Construction Contracts Amendment Bill

That seems a very sensible way to move forward. I just want to talk about the work that Clayton Cosgrove did on this after the Mainzeal Property and Construction collapse. He looked at two options for dealing with this issue of retentions: one was contractors’ liens, where contractors would be legally required to retain a portion of the money that they owed to the subcontractors, and the second option that he worked on was statutory construction trusts. So these would be trusts that are required by law to be set up, where money would flow through that trust to ensure that the subcontractor gets paid first in the event of something like a company collapse. That solution that Mr Cosgrove proposed would apply to significant commercial construction projects—projects of a really significant size, not your garden-variety, standard home construction.

The other issue that Mr Cosgrove identified was the need to protect contractors’ tools, because there are so many operators in the construction industry who are, essentially, sole operators. Their tools, their vehicle, and their goodwill are all they have got, and if they lose their tools, as happened to many contractors with the Mainzeal Property and Construction collapse, then they are between a rock and a hard place. So that was the other really important thing.

I know that the Minister has been studying up on the Supplementary Order Paper. Really, for the purposes of this debate this afternoon, what we have got is a huge rewrite of this bill. It is a massive rewrite, and I am not complaining about that. It is good that the Minister has come around, because, actually, I think there is not much space between the Minister’s Supplementary Order Paper 106 and the Supplementary Order Papers that Clayton Cosgrove and Julie Anne Genter brought to the House. But it is that space that I think would be really interesting to explore, so I welcome the Minister’s comments on that.

So Clayton Cosgrove’s Supplementary Order Paper 439—basically, what it does is it requires “retention money for commercial and industrial developments to be held in trust” for the benefit of the contractor entitled to the money. Basically, it provides the opportunity for the Governor-General by Order in Council to require retention money for these developments to be held in trust and to require that the head contractor holds the retention money in an independent trust account. So it is quite specific. The money has to be held in an independent trust account. Also, it provides for procedures to be followed in connection with the authorisation of payments, the keeping of records in relation to that trust account, and the resolution of disputes. So that is Clayton Cosgrove’s Supplementary Order Paper.

Also, Julie Anne Genter has brought to the House Supplementary Order Paper 446. What this does is it amends the bill to deal with the withholding of retention payments, and it does so by making it clear that “where a construction contract provides for the provision of retentions, these are clearly identified in any payment schedule.” It also proposes a new section that “qualifies the status of retention monies and the basis on which they may be held.” Again, it basically provides the power for regulations to be made for this. The problem currently, with the current Act, is that there is no provision for any reference to the status of retention funds, even though they are held against work that is performed by the subcontractor. Often the problem is that they are held far longer than is necessary.

It needs to be said, as well, that the underlying reason for this is that the practice has been rife in the industry that companies’ head contractors have used retentions for their own cash flow. They have used the retentions. Often the money that has been held for subcontractors has been used to leverage other investments and, basically, to provide the cash flow. So when things are difficult, when the market takes a dive—and we all know that the construction industry in this country has a wild, roller-coaster, boom-and-bust cycle. That, I suppose, is the other really important part of this.

So we have got those two Supplementary Order Papers by Clayton Cosgrove and Julie Anne Genter. What we see in Supplementary Order Paper 106, which the Minister has brought to the Table, is, I think, quite a wholesale incorporation of the material in those two Supplementary Order Papers. It defines the “retention money”. It requires the party to hold that money on trust. It provides that the trust only ends—

It was no great surprise that the area of retention payments was going to be traversed quite strongly, I think, in this debate. So we have our Supplementary Order Paper 106 from the Minister for Building and Housing, which is what I will touch upon here. There were some Supplementary Order Papers from other members, including the Hon Clayton Cosgrove. Our position on this will be that the measures that the Government is proposing in our Supplementary Order Paper are adequate and, in fact, are comprehensive in helping to protect the moneys that are owed for those contractors who are doing work—those people in charge of construction work.

So if we look into the actual provisions in terms of what will be done, section 18A through to section 18H in proposed clause 8BC is really dealing with this notion that moneys that are owed to that contractor, or those contractors—and we express them in terms of party A, with party A being the construction company or the company owning the construction development—and party B being the contractor providing services and, therefore, being a creditor to party A. So party A is required to hold moneys that would be owed, or retention moneys, in a trust for work done that will eventually be due to party B so that they cannot be used as normal cash flow or normal cash resources for party A. They do not have to be held in a separate trust, but they must be held for specific purposes.

