Construction Contracts Amendment Bill

Thank you for the opportunity to take a call on what seems to be the long-running debate on the Construction Contracts Amendment Bill, which I think—I am just trying to refresh my memory as to when this bill first actually came before Parliament—has been through three different Ministers and a number of different iterations. Tonight we are faced with yet more amendments to the bill, which will need some elaboration by the Minister. I am hoping that he will take an early call on this bill, just to bring the Committee up to date with where he is up to as the Minister, particularly on the part of the bill that deals with retentions—or, as otherwise known to people listening to the debate tonight, the part that is really around the Mainzeal collapse clause of the bill and how the industry and subcontractors within the industry can be protected, and can be protected within legislation.

Can I say that Labour is supporting this bill. It appears as if, even though it has taken quite a long time to get to this place, we are moving to a place where, as we argued right from the very beginning, there will be strong provisions put within this particular piece of legislation to protect subcontractors if there were collapses in the construction industry, collapses of companies—that the subbies that flowed on from them who were owed money would actually be able to receive some protection. It appears, finally, that that advice has been listened to and this does appear to be in the bill. As to the questions that we do have around this, they will be around to what extent and how sensible the provisions are. That is what I am hoping to hear from the Minister as we go through the debate tonight.

But, ultimately, to recap, because it has been some time since we debated this bill—I think it was last in March, and that is when we started off the Committee stage of this bill—Labour supports the measures in this bill that speed up the resolution or the resolving of disputes in construction contract cases. We have worked pretty closely with the industry to try to come up with sensible measures that would be taken seriously by officials and by the select committee to make sure that subcontractors do not miss out on the money that they are owed when things go wrong. My colleague Clayton Cosgrove was responsible for the original Supplementary Order Paper, Supplementary Order Paper 439, which is still sitting on the Table tonight and which actually ensured that that happened, and it appears as if the Government has moved to make sure that that happens.

I note that I have been doing just a little bit of reading around this bill tonight and around some of the debates in the select committee that led to getting where we are. It was described by a law firm, actually, as “the long road to fairly minor reform”, which I think is quite apt, although the part to do with subcontractors and protecting them certainly is not minor. It has taken a long time to get the bill to this place and it is a feature of a lot of legislation that comes through this House that it sort of gets stuck and then disappears, sometimes for a year or two, before it comes back to the House for proper discussion. So I think it is important that we move it on and that we actually get it through the legislative process, and that this Construction Contracts Amendment Bill actually does become legislation and does see that there is—

Look, Labour does support the measures in this bill, obviously, because we think that it is important to speed up the resolving of disputes in construction contract cases. If I think back to the meetings I have had with the industry in the time that this bill has been in Parliament, there is a real desire to solve this issue, and that is regardless of whether those people in the conversations are from the big end of town or the small end of town. I have had two quite separate sets of conversations about this topic, and certainly at the small end of town there is the concern about livelihoods, concern about the borrowing that has to go on sometimes to sustain businesses and pay employees, and concern about the fairness and justice of the system as it is presented.

At the big end of town there is a concern about the costs of measures that set up protection mechanisms and the fact that that will be borne by an entire industry, and there is a concern that that will push up building prices and, therefore, reduce the amount of activity that goes on in our country. These are, I think, tensions that sit in the system, and they are legitimate tensions to be debated and to be worked out. I want to congratulate those members who have brought this bill through the House, because it is an issue that needs to be improved on as we have seen with Mainzeal—that is the obvious example that is frequently cited. It is the subcontractors who are hit the hardest, but that does not take away from the issue of increasing costs on the industry and where those costs will fall. It is really important that there are no unintended consequences when the final deal is struck.

I am aware of some of the conversations that have gone on behind the scenes—Treasury and the Minister for Building and Housing are having a few differences of opinion on this and that—and that is healthy, actually. That is the kind of robust debate that we in this Parliament think ought to be happening, so I am glad that the Minister is having robust discussions, whether I agree with him on every point that he makes or not. I think that in this Parliament we should acknowledge that good process and good, robust debate are essential. We should also thank the officials who have worked on this and who have argued the principles, because we need a fair solution and we need a better solution than the one that we have now.

