Security of payments and adjudication in New Zealand

Introduction

Security of payments and adjudication in New Zealand are regulated by the Construction Contracts Act 2002 (CCA), which came into force on 1 April 2003. As the primary legislation for payments and dispute resolution under construction contracts, it has played a central role in engraining good practices and processes across the industry.

 

Which statutes govern the payment regime in New Zealand?

The CCA, and the Construction Contracts Regulations 2003 govern New Zealand's payment regime. The Regulations play a support role in the payment and dispute resolution process. Among other things, they prescribe the information that must accompany payment claims made under construction contracts, and information that must be set out in a notice of adjudication.

The CCA and the Regulations have been in force for over 20 years, with the CCA having been amended many times during this period (including the recent updates to the retention regime discussed below).

 

Briefly, what is the effect of this legislation?

The CCA significantly reformed the law relating to construction contracts in New Zealand. Similar to equivalent legislation in other jurisdictions like the United Kingdom, it facilitates regular and timely payments between parties to contracts, provides for the speedy resolution of disputes, and provides remedies for the recovery of payments. Consistent with its focus on best practice payment processes, it also prohibits conditional "pay when paid" provisions.

 

To what type of contract does the payment regime apply?

The CCA applies to every construction contract (whether or not governed by New Zealand law) that relates to carrying out construction work in New Zealand. Parties cannot contract out of the CCA. "Construction work" is broadly defined – design, engineering and quantity surveying work carried out in New Zealand is captured where performed in relation to a construction project. However, it does not capture drilling for or extracting oil or natural gas, or extracting minerals.

Also, the CCA does not apply to a construction contract under which an employee is carrying out construction work for their employer. Other exceptions include contracts to the extent they contain provisions under which someone undertakes to carry out:

• construction work as a condition of a loan agreement or an agreement for the sale and purchase of second-hand chattels, fixtures or fittings; or
• services for operating and managing a building, structure or other part of any land, which are not and do not relate to construction work.

Specifically, the retention regime in the CCA applies just to commercial construction contracts (regardless of size/value), so does not apply to contracts where one party is a residential occupier of the premises that is being worked on.

 

Conditional payment provisions

Conditional payment provisions (eg, "pay when paid" clauses) in a construction contract have no legal effect. They cannot be enforced and may not be used as a basis for withholding due and payable amounts. With contractor solvency remaining a central issue for the industry, this prohibition prevents many instances where payments would be deferred or excluded entirely. The regime also extends to provisions which limit the repayment of retentions (retentions are discussed further below).

 

Default provisions for payments

The CCA allows parties to agree a mechanism for determining the number of payments, the interval between those payments, the amount of those payments, and the date when those payments become due.

While those looking to implement their own regimes can enjoy this contractual freedom, the CCA ensures there are default provisions in the absence of agreement on any of the above. For example, a party carrying out construction work will have the right to progress payments. Also, for due dates for payments, the default position under the CCA is 20 working days after a payment claim is served.

 

Payment claims, payment schedules and suspension

Under the CCA, payees can serve payment claims on the payer. There are minimum form and content requirements, supplemented by the information requirements in the Regulations.

Payers may respond with a payment schedule setting out a "scheduled amount" the payer is prepared to pay. If the scheduled amount is less than the claimed amount, the payment schedule must set out how this was calculated and why. If a payer does not provide a payment schedule in response to a payment claim by the contract's or the CCA's deadline, they are liable to pay the entire claimed amount on the due date. If full payment does not follow, or if the payer had provided a payment schedule but fails to fully pay the scheduled amount, the payee may recover that amount as a debt due in court.

In this case, the payee may also notify the payer of its intention to suspend the construction work. The CCA makes it clear that a payee who exercises this right is entitled to an extension of time and is not in breach of contract or liable for any loss or damage suffered by the payer.

 

Retentions

The CCA's retention regime has been a hot topic for the industry and lawmakers alike over the past decade. The earlier 2017 regime required retention money to be separately accounted for (and for a trust to be created) but did not require the money to be held in a separate bank account. These issues were put in stark relief by a high-profile insolvency case in 2018 where subcontractors suffered significant losses.

The government responded with a new regime that came into effect in late 2023. The key change is that when amounts become retention money under the CCA, they are automatically held on trust and must be deposited in a separate bank account. This mirrors overseas regimes and, in our view, has always represented good practice. There are also more comprehensive reporting and record-keeping obligations. Critically, parties withholding retentions (and their directors) can now face criminal liability for failing to comply with the new regime – this is an important deterrent because, despite the CCA's best efforts, there remains a risk that where the regime is ignored, payees will struggle to recover their retentions in an insolvency.

 

What types of disputes can be referred to adjudication?

The general rule is that any dispute or difference that arises under a construction contract can be referred to adjudication under the CCA – it is not limited to payment disputes. There are very particular exceptions, including where the parties have agreed to refer disputes to arbitration and the arbitration is an international arbitration or is covered by certain Protocols or Conventions.

Adjudication is provisional, and not final. Parties are allowed to submit disputes to another dispute resolution procedure (eg, a court, a tribunal or to mediation) whether or not the proceedings for that other procedure take place concurrently with an adjudication (and such submission does not affect any adjudication, unless the dispute is determined first under that other procedure in which case the adjudication must be terminated).

 

What impact has the payment regime had on New Zealand's construction industry?

The CCA has introduced straightforward processes and procedures to the world of construction payments and adjudication. Commentators have noted improvements to payment-related behaviours since it arrived, and the recent strengthening of the retention provisions also demonstrates that it can evolve to meet the industry's needs.

It is not without its blind spots. For instance, it does not secure progress payments down the contract chain (ie, providing visibility to the principal to ensure that payments to head contractors are properly disbursed to subcontractors). Also, stepping back, the numerous contractor insolvencies over the last few years serve as a reminder that the CCA's strict compliance obligations cannot replace robust cashflow management practices and, for principals, thorough financial due diligence during the procurement process.

 

What reforms do you expect to the regime?

The CCA has recently been significantly amended with the updates to the retention regime, and we do not expect any other imminent reforms. However, Standards New Zealand, the country's leading developer of contract standards, is updating its suite of construction contracts widely used by the industry. The first cab off the rank, NZS 3910 (the most commonly used construction contract in New Zealand), had its update released in late 2023. Among other changes, the retention provisions now specifically mention the Principal's obligations under the CCA.