06 Dec

GREATER SECURITY FOR SUBCONTRACTORS – REALLY?

alan-johnston-columnIt was with a great deal of interest, and a fair sprinkling of scepticism, that I read last month that the Government was going to amend the Construction Contracts Act 2002, with a view to imposing a trust obligation on retentions.

Reaction from various parties affected by the move included subcontractors being “overjoyed” by the news; that the law changes were long overdue; and confidence that these changes would bring “improved certainty and stability” to the construction sector.

I’m not so sure. Let’s go back to when the Act was passed in 2002 (and implemented in 2003). The purpose of the Act was to reform the law relating to construction contracts, and in particular to:

  1. Facilitate regular and timely payment between the parties to a construction contract.
  2. Provide for the speedy resolution of disputes arising under a construction contract.
  3. Provide remedies for the recovery of payments under a construction contract.

The Act, in principal, was met with great acclaim at the time, particularly by the subcontractors, and was seen as the answer to many of the problems being encountered by them – in particular the removal of the “paid when paid” clauses which contractors often used to delay or reduce payments to subbies, and the subbies’ right to discontinue work on the site if payment wasn’t forthcoming within acceptable timeframes.

So why was it that subcontractors continued to lose huge amounts of money when contracting and developing companies fell over? The main reason, in my view, was that subcontractors failed to invoke their rights under the CCA at an early enough stage, for fear of losing what they saw as a profitable ongoing business supply arrangement.

In essence then, while the Act was a great step forward for the construction industry, its effectiveness is determined by the intended beneficiaries, and the extent they are prepared to go to, to enforce their rights.

Which brings me to the latest Amendment, and what I see as the critical difference between it being a godsend for the industry, or just another tool which will be useful only if the intent is honoured by those responsible for administering it.

I would also like to point out the obvious at this stage, in that my comments are only directed at the small number of companies who go bust in the industry. For everyone else, it will be “business as usual” under the new rules.

So what is the crux of the Amendment?

The Amendment Bill currently before Parliament would impose a trust obligation on retention money, preventing it from being used for other purposes, and impose penalties where funds were used for purposes unrelated to the project.” (Nick Smith, Building & Construction Minister, September 2014)

So far so good! Smith then goes on to say;

Retention funds would not be required to be put into a separate bank account or lawyer’s trust fund, as the cost of compliance would be too high. Putting a trust obligation into the law makes plain these moneys are not to be used inappropriately and should take priority over other creditors in the event of liquidation.

Finally:

This law change is about ensuring the billions held in retentions is responsibly managed.

I’m sorry Mr Smith, but I fail to see how leaving the retention funds in the hands of the developers and contractors to “manage responsibly” will have the desired effect?

At this point, I must be honest and say that I haven’t read the Bill in its entirety, but unless there is a regular, current independent audit system in place to ensure these retention funds remain in trust (and there is no suggestion there is) then I would imagine we will end up with the same scenario that plays out in nearly every construction liquidation I have seen where every drop is squeezed out of a business before it fails.

Forget the penalties that can be imposed. There are enough penalties in law now for culpable directors and owners of companies who run them into the ground while trading recklessly and insolvently. However these are seldom enforced, due to the high cost of taking the action and the likelihood of there being little, or no, remedial funds available at the end of the judgment and ultimate bankruptcy process.

I hope I am proved wrong. However, at this stage I cannot see this Amendment being the panacea it is made out to be. As long as retention funds continue to be controlled by and remain accessible to (in “trust” or not) the very people they are designed to be protected from, then I can’t really see the status quo changing.

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Alan Johnston is General Manager, CreditWorks Data Solutions Ltd, and has been involved in credit management for over 35 years. In 2011 he was presented with the NZCFI Credit Professional of the Year Award, for his achievements within the credit industry. Email him at alan.johnston@creditworks.co.nz or call him on 09 520 8133 to find out more.

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