Hon Laila Harre

Speech to Subcontractors Federation AGM
Heritage Hotel
35 Hobson St
Auckland

Thank you for inviting me here today to speak with you about security of payment in the construction industry.

I would like to start by congratulating the Subcontractors Federation for the important role it has played in this review. It shows the value of this type of industry grouping and what can be achieved by working in partnership with a pro-active, sympathetic government. I know the federation is in the early stages of formation, and I hope that as many of you as possible get in behind it. I certainly pledge that this Government will continue work closely with the federation on matters of importance to the industry. There are likely to be a number of these in the near future.

The reason I say this is that, as some of you may be aware, the security of payments issue is only one part of a long overdue review of our insolvency legislation. In addition to the security of payment issue, the Insolvency Review will also look at issues surrounding Phoenix Companies, Statutory Preferences, Cross-Border Insolvency, Voidable Transactions and Bankruptcy Administration. Other issues include the Role of the State, Voluntary Administration, Directors Duties, Abuse of Trusts and Statutory Management.

We want to have this work completed within this term of government. It is a big task, but I am confident that officials will be able deliver on this tight timetable. The Labour Alliance Government is committed to making business in this country fairer and more efficient.

The present situation regarding security of payment in the construction industry was bought about by the repeal of the Statutory Liens Act in 1986. The then government was not able to find common ground between different industry sectors, and left it in a kind of legal vacuum - a vacuum that has been ruthlessly exploited by some operators. The result has been for those at the top of the industry pyramid to push the risks towards the bottom. And when others don't pay their bills on time, or not at all in some cases, sub-contractors and their workers are left to pick up a significant portion of the industry's financing requirement.

I should make the point here that not all participants in the industry are unscrupulous. There are a large number of reputable operators at all levels. However the activities of the few has weakened the whole industry. I believe this is why there has been the unprecedented level of recent cooperation in dealing with these issues, and why the industry working party managed to come up with a set of recommendations so quickly.

Nick Smith recently announced that he has National Party caucus approval for a private members bill that deals with much the same topics. That won't be necessary, but the news makes me hopeful that there will be a high level of cooperation within the House as well – a rather uncommon occurrence I must say.

I would also like to thank all the members of the working group for their efforts. They have worked long and hard with the officials to produce a final report. I particularly want to thank Geoff Bayley of G R Bayley and Associates for providing the initial impetus to get things going. His ongoing work and expertise have greatly assisted the process. You will be able to judge this for yourself, as Geoff is the next speaker. I also want to mention the Master Builders Federation and the Contractors Federation. They represent industry participants high up in the industry pyramid that stand to lose the most from the proposed changes. Both these organisations have moved considerably on their previous positions and I would like to thank them for their progressive attitude in helping to build a stronger industry, one which will be better for all participants in the long term.

The fundamental problem identified by the working group was that people in the industry were 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 were 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 working group's recommendations have now been considered by Cabinet and agreed to as the basis for new legislation. What this means is that the government agrees to the broad thrust of the proposals, while some more work is still needed on the details. This will involve consultation with a wider group of interested parties. It is not envisaged that this consultation will change the basic principles, but it may throw up details that have not yet been considered by the working group or officials. The working group has strongly recommended that New Zealand adopt a fast track adjudication process along the lines of recent legislation enacted in New South Wales and in the United Kingdom. While neither scheme has been in place long enough to be properly evaluated and some problems have been identified, it is hoped that we will be able to learn from their experience and come up with an improved version of the law.

The new legislation will 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.

It is envisaged that adjudicators will have a high level of discretion as to how they can act, and superficial evasive tactics such as ‘pay-when-certified’ provisions will not be condoned. Another key feature of the scheme is that the adjudicators ruling would be binding but not final.

The working group has also recommended that the government examines the use of security interests over land and chattels and further work will be done on this. 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, therefore it would be necessary to ensure that an effective mechanism is in place to safeguard against this type of activity.

A key point of difference between the NSW legislation and the working group's report is for the law to also cover the residential sector. It was felt that this sector was a large part of the industry in New Zealand and that there should be a uniform approach. The scheme will allow for sub-contractors to stop work if they have not been paid. The fact that this basic right has been legally taken away shows how inequitable the present situation has become.

As I mentioned earlier, it is envisaged that the adjudicators will have a high level of flexibility and discretion to ensure that all parties are treated fairly. We do not want this process to turn into just one more round of legal skirmishing. Unless there are compelling reasons it is hoped that the process can be kept as informal as possible. It should also be able to appoint experts in complicated cases.

Further work is currently being done on the finer details of the proposals I have announced today. The next speakers will deal with some of the issues in greater depth. A limited consultation process will be carried out over the next six weeks, after which a final paper will be put to Cabinet. Because of the complicated nature of the legislation and the crowded legislative program it is hard to give a definite timetable on when these changes will come into force. However, given cross party support in Parliament I would hope to have the legislation before the House early next year.

The aim of the government and the working group has always been to build a more robust and profitable industry 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. It is essential that these diverse groups work together for a profitable robust industry to thrive, and this is the goal of the changes that I have announced today.

Thank-you.

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