Developing a More Effective, Low Cost Disputes Resolution Service
Hardly a day goes by when my firm does not receive a phone call or an e-mail from a builder, seeking assistance in a dispute with a building owner, building consultant, subcontractor, supplier, territorial authority, or insurer. the disputes with the clients seem to be the most prevalent and the most difficult. I have lost count of the number of times these builders have told me that it is the first time they have encountered this situation in 20, 30 or 40 years of building. Like it or not, this is a growing phenomenon, particularly in the residential building sector.
This trend has also been noted by the Government. For example, the New Zealand Productivity Commission, in its June 2011 Issues Paper on Housing Affordability, has commented that one of the reasons for low productivity in our residential building sector is the major rework required as a result of disagreement between homeowners and builders on the quality of work completed. Apparently a study commissioned by the Department of Building and Housing (“DBH”) in 2010 revealed that 31% of homeowners who commissioned building work experienced a disagreement, and in almost two thirds of those cases it was a major dispute.
Building disputes plague commercial and residential projects alike, but they seem to be more dysfunctional in the residential setting. In commercial projects the participants are less emotionally involved and far more experienced at the rules of engagement. For them it is just business, whereas for the homeowner it is often an unfamiliar experience that affects their most treasured asset. In commercial construction the amounts involved are usually far greater and the traditional dispute-resolution methods such as litigation and arbitration are affordable and provide a more comprehensive array of remedies and processes. So it is in the light commercial and residential context that effective, low cost dispute resolution services are in greatest demand.
There is a popular perception that in residential building disputes, the homeowner or “consumer” as they are often described, is always right. So if the owner is complaining about defective workmanship or materials, it is assumed that the professional consultants or tradesmen have lacked the requisite skill, or have deliberately cut corners to maximise returns, or have been careless or indifferent about the standard of their work. This perception underpins much of the reform of building law that has taken place over the past decade, and certainly influences the vast majority of media reports.
However it is important to remember that consumers vary in their ethics, morality, intelligence and judgment, just like builders and every other sector of society do. Not every defect claim by a consumer is honest, dispassionate or fair. And many claims that are genuinely made are simply based on mistaken assumptions about the cause or severity of the defect, or the consumer’s legal rights. In reality, there are some poor-performing builders and there are some poor-performing consumers. And then there are the vast majority of well-intended individuals who have a genuine disagreement over some aspect of the building project, and who require the intervention of some independent, qualified third party to assist them to reach a resolution.
Unfortunately, our justice system only exists to serve the very rich (high wealth individuals or medium-large corporations) and the very poor (those on legal aid). For everyone else, it is not an economic proposition. they only embrace the system if they are so outraged at the perceived or actual wrong done to them that the vindication/retribution factor outweighs the expense. For those with no choice in the matter, either because they are defendants or because they stand to lose more if they do not prosecute their claim, it leaves a bitter taste in the mouth and leads to disenchantment and disrespect for the rule of law. In a civilised society, that is no way to dispense justice.
For these reasons, successive Governments (in all developed countries) have striven to find a better system. Inevitably that involves some form of “quick and dirty justice” that sacrifices formality (and the refore reliability of outcome) for the sake of economy and speed. This recognises that the average citizen, faced with a financially prohibitive alternative, is content with a “near enough is good enough” outcome that allows them to put the matter behind them, and get on with their lives.
Disputes Tribunals, which are the successor to the old Small Claims Tribunals, are one response to this need. they have jurisdiction to resolve contractual disputes or tortious disputes involving property damage, provided the amount at stake does not exceed $15,000, or $20,000 where all parties agree. they are presided over by Referees who have had some basic legal training but generally possess no legal qualifications. the process involves the filing and service of a standard claim form, followed by a response form, plus whatever documentary evidence the parties wish to rely upon. then a relatively informal hearing is held where the parties represent the mselves (lawyers are barred from participating). The Referee encourages them to settle the dispute by mutual agreement, but failing that the Referee will issue a ruling.
