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The Construction Contracts Amendment Act 2015, to come into force progressively from 1 December this year, will result in significant change across the whole construction sector.
We tell you what you need to know.
Key changes and timeline
|All adjudicator determinations – on rights and obligations as well as on payment disputes – enforceable in court||1 December 2015|
|Design, engineering and quantity surveying (QS) work brought within the Construction Contracts Act 2002 (CCA)||1 September 2016|
|Retention money to be held in trust||31 March 2017|
The changes are not retrospective so, subject to narrow exceptions, will not apply to:
- construction contracts entered into before 1 December 2015, or
- design, engineering and QS agreements entered into before 1 September 2016.
Enforceability of adjudicator determinations on rights and obligations
Currently only payment dispute determinations of an adjudicator under the CCA are enforceable in court. From 1 December, enforceability will be extended to rights and obligations determinations also.
The courts have no overriding discretion to refuse to enter judgment and can only refuse to enter it on very narrow grounds. These are:
- the amount payable has been paid
- there was in fact no construction contract
- a condition imposed by the adjudicator has not been met
- due to a change in circumstance, not caused by the respondent, it is not possible to comply with the determination, and
- the date (if any) specified in the adjudication for compliance has not yet passed.
Typical rights and obligations determinations might include:
- whether work is within scope or a variation
- contract interpretation disputes
- whether work is defective, creating an obligation on the contractor to rectify it
- extension of time claims (as opposed to time related cost claims or downstream liquidated damages claims)
- whether time is at large
- rights to suspend or terminate a contract
- assignment rights
- issues regarding bonds
- entitlement to a Practical Completion Certificate or Final Completion Certificate
- ownership of plant, equipment and materials
- damages claims for breach of contract, and
- in relation to design, engineering and QS consultants, contractual claims for damages for breach of requirements of reasonable care and skill.
Chapman Tripp comments
Construction disputes can be complex, often with large amounts of money at stake and requiring the participation of experts and insurers.
Whether a "quick and dirty" binding adjudication process is appropriate in these circumstances – certainly on large construction projects – is questionable, noting that as a general rule a respondent has only five working days after receipt of the claim or appointment of the adjudicator (whichever is later) to prepare and submit its response to the claim.
The new legislation provides that an adjudicator must allow a respondent additional time to prepare and submit its response to a claim upon request if this is considered justified having regard to the size or complexity of the claim or because the claim has been served with undue haste giving the respondent insufficient time to respond.
We welcome this flexibility to grant additional time but wonder how fully or generously it will be used, given that the normal position is only five working days and the clear intent of the CCA that resolution of disputes should be speedy.
Assuming adjudication timeframes remain very tight, it is reasonable to ask whether the full effect of this change has been properly explored and understood. Money claims are easier to unwind after any subsequent arbitration or court proceedings than claims relating to rights and obligations. How, for example, could a "quick and dirty" determination which allowed a contractor to terminate a contract be un-wound if the decision were later overturned through arbitration or at court?
Design, engineering and QS work pulled into the CCA
This change has been achieved by extending the definition of "construction work" to include design, engineering and QS work.
So design, engineering and QS consultants will get the benefit of the payment protections under the CCA, but will also be subject to the adjudication process either as claimants or respondents.
Chapman Tripp comments
Claims against consultants where terms of engagement typically require the exercise of reasonable skill and care will necessarily involve a degree of judgement.
They will also often involve matters of technical complexity, requiring the use of specialist independent experts (often drawn from a small and heavily committed local pool, or from overseas).
In many cases timing will also be an issue for other reasons – for example, in disputes relating to structural design completed years ago, it will be hard to locate all of the relevant information and people.
All these challenges are compounded by the short adjudication process. How can a defendant served with a complex claim hope to mount an appropriate response in a short timeframe?
Almost invariably, professional indemnity insurance will be involved, meaning that the insurer's interests and requirements will need to be observed. This can be time consuming and cumbersome:
- the insured must notify the insurer of the claim (or circumstance)
- the notification passes through a broker, and may involve multiple layers of insurance and reinsurance
- issues of cover/ policy response can be contentious (e.g. policy exclusions)
- decision is required on who has conduct of the claim (including the choice of lawyers and experts), and
- the insured cannot take steps which may prejudice the insurer.
Some significant work will be required from insurers and brokers to ensure that claims can be notified and managed quickly enough to enable effective responses to claims under the CCA which may be covered under professional indemnity policies.
Obligation to hold retention money on trust
The retention trust regime will only apply to commercial construction contracts (not to residential contracts with the home owner) where the retention money is above a "de minimis" amount, to be determined by regulation.
In New South Wales, the threshold for a construction project is where the head contract is valued at AUD20,000,000 or more. The language used in the Act suggests that the threshold will be much lower in New Zealand.
Retention money will be required to be held on trust by the payer.
The Ministry of Business, Innovation and Employment (MBIE) says all trustees must:
- act honestly and in good faith
- act for the benefit of the beneficiaries or to further the purposes of the trust (not for their own benefit), and
- manage the trust with care and skill.
MBIE warns that breach of these obligations, which may implicate directors personally, will give rise to significant penalties, including potential criminal sanctions in serious cases.
Retention money can be held on trust in the form of cash or other "liquid assets" that are readily converted into cash. It does not have to be paid into a separate trust account and can be commingled with other money.
The retention money can be used by the payer only to remedy defects in the payee's work. It cannot be used for working capital – MBIE says this is the main driver for the retentions regime – nor is it available to creditors of the payer.
The date for payment of the retention money to the payee cannot be later than the date on which the payee has fulfilled its obligations under contract. Where payment is late, default interest will apply.
The payer may invest the retention money and retain interest earned, but it is liable to make good any loss to the retention money if the investment is unsuccessful.
Proper accounting records must be kept and made available for inspection.
Chapman Tripp comments
The retentions trust regime throws up some difficult questions and challenges:
- where the payer draws down on a loan facility in order to make a progress payment to the payee, does the payer need to draw the gross payment amount down and place the retention money portion in a separate account? MBIE suggests that this is not the intent, but this view is hard to reconcile with the wording of the legislation
- will the retentions system lead to more payment milestone regimes as an alternative to retentions i.e. payment based on the completion of milestones such as X% of the contract price is payable upon practical completion
- will it lead to higher levels of bonding (for instance, the principal requiring a larger performance bond instead of contracting for retentions)
- from the payee's perspective, which money is mine? This is the tracing problem – particularly where trust money is commingled with other money in the same account, including money held on trust for other payees. How is particular trust money to be identified, especially when there isn't enough to go around
- is the payer only required to hold in trust the net amount of retentions i.e. the difference between the retentions held by it and retentions held against it, and
- are retentions receivable by the payer a "liquid asset" (noting that receipt will generally be conditional on future events, including the quality of works performed and the solvency of the payer)? This seems doubtful, especially if those receivable retentions are not readily convertible into cash until some point in the future.
All of which raises the question of what the true practical and financial cost to industry will be from the new regime.
Preparing for change
Chapman Tripp will be running presentations on the key changes to the CCA soon.
The information in this article is for informative purposes only and should not be relied on as legal advice. Please contact Chapman Tripp for advice tailored to your situation.