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Construction and Projects Disputes Update – November 2015

Home Insights Construction and Projects Disputes Update – November 2015

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Contributed by: Polly Pope and Michelle Mau

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Published on: November 03, 2015

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Points of interest

  • Amendments to the Construction Contracts Act 2002 pass, including provisions requiring retentions to be held on trust
  • The Ministry of Education’s claim against Carter Holt Harvey reaches the Court of Appeal
  • Payments by a financier to a contractor under a direct payment agreement are clawed back by the liquidators of a developer

Legislation

Construction Contracts Amendment Act 2015

The Construction Contracts Amendment Bill received royal assent on 22 October 2015. Subcontractors will likely benefit from the passage of the Bill as it is aimed at providing improved security of payment and better access to dispute resolution. The key changes include:

  • Retentions: From 31 March 2017, all retention money in relation to a commercial construction contract (above the de minimis amount to be prescribed by regulation) is required to be held in trust, in the form of cash or other liquid assets. The retention money cannot be appropriated to a use other than to remedy defects. However, it is not required to be paid into a separate trust account and may be commingled with other moneys.
  • Residential contracts: From 1 December 2015, certain measures for securing payment (including the ability to seek approval for charging orders) that were previously available exclusively to commercial construction contracts will also be available to residential construction contracts.
  • Scope of services: From 1 September 2016, coverage of the Construction Contracts Act 2002 will be extended to design, engineering and quantity surveying work.  
  • Adjudication: From 1 December 2015, changes to the adjudication process aimed at limiting opportunities for “ambush claims”, will apply, including:
    • Extending the timeframe for selecting an adjudicator;
    • Requiring a notice of adjudication and a notice of acceptance to be in a form prescribed by regulation; and
    • Setting default timeframes for serving a response to adjudication claim and a reply to a response to adjudication claim.

A copy of the Construction Contracts Amendment Act 2015 can be found here.

Building (Earthquake-prone Buildings) Amendment Bill

The Building (Earthquake-prone Buildings) Amendment Bill proposes amendments to the Building Act 2004 to improve the system for managing earthquake-prone buildings. It stemmed from recommendations from the Canterbury Earthquakes Royal Commission.

On 2 September 2015, the Local Government and Environment Committee reported back to Parliament with substantial amendments to the Bill. The most significant changes to the policy contained in the Bill include extending the time for assessing and strengthening earthquake-prone buildings. A copy of the Select Committee Report can be found here.

 


New Cases

Building product manufacturers may owe a duty of care to end-consumers and claims against them are not subject to the 10-year Building Act 2004 limitation

Carter Holt Harvey Limited’s fight to have claims brought against it by the Ministry of Education relating to the supply of allegedly defective cladding struck out reached the Court of Appeal. Notably, the Court’s conclusions included:

  • It is arguable that Carter Holt may owe a duty of care to the Ministry as end-consumers. There were some factors which pointed against the existence of a duty of care – such as the fact that building components were supplied by commercial parties subject to no duties under the Building Act 2004, who had the potential capacity and opportunity to negotiate for contractual terms dealing with liability. However, the key factors in favour of a duty of care, of foreseeability and proximity, were made out.
  • It is arguable that cladding is a “good” to which the Consumer Guarantees Act 1993 applies, and that it could have been supplied in a way that brought it within the scope of that Act. This issue is far from resolved – effectively the Court’s conclusion is that the issues require evidence and careful examination at a trial.
  • The 10-year “longstop” limitation period under the Building Act 2004, after which claims relating to “building work” cannot be made, does not apply to claims against manufacturers and suppliers of building products.

Carter Holt has sought leave from the Supreme Court to appeal the decision.

Carter Holt Harvey Ltd v Minister of Education [2015] NZCA 321

Arbitrator’s decision stands despite breach of natural justice

The Court of Appeal held that an arbitrator breached the principles of natural justice when he inspected premises, the subject of a rent review arbitration, with a witness for only one of parties, without the other party being present. However, the Court declined to set aside the arbitral award as it was satisfied that this did not have any material effect on the outcome of the arbitration. 

The case highlights that a finding of a breach of the rules of natural justice does not mean that an arbitral award must be set aside. The power of the courts to set aside an arbitral award in such circumstances is discretionary. The discretion enables the court to evaluate the nature and impact of the particular breach in deciding whether the award should be set aside. As a matter of policy, the courts will encourage the finality of arbitral awards, which weighs against setting aside awards where the breach is relatively immaterial, or not likely to have affected the outcome. Similarly, an award may not be set aside when the costs and delays involved would be disproportionate in the context of the dispute.

Kyburn Investments Ltd v Beca Corporate Holdings Ltd [2015] NZCA 290

Construction company issues summary judgment proceedings for unpaid amounts notwithstanding arbitration clause

The High Court recently considered whether summary judgment for amounts claimed under a construction contract (when the defendant had failed to submit a payment schedule) would be available to a plaintiff notwithstanding an arbitration clause in the construction contract.

The plaintiff claimed that there was no "dispute" that needed to be submitted to arbitration. The High Court applied the interpretation of Article 8(1) of Schedule 1 of the Arbitration Act 1996 adopted by the Supreme Court in Zurich Australian Insurance Ltd v Cognition Education Limited [2014] NZSC 188, that, High Court proceedings must be stayed unless the Court finds that the arbitration agreement is null and void, inoperative or incapable of being performed or it is immediately demonstrable either that the defendant is not acting bona fide in asserting that there is a dispute or that there is, in reality, no dispute. The defendant was able to show that there was a dispute regarding the validity of the payment claim (regardless of whether or not it had an arguable defence) so the application to dismiss the proceeding was granted.

Teak Construction Ltd v Andrew Brands Ltd [2015] NZHC 2312

Payments made pursuant to a direct payment agreement held to be voidable transactions

The High Court has confirmed that payments by a financier to a contractor under a direct payment agreement may be clawed back by liquidators of the developer.

This seems to be the first time that the courts have considered the application of the voidable transactions regime to direct payment agreements. A key question in the case was whether the payments by the financiers were insolvent transactions of a developer company. The Court found they were – the financier did not owe the contractor an independent obligation.

The case again highlights the need for participants in the construction industry to understand and manage the risks to them from the insolvency of a counterparty.

Sanson v Ebert Construction Ltd [2015] NZHC 2014

 

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This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.

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