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 Burke
As always, there is a downside – the decision will mean that there will be less to go around for those who haven't been paid.
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.
A copy of the decision can be accessed here.
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