Consequences of the Construction Contracts Amendment Act

By Malcolm Abernethy, executive office, Civil Contractors New Zealand.

 

This Government has been pushing through legislation that results in a great deal of work by interested parties within condensed time frames. Examples of this are the Health and Safety at Work Act which requires regulations and guidance materials to be developed. A further example is the Construction Contracts Amendment Act which was passed in Parliament on October 20 2015 and gained Royal assent two days later.

To make legislation work, regulations and guidelines are required to be developed that detail how the legislation works in practice.

As Civil Contractors NZ works on, and contributes to, the development of regulations we are faced with a plethora of people and organisations promoting seminars to explain the legislation – what it means and how it might work – yet the detail has not yet been determined. We have seen this in the health and safety space and now for the Construction Contracts Amendment Act 2015 and there have been a large number of organisations that are suggesting it is imperative to attend seminars in relation to the Act which I believe is a little premature.

So what are the issues and impacts on the construction industry?

Civil Contractors NZ is preparing comprehensive fact sheets related to payment claims and the adjudication process for members. In addition we are preparing a seminar series early next year that detail the requirements for retentions.

The Act comes into effect in three stages. However, for a period of time contractors will need to continue work under the old version of the Act. The updates assume there is a new contract on, or after, the commencement date. Dealing with the changes in chronological order – changes on from this month (December 2015) include the following.

Within the Act there are various provisions that have received a relatively minor update from the overview that identifies where in this Amendment Act various provisions are amended. Then there are several new definitions that are provided in the interpretation section.

Some of these provisions include repealing the residential construction contract, updating the definitions of the construction contract and construction site. The definitions for a defendant, for instance, will be replaced – aligning it with the adjudication process and enforcement. The definitions for plaintiff and progress payment are similarly replaced. Progress payments include installments as part of the construction work and final payment, but do not include an amount that is a deposit for the construction work.

The working day definition is also updated in line with NZS 3910:2013. Three new definitions are added for ‘chief executive’ who is the chief executive of the department responsible (MBIE), identifies premises in relation to related services, and ‘related services’ means construction work carried out by design and engineering work and quantity surveyors.

The amendment removes the difference between a residential construction contracts and any other form, a commercial construction contract.

There are some minor amendments to payments and payment provisions. Progress payments are treated as any other payment would be treated and so the difference between a payment and progress payment is removed. Of significance in these sections is the Amendment Act allowing parties to agree payment provisions and further allowing the parties to a construction contract to expressly agree a single payment.

Suspension of work is clarified within the Amendment Act and details the reasons that apply if work is to be suspended. Adjudication of disputes is also amended and clarified along with processes for initiating adjudication proceedings.

The strict requirements of serving an adjudication notice are relaxed, provided it is in writing, describes the nature of the dispute, and does not mislead or affect the interests of the recipient. The Amendment Act also allows a party to an adjudication to provide another party, or the adjudicator, with copies of, or extracts from, the construction contract – but is for any reason unable to do so (for example, in a case where the contract is oral), that party may provide the missing information in the form of a statutory declaration together with any supporting documents that are available.

Adjudication process timeframes have been adjusted for the selection of adjudicator, response to a claim, and notice of adjudication acceptance.

The provisions that include design and engineering work (consultants) and quantity surveyors being covered by the Act comes into effect on September 1, 2016.

The meaty part of the Amendment Act that does not come into effect until March 31, 2017 relates to retentions. The intent of this section of the Amendment Act is to require retentions to be ‘deemed’ to be held in trust. It is this section that will need considerable input into the development of regulations and guidance. The important point to consider for this section is that contracts that have commenced before this section of the Act comes into effect will need to meet the Act’s requirement (this is our interpretation of the Act as it is silent on the savings provision that deals with commencement of this section). And it is this section that needs clarity – particularly in commencement and establishing by regulation the ‘de minimis’ amount.

Retentions are held to ensure defects are remedied and should only be used for that purpose. When retentions are due for payment at practical completion, and at the end of the defects notification period, they must be paid irrespective of whether retention payments have been made by the client.

The release of retentions is no different from any other payment. Main contractors cannot withhold retention payments from subcontractors until the head contract retentions have been released.

Importantly, it should be noted that retention money can be used by the party holding it, and is not required to be held in a separate trust account, and may be comingled with other moneys. While the Act allows retention money to be comingled, it also provides security of retentions that elevates their priority to that of a secured creditor.

Most of this Act addresses the concerns of industry related to payments, and adjudication but the provisions for retention money needs to be well considered when developing the regulations and those regulations need to be determined early.

This column was first published in the December 2015 issue of Contractor.

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