Construction Contracts Amendment Bill — In CommitteeText is incorporated into the Bound VolumeConstruction Contracts Amendment Bill — In Committee[Sitting date: 22 September 2015. Volume:709;Page:6839. Text is incorporated into the Bound Volume.]Construction Contracts Amendment BillIn CommitteeDebate resumed from 12 March.Part 1 Amendments to preliminary provisions(continued)CLARE CURRAN (Labour—Dunedin South):Thank you for the opportunity to take a call on what seems to be the long-running debate on the Construction Contracts Amendment Bill which I think—I am just trying to refresh my memory as to when this bill first actually came before Parliament—has been through three different Ministers and a number of different iterations.Tonight we are faced with yet more amendments to the bill which will need some elaboration by the Minister.I am hoping that he will take an early call on this bill just to bring the Committee up to date with where he is up to as the Minister particularly on the part of the bill that deals with retentions—or as otherwise known to people listening to the debate tonight the part that is really around the Mainzeal collapse clause of the bill and how the industry and subcontractors within the industry can be protected and can be protected within legislation.Can I say that Labour is supporting this bill. It appears as if even though it has taken quite a long time to get to this place we are moving to a place where as we argued right from the very beginning there will be strong provisions put within this particular piece of legislation to protect subcontractors if there were collapses in the construction industry collapses of companies—that the subbies that flowed on from them who were owed money would actually be able to receive some protection.It appears finally that that advice has been listened to and this does appear to be in the bill. As to the questions that we do have around this they will be around to what extent and how sensible the provisions are.That is what I am hoping to hear from the Minister as we go through the debate tonight.But ultimately to recap because it has been some time since we debated this bill—I think it was last in March and that is when we started off the Committee stage of this bill—Labour supports the measures in this bill that speed up the resolution or the resolving of disputes in construction contract cases. We have worked pretty closely with the industry to try to come up with sensible measures that would be taken seriously by officials and by the select committee to make sure that subcontractors do not miss out on the money that they are owed when things go wrong. My colleague Clayton Cosgrove was responsible for the original Supplementary Order Paper Supplementary Order Paper 439 which is still sitting on the Table tonight and which actually ensured that that happened and it appears as if the Government has moved to make sure that that happens.I note that I have been doing just a little bit of reading around this bill tonight and around some of the debates in the select committee that led to getting where we are. It was described by a law firm actually as “the long road to fairly minor reform” which I think is quite apt although the part to do with subcontractors and protecting them certainly is not minor. It has taken a long time to get the bill to this place and it is a feature of a lot of legislation that comes through this House that it sort of gets stuck and then disappears sometimes for a year or two before it comes back to the House for proper discussion. So I think it is important that we move it on and that we actually get it through the legislative process and that this Construction Contracts Amendment Bill actually does become legislation and does see that there is—Dr DAVID CLARK (Labour—Dunedin North): Look Labour does support the measures in this bill obviously because we think that it is important to speed up the resolving of disputes in construction contract cases. If I think back to the meetings I have had with the industry in the time that this bill has been in Parliament there is a real desire to solve this issue and that is regardless of whether those people in the conversations are from the big end of town or the small end of town. I have had two quite separate sets of conversations about this topic and certainly at the small end of town there is the concern about livelihoods concern about the borrowing that has to go on sometimes to sustain businesses and pay employees and concern about the fairness and justice of the system as it is presented.At the big end of town there is a concern about the costs of measures that set up protection mechanisms and the fact that that will be borne by an entire industry and there is a concern that that will push up building prices and therefore reduce the amount of activity that goes on in our country. These are I think tensions that sit in the system and they are legitimate tensions to be debated and to be worked out. I want to congratulate those members who have brought this bill through the House because it is an issue that needs to be improved on as we have seen with Mainzeal—that is the obvious example that is frequently cited. It is the subcontractors who are hit the hardest but that does not take away from the issue of increasing costs on the industry and where those costs will fall. It is really important that there are no unintended consequences when the final deal is struck.I am aware of some of the conversations that have gone on behind the scenes—Treasury and the Minister for Building and Housing are having a few differences of opinion on this and that—and that is healthy actually. That is the kind of robust debate that we in this Parliament think ought to be happening so I am glad that the Minister is having robust discussions whether I agree with him on every point that he makes or not. I think that in this Parliament we should acknowledge that good process and good robust debate are essential. We should also thank the officials who have worked on this and who have argued the principles because we need a fair solution and we need a better solution than the one that we have now.We supported the contractors’ liens option—that is the favoured approach of the Labour Party. We worked through with contractors in the industry to find out how they best thought these issues could be addressed and that is the point that we came to as a party. We support the measures in the bill that speed up the resolving of disputes and construction contract cases because that is something that sorts out the uncertainty and the uncertainty that carries costs but we want to see more done to make sure that subcontractors do not miss out on the money they are owed when things go wrong. We need to take action so that the situation we saw with Mainzeal does not happen again. That is where we are coming from when we are discussing this bill and Part 1 where the main action occurs—the principle of making sure that there are speedy mechanisms and that there is something that is fit for purpose for addressing the obvious issues.The second option that we considered was statutory construction trusts where money would flow through to a trust to ensure that subcontractors got paid first should a construction company collapse. We know that these solutions apply to significant commercial—Hon Dr Nick Smith: I raise a point of order Mr Chairperson. I appreciate the contributions that the current speaker and the previous speaker are both making about the Supplementary Order Paper that addresses the retentions in Part 2. The contributions they are making are valuable. I wonder whether it would be helpful so that we can actually debate the bill as one debate to take leave for the debate to be on Parts 1 and 2 together and then for them to be voted on separately given that the major retention issues that members wish to discuss are in Part 2.The CHAIRPERSON (Lindsay Tisch): Well that is not a point of order. We will just let the member have his few seconds remaining if he wishes—only a few seconds—and then