Contractor

Kensington Swan: The legal perspective on construction sector in 2016

Sam McCutcheon Solicitor and Arie Moore Associate Kensington Swan’s Construction Team Contractor Magazine

Solicitor Sam McCutcheon and Associate Arie Moore of Kensington Swan’s construction team reflect on legal developments

AS WE ENTER 2016 it is worthwhile reflecting on the past year and there have been a number of developments in the construction sector that have helped to shape the current industry position.

There is no shortage of reports which discuss the construction industry as the star of the economy. These generally highlight areas of concentrated growth in Auckland and Christchurch, although other regions have also been developing in their own right. Looking forward, the prediction is towards sustained growth, especially in infrastructure as the government and developers look to upgrade current assets and prepare for future expansion.

On the legal front 2015 was marked by three areas, all of which coincidentally begin with the letter L: legislation; liquidation; and liquidated damages.

Legislation

The amendments to the Construction Contracts Act 2002 are some of the most significant legislative changes we have seen since the Act was introduced. We provided a summary of these changes in the November edition of Contractor and while not all of the changes come into effect immediately there are a few amendments that have applied from December 2015. One of these is the requirement to serve a prescribed notice with ‘all’ payment claims for contracts entered or renewed after December 1, 2015. This must now be complied with.

Further significant changes include the broadening of the Act to include designers, engineers and quantity surveyors that will occur from September this year, and the much-discussed retention scheme that will apply from April 2017. There are a number of questions around this retention trust scheme and these are likely to be answered in 2016.

Liquidation

Liquidation received a high level of judicial attention in 2015.

First in the Hiway Stabilizers case, the Supreme Court provided clarity around when a contractor will have given value in relation to the voidable transactions regime. This case clarified that the good faith defence in section 296 of the Companies Act 1993 is still available where a contractor has provided goods or services before receiving payment from the insolvent company. This has been a welcome decision for the contracting industry as it has reduced the scope of claw back by liquidators.

In the second case, the High Court provided comment on the voidable effect of direct agreements between financiers, developers and contractors. In this case the liquidators of a development company were able to recover a payment that was made directly to the contractor from the financier (ie, no money went through the insolvent development company). This has significant implications for project funding arrangements and contractors have less payment security under direct agreements than once thought.

Liquidated damages

Finally, a comment needs to given on the developments around liquidated damages, or LDs. You will be familiar with LDs in construction contracts. They are usually imposed on a contractor who does not complete in the time specified.

The test of whether an LD amount is enforceable has traditionally been determined by assessing whether the amount was a genuine pre-estimate of the principal’s loss; if it was not, the LD amount was held to be a penalty and unenforceable.

Recently this has been fundamentally changed by the UK Supreme Court. Instead the Court took a new approach and assessed whether the amount of LDs was ‘out of all proportion’ to any interest in enforcement of the obligation. The Australian court system is currently hearing a case based on similar principles in relation to banking fees and it will be interesting to see whether the Australian courts adopt this UK approach.

In our view the UK approach is a welcome decision. It represents a commercially pragmatic approach that preserves parties’ freedom of contract. This UK decision has not yet been considered in New Zealand although we hope the New Zealand courts will adopt a similar direction if the opportunity arises in future.

The year ahead

Putting aside the CCA amendments, the obvious legal change will be in Health and Safety. This is looking to impose much wider implications on a much broader group of people (including company directors). If you haven’t got on top of these pending changes then this would be a worthwhile new year’s resolution.

Looking a bit wider we can expect technology to play a more important role in projects. Electronic project management software is commonplace these days and has proven extremely useful on larger projects. Building Information Modelling (or BIM) is beginning to have a major role in vertical construction and it is not a far stretch to see the value from this technology becoming widely used in the horizontal infrastructure sphere as well.

In terms of emerging technologies, prefabrication is fast becoming a cost-effective way to reduce build time and cost. While there is currently limited use of this in civil works it presents an innovation to watch with interest.

It is likely that project funding will be under review following the liquidation decision mentioned above. As demand for construction services grows principals are continually looking for innovative ways to finance developments and 2016 is likely to see further variations to the traditional funding models.

One final area that is long overdue for a shake-up is dispute management. Disputes can be costly and time consuming; the more disputes that can be minimised the more successful a project will become. While dispute management begins with quality contract drafting, a number of other mechanisms are being adopted to reduce the occurrence of, or impact from, disputes.

Two developing measures are the use of dispute resolution boards, or dispute avoidance boards. These can take on a number of different shapes and forms depending on the contractual and project requirements, although the primary objective is to resolve (or avoid) disputes at an early stage. The idea behind these mechanisms is to present the parties with an informed, independent opinion at an early stage of disagreement. This initial direction gives the parties an indication on the likely outcome and can refocus their intentions on achieving the project objectives.

Any way you look at it the construction industry continues to be an exciting area to be involved in.


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