Many subcontractors and tradespeople will be very relieved with
a Supreme Court ruling yesterday that will make it easier for them
to keep their money in the insolvency of a head contractor.
The construction industry was concerned about a Court of Appeal
ruling from 2013, which allowed money to be "clawed back"
from subcontractors for up to two years after the payment was made.
The earlier ruling meant that a subcontractor could only hold onto
its money where it was paid in advance for the work – very
rare in the construction industry. The result was that any business
providing goods or services on account was always on risk that
money it had received could be clawed back for up to two years.
The Supreme Court has unanimously held that it does not matter
whether the work was performed before or after receiving the
payment, provided that the subcontractor:
acted in good faith in receiving the payment
did actually perform the work, and
had no reason to suspect that the company was insolvent.
Malcolm Abernethy, executive officer for Civil Contractors NZ,
said the decision would come as a huge relief to members. Civil
Contractors NZ helped fund the appeal.
Specialist Trade Contractors Federation president Graham Burke
has also praised the decision, saying that the prior uncertainty
made it difficult for small businesses to grow.
"It's been a long fight but the Supreme Court
decision has finally drawn a line under the issue. It's a
victory for common sense."
-- Specialist Trade Contractors Federation president Graham
As always, there is a downside – the decision will mean
that there will be less to go around for those who haven't been
This makes it even more important that subcontractors and
tradespeople are conscious of the insolvency risk in the sector,
and take steps to protect themselves, including:
ensuring regular payment (and using the Construction Contracts
Act to do so)
limiting retentions (noting that proposed law changes on
retentions aren't yet in force)
registering on the Personal Property Securities Act to protect
their materials and equipment
if you are in a strong bargaining position with the contractor
or principal, seeking bonds and guarantees to secured payment.
Be aware that most modern subdivisions now include land covenants which are registered against the titles.
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