if you want to bring forward a point of order we can handle that then.Dr DAVID CLARK: In the few seconds available to me I would like to say that I think it is important to have a good strong debate on Part 1. I know that I have got colleagues still wishing to debate that part but we will make the call when the Minister puts the leave. Thank you.Dr MEGAN WOODS (Labour—Wigram): It is my pleasure to take a short call on Part 1 of this legislation. Part 1 is a very important part of this legislation in that it is where the definitions of a number of the issues that we are dealing with are very clearly laid out. As my colleagues who have spoken before me have mentioned Labour is supporting this legislation. We think that it is vitally important that we get this right and critical to getting this right are the provisions laid out in clauses 4 to 8A which are where we are doing the definitional work. Some of the hard work that we see of the Commerce Committee was actually in its work when it came to consider much of the definitional changes that needed to be made.If we have a look at the change that the select committee made to the definition of “construction site” in clause 5 of the bill as it relates to related services this was in order to include the land where work is planned but has not yet begun. It is vitally important that this is captured so that work that may well be in plan but that has not yet begun is captured by this legislation. I think that this was a very important change that the select committee has made to clause 5 in Part 1 of this legislation.If we then turn our attention to clause 6 this is where the amendment was made by the select committee to add operations that are critical to the completion of or preparatory to construction—the scope of design engineering and quantity surveying work—to the definition of “construction work”. Again we have to have a very clear understanding of just what is meant by “construction work” when we go to consider the more principled parts of this legislation which are contained in Part 2. So this addition—the scope design engineering and quantity surveying work—is vitally important. We understand that that is part of the construction cycle and in this way we are making sure that we are offering the protections that are going to be offered in other parts of this legislation.The select committee did not stop just there; it went through the definitions with a fine-tooth comb. When it came to clause 7(2) the commencement date for the Act applied to related services to 1 November 2015. So where it was sensible there has been a staggering of the commencement of these provisions as it made sense under the Act.Then of course there is the work that the committee did to include new section 9(3) in clause 7 and new clause 32 which adds a schedule to the Act that makes it clear that the amendments proposed in this legislation would apply only to contracts entered into or renewed on or after the commencement date. This was a very important change that the select committee made. I think it is of course a principle of good legislation that we are not legislatingretrospectively—that we are legislating forward that we are changing the rules from the date of the commencement of the legislation and that we do not have a retrospective bill. I think the change that the select committee made there to clause 7 was vitally important.The last change that the select committee made to Part 1 of this bill was of course to insert new clause 8A which excludes contract provisions for the sale and purchase of second-hand assets and property management when they are part of a contract that includes construction work. This was excluded from the Act and there were deliberations at the select committee that made it very clear why this needed to be excluded from the Act. Although all of these changes may seem minor—and there may be a temptation even to gloss over them and not think them important—the key to getting this legislation right is having very clear definitions and having very clear definitions of what we are talking about.I think the amendments that the select committee made that I have spoken about in my contribution tonight make it very clear just how important those amendments are. So when we are talking about amending “related services” to include the land where work is planned but has not yet begun this is of course a very important part of the construction cycle. The planning is vitally important and there is always going to be work to be done. So I commend the work that the committee did to clear up many of the definitions in this bill.CLARE CURRAN (Labour—Dunedin South): Speaking specifically to Part 1 of the bill I have a couple of questions for the Minister for Building and Housing on this. I too want to just refer initially to clause 6 with some further questions about some of the implications of the changes that were made at the Commerce Committee. In the commentary on the bill it says: “In the bill as introduced clause 6 extends the definition of construction work to include design engineering and quantity surveying activities.” We in the select committee recommended amending this clause to add operations and I do remember that there was a reasonably extensive discussion about this 2 years ago when this bill went through the select committee process.The commentary also states: “We recommend amending this clause”—clause 6—“to add operations that are critical for the completion of or preparatory to the scope of design engineering and quantity surveying work. These ‘related services’ directly affect the quality of building work and it would benefit consumers if they were covered by the legislation. We”—in the select committee discussion—“did not agree with the contention that extending the meaning of construction work would unfairly open up to adjudication persons who were not party to a construction contract.” I do remember that there were pretty extensive discussions there were submissions on this and we came to the conclusion that under the Act any dispute that required adjudication would be between the parties to the construction contract.What I would like to ask the Minister about—and I have been doing a bit of further reading about this subsequently—is the bill’s main purpose. It is about implementing stronger consumer protections but it is also about extending the definition of “construction work” and of course the retentions reform which we are going to talk about in more detail in Part 2. But the whole idea of broadening the definition of “construction work” to include the work of engineers designers and quantity surveyors—who are collectively consultants—still remains somewhat contentious. I do want to ask the Minister about this: although consultants are able to rely on the protections under this Act where their payment claims can be enforced as a debt due there is a contention that it remains to be seen whether those benefits would outweigh the potential drawbacks of consultants being brought under the Act. For example consultants might bear the brunt of the amendments proposed in the bill which would remove the distinction between enforcing an adjudicator’s decision regarding payment and enforcing a decision concerning their rights and obligations but it is also possible that adjudicators would be able to hear consultants’ negligence claims and their decisions on such claims would be enforceable in the courts.Some of the things that have not been defined in this bill are the terms “design” “engineering work” and “quantity surveying work”. They are not defined in the bill and my question is: does the Minister have any concerns about the fact that they will end up being defined in the courts as opposed to being defined in this bill and is this an ambiguity that he has considered and does he have any remaining concerns? I do remember that there was extensive discussion around this. For example is the work that is carried out by project managers in relation to a construction contract caught out by the amended definition or not? So if the Minister