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Brief Counsel

Construction sector regulatory update

09 April 2014

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The Construction Contracts Amendment Bill, which is set to come into force on 1 November 2014, has now passed its second reading.

We comment on how the Bill has changed since introduction and on the prospect of legislation to deal with retentions under construction contracts.

We also update you on the Law Commission’s review into joint and several liability, the final report of which is due later this month.

Construction Contracts Amendment Bill

Some fairly significant changes have been made at the second reading stage, most of them positive.
  • Longer timeframes for adjudication.  The Bill as introduced allowed claimants to serve their adjudication claim immediately upon completion of the adjudicator’s appointment, and then required respondents to reply within five working days.  There was a concern that these tight timeframes would encourage “ambush claims”, to the disadvantage of residential property owners and smaller contractors unfamiliar with adjudication under the Construction Contracts Act 2002 (CCA).  To address this, the Bill has been amended to require additional time to be given to respond, where adjudicators believe that:

    • additional time is necessary due to the size and complexity of the claim or for any other reason, or
    • a claim has been served with “undue haste” leaving the respondent with “insufficient time” to respond.

      How much additional time is awarded is left to the discretion of the adjudicator.

  • Pre-adjudication conferences no longer mandatory.  To avoid the parties to a dispute incurring unnecessary cost and delay, the proposed requirement for a pre-adjudication conference has been deleted.  Instead prescribed forms will be used to inform the disputants of their rights and of the standard adjudication procedures.  In particular, when an adjudicator accepts appointment, he or she must issue a prescribed “notice of acceptance” setting out, among other things, the timeframes for adjudication and those where the respondent may seek an extension.
  • New right of reply.  The Bill has been amended to give claimants an explicit right of reply, although the adjudicator may decline to consider any new issues a claimant may raise and may give the respondent a corresponding right of reply. This reflects customary practice in most adjudications.
  • Extended meaning of “construction work”.  The Bill extends the scope of the CAA to include design, engineering, and quantity surveying activities within the meaning of construction work.  This has now been further extended to capture “related services” – i.e. operations that are critical for the completion of, or are preparatory to, the scope of design, engineering, and quantity surveying work.  A consequential change has been made to include within the definition of “construction site” land where work is planned but has not yet begun.

    A 12-month transitional period (to 1 November 2015) will be provided for designers, engineers and quantity surveyors to familiarise themselves with the CCA regime and to give sufficient time for appropriate professional indemnity insurance to be implemented. 

    As the Bill does not attempt to define what is envisaged in design, engineering, and quantity surveying activities, we anticipate some difficulty in interpreting this broadened scope, at least around the edges.  Similarly, there would seem to be inevitable scope for dispute around the extent of “related services” now captured by the amendments.

Retentions

An area of concern within the building and construction sector is the misuse of retentions through practices such as holding back amounts disproportionate to the contract price, delaying payments or using the money as working capital.  The Bill is silent on this issue but the Ministry of Business, Innovation and Employment is investigating how it might be addressed, both legislatively and practically, and the Minister has indicated that he may introduce a supplementary order paper for consideration in the House at the third reading.  Given the complexity of regulating retentions, it may practically be a challenge to formulate a supplementary order paper prior to the election. 

Joint and several liability

Aligned to the security of payments issues addressed by the CCA, another major question which emerges starkly from the leaky homes crisis and the Canterbury earthquakes is whether the joint and several liability rule should be replaced with a proportionate liability rule.

The effect of this change would be that the “last man standing” could not be landed with the cost of the mistakes of others as each defendant would only ever be liable for the proportion of the loss for which it was responsible.

Switching to a proportionate liability model would better realise the Building Act amendments to rebalance accountability and would bring New Zealand into line with Australia, which may encourage Australian building firms to enter the New Zealand market.

Plaintiffs may, however, be disadvantaged unless New Zealand also follows Australia in making it compulsory for builders to take out home warranty insurance for the benefit of the homeowner.

The Law Commission reviewed the joint and several liability rule in November 2012, and its final report on the matter is scheduled for release later this month.

Our thanks to Fiona Bennett for writing this Brief Counsel. 

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