Smith Nick: Construction Contracts Amendment Bill — In CommitteeText is incorporated into the Bound VolumeSmith Nick: Construction Contracts Amendment Bill — In Committee[Sitting date: 22 September 2015. Volume:709;Page:6840. Text is incorporated into the Bound Volume.]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 After the liens legislation was repealed at the height of Rogernomics an increasing number of incidents occurred in the construction industry that I think made New Zealand and Parliament feel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.