is mindful of taking a call on this part of the bill and if he was able to address that question that would be quite helpful because that is on Part 1 of the bill with which we are directly engaged.This bill is very much about trying to prescribe—Hon DAVID CUNLIFFE (Labour—New Lynn): It is a pleasure to take a call in this Committee stage of the Construction Contracts Amendment Bill to note that Labour supports the bill. I note also the presence of the Minister in the chair the Hon Nick Smith. We were not at all sure that he was going to be able to join us for this debate so we welcome him back to the Chamber.Let us begin with a definition of the problem in respect of why this legislation is being passed today the options that were explored the amendments that the Commerce Committee made and the reasons that Labour is supporting it although with one or two minor reservations. Can I note before I get into it that this is the fourth bill in a row that we have had in a Committee stage where the Labour Opposition has been supporting the bill. So to members of the public today is perhaps one of those days when we see the other side of Parliament in action. We see quiet cooperation behind the scenes in select committees and we see work across all sides of the House to try to tease through complicated problems and come up with workable solutions.The problem that we are seeking to resolve with this Construction Contracts Act amendment is the fact that the original 2002 Act—we will call it the Act—essentially provides for a different regime for adjudicating or arbitrating commercial construction contracts from that of residential construction contracts. It has a two-stage process of adjudication or arbitration and if that fails for low-value claims the claimants in the commercial claim can go to the court and receive a judgment. Unfortunately in the case of residential contracts that two-stage process has not been available and therefore the regulatory impact statement notes that people have gone to the court as a first resort not as a last resort thus imposing undue cost and delay on the system.The second part of the problem has been where risk is borne in the construction industry. Essentially the construction industry is like a pyramid. The client contracts with a lead contractor who contracts with specialist subcontractors—an architect quantity surveyor master builder etc.—and underneath each of those particularly in the case of the building contractor there is a large number. There are often several layersof subcontractors—many layers in some cases. Risk tends to be passed down the system and over time professionals in the industry work their way up the layers of the system so that their position is more secure. That does not work when things go wrong because the subcontractors or the sub-subcontractors keep getting it in the neck. That is not fair; they are the most vulnerable. So a second objective of reform here as well as making the system more efficient and robust and bringing more of the same opportunities to bear in the case of residential contracts as well as commercial contracts is to ensure that risk is more fairly and evenly shared throughout the industry so that we have a process that is robust efficient and fair.The Labour Party supports the measures in this bill that are designed to resolve and speed up the resolution of disputes in construction contract cases. We want to see more done to ensure that when things go wrong subcontractors do not miss out on the money that they are owed—the so-called progress payments. If we need any further evidence of the importance of this issue the Mainzeal Property and Construction case shows that subcontractors are hit the hardest when a construction company fails. Subcontractors are almost always last in the creditor queue and they miss out when money is held up. That is not fair and we wanted to take action to ensure that this did not happen again.We have developed two options—contractor’s liens and statutory construction trusts—as a way of addressing the issue of subcontractor risk. In the first option—contractor liens—contractors would be required to retain a portion of the money that they owe. The second option is the statutory construction trust where money would flow through a trust to ensure that subcontractors get paid first should a construction company collapse. Our solution would apply to significant commercial construction projects and would not interfere with contractors’ arrangements. We would also clarify and tighten the law to ensure that in the event of a construction company failure subcontractors could get access to their tools as fast as possible. [Bell rung]The CHAIRPERSON (Lindsay Tisch): I call the Hon David Cunliffe.Hon DAVID CUNLIFFE: Thank you. I appreciate the opportunity to continue the exposition of this debate.Following consultation with the industry on these options Labour put forward as Supplementary Order Paper 439 in the name of the Hon Clayton Cosgrove the requirement that retention money for commercial and industrial developments be held in trust for the benefit of the subcontractor entitled to the money. The Minister for Building and Housing has in effect piggybacked on Labour’s proposal adding provisions via a Supplementary Order Paper that he has put forward for retentions now to be held in trust. The Supplementary Order Papers that are before us include Supplementary Order Paper 439 from the Hon Clayton Cosgrove released on 17 April; Supplementary Order Paper 446 from Julie Anne Genter; and Supplementary Order Paper 52 from the Hon Nick Smith. Mr Cosgrove’s Supplementary Order Paper inserts new clause 9B which would create new section 24AA requiring “retention money for commercial and industrial developments to be held in trust”. The Minister’s Supplementary Order Paper provides provision for “retentions being money withheld by one party to a construction contract from money payable to another …”—so that is in effect the other option.Can I turn now briefly to the Commerce Committee’s report. The committee considered this bill at some length and it has done I think it is fair to say a pretty comprehensive report given the size of the bill. It has turned its mind firstly to the purposes of the bill: to remove the distinctions between residential and commercial contracts as I said; to extend the scope of the Act to apply to contracts for design engineering and quantity surveying work; to remove the distinction between enforcement of payment determinations and of those relating to rights and obligations that are not payment related; and to speed up and make more efficient the enforcement process particularly for residential contracts as we described earlier.The committee first turned its mind to a range of provisions relating to adjudication. It was worried about so-called ambush claims in the tight time frames that the Act set out so it therefore proposed to insert by amendment new clause 13A changing the time frame from 2 to 5 working days—The CHAIRPERSON (Lindsay Tisch): That is in Part 2.Hon DAVID CUNLIFFE: In Part 2?The CHAIRPERSON (Lindsay Tisch): Well we are not on Part 2. We are on Part 1.Hon DAVID CUNLIFFE: We are on Part 1; you are quite right Mr Chair. I will restrict myself to Part 1. So we will leave it to a further call to trace through some of the select committee’s amendments and I will return then to the final purpose of the bill which is to ensure that the process is smooth that the risk is fair and to be shared and that the time frames achieve the right balance between avoiding ambush and providing for a speedy resolution of complaints which are common in the industry.How common? Well our regulatory impact statement indicated that the authorised nominating authorities under the current Act have heard nearly 700 claims under the Act since it was set up—nearly 700 claims which are by definition commercial and do not extend to residential claims. They will be significant in quantum. They are important and the Committee’s time is well used in trying to improve this area of law. I thank