Consultation over next six weeks before final Cabinet paper
A construction industry payments bill should be before Parliament early next year, Associate Minister of Commerce Laila HarrÃ© said on Friday.
Ms HarrÃ© (right) outlined progress towards a bill, details of it and the likelihood of early enactment to the annual meeting of the New Zealand Subcontractors Federation.
This story opens with the minister’s address and continues with comments from Geoff Bayley, an arbitrator, quantity surveyor and architectural draughtsman who has been closely involved in formulating the new law; Peter Degerholm, the Subcontractors Federation’s executive officer; Hank Lieshout, president of the Master Builders Federation; and construction industry lawyer Graeme Christie, a partner at Simpson Grierson in Auckland.
A separate story, Working group recommendations on construction industry payments, contains details of the proposed bill.
The minister said the security of payments issue was only one part of a long-overdue review of insolvency legislation. Other parts are issues surrounding phoenix companies, statutory preferences, cross-border insolvency, voidable transactions, bankruptcy administration, the role of the State, voluntary administration, directors’ duties, abuse of trusts and statutory management.
“We want to have this work completed within this term of government. It is a big task, but I am confident that officials will be able to deliver on this tight timetable,” she said.
Legal vacuum “ruthlessly exploited”
Repeal of the Liens Act in 1987 brought about the present insecurity of payments in the construction industry, a legal vacuum which Ms HarrÃ© said “has been ruthlessly exploited by some operators.”
Those at the top of the industry pyramid were able to push the risks towards the bottom, “and when others don’t pay their bills on time, or not at all in some cases, subcontractors and their workers are left to pick up a significant portion of the industry’s financing requirement.”
Ms HarrÃ© said the activities of the few had weakened the whole industry, which was why there had been so much co-operation on getting legislation and why the industry working party managed to come up with a set of recommendations so quickly.
Master Builders, Contractors shift positions
The Master Builders and Contractors Federations were high on the industry pyramid, representing participants that stood to lose the most from the proposed changes.
“Both these organisations have moved considerably on their previous positions and I would like to thank them for their progressive attitude in helping to build a stronger industry, one which will be better for all participants in the long term.”
The fundamental problem the industry working party identified was that people were not being paid on time. Blockages in the system meant payments could be held up for years, and for no good reason.
“While those higher up the chain could carry such liabilities, subcontractors at the bottom of the heap were being forced into bankruptcy. The problem is now at the point where even longstanding, large companies are being affected. Clearly things are way out of kilter and it is time to put things right.
Cabinet agrees with broad thrust
“The working group’s recommendations have now been considered by Cabinet and agreed to as the basis for new legislation. What this means is that the Government agrees to the broad thrust of the proposals, while some more work is still needed on the details.
“This will involve consultation with a wider group of interested parties. It is not envisaged that this consultation will change the basic principles, but it may throw up details that have not yet been considered by the working group or officials.”
The industry working group strongly recommended adopting a fast track adjudication process along the British and New South Wales lines.
“The new legislation will outlaw â€˜pay-if-paid’ and â€˜pay-when-paid’ clauses. These features prey on the imbalance of power between contracting parties and are at the heart of the current problems in the industry. Pay-if-paid clauses provide incentives to under-tender for projects in order to obtain cashflow and in effect enable subcontractors to be used to partly finance construction projects.
“In recent high-profile collapses of construction businesses in Auckland, non-payment was able to continue for some time. As a result, significant losses were suffered by a large number of small construction subcontracting firms.
Other evasive tactics will be fought
“It is envisaged that adjudicators will have a high level of discretion as to how they can act, and superficial evasive tactics such as ‘pay-when-certified’ provisions will not be condoned.
“Another key feature of the scheme is that the adjudicator’s ruling would be binding but not final. The working group has also recommended that the Government examine the use of security interests over land and chattels and further work will be done on this.
“The ability for a head contractor to register a security interest or lien over the assets of the principal could help to ensure that money is coming in at the top of the contractual chain so that it can filter down to those at a lower level.
“The inappropriate use of liens was the reason they were abolished, therefore it would be necessary to ensure that an effective mechanism is in place to safeguard against this type of activity.
Residential sector included
“A key point of difference between the New South Wales legislation and the working group’s report is for the law to also cover the residential sector. It was felt that this sector was a large part of the industry in New Zealand and that there should be a uniform approach.
“The scheme will allow for subcontractors to stop work if they have not been paid. The fact that this basic right has been legally taken away shows how inequitable the present situation has become.”
Ms HarrÃ© said flexibility for the adjudicator would enable fairness. “We do not want this process to turn into just one more round of legal skirmishing. Unless there are compelling reasons it is hoped that the process can be kept as informal as possible. It should also be able to appoint experts in complicated cases. Further work is currently being done on the finer details of the proposals.”
Ms HarrÃ© said that because of the complicated nature of the legislation and the crowded legislative program it was hard to give a definite timetable for the changes to come into force. “However, given cross-party support in Parliament, I would hope to have the legislation before the House early next year.”
Not attack on entrepreneurship
She said it was not an attack on entrepreneurship: “We are well aware of the wealth-creating skills of the developers and don’t want to damage that entrepreneurial spirit. We are aware of the difficult job that contractors do in juggling the many different aspects of a large construction project.”
Mr Bayley (right) said it had to be asked, why should the construction industry get any special ? “One reason is to correct the power imbalance.” Results of this were over-competition and under-pricing. Other issues were parasitic tendering, credit spreading and fraudulent contracting.