We supported the contractors’ liens option—that is the favoured approach of the Labour Party. We worked through with contractors in the industry to find out how they best thought these issues could be addressed, and that is the point that we came to as a party. We support the measures in the bill that speed up the resolving of disputes and construction contract cases, because that is something that sorts out the uncertainty and the uncertainty that carries costs, but we want to see more done to make sure that subcontractors do not miss out on the money they are owed when things go wrong. We need to take action so that the situation we saw with Mainzeal does not happen again. That is where we are coming from when we are discussing this bill and Part 1, where the main action occurs—the principle of making sure that there are speedy mechanisms and that there is something that is fit for purpose for addressing the obvious issues.

The second option that we considered was statutory construction trusts where money would flow through to a trust to ensure that subcontractors got paid first, should a construction company collapse. We know that these solutions apply to significant commercial—

💬 Hon Dr Nick Smith: I raise a point of order, Mr Chairperson. I appreciate the contributions that the current speaker and the previous speaker are both making about the Supplementary Order Paper that addresses the retentions in Part 2. The contributions they are making are valuable. I wonder whether it would be helpful, so that we can actually debate the bill as one debate, to take leave for the debate to be on Parts 1 and 2 together, and then for them to be voted on separately, given that the major retention issues that members wish to discuss are in Part 2.

The CHAIRPERSON (Lindsay Tisch): Well, that is not a point of order. We will just let the member have his few seconds remaining, if he wishes—only a few seconds—and then if you want to bring forward a point of order, we can handle that then.

In the few seconds available to me, I would like to say that I think it is important to have a good, strong debate on Part 1. I know that I have got colleagues still wishing to debate that part, but we will make the call when the Minister puts the leave. Thank you.

It is my pleasure to take a short call on Part 1 of this legislation. Part 1 is a very important part of this legislation, in that it is where the definitions of a number of the issues that we are dealing with are very clearly laid out. As my colleagues who have spoken before me have mentioned, Labour is supporting this legislation. We think that it is vitally important that we get this right, and critical to getting this right are the provisions laid out in clauses 4 to 8A, which are where we are doing the definitional work. Some of the hard work that we see of the Commerce Committee was actually in its work when it came to consider much of the definitional changes that needed to be made.

If we have a look at the change that the select committee made to the definition of “construction site” in clause 5 of the bill as it relates to related services, this was in order to include the land where work is planned but has not yet begun. It is vitally important that this is captured so that work that may well be in plan but that has not yet begun is captured by this legislation. I think that this was a very important change that the select committee has made to clause 5 in Part 1 of this legislation.

If we then turn our attention to clause 6, this is where the amendment was made by the select committee to add operations that are critical to the completion of, or preparatory to, construction—the scope of design, engineering, and quantity surveying work—to the definition of “construction work”. Again, we have to have a very clear understanding of just what is meant by “construction work” when we go to consider the more principled parts of this legislation, which are contained in Part 2. So this addition—the scope, design, engineering, and quantity surveying work—is vitally important. We understand that that is part of the construction cycle, and in this way, we are making sure that we are offering the protections that are going to be offered in other parts of this legislation.

The select committee did not stop just there; it went through the definitions with a fine-tooth comb. When it came to clause 7(2), the commencement date for the Act applied to related services to 1 November 2015. So where it was sensible, there has been a staggering of the commencement of these provisions, as it made sense under the Act.

Then, of course, there is the work that the committee did to include new section 9(3), in clause 7, and new clause 32, which adds a schedule to the Act that makes it clear that the amendments proposed in this legislation would apply only to contracts entered into or renewed on or after the commencement date. This was a very important change that the select committee made. I think it is, of course, a principle of good legislation that we are not legislating retrospectively—that we are legislating forward, that we are changing the rules from the date of the commencement of the legislation, and that we do not have a retrospective bill. I think the change that the select committee made there to clause 7 was vitally important.

The last change that the select committee made to Part 1 of this bill was, of course, to insert new clause 8A, which excludes contract provisions for the sale and purchase of second-hand assets and property management when they are part of a contract that includes construction work. This was excluded from the Act, and there were deliberations at the select committee that made it very clear why this needed to be excluded from the Act. Although all of these changes may seem minor—and there may be a temptation, even, to gloss over them and not think them important—the key to getting this legislation right is having very clear definitions and having very clear definitions of what we are talking about.

I think the amendments that the select committee made that I have spoken about in my contribution tonight make it very clear just how important those amendments are. So when we are talking about amending “related services” to include the land where work is planned but has not yet begun, this is, of course, a very important part of the construction cycle. The planning is vitally important, and there is always going to be work to be done. So I commend the work that the committee did to clear up many of the definitions in this bill.