you for the opportunity to comment on this stage of the bill and I look forward to further comment as we get into subsequent parts. Thank you.BRETT HUDSON (National): I move That the question be now put.A party votewas called for on the question That the question be now put.Ayes 63New Zealand National 59; Māori Party 2; ACT New Zealand 1; United Future 1.Noes 58New Zealand Labour 32; Green Party 14; New Zealand First 12.Motion agreed to.The question was put that the amendments set out on Supplementary Order Paper 106 in the name of the Hon Dr Nick Smith to Part 1 be agreed to.Amendments agreed to.Part 1 as amended agreed to.Part 2 Amendments to principal provisionsJULIE ANNE GENTER (Green): It is with great pleasure that I rise to speak on Part 2 in the Committee stage of the Construction Contracts Amendment Bill. It has been quite a long time since we considered this in the Commerce Committee. In fact it has been about 2 years and it has been even longer since some of the changes in this bill were first considered.The Government initially asked for a Building Act review in 2009. Subsequent to that in 2010 there was a review of the Construction Contracts Act itself and in that review two of the recommendations that originally were not put forward were specifically around the use of retentions and security of payment for subcontractors. Unfortunately when the National Government initially introduced the bill it did not deal with the issue of retentions and so 2 years ago in the select committee deliberation—which was of course in 2013 and not long after the issue with Mainzeal Property and Construction which collapsed in February 2013—the issue of retentions became one of the biggest issues for submitters that we heard about during the select committee process.Just for those who might be watching at home tonight I will get to the issue of retentions or an explanation of them. Retentions are a portion of the contract price that are withheld by the principal or head contractor and not paid until after the construction work is checked and found to be free of defects. What was happening was that we had principal contractors who were receiving payment from the client and they were withholding a portion of the payment that technically would belong to subcontractors who were meant to undertake the work until they were certain that that work was completed and free from defect except instead of holding on to that money the principal contractors—many of them some of them—were using it as cash flow on some of their other projects. Even though the money technically should have belonged to the subcontractors who had been engaged to do the work who oftentimes had done the work already they were not being paid.We heard that there were significant problems with the late payment of retentions and the money being held back and in cases where the principal contractor became insolvent—which happened of course to Mainzeal Property and Construction in February 2013—then the subcontractors missed out on payment for work that they had already undertaken. Although we were not meant to consider the issue of retentions because the Government had deemed that it was not going to deal with it in the Construction Contracts Amendment Bill as it came to the select committee in 2013 we heard from 14 submitters and almost half of the submitters talked about how important it was to deal with this issue of retentions as soon as possible. It was unjust for the subcontractors that money that technically belonged to them was being used by principal contractors for cash flow and for other purposes and then it was not always there as it should be or at times it was being paid late.Although we heard about this during the whole select committee process and the officials told us that they were considering options initially when the bill came to the second reading there were no changes introduced and there was no intention from the National Government to introduce the changes to deal with retentions. So obviously the Labour Party came up with a solution and put forward Supplementary Order Paper 439. I put forward Supplementary Order Paper 446 myself. Mine was a little bit simpler than the one that the Labour Party proposed. I have it here. We will still be voting on it tonight. My Supplementary Order Paper 446 was designed in conjunction with people in the industry who were extremely concerned about this issue and the lack of action on the part of the National Government Minister at the time Maurice Williamson.The way that Supplementary Order Paper 446 works is quite simple. It simply deems that retentions must be held in trust. So the principal contractor has to be holding the money in an account somewhere. They do not have to set up a new or separate account for this; it just needs to be an account and deemed to be held in trust until such time that it is paid to the subcontractor. It is an elegant solution and I am very very pleased to see that the Government has in fact picked up something very similar to this Supplementary Order Paper 446 on its own Supplementary Order Paper 106 which is obviously somewhat more complex. It has worked through it with officials. I assume that it is for that reason that it has taken so long for this bill to come back to the House for its Committee stage—because the Government actually has listened to the industry and has succumbed to pressure and is going to do right by the subcontractors and ensure that their property their earnings are protected from this sort of abuse that was quite rampant in the building sector.I congratulate the Minister in the chair tonight Nick Smith because I do think that he must have played a critical role in actually including the retentions issue in this legislation because it did not seem that former Minister Maurice Williamson was intending to do so and it was only after the change in portfolios that this change came forward. So we are very very pleased tonight to be supporting the bill and supporting the Government’s proposed amendment although we have not had the time to scrutinise it in the select committee. Looking at the Government’s amendment on Supplementary Order Paper 106 it outlines all the different changes and new Subpart 2A is about retention money.The one question that I would ask the Minister to address is that although we have got the use of retention money in new section 18E in proposed clause 8BC which says “Party A must not appropriate any retention money to a use other than to remedy defects in the performance of party B’s obligations under the contract.” and that sounds very good I am slightly concerned about new section 18F which says that “Retention money may be invested by party A”—the head contractor—“in accordance with the Trustee Act 1956 …”. So it looks like the Government has accepted that the principal contractor does need to legally be held to account and hold the money aside in trust so that it is safe but it looks like the main contractor is still free to invest the retention money in accordance with the Trustee Act 1956 and if they make a profit on that money they get to keep the profit. They do have to pay interest on a late payment. I think that sounds good.So all in all I would say that this has been a win for democracy because the bill that came before the select committee was not addressing significant issues that had been identified in the review. Because of the circumstances of the Mainzeal meltdown and the reverberations that it sent throughout the building sector we did hear from a number of submitters in the select committee process about the retentions issue. I believe that Opposition parties like Labour and the Greens were instrumental in putting pressure on the National Government to actually take action when it was failing to do so by putting forward our own options by asking questions of the Minister in the House and by demonstrating to the construction sector that we took its concerns very seriously and we were willing to stand up for its rights.We are very very pleased to see from the changes tonight that actually