Referees have the power to adjourn the hearing and if necessary to obtain a report from an independent experienced investigator at the Government’s expense. the Tribunal can summon witnesses. Settlement agreements reached at Disputes Tribunal hearings, and Referees’ rulings, are binding on the parties and can only be appealed from in limited circumstances. They are enforceable in the same way as District Court judgments. Referees can rule not only that one party pay another party a sum of money, but can also direct that certain work be done, or that certain property be handed over, or that an agreement be modified. Referees are not obliged to strictly apply the letter of the law (or even to know it, for that matter), so inevitably there is an element of common sense or pragmatism in their decisions.
Parties cannot contract out of their right to have recourse to the Disputes Tribunal, and once a ruling is made it will be determinative of the issue unless there is a rehearing or an appeal. the Disputes Tribunal process the refore supersedes the dispute-resolution provisions in the building contract, if one of the parties opts to use the Tribunal. However, if proceedings have already been commenced in a court or another tribunal, then that alternative forum takes precedence. In addition, if the parties have entered into a consumer arbitration agreement pursuant to section 11(1) of the Arbitration Act 1996 after the dispute has arisen, then the Disputes Tribunals have no jurisdiction in respect of the subject matter of the agreement.
The major advantages of the process are its speed (6-8 weeks on average from commencement to conclusion), informality (if that is attractive to the participants), and economy ( the service is provided for free, apart from the filing fee, and the lawyer’s role is limited to providing assistance before or after the hearing). As at 1 July 2011, where the dispute involves $5,000 or more, the fee for lodging a claim is $120.80. there are, however, some major disadvantages to using the Disputes Tribunal as a forum to resolve building disputes, particularly if you are not the building owner.
For a start, you cannot use it to collect an undisputed debt. So if the owner is simply resolutely refusing to pay the contract price with no justification, the builder will have to goad him into alleging some kind of grievance with the builder in order to bring the dispute within the Tribunal’s jurisdiction. Frequently, this can backfire on the builder. there are numerous cases where a building owner, having refused to pay the contract price without any apparent justification, responds to the builder’s Disputes Tribunal claim with a previously unheralded counterclaim for alleged defects that exceeds the quantum of the unpaid invoice(s).
Furthermore, unless the Referee can be persuaded to obtain an independent investigator’s report, the Referee will invariably lack the means to assess the credibility of the defects claims. Those claims might be completely unmeritorious. But given the propensity of the Tribunal to split competing claims down the middle when the evidence does not clearly favour one side or the other, the aggrieved builder might find himself paying out to the owner rather than recovering the unpaid invoice.
The Disputes Tribunals serve a valuable function when the dispute in question does not require specialist knowledge or expertise. But too often, building disputes require exactly that. Unless the Ministry of Justice develops a body of Referees who are specifically trained in or knowledgeable about the characteristics of the construction industry, the Tribunal’s decisions in this area are likely to be too hit-and-miss. If people perceive that recourse to the Tribunal is equivalent to a lottery, they will look for alternative avenues, even if they involve greater expense. In this industry as in all others, you get what you pay for.
It will be little consolation to the disappointed party that they might be able to appeal the decision. Generally to qualify for an appeal you must be able to prove a substantial element of procedural unfairness, which is a very difficult burden to discharge. Appeals involve a protracted District Court process, technical legal issues, and reliance on legal expertise, all of which seem difficult to justify for a dispute involving less than $20,000 and in most cases less than $15,000.
District Court Reforms
the Ministry of Justice has been working on the problem of better access to justice for some time, and in 2009 introduced a radical reform of the District Court Rules to address the inefficiencies of the previous system. the objective of these reforms was to encourage litigants to undertake a kind of do-it-yourself process before the formal litigation process commences, in the expectation that they will voluntarily settle their differences once each side has put their cards on the table. This reflects the prior experience that only 3% of District Court cases were ever defended, and of those, only 5% ever reached a trial. the intention is that if litigants are assisted to come to their senses before too much time has elapsed, money has been spent, and pressure placed on the Court’s resources, then everyone will benefit.
