The End of Slow Payers and No Payers --Kiwis Lead the Way in the Building and Construction Industry: Proposed New Zealand Laws Promise to Expedite Payments Down the Building Food Chain to the Benefit of All. (Debt Management)
Degerholm, Peter, Journal of Banking and Financial Services
Payment behaviour in the New Zealand building industry is about to fundamentally change for the better. The proposed Construction Contracts Act will introduce transparency and accountability to the process, as well as removing the most common obstacles to the flow of payments.
At the time of writing the legislation was known as the Construction Contracts Bill 2001, a government bill sponsored by the Associate Minister of Commerce, the Hon Laila Harre. The bill had been unanimously approved by Select Committee and was expected to pass through its final stages by May 2002.
A snapshot of the Act
The Act focuses on improving cash flow, through three main provisions:
> Facilitating regular and timely payments between the parties to a construction contract by providing default payment terms that apply when a contract is silent on a particular aspect. Under the Act, a payer becomes liable for payment of a claim unless he or she provides a written payment schedule before the payment due date. This details how the payment was calculated and, most importantly, states the reasons for any amount(s) not approved for payment or deductions made. The Act also renders any provisions making payment conditional on receiving payment from a third party (the infamous "pay when paid" clause) legally ineffective.
> Providing for the speedy resolution of disputes through a fast-track adjudication process. This allows a party to refer a payment dispute to an adjudicator, who must give a binding determination within 30 days. The adjudication process should allow disputes to be resolved while they are small, and avoid the delays and high costs of arbitration and court action. If a party is unhappy with the adjudicator's determination, the matter can be appealed to arbitration or to court, but only after payment has been made.
> Providing remedies for the recovery of payments under a construction contract. These provide a statutory right to suspend work while payment is overdue, to undertake processes to enforce payments, and to place charging orders on land or money.
Who it affects
I have identified the following generic parties in a typical project:
The principal is the owner or developer, who may even be a homeowner carrying out alterations. Usually the principal engages a contractor under a head contract, or main contract. The contractor in turn engages a mix of direct employees and specialist subcontractors to perform the work.
The principal often engages consultants--professionals such as an architect, engineer, quantity surveyor or professional project manager to carry out the design and administration of the project.
The Act applies to all "construction contracts". On a typical project the principal has a construction contract with the contractor, who in turn has a construction contract with each of the 30 or so subcontractors performing specialist trade work. There may be lower tier construction contracts involving sub-subcontractors. On a project the contractor will have obligations as payee to the principal, and as payer to its subcontractors.
The definition of a construction contract, although wide, does not cover the supply of materials, or professional services such as the contract between the principal and its consultants.
If the work is on a house in which the principal is homeowner or intends to reside, the contractor will have a residential construction contract, with special payee obligations, having regard to the principal's rights as a consumer. However, all subcontracts on that project, being business to business arrangements, will be commercial construction contracts.
The Act will apply to all new construction contracts following a three-month transition period.
Why the cheques get lost in the mail
Some payment blockages are the result of the principal's failure to pay the contractor, but contractors generally fare much better than their subcontractors. …