our democratic process can work. This bill can be improved even if it takes 2 years to deal with a substantial issue that is affecting people’s lives and that is affecting the subcontractors who are out there doing the dirty work out on a building site by ensuring that they are not going to lose their money because the principal contractors have been misusing it. I invite the Minister to address my questions about section 18F—whether that is standard and whether there are any concerns about what might happen if retention money is invested and in fact lost and it turns out that the principal contractor no longer has the money to pay back the subcontractor. Because that is really the issue here right? It is that when the principal contractors lose money and go into receivership or insolvency then the subbies who are out there doing the real hard work—not getting paid an enormous amount for it and taking a huge amount of risk for themselves—miss out. Thank you.Hon Dr NICK SMITH (Minister for Building and Housing): Because Supplementary Order Paper 106 deals with this issue of retentions which was not in the Construction Contracts Amendment Bill that went off to the select committee it is reasonable to take just a moment of the Committee’s time both to explain the history of these new provisions and to answer some of the questions that members have raised.I think it is important firstly to put on the record that the genesis of the problems that have occurred in ill-disciplined construction contracts actually goes back to significant changes that were made in 1988 by the Labour Government in repealing as one member mentioned the Wages Protection and Contractors’ Liens Act. The liens legislation was a very powerful tool by which a subcontractor or contractor on a building site could register a liens against the title and so protect the considerable investment that that builder or subbie may have had in a particular building project. After the liens legislation was repealed at the height of Rogernomics an increasing number of incidents occurred in the construction industry that I think made New Zealand and Parliament feel uncomfortable. I actually introduced a member’s bill in Opposition in 2001 to try to get action in this space—the Construction Contracts Act. I commend the work at the time that was done by Laila Harré in bringing that legislation to the fore.Today we are dealing with this quite specific issue of how retentions can be dealt with fairly. I think David Cunliffe put his finger on the pulse accurately in that this is an issue about where the risk is carried. There are no free lunches here. No matter where Parliament chooses to impose the risk there is a cost. The true question for Parliament is to try to ensure that our commercial law around construction ensures that the risk rests with the party that is best able to manage that risk. That in my view is where the public interest in what this Parliament does should be focused.I do agree with those members who have said that in the current environment where a main contractor is often in the position to have the most information about the bankability of the client—whether he is going to pay his bills or such things—the main contractor is not necessarily the party that carries the risk. We have seen a number of high-profile failures where good hard-working small New Zealand businesses have lost out.What we have attempted to do in Supplementary Order Paper 106 is to provide a practical regime that will address that issue but we are also being cautious about not either wasting money or introducing compliance costs that overegg the problem and end up adding more cost than we save. So let me go through firstly the questions that Julie Anne Genter asked which actually relate to one of the most beneficial elements of the changes in these retention provisions and it is this. At the moment if a large construction company goes broke and there are retentions owing the subcontractors are unsecured creditors and they are at the back of the queue. The key change that is made in this bill is that those funds are deemed to be held in trust and that means that those funds are firstly paid out of the circumstance—and I will take the high-profile example of Mainzeal where there was about $20 million worth of retentions. All of those subbies would have got paid ahead of either the secured creditors like the banks or ahead of things such as the taxes the wages and the other things that normally occur when there is a liquidation of a company. So that is a big gain.The second provision then is how we ensure that these moneys are firstly transparently reported and also that there is not a waste of money. So what we have done with these provisions starting with section 18A is set out those trust obligations that rest with the party holding the retentions. We have set out that there will be a default rate of interest set by regulation in the event that they are not paid on time and we have set out when that trust obligation concludes either they are either paid out to the subbie the substandard work is fixed or there is some other legal means. These provisions also enable the party that holds those trust funds to not just have the moneys sitting loose and to not have to have a separate lawyer’s bank account. It is true that in some jurisdictions they require that. In my view that would be overstretched. That would make the compliance costs excessive.We also need to be honest about what these provisions will do in terms of the bankability of development in construction projects. There is no free lunch in terms of improving the security of the payments for the subcontractors. It does mean that there are projects that may have gone ahead and would have been bankable that now will not be because the trust imposed by this law means that there will be banks and other parties that are more cautious about a particular construction project proceeding. It is also true that it significantly changes the cash-flow position for a number of projects and that is why the provisions in the Supplementary Order Paper give a reasonable time of transition over to these new arrangements for the construction industry.The last point I would make is that I have had contact from a number of people in the construction industry who would prefer to have alternative arrangements that are common in the United States—bond arrangements and those sorts of things. I want to emphasise that no matter what we have in our construction law this is in the area of contract and if people want to enter into arrangements for performance bonds they are free to do so. Equally so no amount of good construction law will ever save somebody from contracting with parties that are not bankable and parties entering into construction contracts do still need to show caution about who they are doing business with to ensure that they are bankable and to show the normal due diligence because this Parliament would be misleading subbies if it said that any law is going to provide them with absolute protection of payment.In my view these are pragmatic provisions. I do note that some members have claimed that their Supplementary Order Papers were tabled first prior to the Government’s and I would simply point out actually that the Government noted last July in fact that we intended to make these changes and to provide for increased protection for these retention payments because we do believe that it will provide for a more disciplined and sensible way in which retentions are managed in the construction industry.CLARE CURRAN (Labour—Dunedin South): I thank the Minister in the chair the Minister for Building and Housing for his contribution for his substantive comments on Part 2 of the bill and for the explanations that he has given. I would like to make a few points. I preface the points by saying that in the main Labour finds itself in the position of agreeing with the Minister on many of the points that he has made tonight.But the main point I want to make and I think that my colleague Julie Anne Genter has made