Proposed clause 18E is very, very clear that “Party A must not appropriate any retention money to a use other than to remedy defects in the performance of party B’s obligations under the contract.” So they cannot use the moneys they are holding in trust to take away from party B in any other fashion, other than where there is an agreement that party B has failed to meet the standard of work—the quality of work or the outcomes—that they were contracted to do. But there is a note that although they cannot use the money for other purposes other than to address the defects and performance of party B, the money does not have to be held in a separate trust account and it can in fact be commingled with other moneys in the trust, including retentions for other contractors.

It is important, and it is provided for in proposed clause 18D, that not only must party A keep proper accounting records of the retention moneys that are held in that trust, they must make those available to party B at all reasonable times and without charge so that party B can have confidence that the moneys that are being held and that will become due to party B in time are still there and available to them when that time comes.

Another proposed clause that is extremely important to this whole approach to dealing with retentions relates to the protection of that money. Proposed clause 18H states very clearly that “Retention money—(a) is not available for the payment of debts of any creditor of party A (other than party B):”. So although moneys might be commingled in the trust, that which is held for a specific contractor cannot be used to make any other payments to any other creditor, including another contractor. It also says: “Retention money— … (b) is not liable to be attached or taken in execution under the order or process of any court at the instance of any creditor of party A (other than party B).” So another creditor of party A cannot have an order to take funds that are held in trust for party B—in this case, this particular contractor.

So what have we achieved? Well, without requiring the extensive compliance and compliance cost that would be accrued under Supplementary Order Paper 439 from the Hon Clayton Cosgrove, with separate trusts for all of these contracts, we still have the provisions that ensure that the moneys held in a trust can be used or withheld only for performance issues of the work of the specific contractor. It cannot be used to pay the debts to any other creditor, and another creditor cannot go to court and get an order to take from that pool of retention moneys money for another contractor. So their money is secured, and it is secured against the contractor that is obviously doing the work that they have been contracted to perform, and to the standard that is required. So we have achieved that which I think all parties want to achieve with retentions, and we have done it in a way that meets the test of ensuring that both parties have the right protections and without the unnecessary enlarged compliance cost that would come if we required every contract to be held in separate trusts. So I will leave it there. Thank you.

I want to speak to Part 2 of the bill, and in particular to the adjudication clauses. Before I start I have got what I consider to be quite an important question for the Chair, who I—

The CHAIRPERSON (Hon Trevor Mallard): I think you mean the Minister in the chair.

Sorry, not you, Mr Chair—although you are welcome to have a go—but the Minister in the chair, Simon Bridges, who I am sure is not just a pretty face. The officials are actually here. This is a serious question and I hope it can be answered quite easily.

The CHAIRPERSON (Hon Trevor Mallard): I am going to interrupt the member now. I have reflected on the comment that she made. There has been a bit of a problem this afternoon with some comments, and in respect of the comment she just made about the Minister, I think that if she reflected on whether it would have been an appropriate comment if the genders had been reversed, she would have taken offence. So I am just going to ask the member to take care.

Well, I will apologise for that comment. What I would like to ask the Minister in the chair, or the officials, though, is with regard to the Minister for Building and Housing’s Supplementary Order Paper and to the explanatory note. The most substantial part of this Supplementary Order Paper was around changes to the retentions part of the bill. But it also said that there were other minor and technical changes. When you look at Part 2, particularly with regard to the adjudication of disputes—which runs from proposed clause 10A through to probably around clause 18, or perhaps even beyond that, pretty much up to Subpart 4 of that Part 2—there appear to be changes. But because we have not had an opportunity to have a select committee briefing on this, what I want to know is whether the changes in that part with regard to the adjudication provisions are just very minor, or whether they go to any substantive changes.

The reason I am asking is, as the officials will be aware, that in the select committee there was a lot of discussion around this part of the bill and there were a lot of submissions. We had some private submissions given, and there was a lot of discussion and changes that were made during that part of the bill. I just want to draw the Minister’s attention to the reason for this, and the problem that was being solved was that—and this goes to enforcement—under the existing provisions in the Act, enforcement of a determination about payment is time-consuming and costly. So determinations about rights and obligations disputes have ended up not being able to be enforced and have ended up being reheard in court.