Much like in the Disputes Tribunals, a plaintiff can now download a Notice of Claim form from the District Court website, fill it in, and file it in the District Court to start the ball rolling. Once served with the Notice of Claim, the defendant(s) then respond with a Response form which they serve on the plaintiff. the plaintiff then provides an “information capsule” which replies totheresponse and summarises the evidence that supports the plaintiff’s case, and this is followed by the defendant’(s) information capsule. Counter claims are dealt with in a similar way. Each of these forms is written in user-friendly, plain English, and they prompt the author to provide the requisite information.
Those exchanges of allegations and information define the dispute in a rudimentary kind of way. It is not essential that lawyers be involved in writing the m, and in fact the intention is that litigants can avoid the prohibitive cost of heavy reliance on lawyers at this early stage by doing the bulk of the work the mselves. If this preliminary process has not resulted in a negotiated settlement, then the plaintiff and/or the counterclaiming defendant can file a Notice of Pursuit of Claim which alerts the Court to the fact that its active intervention is required. there is then an opportunity for third parties to be joined, following which the Court elects whe the r to allocate the dispute to the Disputes Tribunal (if it has jurisdiction and the case is suitable), a short trial, or a judicial settlement conference (“JSC”).
Short trials are reserved for cases where the issues are simple, a modest amount is at stake, and the trial time is not likely to exceed one day. other cases go to a mandatory JSC, where the expectation is that the Judge will persuade the parties, who by this stage should have a better appreciation of the merits of their case, to reach a mutually satisfactory settlement of their differences. A dispute that fails to settle as a result of the JSC will, depending on its complexity, then be allocated to either a simplified trial, a full trial, or a summary judgment proceeding (if appropriate).
Although the new District Court process does not apply to every type of legal dispute (for example, defamation, admiralty proceedings, or enforcement or arbitration awards), it does apply to construction disputes. It applies to proceedings under the Construction Contracts Act 2002, but only to the extent provided under Part 9 of the District Court Rules. However Part 9 modifies the general procedural rules only to a very minor extent – mainly by prescribing the forms to be used in an application to review or enforce an adjudicator’s award. Notwithstanding that, the usefulness of the new District Court process in the context of a low value building dispute is highly questionable, for the following reasons.
For a start, it is still extremely time consuming. For a landlord requiring urgent completion to get the rental income flowing, a homeowner who desperately wants to move out of rental accommodation, or a builder who is under pressure to pay his subcontractors and suppliers and feed his family, the prospect of a potential 5 month delay before the matter is allocated to a short trial or JSC, and then a further potential 5 month delay before a judgment is issued, is extremely unpalatable.
Most of these disputes emerge towards the end of the project, after the relationship has steadily deteriorated. Frequently the owner has masked his displeasure until he has possession of the building and has retained the final instalment of the contract price. His intention is then to use that money to pay a substitute builder to finish off the project. That is notwithstanding that the underlying dispute has not been resolved, there are probably insufficient grounds for terminating the building contract, and the owner may well be genuinely mistaken about the merits of his case.
In our legal practice we see evidence of this strategy being implemented over, and over, and over again. It is the almost inevitable consequence of a contractual arrangement whereby the builder completes a portion of the work, and then hopes to be paid for it. Some building contracts provide for payments in advance, or for the builder to hold some form of security for payment, but in most cases the builder is an unsecured creditor and the refore is at a distinct disadvantage.
This arrangement creates a perverse set of incentives as far as dispute-resolution is concerned. A building owner who is in possession of both the property and the final instalment of the contract price, has little incentive to participate in any dispute-resolution process, let alone accelerate it. He is in the driver’s seat, and it is up to the builder to do something if he wants his money. A similar but opposite situation arises where the builder has been paid up to date (or overpaid), and has then abandoned the project before completion. In those situations, do the 2009 District Court Rules provide a viable way of achieving justice?