this point as well is that it is better late than never in coming to the party on these substantive changes to this piece of legislation. Can I say that Part 2 looks completely different from the bill that went through the Commerce Committee. Although it is better late than never these substantive changes around the retentions part of this bill which the Opposition parties argued very strongly for during the select committee hearing—they were argued for by many of the submitters. There were arguments with officials. There were pleas. There were letters written to the Minister. And there was no response—no response at all.I would like to acknowledge that it was not the Minister sitting in the chair tonight but it was Maurice Williamson who happened to be the Minister at that time. There were sensible pragmatic reasoned arguments following the collapse of Mainzeal which was the major company that collapsed and that was on everybody’s mind when this bill was before the select committee. There were compelling reasons to consider making changes to the retentions where subcontractors would end up being paid and not being left floundering with some of them ending up going out of business—but no there were none.So what we have now is a substantive part of this bill that has been added in after the select committee process with no ability for there to be discussion with those submitters or to seek more submissions from the industry and from other independent interested parties about how well this will work. We have had no ability to do that and we are having this debate in the Committee of the whole House stage tonight which is just not acceptable for how the legislative process should occur. I cannot hold the current Minister in the chair to account. He has actually done the work of bringing some substantive changes to the Committee tonight. But the problem is that it has not been tested so all we have is the Minister’s word that he has done the consultation. In fact during his contribution we did not hear what consultation there had been and where these changes came from and what lies behind them. If the Minister does address this part of the bill tonight again it would be useful for the Committee to hear what input there has been and what assurances he has that this is the best way forward and that there are not others.I would like to refer to my colleague Clayton Cosgrove’s quite comprehensive Supplementary Order Paper 439 which was put forward quite some time ago to try to address this after we came out of that select committee process without the retention process. That Supplementary Order Paper called for the retention money for commercial and industrial developments to be held in trust for the subcontractors entitled to the money which is where the Minister has gone but also it added another clause that required the head contractor who holds the retention money to pay the money into an independent trust account which was the retention money trust account established and operated in accordance with the regulations.I suppose given the fact that we are unable to have a discussion with officials as to how that money gets paid out what the assurances are that there will be adequate transparency and good process around that and accountability back to the industry and to Parliament and given that we are passing this legislation that those are the things that we want to know more about tonight. I hope that there is the opportunity for there to be some more information provided to this Committee tonight as to what process the Minister has gone through to come to the conclusions that he has to put in these quite substantive provisions in new Subpart 2A in proposed clause 8BC in Part 2 new section 18A right through to section 18I which make those changes.I do want to take us back to the reason for the main debate in this Committee tonight on this bill and it was the collapses of companies—the collapses that shocked the nation and the severity of them. Of course Mainzeal Property and Construction has been held up. In 2013 it affected 486 workers and was a severe shock to the construction industry that sent those shock waves right through all those subcontracting parts of the industry. But more than that it was preceded by Alliance Construction in Auckland in 2012Gremara in the Waikato the Pothole People in Christchurch Canbuild Construction Ltd Tectonic Construction in Christchurch Abode Design and Build in New Plymouth and in 2015 Phil Rouse Ltd in Tokoroa—so it is still happening and the need for these clauses for this legislation to be passed is critical so that there is that ability to protect that subcontracting part of the industry. There are also Williams and Co. in Christchurch Strongline Buildings Ltd and NZ Premium Construction also in Christchurch.This issue has been around for a long time. This legislation has taken such a long time to get to get this point and yet despite the calls from submitters despite the calls from the Opposition despite a strong Supplementary Order Paper from my colleague Clayton Cosgrove and another one from the Greens’ Julie Anne Genter and despite the knowledge that there were some simple solutions that could be put forward it took this Government 2 years to actually get to that point. Yes it was signalled. It was signalled just before the election actually and I wonder why—because all of a sudden the Government woke up and realised that it should really be paying attention to this. It had gone to sleep in the select committee but it woke up and decided that it needed to do something about it but it has taken this long to actually get these clauses back to the Committee stage with an explanation of how this retention scheme will work to protect those subcontractors.Unfortunately there has not been the ability for there to be independent input into that process. So I am asking for the Minister tonight to give us some indication of what process he has gone through to assure himself and this Committee that this is rigorous and that these clauses will stand up and will be able to be enacted in a way that will provide that protection to subcontractors in the building industry.RIA BOND (NZ First): I am pleased to rise on behalf of New Zealand First and take this call on the Construction Contracts Amendment Bill. I have trawled through Hansard and I have read the Supplementary Order Papers. This was in order for me to completely understand that the intentions of the bill are clear what it is hoping to achieve and also what effect the Supplementary Order Papers may have in improving this bill. I found the commentary from the Commerce Committee very informative—in particular the commentary regarding retentions; and this has been a real concern. I would like to quote the commentary: “We were concerned to hear that many head contractors may be misusing retentions as working capital delaying payment or holding retention amounts disproportionate to the contract prices. This behaviour undermines the sector’s growth and productivity. While it is outside the scope of this bill we are encouraged to hear the Ministry of Business Innovation and Employment is giving priority to addressing these issues. We urge the ministry to continue to work with industry players and look forward to policy solutions in legislation in early 2014.”Then I read the debate pack provided by the Parliamentary Library and in the legal commentary—which again I will quote—it says: “It is long-established practice in New Zealand and internationally for retentions to be held under construction contracts to ensure that if there are defective works the head contractor or principal is able to recover the cost of fixing these defects. In the wake of the Mainzeal collapse where subcontractor’s retentions were unsecured debts in Mainzeal’s liquidation amendments were seen as necessary to protect payment of retentions to subcontractors and head contractors.”What these two commentaries tell me is that the biggest losers here were in fact the subbies—the plasterers the painters the bricklayers the drainlayers the