Perspectives 2020 – a legal report
By Stuart Robertson, partner, and James France, solicitor, in Dentons Kensington Swan’s Construction and Major Projects team.
The 2020 year entailed a lot of different things for different people. We might all agree, however, that it has been the most ‘noteworthy’ in a number of years, and many will be breathing a sigh of relief as it comes to an end.
But the troubles we have faced in 2020 did not end on 31 December. Covid-19 will continue to affect the market – and (fundamentally) the people working within it – for some time to come. We go into 2021 prepared to ‘keep on, keeping on’, while expecting the unexpected.
And while the pandemic is hugely significant, there are other matters on the construction sector’s horizon. This article gives our brief legal perspective on the year just been and what we think 2021 may have in store for the construction industry.
Reflecting on our predictions for 2020
Last year we predicted that there would be legislative reform of some sort and mentioned that we were yet to see what MBIE had in mind for the Construction Contracts Act 2002 (CCA) retentions regime.
There was certainly quite a flurry of legislation thanks to Covid (which, to confess, we did not predict). However, MBIE did release its recommendations on improvements to the CCA retentions regime, including the preparation of a draft Bill. These are discussed below.
We predicted more insolvencies, simply on the basis that low margins and often unfair risk allocations are still prevalent, despite many positive initiatives. Unfortunately, more insolvencies have occurred this year – although for this the pandemic must share some of the blame.
We also predicted that the new Government initiatives – the Construction Sector Accord (Accord) and Infrastructure Commission – would begin to make a positive impact on the industry. This prediction has turned out to be correct, but through the unexpected lens of Covid. These initiatives cut their teeth on the effects of the pandemic, and (we think) made positive contributions to the stability of the sector during lockdown and in its wake, as discussed below.
The 2020 year in review
Construction contracts and Covid-19
Plenty of ink has been spilled elsewhere on Covid-19 and construction contracts, so we will keep these comments brief. Construction contracts were not ready for the pandemic, which could not feasibly have been legislated for in advance. Even now contracting parties struggle to determine how the risks should fall if another lockdown arises.
In the public sector, what might have been a cacophony of varying approaches across ministries and departments was avoided by MBIE issuing guidance to these entities addressing the costs and delays arising from the lockdown under NZS 3910:2013.
While we are aware anecdotally of plenty of disputed claims within the public sector, generally the MBIE advice seems to have been followed.
In the private sector, some debate continues to simmer as to whether lockdown under Alert Level four has entitled contractors to a Variation and time-related costs (though few seem to dispute an EOT is warranted).
Adjudications and arbitrations will be underway, but as the outcomes of these resolution processes are confidential, the industry as a whole will not benefit from the guidance of these decisions. There remains the possibility, however, that determinations on these issues may become publicly available if the matters in dispute make their way to the courts.
Fundamentally the most enduring issues are likely to be commercial rather than legal. Parties have struggled to determine precisely who should bear the costs of further lockdowns (contractors or their clients). The ‘border’ issue is even harder still. Overseas materials, necessary expertise, etc. may be delayed for years to come as the rest of the world continues to fight the pandemic. Neither party is in any position to control this risk, and, to boot, insurance is often unobtainable (or so extortionate it may as well be).
No better timing for the Accord
It must be said that the Accord could not have come at a better time. The pandemic required a Government response that focused on the construction industry, both because the industry required relief and guidance, and because the industry presents an optimal mechanism for re-stimulating the economy.
While there was some initial scepticism over the Accord, it is difficult to imagine the industry being in as strong a position if the pandemic threat had been faced without it. A sceptical commentator may say that having signed up to the Accord, it was difficult (if not impossible) for the public sector to adopt its ‘usual’ entrenched positions.
Others would say that the sector has stood by its commitment under the Accord to see a more balanced and fair approach to procurement and contract management.
The myth of the ‘shovel ready’ project
The ‘shovel ready’ projects announced by the Government in the wake of the lockdown have proved to be more ‘shovel worthy’ than anything else. Despite initial optimism from the industry and fast-tracked consenting, the projects have not come to market nearly as quickly as hoped.