Under guaranteed maximum price contracts, which developers have adopted over the past two or so years, risk went to those at the bottom of the chain. Current arbitration and litigation procedures “are not quite enough to prevent insolvencies… and are being abused to prevent payment,” Mr Bayley said.
“The legislation would reduce insolvencies. Directors of failed companies confirm that if legislation had been brought in prior to their problems, it would have minimised them [the problems].
Flow-ons from Goodall-ABL
“It would reduce the domino effect of insolvencies. Third-tier labour contractors are now going into insolvency and bankruptcy as a result of Goodall-ABL. It would protect employees at the bottom of the food chain and remove undesirable practices.”
Mr Bayley said 1000 jobs were effectively lost in the Goodall-ABL collapse, “135 million of turnover was lost and the total lost by unsecured creditors was $35 million.
“The protective legislation does not equal security of payment. It reduces the risk of non-payment. The legislation concentrates on keeping business solvent â€” a fence at the top of the cliff rather than an ambulance at the bottom.”
He said security of payments would only be guaranteed by systems which at the moment were not viable, such as statutory guaranteed payment bonds and insolvency insurance.
The primary document on which all this legislation is based, internationally, is Britain’s Latham report, produced in 1994. The New South Wales state government adopted the British legislation only to the extent of addressing payment disputes.
Adjudication very fast-track
Mr Bayley said the NSW process was “very fast track” â€” an adjudicator is appointed within three days of a dispute being registered and a decision will be produced within 10 days. “Adjudication is not arbitration, mediation, conciliation or expert determination, and it does not require agreement [between the parties that they should follow this course] to start. The adjudication is binding, not final, so it could be appealed.”
Under the British law, the party found liable must pay the money found to be owed before lodging its appeal, but appeals have been heard quickly. There have been 35 of them since the first one, where an adjudicator reached a decision on 14 January 1999. That decision was upheld by the court, on appeal, on 12 February 1999.
“It would reduce disputes to a manageable size and keep cashflow going. Very often the reason for large disputes is they weren’t resolved early. It would reduce, if not eliminate, fictitious and fraudulent claims. It would eliminate â€˜enthusiastic litigators’. It would reduce creditors’ exposure to cost at an early stage. It would reduce risk in construction contracts and reduce the cost of buildings.”
Peter Degerholm (left), Chubb NZ’s commercial manager, was instrumental in forming the Subcontractors Federation three years ago and in highlighting the inequality of subcontractors’ positions, where their work or product had been used or installed and they had no redress for non-payment.
Legislation the start to culture change
“We see legislation as the start. Fifty-three recommendations came out of the Latham report â€” the last one was legislation and that was to start a culture change.”
Mr Degerholm said the move to new legislation meant the federation also had to strengthen its organisation to bring force to the law change, and to raise support for other insolvency law changes. “We represent 13 organisations. We would like to see that grow.
“We realise that security of payments is something elusive and so heavily tied in with insolvency legislation.”
Mr Degerholm said the consequences were “not policeman-type, but actual commercial consequences at work. At the moment, if you have a difference of opinion people don’t want to talk about it. Here, in 10 days you’re going to go to adjudication. It’s risk management, it’s not risk elimination.”
Again, the Goodall-ABL debacle arises: “Goodalls’ retentions were just under $1 million, according to the liquidator’s report. In fact, $6-7 million may have been retained. It smacks of abuse, to me. They were using the pay-when-paid clause as an excuse â€” 12% of creditors were owed $1 million on pay-when-paid clauses.”
Mr Degerholm said the act would be a catalyst for improved contract documentation, “so we can get good practice, work on conditions of contract we haven’t been happy to talk about.”
Master Builders’ head ensures antagonism remains
Mr Lieshout got a politely antagonistic reception, given the Master Builders’ rejection of the Subcontractors’ position over many years, but set himself up to be pilloried with one question: “Why are all these people [subcontractors] seeing the main contractor as the cashcow?”
The answer to that, of course, comes not simply through a legislative change but through time-honoured commercial practice, that you don’t get a job done unless you’re prepared to pay for it, irrespective of commitments to you.
He made the Master Builders’ position more curious, by saying “This is perhaps a good opportunity to put some acid on the developers to provide proof of ability to pay.”
Pay-when-paid clauses allow main contractors to be sloppy
Mr Christie, citing the 1997 case of RH Page Ltd v Hitex Plastering Ltd (Ian Holyoake) over non-payment for work done on the Blue Harbour Apartments in Auckland, said “Hitex fended off subcontractors with a pay-if-paid clause. Pay-if-paid clauses allow main contractors to be sloppy.”
He said contractors should require a bond from the project principal, but “it doesn’t happen.” Main contractors took incredible risks and subcontractors were not all lily-white: “That’s mainly because you keep working for the abusers. You keep them in business.”
Tongue in cheek, Mr Christie said: “I see this new legislation as providing great opportunities for lawyers and would like to thank the minister for that.” Then seriously, he added: “No, keep the lawyers out of the process. There are some very capable people within the construction industry , sufficiently capable to know the real issues.”
Two suggestions Mr Christie raised were, that the new law should give the adjudicator the ability to subpoena people to appear at hearings, a power which arbitrators possess; and that the adjudicator should have the power to join the developer to proceedings, “to try and get the cashflow flowing.”