plumbers and the electricians. Where has their protection been these past 2 years? It is the subbies who have been shafted and left out of pocket all because developers and contractors withheld the retention money and moved it to other projects. This placed even further risk on that money because they actually turned round and used it as working capital. As I mentioned earlier the millions of dollars lost in the collapse of Mainzeal and the subcontractors having no legal protection whatsoever was of real concern. We have seen with the Canterbury rebuild that homeowners have had two options available to them: one to go through the Earthquake Commission and use the Government contractors or two to opt out do their own research and select a private contractor or company.Another issue that this bill does not address is the substandard work that has been carried out that has in fact left some homeowners unable to seek a remedy from the contractors or companies because they have disappeared. They have been struck off the New Zealand Companies Register but then the next day like a pop-up shop they come along as a new company with a new name and open for business subjecting more homeowners to be left with no apparent way to take possible legal action because not only the contractorsbut also the companies have avoided responsibility.This bill has taken 2 years since its first reading in June 2013 to get to the Committee stage. My question to the Minister is: why has it taken so long? Everyone knows that for small to medium sized businesses time is money—time is money. Perhaps spending more time on a real issue such as this bill and not changing our flag would have—The CHAIRPERSON (Lindsay Tisch): Order! That is not part of the bill.RIA BOND: Sorry Mr Chair. I am pleased to see that the Minister has sought further advice and has listened to the concerns raised earlier this year by members of the House. New Zealand First is pleased with Supplementary Order Paper 106 introduced to amend the Construction Contracts Amendment Bill. It replaces Supplementary Order Paper 52. This will make provisions in the Construction Contracts Act 2002 the principal Act for retentions—that is money withheld by one party to a construction contract from money payable to another party to the contract as security for the performance of obligations under the contract. New Zealand First supports this bill.Hon DAVID CUNLIFFE (Labour—New Lynn): In my last contribution I strayed into Part 2 of the bill and you Mr Chair quite rightly turned me back to Part 1. I am now going to address on a clause by clause basis several of the issues in Part 2 but recalling first the purpose of the bill which is of course to solve two problems: to make access to justice more evenly and readily available across the industry and secondly to avoid a cascade of risk down on to subbies which the Minister has very aptly described as a problem that has been rife in this industry for too long.What is really interesting when you go through the clause by clause analysis and the amendments that the Commerce Committee has very thoroughly addressed its mind to—and I will say it again. This is one of those bills where the hard slog has gone on in the back room and the public do not see I do not think the amount of cooperation that has occurred between the parties to get to where we have got to today. But it is intriguing the level of prescription that is now contained in the drafting which the committee if anything has added to on the basis of submissions and fair enough. This is clearly against the background of an industry where end runs occur shady things happen people get cheated and bad practice does occur. So the law has to be robust and provide remedies for that.One matter that the committee turned its mind to was the issue of so-called ambush claims—a claim is very quickly brought and the defendant does not have sufficient time to prepare a defence. So in new clause 13A the committee has recommended that the time frame for selecting an adjudicator be shifted—there is actually a typo in the committee’s report; the commentary—from 2 to 5 working days after the notice of adjudication has been served.Clare Curran: Well spotted.Hon DAVID CUNLIFFE: Thank you. Likewise in new clause 14A the committee has recommended adding a new clause to require the information in a notice of acceptance to be prescribed by regulation. As I say fair enough. The Minister of the day whoever that is should have the power to be very explicit about what information needs to be provided because by definition this law has to be robust to a conflict situation where the parties do not agree. If they cannot agree and they cannot even agree on what information they are entitled to have access to and needs to be provided to the adjudicator they will not be able to solve the problem. The adjudicator then cannot do his or her job. So we support the addition of that power. There are a number of sub-points under new clause 14A but I do not think we need to trouble the Committee with the sub-points.Let me flick back quickly to the start of Part 2 new clauses 8A 8B and 8C. It is quite interesting because the committee has both narrowed and widened the scope of the bill. It has narrowed the scope by excluding second-hand assets in property management contracts under certain circumstances but it has widened it in respect of the claimed amounts to include liquidated damages breaches of implied warranties and construction work already carried out. The committee has made it a little more flexible by allowing the parties to agree on single payments as well as part payments. The committee has then tightened new clause 9A to replace the word “indicate” with the word “state” in sections 20(2)(d) and 21(2)(c) thus requiring the amount of the claim to be specified exactly. The combined effect of those clauses is as I commented in relation to the regulation-making power to accept the fact that this is a conflict situation by definition to ensure that the law is clear about its boundaries and scope and within that scope to drive quite definitely and clearly to a solution which is what it is seeking to do with those amendments.Clause 15 had proposed mandatory pre-adjudication conferences. The rationale was to require the parties to go through a low-cost low-legality step in the process and escalate gradually. The committee reached the view after hearing submissions that that was likely in fact to add time cost and delay because it was a requirement not an option. So the committee has removed that requirement by amending the clause that had required pre-adjudication conferences—clause 15.In clause 16 the committee has recommended inserting a new subclause (2) that requires an adjudicator to allow a respondent additional time if the adjudicator believes the claim has been served with undue haste and the respondent has had insufficient time to prepare a response. That is a further measure against ambush claims and we think it is a reasonable step to take. The right of reply is strengthened in new clause 16A which is amended by the select committee. It allows claimants a right of reply in response to an adjudication response. Adjudicators are free to ignore those replies but they may raise new issues and material and it would be proper then for the adjudicator to address those matters.Coming towards the end of Part 2 in clause 18 there is an amendment recommended to require an adjudicator’s determination to be dated. It is a small thing in itself but I think it is another example of the Commerce Committee’s focus on bombproofing these rules so that people cannot do an end run around them. It is a shame when that has to be written into the law but we accept that that is the world we are in with a conflict situation that has led to these types of claims and it is an industry where those issues are shall we say not unknown.There is an amendment to clause 28(3) to remove the distinction between payment and other types of determinations—that is to ensure that an adjudicator’s determination is enforceable whether