The whole purpose of this part of the bill—and, in fact, when you think about it, a lot of the reasoning behind making these changes to the Act in general—has been about trying to tighten up the enforcement part and the adjudication, and how that process works in practice. So what I am concerned about is knowing, and being reassured as a member of that select committee who took this seriously, whether there are any changes in this part. Are they very minor and technical or are there any substantive changes, and, if so, can the Minister tell us what they are? So I am hoping that after I have made my contribution that he at least will be able to give me possibly a yes or no answer.

So, just quickly, to give the Committee an indication of the importance of this—and I think the Minister who was in the chair previously did actually address this the last time we had the discussion at the Committee stage on this, which I think was last night or the night before; it all seems a bit of a blur—we talked about ambush claims. One of the other problems we were trying to ensure we did not create so that there were not unintended consequences was that there would be opportunities for ambush claims by people trying to abuse the process. We talked about the way that adjudication works now. Currently, the claimants can set adjudication in motion within 1 working day, and the respondent is required to reply within 5 working days. Residential owners and smaller contractors are particularly vulnerable to ambush as they are not likely to be familiar with the provisions of the Act. Our recommendations were to add new clauses that changed the time frame for selecting an adjudicator from 2 working days to 5 working days after the notice of adjudication had been served where both the parties cannot agree on the appointment. That was described as being a pause in the process. Even though it is several years ago, I do remember there being quite a lot of discussion around how that would work and whether that would work.

Then it went through a quite detailed process—and I acknowledge the work the officials did on this, because it was quite a detailed process—as to how that would actually play out and how the adjudicator would be appointed, and, once they had been appointed, what process would happen then. Then the eligibility criteria were gone through, in terms of who was eligible and who was not eligible, what were the rules around that, and then the time frames for adjudication. And then the fairness—it is basically all the fairness provisions in this process, so that there could be extensions of time, and then around cost and the knowledge of the cost, so that there were not going to be surprises in this process. We talked quite a lot about pre-adjudication and whether there should be a pre-adjudication conference. I remember there was, again, a big discussion about that.

I do not want to take up the time of the Committee tonight by going into great depth around this, but we felt comfortable with this part of the bill. We were not happy about the fact that retentions were not in the bill. But what I do want to be reassured about is whether any changes that have been made by the Minister’s Supplementary Order Paper to this part of the bill are minor and technical, without any of the amendments changing the intent of the select committee, or is there any greater impact that we should know about? So that is what I am asking the Minister for tonight—his advice to the Committee. Thank you.

It is a pleasure to take a call in the Committee stage of this Construction Contracts Amendment Bill. We have been covering the issue of retention money, which was inserted initially through the good work of our good colleague here on our side the Hon Clayton Cosgrove. He sounded out many in the construction community—particularly, subcontractors up and down the country. It was very clear from the business community that subcontractors really needed greater protection in terms of getting paid. Ultimately, you would like to think that if you were a subcontractor and put in a hard day’s work, you would get a fair day’s pay. This has been a concern because we have seen many developers go out of business up and down this country—they go broke, the money disappears, and, unfortunately, the subcontractors do not get paid. Usually it is the subcontractors, because, typically, it can cascade in many, many different ways to include many different business people. Ultimately, that is a travesty.

Mr Cosgrove was attempting—and I think he actually proposed a very good amendment in his Supplementary Order Paper—to alleviate that situation and to provide assurance and protection to subcontractors. But looking at the Supplementary Order Paper put forward by the Minister, from my quick cursory read of proposed Subpart 2A on Supplementary Order Paper 106, this retention money part—we have a saying in Māoridom—has more holes in it than a hīnaki. For those of you who do not know, a hīnaki is an eel net. There are a mighty lot of holes in that eel net. My whanaunga Peeni Henare will know this very well because they are great catchers of eels up in the north, my whanaunga up there. This subpart dealing with retention money has more holes in it than a hīnaki, because, just from my quick read of this subpart, it is illusory still.

There is another very, very well-known saying—that possession is nine-tenths of the law. What Mr Cosgrove was trying to achieve through his Supplementary Order Paper was: “Let’s put the retention money into a separate trust account that is protected, so that if something were to go awry or a dispute were to arise but is ultimately sorted out, that money would be paid through to the contractor.” This subpart is illusory still. When you think of developers and when you think of big major construction contractors, we are not dealing with boy scouts. We are not necessarily dealing with upstanding individuals; we are dealing with hard-core commercial businessmen. This is not tiddlywinks that they are playing here; it is a very, very tough game, and head contractors are very sharp businessmen.