Speaking specifically to Part 1 of the bill, I have a couple of questions for the Minister for Building and Housing on this. I too want to just refer initially to clause 6, with some further questions about some of the implications of the changes that were made at the Commerce Committee. In the commentary on the bill it says: “In the bill as introduced, clause 6 extends the definition of construction work to include design, engineering, and quantity surveying activities.” We in the select committee recommended amending this clause to add operations, and I do remember that there was a reasonably extensive discussion about this 2 years ago when this bill went through the select committee process.

The commentary also states: “We recommend amending this clause”—clause 6—“to add operations that are critical for the completion of, or preparatory to, the scope of design, engineering, and quantity surveying work. These ‘related services’ directly affect the quality of building work, and it would benefit consumers if they were covered by the legislation. We”—in the select committee discussion—“did not agree with the contention that extending the meaning of construction work would unfairly open up to adjudication persons who were not party to a construction contract.” I do remember that there were pretty extensive discussions, there were submissions on this, and we came to the conclusion that under the Act, any dispute that required adjudication would be between the parties to the construction contract.

What I would like to ask the Minister about—and I have been doing a bit of further reading about this subsequently—is the bill’s main purpose. It is about implementing stronger consumer protections, but it is also about extending the definition of “construction work” and, of course, the retentions reform, which we are going to talk about in more detail in Part 2. But the whole idea of broadening the definition of “construction work” to include the work of engineers, designers, and quantity surveyors—who are collectively consultants—still remains somewhat contentious. I do want to ask the Minister about this: although consultants are able to rely on the protections under this Act where their payment claims can be enforced as a debt due, there is a contention that it remains to be seen whether those benefits would outweigh the potential drawbacks of consultants being brought under the Act. For example, consultants might bear the brunt of the amendments proposed in the bill, which would remove the distinction between enforcing an adjudicator’s decision regarding payment and enforcing a decision concerning their rights and obligations, but it is also possible that adjudicators would be able to hear consultants’ negligence claims, and their decisions on such claims would be enforceable in the courts.

Some of the things that have not been defined in this bill are the terms “design”, “engineering work”, and “quantity surveying work”. They are not defined in the bill, and my question is: does the Minister have any concerns about the fact that they will end up being defined in the courts as opposed to being defined in this bill and is this an ambiguity that he has considered, and does he have any remaining concerns? I do remember that there was extensive discussion around this. For example, is the work that is carried out by project managers in relation to a construction contract caught out by the amended definition or not? So if the Minister is mindful of taking a call on this part of the bill and if he was able to address that question, that would be quite helpful because that is on Part 1 of the bill, with which we are directly engaged.

This bill is very much about trying to prescribe—

It is a pleasure to take a call in this Committee stage of the Construction Contracts Amendment Bill to note that Labour supports the bill. I note also the presence of the Minister in the chair, the Hon Nick Smith. We were not at all sure that he was going to be able to join us for this debate, so we welcome him back to the Chamber.

Let us begin with a definition of the problem in respect of why this legislation is being passed today, the options that were explored, the amendments that the Commerce Committee made, and the reasons that Labour is supporting it, although with one or two minor reservations. Can I note, before I get into it, that this is the fourth bill in a row that we have had in a Committee stage where the Labour Opposition has been supporting the bill. So to members of the public, today is perhaps one of those days when we see the other side of Parliament in action. We see quiet cooperation behind the scenes, in select committees, and we see work across all sides of the House to try to tease through complicated problems and come up with workable solutions.

The problem that we are seeking to resolve with this Construction Contracts Act amendment is the fact that the original 2002 Act—we will call it the Act—essentially, provides for a different regime for adjudicating or arbitrating commercial construction contracts from that of residential construction contracts. It has a two-stage process of adjudication or arbitration, and if that fails for low-value claims, the claimants in the commercial claim can go to the court and receive a judgment. Unfortunately, in the case of residential contracts, that two-stage process has not been available, and, therefore, the regulatory impact statement notes that people have gone to the court as a first resort, not as a last resort, thus imposing undue cost and delay on the system.