that is payment related or not. That has got to be a good thing. Finally the defendant may oppose entry as a judgment. That is to preserve the defendant’s right in relation to any subsequent District Court action and we think that is reasonable.Summing up it is clear that the select committee has turned its mind in some detail to the drafting of this part and thank you Mr Chairperson for allowing me the time to mention most but not all of the select committee’s amendments on a clause by clause basis. The select committee has also worked hard and the Government has worked with it to look at issues such as a trust or contract payments that get around the problem of the risk passing to subcontractors. We are supporting this bill because we think that with the Supplementary Order Papers on board we have got to a reasonable place.It will be instructive to see once this bill has been passed—as I am sure it soon will be by the Committee stage—how it beds in and from a Regulation Review Committee point of view we will be interested to see what regulations are promulgated by the Minister for Building and Housing under the bill. I wonder whether the Minister would take a short call perhaps just to provide a short outline to the Committee as to the regulation-making process that he envisages and the scope of those regulations under the relevant clause. I think that would help the Committee’s consideration because regulation-making powers are never to be taken lightly. They have to be prescribed in legislation and the conduct of that regulation making must occur within the scope and ambit of the empowering provisions. We are hopeful that it will be and we have no reason to think otherwise but I think it would assist the Committee if the Minister could give us a brief outline to that effect. Thank you.IAIN LEES-GALLOWAY (Labour—Palmerston North): It is a pleasure to rise and speak on Part 2 of the Construction Contracts Amendment Bill a part that appears to be significantly amended by the Minister for Building and Housing’s Supplementary Order Paper 106. Can I say at the outset that on this side of the Chamber we acknowledge the interest and enthusiasm from the Minister in the issues addressed by the Supplementary Order Paper. I understand from speaking with colleagues who were on the Commerce Committee that the interest in this issue of retentions and this issue of trying not to give a cast-iron guarantee but to provide more security of payment to small-business people and to tradespeople in particular is something that this Minister has picked up. That enthusiasm was absent before the current Minister took over the role so I want to acknowledge that the Minister has decided to pick this up. That is probably why it has been a long time between drinks as far as this legislation’s progress through the House is concerned as the Minister has been working on this Supplementary Order Paper with officials. So we appreciate that that has taken some time.I agree though with Ria Bond that time is money and we are talking about people who are not big-business people. They are not people with large accounts. They are people who are going from one contract to the next and it is money in money out for most people. So the fact that this has been something that has taken considerable time for Parliament and the Government to reach this point on will have been concerning and devastating for a lot of people who were affected by some of those high-profile collapses and for other people who have not had their stories told in the media and who have had to face the issue of not being able to recover payments from principal contractors.These changes are significant though. It is a shame that the changes have not been put before the select committee and that the Minister has not assured us that he has consulted. We do not know exactly the scope of that consultation and with whom it has been carried out but I think that with this level of amendment to the legislation we are almost in Part 2 dealing with an entirely different piece of legislation from what the select committee considered. It is shame that the amendments have not had a chance to go back to the select committee.I want to look at new Subpart 2A in proposed clause 8BC which relates to the retention money. This sets out in quite some detail how retention money is to be dealt with and how parties have to put that money into trust and what they can and cannot do with that money. One bit that was of interest to me—and I would appreciate the Minister in the chair the Hon Nick Smith taking a call on this—is new section 18F under Subpart 2A which deals with the investment of retention money. This may be something that has been addressed but new section 18F(1) says: “Retention money may be invested by party A in accordance with the Trustee Act 1956 …”.I have to be honest. I do not know what limitations the Trustee Act 1956 places on the types of investment that money can be used for. But then 18F(2) concerns me a little bit. It says: “If upon the realisation of any investment the amount received is—(a) less than the amount invested party A must make up the difference between the amount invested and the amount realised:”. In other words it envisages the possibility that party A could invest that money into something that actually leads to a loss and some of that retention money is lost as a result of that. Of course in the legislation there is an expectation that that loss would be made up when any payment to party B had to be made. But in the event that party A meets some unfortunate circumstances and finds it difficult to make their payments to party B—which is exactly the type of situation that we are envisaging here; it is exactly the reason why money should be set aside in trust so that there is some more security around those payments to party B—or if party A finds themselves in financial difficulty they may have some trouble making up that difference between what they actually put in trust and what they are able to recover from it if there is a loss as a result of investing that money.So I would appreciate some clarification from the Minister as to exactly what restrictions and limitations are placed upon the types of investment that that money can be used for. If there are no limitations—and as I said I do not know what the Trustee Act 1956 says about this—then there is the potential there for that money to be invested in something that is high risk and that could result in exactly the opposite of what this part of the legislation seeks to achieve which is to have money put aside securely so that it is available for payment to be made. So I would appreciate some advice on that from the Minister or from any member opposite who has some knowledge about how that is potentially going to work.The other provisions under section 18 do appear to be all about protecting the money. There is interest on late payments. That is to be expected under any contract. There is protection of retention money under section 18H which says that “Retention money—(a) is not available for the payment of debts of any creditor of party A (other than party B): (b) is not liable to be attached or taken in execution under the order or process of any court …” and section 18E(1) talks about the use of retention money and says it cannot be used “other than to remedy defects in the performance of party B’s obligations under the contract.” So the purpose of that money is quite clear in other parts of Subpart 2A. But I just wonder whether that ability to invest that money is really in line with those—The CHAIRPERSON (Lindsay Tisch): I am sorry to interrupt the honourable member but the time has come for me to report progress.House resumed.The Chairperson reported the Accident Compensation (Financial Responsibility and Transparency) Amendment Bill without amendment the Passports Amendment Bill (No 2) with amendment the Tariff (Free Trade Agreement between New Zealand and the Republic of Korea) Amendment Bill without amendment and progress on the Construction Contracts Amendment Bill.Report adopted.