Construction Contracts Act 2002: will contracts need to change?

February 2003

The answer to this question is - yes - and with the legislation imminent, the time to look at contract wording and administration procedures is now.

Introduction

Although it will not revolutionise the industry, the Construction Contracts Act 2002 makes necessary changes to the administration of construction contracts.

The Act applies (with very few exceptions) to contracts entered into, or existing contracts that are substantially varied, after 1 April 2003.

If you do not commit your construction contracts to writing, the Act helps by providing some basic rules and procedures.

While the Act will provide comfort and protection for smaller and less sophisticated contractors, it offers something for all industry participants.

We suggest that you modify future contracts so that the requirements of the Act are met and the key elements of commonly used and understood contract forms are kept intact.

We have already prepared Act-compliant revisions to the most commonly used New Zealand conditions of contract, so please contact us if you would like copies.

Payment procedures

The Act bans "pay when paid" and similar provisions that make payment to one party contingent on receipt from another.

This will force all parties to examine the security and regularity of cash flow at the beginning of a contract and throughout the work.

We believe that the Act's payment procedures will soon become the industry standard; this is not entirely a bad thing as they are fair and commercial procedures.

The Act also sets out procedures for payments and their calculation that will apply in the absence of any specific provision in the contract. This includes, for example, the notion of monthly progress payments.

A parallel process is created by the progress payment claim and the certification system prescribed by the Act.

We believe the two should be brought together.

This is important for all parties:

• For the contractor, it will make claim documentation consistent with the requirements of the Act introducing the response and payment provisions (and ultimately the adjudication processes) without having to amend everything for both the contract and the Act.
  
  
• It is important for a principal, as it will ease the architect/engineer's administration through a single set of claims and responses.
  
  
• It is important for all parties in the contract chain, as it will ensure consistency of time frames and treatment at all levels.
  

Adjudication

The adjudication processes and procedures codified by the Act are also sensible and useful.

The regularisation by statute of procedures at any link of the contractual chain will have an effect up and down that chain, and it makes sense to ensure that contracts at each level of a project are consistent.

Contractors, principals, administrators and certifiers should also check and revise their procedures.

The adjudication provisions are intended to provide a mechanism for speedy resolution of payment and other types of dispute.

Sensibly, adjudication may be used in place of the expert and "quickfire" resolution processes prevalent in many contracts.

The selection and appointment of the authorities that can nominate adjudicators is still to be finalised, but it is to be hoped that those putting themselves forward to be adjudicators will be suitably experienced and qualified to deal with the disputes in question.

We think the qualifications of adjudicators should be put beyond doubt, with the contract specifying the skills and qualifications required in each case depending on the nature of the dispute and the contract.

Obviously, adjudication of a technical dispute under a contract for specialist electrical engineering services will require a different set of skills to those required for a civil works contract.

International experience (especially in the UK) signals some interesting times ahead as adjudication becomes a mainstream mechanism for dispute resolution.

Charging orders

In certain circumstances, a contractor will be able to obtain a charging order against the title to the site on which the work is being carried out.

A charging order will not override, in priority, advances already made under pre-existing charges registered against the title to the property.

Our question is whether in those circumstances a lender will be willing to continue to make advances. What would a hold-up in funding a draw-down do to the project?

At the very least, continuous disclosure and re-affirmation of warranties may be required in the draw-down certificates for lenders.

The Act may override explicit rights and remedies set out in the contract, and these can and should be made consistent.

Transitional issues

The Act comes in to effect from 1 April 2003. Contractors committed to head contracts will need to carefully manage the overlap with subcontracts entered into after that date as the Act will apply to those subcontracts but not the head contract itself.

Conclusion

The Act was intended to bring about a change in mindset as much as a change in rules. It will succeed in both respects - the question is how quickly.

The Act is now law and the industry must work with it, but simple changes in documentation and contract administration procedures will make the transition both speedy and smooth.

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If you would like to know more about the Act and how it may affect you, please contact Mark Crosbie.

Click here to read the full text of the Act.

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