The second part of the problem has been where risk is borne in the construction industry. Essentially, the construction industry is like a pyramid. The client contracts with a lead contractor, who contracts with specialist subcontractors—an architect, quantity surveyor, master builder, etc.—and underneath each of those, particularly in the case of the building contractor, there is a large number. There are often several layers of subcontractors—many layers in some cases. Risk tends to be passed down the system, and, over time, professionals in the industry work their way up the layers of the system so that their position is more secure. That does not work when things go wrong, because the subcontractors or the sub-subcontractors keep getting it in the neck. That is not fair; they are the most vulnerable. So a second objective of reform here, as well as making the system more efficient and robust and bringing more of the same opportunities to bear in the case of residential contracts as well as commercial contracts, is to ensure that risk is more fairly and evenly shared throughout the industry so that we have a process that is robust, efficient, and fair.

The Labour Party supports the measures in this bill that are designed to resolve and speed up the resolution of disputes in construction contract cases. We want to see more done to ensure that when things go wrong, subcontractors do not miss out on the money that they are owed—the so-called progress payments. If we need any further evidence of the importance of this issue, the Mainzeal Property and Construction case shows that subcontractors are hit the hardest when a construction company fails. Subcontractors are almost always last in the creditor queue, and they miss out when money is held up. That is not fair, and we wanted to take action to ensure that this did not happen again.

We have developed two options—contractor’s liens and statutory construction trusts—as a way of addressing the issue of subcontractor risk. In the first option—contractor liens—contractors would be required to retain a portion of the money that they owe. The second option is the statutory construction trust, where money would flow through a trust to ensure that subcontractors get paid first should a construction company collapse. Our solution would apply to significant commercial construction projects and would not interfere with contractors’ arrangements. We would also clarify and tighten the law to ensure that in the event of a construction company failure, subcontractors could get access to their tools as fast as possible. [Bell rung]

The CHAIRPERSON (Lindsay Tisch): I call the Hon David Cunliffe.

Thank you. I appreciate the opportunity to continue the exposition of this debate.

Following consultation with the industry on these options, Labour put forward as Supplementary Order Paper 439, in the name of the Hon Clayton Cosgrove, the requirement that retention money for commercial and industrial developments be held in trust for the benefit of the subcontractor entitled to the money. The Minister for Building and Housing has, in effect, piggybacked on Labour’s proposal, adding provisions, via a Supplementary Order Paper that he has put forward, for retentions now to be held in trust. The Supplementary Order Papers that are before us include Supplementary Order Paper 439 from the Hon Clayton Cosgrove, released on 17 April; Supplementary Order Paper 446 from Julie Anne Genter; and Supplementary Order Paper 52 from the Hon Nick Smith. Mr Cosgrove’s Supplementary Order Paper inserts new clause 9B, which would create new section 24AA requiring “retention money for commercial and industrial developments to be held in trust”. The Minister’s Supplementary Order Paper provides provision for “retentions being money withheld by one party to a construction contract from money payable to another …”—so that is, in effect, the other option.

Can I turn now, briefly, to the Commerce Committee’s report. The committee considered this bill at some length, and it has done, I think it is fair to say, a pretty comprehensive report given the size of the bill. It has turned its mind, firstly, to the purposes of the bill: to remove the distinctions between residential and commercial contracts, as I said; to extend the scope of the Act to apply to contracts for design, engineering, and quantity surveying work; to remove the distinction between enforcement of payment determinations and of those relating to rights and obligations that are not payment related; and to speed up and make more efficient the enforcement process, particularly for residential contracts, as we described earlier.

The committee first turned its mind to a range of provisions relating to adjudication. It was worried about so-called ambush claims in the tight time frames that the Act set out, so it therefore proposed to insert by amendment new clause 13A changing the time frame from 2 to 5 working days—

The CHAIRPERSON (Lindsay Tisch): That is in Part 2.

In Part 2?

The CHAIRPERSON (Lindsay Tisch): Well, we are not on Part 2. We are on Part 1.

We are on Part 1; you are quite right, Mr Chair. I will restrict myself to Part 1. So we will leave it to a further call to trace through some of the select committee’s amendments, and I will return, then, to the final purpose of the bill, which is to ensure that the process is smooth, that the risk is fair and to be shared, and that the time frames achieve the right balance between avoiding ambush and providing for a speedy resolution of complaints, which are common in the industry.

How common? Well, our regulatory impact statement indicated that the authorised nominating authorities under the current Act have heard nearly 700 claims under the Act since it was set up—nearly 700 claims, which are, by definition, commercial and do not extend to residential claims. They will be significant in quantum. They are important, and the Committee’s time is well used in trying to improve this area of law. I thank you for the opportunity to comment on this stage of the bill, and I look forward to further comment as we get into subsequent parts. Thank you.

I move, That the question be now put.