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Speech to NZ Institute of Building North Chapter

Hon Laila Harre
May 3 2001 Speech Notes

Speech to NZ Institute of Building Northern Chapter
5pm
Romfords
Tamaki Yacht Club
Auckland


Developments in legislation relating to security of payment in the construction industry

Good evening, and thank you for the invitation to speak to you tonight.

It's always nice to kick things off on a high note, so I'd like to start with some good news on a piece of legislation I know your all very interested in – the Construction Contracts Bill.

The drafting of this Bill is now complete, which means it will go to cabinet for consideration Monday and should be introduced to the house within the next couple of weeks.

The passage of this Bill will bring about the end of 14 years of cashflow problems and insolvency within the construction industry.

These problems became commonplace following the repeal of the Wages Protection and Contractors Liens Act in 1987.

The repeal of the Act removed much of the real protection for contractors in their dealings with property developers and head contractors. Some of those developers and head contractors took advantage of the gap left by the repeal of that Act to frame contracts in way which passed on the risk of the development to those least able to bear it – the smallest businesses in the building industry pyramid and the workers and self-employed tradespeople connected to them.

When the Alliance and Labour became the government we were faced with nothing short of a mess in the system of payments in the construction industry.

Here we had two options. Either we could do nothing, or we could apply our general approach to the situation. This approach is based on a willingness to intervene when it is clear that a free market in any particular area is not the same thing as a level playing field. Sometimes to get a level playing field you have to interfere with free markets, and that is certainly the case in your industry.

We decided quickly that doing nothing was not an option. This was helped by the fact that sub-contractors were themselves getting organised and writing to me in their hundreds within a few weeks of my appointment as a Associate Minister of Commerce alerting me to the crisis in the industry.

I may not have been born to the building industry, but I know that it's a vital part of the New Zealand economy. For this reason I prioritised the work needed to make sure that the future of the industry would be based on a workable legislative framework.

And rather than pretending I had all the answers, I enlisted the help of the experts, as I'm wont to do when it comes to building projects.
I didn’t believe the issues in the construction industry could be solved by orders from the top. So I invited a group of key players to gather round a table and put forth their ideas and suggestions for solving this problem.

This core group became the Construction Industry Working Party, and it was tasked with identifying the issues facing the industry and coming up with some solutions.

This Group was made up of representatives of the Master Builders Federation, Contractors Federation, Sub Contractors Federation, Quantity Surveyors, Architects and the Amalgamated Workers Union as well as officials from the Ministry of Economic Development.

On that note I’d just like to say how much I’ve appreciated the hard work and commitment shown by the group and all those who have contributed to this process. I think it shows what can be achieved when government, business and unions work together.

There was pretty much unanimous agreement on the working group’s recommendations, which probably shows how bad things had got and how even people who stood to lose some of their power under this proposed law have swung in behind it.

And the fact that all this has happened in a little over a year shows just how responsive this government is trying to be when it comes to meeting the needs of the industries that form the backbone of our economy.

Yes, we are moving quickly on payment issues within the construction industry, but it's just one part of a long-haul review of insolvency laws and procedures in general.

The first tier of discussions has looked at phoenix companies, statutory preferences, cross border insolvency, voidable transactions and bankruptcy administration.

The Ministry of Economic Development has recently gathered industry feedback on each of these issues, and I'm expecting a report back on these discussions next month.

Shortly it will be initiating consultation on the second tier of the review, which will be based on a law commission advisory report on these issues.

So all in all the Insolvency Review is a big task, but the Government is confident it can have the issue wrapped up before next year's election.

But let's get back to the construction industry.

It seems that the best business is done where risk equals reward. What we’ve seen over recent years in your industry is just the opposite. Those who have stood to make huge profits have been able, because of the present legal framework, to push the risks onto people like you who can least afford them, and have little control over decisions affecting risk. It’s the small to medium sized operators that have had to dig deep into their own pockets to clean up the financial mess left by the large operators. The result has often been financial meltdown for people like you.

It's just plain fair that if you do work to the appropriate standard then you should be paid. It may sound straightforward, but as too many of you have experienced things often don’t work out this way. It’s just too easy for the big players to walk away from the deal, and from their financial responsibilities, leaving you with nothing to show for your hard work. The Working Group’s recommendations are designed to fix this, so if you don’t get paid then you can be confident that the law will not discriminate against you by tying a dispute up in a legal knot.

So what have been the big problems and how does the Government, acting on the recommendations of the Working Group propose to fix them? The fundamental problem has been payments either not being made on time – the cheque’s in the mail line – or not being made at all. The new legislation will rectify this.

The first thing the Government is going to do is put in place an adjudication service so sub-contractors will have a designated place to take their disputes. These Adjudicators will be given a high level of flexibility and discretion to act promptly and effectively. We don’t want this process to turn into just one more round of legal skirmishing. Unless there are compelling reasons its hoped that the process can be kept as informal as possible, however experts will be able to be appointed in complicated and difficult cases

Although the legislation will not guarantee payment it will put in place a process of adjudication that will ensure disputes are dealt with within 28 days. Fast track adjudication procedures have recently been put in place in New South Wales and in the UK and the Working Party recommended that we adopt similar legislation. We are in the fortunate position to learn from their experience and hopefully improve on it.

The adjudication process will help to short circuit delaying tactics used by developers and head contractors. This legislation will mean that they will be called to account within 28 days. Of course, we’ve put in place the right of appeal on any decision made by the adjudicator but the important thing is that disputes will be heard and acted on quickly. And payment can not be withheld while an appeal is waiting to be heard.

Added to the legislative shopping list will be the outlawing of “pay-if-paid’ and “pay-when-paid” clauses in contracts.

Adjudicators will also be able to order that a lien can be placed on an owner’s property in some circumstances.

Finally the new Act will stop the ridiculous situation where even if a sole contractor hasn’t been paid, and knows he won’t be paid, he or she can’t stop work. The proposed legislation will get rid of this nonsense.

Where to from here?

As I mentioned earlier, once it has cabinet approval the Construction
Contracts Bill is on its way to cabinet on Monday, into the house within the next couple of weeks, and hopefully into force by the start of next year.

It strikes me that the construction industry is like a microcosm of society. Like society, which is more that just a heap of individuals, your industry is made up of a number of interlocking parts; financiers, developers, contractors, owners, sub-contractors and workers. And like society your industry succeeds when people look after more than just their own self-interest and realise that its strength and potential lies in pulling together.

No society or successful industry can survive without some rules and regulations.

What the Government, with significant input from you people, is trying to do is put in place a few necessary rules and regulations that will give people a feeling of security and a sense of fair play.

Thank you

ENDS

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