Announcement of construction industry legislation

The fact that today’s announcement comes on the day of the receivership of another large construction company - Hartner Construction -highlights the importance that we all need to place on the swift progress of legislation addressing payment problems in this industry.

I wish to assure all those affected by the collapse of Hartners of this government’s determination to address the issues that have made the collapse of one large business a threat to hundreds of smaller ones.

I can also assure you that, as a government, we have not wasted any time in taking action in this area. In saying that I pay tribute to the people from throughout the industry who worked with my officials to define the issues and recommend action to the government. That such co-operation was possible speaks volumes for the goodwill that remains in the industry.

The fundamental problem we have identified is that people in the industry are not getting paid on time. There are blockages in the system that mean payments can be held up, sometimes for years, for no good reason. While those higher up the chain could carry such liabilities, subcontractors at the bottom of the heap are 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 the situation right.

The Government has already announced that we intend to outlaw “pay if paid” and “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

The new law will establish a fast track binding adjudication process to resolve disputes concerning construction contracts. Adjudicators will be required to issue their decisions within 28 days and those decisions will be enforceable even if steps are being taken to appeal them.

We will also establish a default regime under which contractors and sub-contractors will be entitled to regular progress for work done.

The regime will apply to some elements of contracts with homeowners. This is an important part of the industry but the commercial relationships are different. Both the adjudication process and the outlawing of pay when paid clauses will apply but not other matters as these assume a commercial risk relationship that is not the case with homeowners

The adjudication process will apply to all disputes and not just payment disputes, as is the case in the UK but not in NSW. This will ensure that matters that are about payment can not be avoided by introducing issues of quality or suchlike.

There will be a right to suspend work for non-payment unless the parties have agreed otherwise in their contracts.

One of the more controversial recommendations of the working group was that the government examine the use of security interests over land and chattels. They felt that the ability for a head contractor to register a security interest or lien over the assets of the principle 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, and we have approached this issue carefully.

We are including in the legislation provision for an adjudicator to allow the registration of a security interest when the non-payer and the owner are the same person or are related companies. This means that it will not be so easy to avoid payment through elaborate company structures.

The aim of the government and the working group has always been to make the building industry profitable for all participants. We are certainly not wanting to advantage one group over another. Rather we want participants to be aware of the circumstances of others and use that knowledge to complete trouble free, profitable projects. 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.

We are also aware of the honest hard work that subcontractors and their workers do, without which no projects would be possible.