Dialogue: Harre construction bill noble but flawed

By JOHN WALTON*

Much has been made, in the wake of the Goodall ABL liquidation, the Hartner collapse and the Project Works Construction receivership, of the protections Laila Harre's Construction Contracts Bill will bring. Many contractors say that if the bill becomes law, it will drive them out of business more quickly than a defaulting lead contractor will.

The bill's objectives of facilitating regular payments, improving dispute resolution and providing remedies for recovery are noble. But the proposals are unlikely to achieve those objectives on their own for three reasons.

First, invalidating pay-when-paid and pay-if-paid clauses, promoting progressive payments and allowing subcontractors to suspend work until they are paid will almost inevitably be defeated by careful redrafting of contractual provisions.

Second, adjudication for dispute resolution is hardly new in contracting. The intention seems to be to provide a prompt and cost- effective dispute resolution process. If it turns out to be rough justice, the number of appeals will soon defeat the intended purpose.

When introduced, arbitration was to be the solution to the perception that the courts were available to the rich and powerful. It has become standard as the final stage in dispute-resolution procedures in almost all published construction contracts. It has also turned out to be as lengthy and expensive as going to court used to be, but perhaps more uncertain.

Whether adjudication can deliver an acceptable solution to perceived delays will ultimately depend on its fairness as a process, and the extent to which the participants believe they have had a fair hearing.

Third, allowing subcontractors to register charges against the site will certainly offer protection, but only if the contractor owns the site, or is related in some way to the owner. Like a mortgage, the charge will prevent the property from being sold until the unpaid amounts have been paid.

Unlike a mortgage, the charge does not come with a power of sale, so the subcontractors could be in for a long wait.

The reasons for the requirement of ownership of the site are obscure. Quite why the owner should not be responsible for ensuring that all subcontractors are paid is also far from clear.

That something must be done is obvious. Stephen Franks' prediction in last Thursday's Herald that the removal of pay-when-paid clauses would strain the capital resources of most contractors will certainly prove correct.

I have recently built a house. I appointed a builder (let's call him Stan) using a standard form contract, with usual progress payment clauses. Stan hired labour and equipment and appointed subcontractors.

I was confident that Stan was paying his subcontractors with the money I paid him, though I had no proof. It was clear that if I didn't pay the tradesmen didn't get paid. He simply couldn't afford to take that risk, though it was his responsibility under contract.

Under Ms Harre's new scheme, Stan would either draft new contracts which provided that no subcontractor would be paid at all until satisfactory completion of work, or he would go out of business. Not a very positive step.

Ultimately, it is the responsibility of the owners and their backers to make sure that subcontractors are protected. They are the ones who get the benefit of the subcontractors' work.

Introducing bonds and imposing payment constraints on contractors will only increase the demands on contractors' working capital.

What is needed is a change in attitude recognising the important role of subcontractors, including: identifying all subcontractors; requiring contractors to identify payments due to subcontractors in all progress claims; reducing any delays; making the owners take greater responsibility for ensuring that all contractors get paid.

If the owner or lead contractor getS into difficulty, hopefully the pace of work has not outstripped the rate of payment, and the best we can do for subcontractors is to ensure that Peter does not get robbed to pay Paul, or Stan.

* John Walton is a partner in Buddle Findlay and heads the firm's national construction team.