid clauses - should be abolished, along with any contractual clause that purports to make payment to a contracting party conditional on payment being received from a third party.
  • Right to suspend work - unless the contract says otherwise, subbies can now suspend work immediately on seven days prior notice if the progressive payment contractual sum is unpaid on the due date for payment.
  • Security interests - now have a limited reintroduction, with safe-guards built in to protect the interests of innocent owners. Security interests can only be awarded where the owner and the party who owes money are related entities. They are only available once the subbie has obtained an adjudicator’s award.
  • Adjudication process - the Working Party favoured a fast track process, rejecting a number of slower options like compulsory insurance or bonding.
  • Adjudicators - should be either by appointment or agreement by the parties; and could be different to any parties agreed on before the dispute. The Working Party also realised that, particularly with security interests, adjudicators might need legal qualifications and recommended a nominating authority to ensure the appointment of suitably qualified adjudicators.
  • Length of adjudication process - should be no more than 28 days (the standard UK time period) to still allow more time for complex disputes.
  • Adjudicators’ powers - similar to the New South Wales legislation, with the power to request further submissions, call conferences, set deadlines and appoint expert advisors with the parties’ consent.
  • Costs of adjudication - both parties are jointly and severally liable for adjudicator’s fees, but the adjudicator can aportion fees if appropriate. Adjudicators can withhold their decision until they receive their fee; and may only award costs between the parties where adjudication application or defence was unfounded or in bad faith.

The legislation is widely applicable: it affects all disputes arising under construction contracts; applies to oral contracts; and is binding on the Crown.

It will apply to a broadly similar range of contracts as the UK and Australian legislation, to allow the New Zealand industry to take advantage of the formers’ authority on definitions (though adapted to New Zealand conditions). But it also reflects the smaller industry size and relative informality of many construction contracts in this country.

It is interesting to note that the Bill applies in a more limited way to home owners (largely because the relationship here is less one-sided in favour of a developer or head-contractor). These limitations include:

  • Progress payments being specifically agreed rather than implied.
  • Subbies cannot suspend work if not paid.
  • Any payment claim against the home-owner must be accompanied by an outline of the homeowner’s rights, under statute and procedures available to them.
  • The adjudication process still applies.

At the moment, the Bill’s progress is really subject to Parliament’s calendar. The Parliamentary Counsel Office has commenced drafting of Bill and it is scheduled for introduction later this year in June.

Consideration by the Select Committee and the subsequent call for submissions will probably take around 4-6 months. The final stage will be the Bill’s re-introduction to Parliament, possibly in September or October, with a view to enactment by the end of 2001 or beginning of 2002.

The new Bill will certainly improve the lot of subbies struggling in the wake of current "pay when paid" remuneration. How developers and head contractors react could be another question.

Already there is speculation that the latter will build equivalents to "pay when paid" into new contracts, rewording the terms to work around the Bill’s provisions in this area.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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