Here in this subpart I do not really see any protection for subcontractors, because, just to take an example, all retention moneys must be held in trust—must be held in trust, OK—for the benefit of the other party. However, that money can be cash or it could be liquid assets—liquid assets that could be convertible to cash. Again, we are dealing with some sharp business people here. There are many, many different ways that you could skin a cat when you are looking through these provisions, and there are many ways that you could—oh, and there is another requirement about “must keep accounting records”. Well, there are many ways that a sharp developer could do this. You could literally drive a truck through these so-called protections and the delivery of retention money—cold, hard cash payments—to subcontractors. Actually, you do not have to keep cash aside; you can say “Oh, OK. I’m holding these”, let us say, shares in whatever, or some other easily liquidated asset that may not actually eventuate. That will not satisfy a subcontractor.

The other aspect is that the money does not need to be kept in a separate trust account. So you can just say: “Yes, we have this money. It’s in trust and it’s not in cash. It’s in liquid assets and it’s commingled with other liquid assets.” Under the provisions here, you can mix it all up and slush it all around with goodness knows what other liquid assets a head developer or head contractor may have, in the illusion that that will satisfy payment to this poor subcontractor.

I will get back to my point: possession is nine-tenths of the law. Mr Cosgrove said: “Look, to ensure payment and to ensure protection to subcontractors, let’s ensure that there are these moneys actually set aside in a separate trust account so that it is actually there to be paid out.” That would give confidence to subcontractors. Yes, if someone has all their capital invested in their heavy machinery, which is doing a lot of work, they want to make sure that they are going to get paid and, likewise, they have all the other subbies underneath them whom they have to pay.

There are so many holes in this provision that it is actually sad for the expectant subcontractors, who thought that they were going to get something from this legislation. Actually, I have no trust in this part. I cannot help but think of a story that was on Campbell Live around about a year ago, I think it was, about a contractor in Christchurch who was in heavy digging. He was contracted to put together a Countdown carpark. There was a so-called dispute with the head developer, and he was not paid. He worked on this for months, and he committed a sizable amount of his capital—no doubt, he was actually heavily indebted to do this big job. He was strung out and strung out and strung out—basically, he was shafted by the head contractor. He was driven to the point where he was so upset that he dug up the carpark. He said: “Well, look. If I’m not going to get paid for this carpark, what choice do I have?”. He went out there and dug up the carpark.

Under the provisions of this bill, I can see that situation arising again because there is no real protection that I can see in the provisions of this so-called retention money section. Yes, let us keep the trust money separate, let us make sure it is there, and let us make sure it is actually changeable and readily available for those subcontractors who are business people and family men and women, just like everyone up and down the country. They are out there just trying to get ahead, pay their way, run their businesses, and do good for all of our country. Kia ora tātou.

The question was put that the amendments set out on Supplementary Order Paper 106 in the name of the Hon Dr Nick Smith to Part 2 be agreed to.

Amendments agreed to.

The question was put that the amendment set out on Supplementary Order Paper 439 in the name of the Hon Clayton Cosgrove to Part 2 be agreed to.

Amendment not agreed to.

The question was put that the amendments set out on Supplementary Order Paper 446 in the name of Julie Anne Genter to Part 2 be agreed to.

Amendments not agreed to.

Part 2 as amended agreed to.

The question was put that the amendments set out on Supplementary Order Paper 106 in the name of the Hon Dr Nick Smith to Part 3 be agreed to.

Amendments agreed to.

Part 3 as amended agreed to.

The question was put that the amendments set out on Supplementary Order Paper 106 in the name of the Hon Dr Nick Smith to the schedule be agreed to.

Amendments agreed to.

Schedule as amended agreed to.

Clause 1 agreed to.

The question was put that the amendments set out on Supplementary Order Paper 106 in the name of the Hon Dr Nick Smith to clause 2 be agreed to.

Amendments agreed to.

Clause 2 as amended agreed to.

Clause 3 agreed to.

Bill to be reported with amendment presently.

House resumed.

The Chairperson reported the Gambling Amendment Bill (No 3) with amendment, the Construction Contracts Amendment Bill with amendment, no progress on the Radio New Zealand Amendment Bill, and no progress on the Weathertight Homes Resolution Services Amendment Bill.

Report adopted.