Minister accepts recommendations as basis for bill, with further work yet on some detail
The Law Commission released a study paper entitled Protecting Construction Contractors which recommended the enactment of legislation along the lines of legislation recently introduced in New South Wales to protect construction contractors from non-payment.
This legislation would make “pay-when-paid” and “pay-if-paid” clauses ineffective and provide a fast-track adjudication process for the resolution of disputes.
The Ministry of Economic Development undertook further policy analysis and consultation and the industry working group was established.
The working group rejected alternative options such as compulsory payment bonding, compulsory insurance, compulsory licensing of participants in the construction industry, a scheme of statutory trusts or charges, and covenanting.
The working group was unanimous on the basic scheme of the legislation, believing that at a general level it had to apply to every part of the contractual chain. A concern was that a proposed solution might apply from the head contractor down, whereas to be effective it must also apply to property developers and other principals at the top of the chain.
As part of this concern, the working group considered that the act should apply to construction contracts with the Crown and should apply to all construction contracts whether they are written or oral.
The key features of the scheme would be:
A: Every contract must provide an adequate mechanism for determining what payments are due under the contract and provide a final date for payment of any sum that comes due.
B: The act would provide default provisions that would apply where the contract was silent on the matters above. These provisions would provide for such matters as payment intervals, amounts to be paid, mechanisms for determining amounts payable, and the final date for those payments. Unless a contract provided otherwise, a contractor would be entitled to claim for and be paid monthly progress payments based on work performed.
C: Every contract must require a payer to give notice to the payee specifying the amount, if any, of the payment proposed to be made, and reasons for non-payment of any part of the amount due, not later than five days after the date on which a payment becomes due.
D: Every contract must contain an obligation that a party may not withhold payment of any amount unless they have given effective notice (in the form contained in paragraph (c) above).
E: Either party would have the right to refer a dispute arising under the contract to a fast-track adjudication process for resolution. A simple example would be if the payee disagreed with the reasons given by the payer for why an amount had been withheld.
F: The adjudicator’s decision would be binding but not final, unless the parties agreed to that in writing, in which case there would be a right of appeal from the adjudicator’s decision.
G: The Act would give a payee the right to suspend work if an amount is not paid when it falls due and the payer has not provided effective notice explaining non-payment, and where there is any non-payment of an adjudicated amount.
H: Any provision making payment under a contract conditional on the payer receiving payment from a third party should be made legally ineffective (this would effectively prohibit “pay if paid” and “pay when paid” clauses).
Detailed design issues
The working group also agreed on several detailed design issues of how the scheme will work in practice, but some issues were not fully explored.
The main items on which there is agreement are:
A: The period for adjudication should be between 10 and 28 days, with the ability for that period to be extended by 14 days with the consent of the referring party. As with all the timing issues, the working group believed further work would need to be done to ensure the timing under the act was consistent with existing general conditions of contract as contained in NZIA SSCI and N7S 3910:1998.
B: The adjudicator should be provided with a power under the proposed legislation to consolidate adjudication proceedings. It is important that the proposed bill creates a nominating authority that will provide adequately and appropriately qualified and experienced adjudicators to ensure parties are not joined in inappropriate situations, such as where the resolution of a relatively small dispute would be unnecessarily delayed by the joinder of a larger dispute.
C: The adjudicator’s decision should be binding but not necessarily final. There should be a right of appeal from an adjudicator’s decision to arbitration (if the contract so provides), or to the court.
D: The adjudication process should be confidential.
E: Retention payments are a necessary part of the construction industry, and performance and maintenance retention payments should be included within the scope of the bill. The bill should include a clause that, where a contract provides for sums to be withheld as retention payments, the sum withheld should not exceed a reasonable assessment of the costs that would arise, should another party be required to undertake that work. NZS 3910:1998 would help determine what is a reasonable assessment.
F: The question of legal representation should be left to the discretion of the adjudicator, with the inclusion of a clause similar to one in section 64(3) of the Commerce Act that the proceeding “shall provide for as little formality and technicality as the requirements of [the] act and a proper consideration of the [matter] permits”. The adjudicator would then determine when it is appropriate for the parties to have representation, while still ensuring the process does not become unnecessarily complicated.
G: Where an adjudicator has given a decision in a party’s favour, that party should be entitled to a “security interest” over the land or chattel of the person for whom the work has been carried out if the money is not paid within a prescribed time after the adjudicator’s decision.
This was a response to the concern that the abolition of “pay-when-paid” clauses would require head contractors to pay subcontractors when they themselves had not been paid. The ability for a head contractor to register a security interest or lien over the assets of the principal would help ensure that money is coming in at the top of the contractual chain so it can then filter down to the rest of the chain.
H: The adjudicator’s powers in the British act are preferred over the New South Wales legislation as they are more comprehensive and provide for the adjudicator to be able to appoint experts, assessors and legal advisors, give directions on the timetable for adjudication, for example.
The working group said more work was needed to compare the British adjudication procedures and the British Arbitration Act with the precepts in the New Zealand Arbitration Act to assist in the application of a consistent judicial process.
I: Adjudicators should have the power to appoint experts. The responsibility for notifying other parties should rest with the parties to the proceeding and not the adjudicator.
Detailed design issues not agreed on, and requiring further work by the ministry and industry are:
A: The New South Wales legislation only provides for payment disputes to be referred to adjudication, while the British act refers all matters in dispute to adjudication. The issue of whether the adjudication process should be limited to payment disputes or should apply to any dispute between the parties was not resolved.
Master Builders expressed concerns about the adjudication process dealing with all matters in dispute rather than just payment disputes.
B: The issue of what should be done where the adjudicator’s decision is that a sum of money must be paid and the payer intends to appeal that decision was not resolved.
C: While it was agreed that the registration of a security interest should only be possible after an adjudicator’s decision, the exact detail of the mechanism for achieving this and the property to which such an interest could attach was not resolved.
D: Also not resolved was the issue of whether adjudicators should have the power to opt not to answer questions and instead to allow an expert to answer those questions, in contrast with judges, who are required to answer all questions put to them.