Legal report

A report card review of 2017, with general comment on the industry and a look into the crystal ball for 2018. Brendan Cash, Partner, and Arie Moore, senior associate, Kensington Swan.

 THE 2017 YEAR came and went in a flash. In this article we take a look at notable industry events over the past 12 months and then turn our collective minds to what might lie in the year ahead.

Before we get into a recap of 2017 let’s look at what we predicted last year. In the 2016 legal report we took a stab and said that the following areas were going to feature in some manner in 2017:

1. resourcing constraints will continue;
2. the industry will need to grapple with the retentions trust regime;
3. the RMA reforms will finally be passed into legislation; and
4. focus on larger developments due to low interest rates and housing shortage.

So how did we go?

Resourcing – It appears that resourcing continues to be a major constraint and there is no shortage of work for civil contractors. Despite this growing demand there is still competition in pricing and it is more important than ever that projects continue to be resourced and managed effectively.

Retentions and RMA amendments – These were relatively safe bets and both pieces of legislation came into force. We discuss the retentions trust regime below. The majority of the RMA reforms have only recently come into effect so it is too early to see the scale of effect that these might have (there are also whispers that Labour may look to undo/amend some of these changes over time).

Larger developments – There has continued to be large developments, although the increase we were expecting did not quite materialise. There continues to be dialogue around the ‘housing shortage’, but aside from promises of satellite cities as part of mayoral campaigns, significant large scale development has not really materialised. We comment further on this below.

2017 – Head down, bum up

This year has been particularly notable for the lack of significant events.

We believe the real hero of 2017 would have to be the effort that has occurred down in Kaikoura, where amazing work has been put into getting the road and rail system operational. This has largely occurred out of the spotlight of the media and without significant issues. There were also some large scale infrastructure projects that were completed and which are now in use. The benefits of this investment by the government quickly became clear, the Waterview tunnel and Mackays to Peka Peka are the first two that spring to mind.

Retentions trust regime

Retention money under any (commercial) construction contract entered into, or renewed on or after 1 April 2017, is required to be held on trust or be covered by a complying instrument. This change will have capital constraints at the upper levels of the contractual chain, as parties are now required to hold retention monies in a form that is readily convertible to cash (and are not able to use these as working capital). The Act also prescribes a number of other requirements that contractors will need to comply with.

The frustration with this change is that there are still a number of legal grey areas and questions around how to achieve compliance. It appears that a number of the provisions in the Act have been added at the 11th hour as almost an after-thought, with the result being that the current regime does not fully address the problem. We expect that clarity will come over time and remain hopeful that regulations will be issued clarifying some of these questions.

We have had discussions with a number of different stakeholders who are all interested in how they can comply with the new obligations. While it is not a requirement of the Act, we have been discussing the merits of establishing a separate bank account to hold retentions as a means of complying with the Act and clearly tracking the money held on trust. Over time the impacts (and compliance costs) are likely to flow through into contracts as well.

Change in government

Following the election there was a change in government, with the new government formed by Labour and New Zealand First (with some help from the Greens). There were a lot of election promises from both sides of the fence and the effect this will have on the construction industry remains to be seen.

It is clear that there has been a noticeable shift in emphasis from road to rail in and around Auckland. The Christchurch rebuild is also likely to be a big focus, with Labour’s policy to have a global settlement between the government and Christchurch City Council.

The priority area for the new government will be housing, with significant focus already occurring in this area. Ministers Jenny Salesa and Phil Twyford are responsible for Building and for Housing and Transport, respectively. Throw Shane Jones (Minister for Infrastructure, Associate Minister for Transport) into the mix and we are likely to see some significant policy shifts in the industry over the next term, particularly once details of the regional development fund are confirmed. In that regard a shift of some of the government’s infrastructure spend to the regions is likely on the cards.

Direct agreements and other legal issues

The courts got their fair share of the construction action in 2017. There have been a couple of cases which have paved the way for claimants to bring a representative action against building product suppliers, with the Supreme Court recently confirming that representative actions provide greater access to justice and are permissible in New Zealand.¹ The Court of Appeal also got a rare taste of 3910 when it heard a case on the entitlement to terminate and the implications that flow from termination.² This will provide rare judicial comment on the 3910 form of construction contract and the decision is expected sometime next year.

In 2015, the High Court held that in the case of developer insolvency, a liquidator could recover payments made to a contractor under a direct agreement. This would have had far reaching constraints on the manner in which a number of construction projects are funded and earlier in 2017 the decision was appealed to the Court of Appeal, which overturned the High Court decision.³ The Court of Appeal held that payments made from a bank/financier pursuant to a direct obligation under a funding agreement are not payments ‘by’ a developer and so these payments are not able to be clawed back by a liquidator following insolvency. This will be a welcome decision for contractors who now have certainty that payments under properly structured direct agreements are not subject to claw-back.

2018 – The crystal ball

Each year we like to have a look at the tea leaves and predict some events or trends that may occur over the next 12 months. Our predictions for 2018 are:

Continued capacity constraints in the industry – As resourcing continues to be stretched and the impacts of the retentions trust regime sink in. It is only natural that the costs of operating in the construction industry will increase; there will also continue to be significant resource constraints that will present challenges to delivering successful projects. Overall, as some economists have noted, capacity, cost and capital constraints are acting as caps on growth in the industry.

Technology will have a larger impact – Technology is already a major part of the construction sector, although to date we have seen this focused on the direct works themselves. Over 2018 we expect to see technology enter more of the ancillary services; think Tinder to find digger drivers, Air BnB for spare yard space and electronic monitoring for security and QA processes; some of these are already under way.

Increase in housing, decrease in PPPs – Labour has indicated that it wants to build 100,000 homes over the next 10 years and if it is going to have any chance of achieving this goal it better get started in 2018. Further, its past rhetoric towards public-private partnerships means that it is unlikely that new housing projects (or any other projects for that matter) will be constructed under a PPP.

Focus on regional infrastructure – Along with housing we expect that the government will push through some larger scale infrastructure projects aimed at connecting the regions and boosting economic activity.

The election has produced the first minority government New Zealand has seen for a number of years. It is likely that we will start to see the real impact of the election promises start to come through in 2018.

We expect 2018 will present a number of different opportunities for those involved in the civil contracting space and it will be important that the industry is able to adapt in order to meet this demand.

We look forward to seeing a busy 2018.