Amongst the multitude of things learned from the pandemic, we have learned that our decision-making is far too slow and is as much a clog in the pipeline as is consenting under the (ever more notorious) Resource Management Act. It pays to remember that sometimes a suboptimal decision is better than no decision. As Theodore Roosevelt once observed:
“In any moment of decision, the best thing is to do the right thing, the next best thing is to do the wrong thing, and the worst thing is to do nothing.”
It is heartening to see that MBIE has listened to the industry’s concerns that the retentions regime under the Construction Contracts Act 2002 (‘CCA’) lacks any real ‘teeth’ and that (based on the Ebert decision) a trust may not even exist over the moneys.
Cabinet’s decisions of 25 May 2020 resolved to strengthen and clarify the existing retention money regime in the CCA, and amendments have now been released for consultation and consideration.
The key issues being addressed are whether (a) a trust exists automatically (there is no need to ‘form’ a trust), (b) retentions are to be held in a separate bank account, and (c) directors are to be liable for failing to follow the retentions regime. If these and the other proposed initiatives are passed into law, it will be a marked improvement – bad apples will still exist, but as directors could be personally liable, we hope we will see fewer of them.
Predictions for 2021
More enforcement action in the competition and tax spaces
The Commerce Commission has signalled further scrutiny of the industry. This has been on the radar for some time.
The relatively small number of large contractors operating in our market (and the rate at which these contractors inevitably fraternise at events and sit together on working groups) makes the construction industry ripe for the possibility of cartels or price-fixing.
But this is not limited to the larger players. Any person, company or organisation entering into an agreement or arrangement to price fix, restrict output, or allocate markets could be subject to criminal conviction from 8 April 2021.
If convicted, individuals could face imprisonment of up to seven years and a fine of up to $500,000. Companies can face the greater of a fine up to $10 million or either three times the gain obtained or 10 percent of total group company turnover.
This follows the IRD’s crackdown on cash-jobs a year ago. Small residential contractors looking to take advantage of the recently added building consent exemptions for many single-storey and other small structures should remember that the IRD will be looking out for an increase in ‘cashies’.
NZS 3910 rewrite
Much has been written elsewhere about the NZS 3910 review currently being undertaken. We will not add anything further here – suffice to say that the industry will be watching the outcomes of that process eagerly. When the opportunity for input arises, get involved – have your say.
More vertical construction in Labour’s second term
Labour’s track record for delivery of major infrastructure projects during its first term was less than impressive, cancelling several major projects once elected.
Now that it governs alone, will its second term be any better? The Government will be aware that the industry will be watching it carefully now that it has no minor parties to stall progress (or perhaps, to blame for a lack of delivery). But there will still be political constraints. The Government will be looking for the hat-trick and will be aware that it may need the support of minor parties (and the Greens in particular) to get there. The Government will not want to completely alienate the Greens, particularly when the Resource Management Act overhaul it has promised will be trying enough on their relationship.
We therefore tentatively suggest that we may see more focus on vertical construction going forward, which is likely to be more palatable to the housing-conscious Greens than massive infrastructure projects.
We had a taste of this on 23 November 2020, where three vertical shovel ready projects were announced. Vertical construction tends to employ more of the workforce than infrastructure work, so this may lead to good outcomes for the construction sector as a whole. What it doesn’t address is the long-term economic benefits from infrastructure projects.
We think that 2021 will continue to see the public sector employing more collaborative contracting models, such as Early Contractor Involvement and alliancing. These models have increased appeal and relevance following the Accord and the latest Procurement Guidelines, while internationally, PPPs are falling out of favour.
However, different models do bring different risks to contractors, and these risks have the disadvantage of being comparatively more poorly understood by the industry at large than the risks in a ‘standard’ lump sum NZS 3910 contract.
Early Contractor Involvement contracts particularly can see the contractor (sometimes inadvertently) taking on the risk for parts of the design. Fundamentally though, the risks still come down to cost and delay. We therefore predict that we will see ‘new’ disputes about the ‘old’ issues in 2021.
The 2020 year was certainly one to reflect on, but unprecedented times have led to a number of positive developments within the industry, and we go into 2021 having learned a lot. The team here at Dentons Kensington Swan are here to support CCNZ members in 2021, and we wish everyone the best for this new year.
Dentons Kensington Swan offers 15 minutes of free advice on construction issues to CCNZ members. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Dentons Kensington Swan does not accept any liability other than to its clients, and then only in relation to specific requests for advice.