Apart from the delays, the main problem is that the system assumes that the participants in a light commercial or residential building project will act rationally, and will settle their dispute long before it runs its full course. But that is a rather optimistic assumption. In practice, as many modern day economists are discovering, human beings are not driven purely by economics, and are certainly not driven by a desire to be reasonable and concede where appropriate. Where people are emotionally involved in a dispute they feel an intense sense of injustice, and are determined not to give an inch until the toll that the dispute takes on them becomes so overwhelming that they are left with little choice but to cut their emotional and financial losses.
The typical pattern that we encounter is that at the outset, each party is intent on using their lawyer as a blunt instrument with which to bludgeon their adversary into submission. the idea is to inflict more financial and emotional pain on your opponent than you are currently feeling, in the hope that they will capitulate. Only once several nasty counter-punches and several hefty lawyer’s invoices have been absorbed over an extended period, do the parties tend to tire of the process and look for a way out. But under the new system that point is unlikely to be reached until way past the JSC or short trial allocation. then it becomes a poker game sustained by bravado or the macho instinct, until one player blinks. It is a question of who can hold out the longest.
As experienced lawyers we like to think that we can counsel our clients out of this trial-by-attrition approach, but we cannot blame them for not capitulating when their adversary is one of those “pound of flesh” types, as they frequently are. In those situations the preliminary exchanges of correspondence, claim, counterclaim, response, and mutual information capsules, followed by stubborn resistance at the JSC or private mediation can be an expensive waste of time. What the parties really need is immediate referral to an authoritative third party who can rule on who is right and who is wrong, at the earliest possible opportunity.
Can the District Court process deliver that? Regrettably not, it seems. Except in the rare cases where a strikeout application is appropriate, a District Court Judge can only deliver a judgment following a short trial, simplified trial or full trial. And those must all follow the prescribed exchanges of claim, counterclaim, response, and mutual information capsules, and in the latter two cases, a JSC as well.
It is possible to apply at an early stage for leave to proceed by way of statement of claim or originating application, which will enable you to by-pass all the preliminary steps. But leave will only be granted in very rare cases. the factors the Court will take into account in deciding whe the r to grant leave include the amount of money involved, the importance of the case, the degree of difficulty or complexity to which the issues in the proceedings give rise, the urgency of the matter, the financial position of each party, any other matters the court considers relevant. In a relatively small claim the application for leave is going to soak up a disproportionately large amount of money, with no certainty of success. And even if it does succeed, the parties then have to endure a formal trial conducted under the High Court Rules, rather than a less formal but reasonably reliable procedure that would be more suited to the circumstances of the case.
The Construction Contracts Act 2002
At the turn of the century there were a number of high profile construction company collapses ( the leading example of which was Hartner Construction) brought about by intense competition, squeezed margins and unethical practices that were prevalent in the industry. In response, the Government borrowed from overseas experience, and passed the Construction Contracts Act 2002 ( the “CCA”). This was intended to assist head contractors and specialist subcontractors below them to extract prompt payment from their principals, and to resolve disputes promptly and inexpensively.
The CCA applies to both residential and commercial construction contracts. It was specifically introduced to streamline the whole dispute-resolution process in the building industry. It does this in two main ways.
- It sets up a procedure whereby a builder or subcontractor can force the party he has contracted with to pay his progress claim as an interim measure, irrespective of any dispute they may have with him. the only way they can avoid doing that is to promptly provide genuine reasons in writing why they propose to pay less. This is known as the payment claim/payment schedule procedure.
- It allows either party to submit any dispute concerning the work or the building contract, to an adjudicator to have it resolved quickly and informally. This is known as the adjudication procedure.
Payment Claim Enforcement
If the builder has given the owner a payment claim for the money that is owed to him, and the owner has not responded with a payment schedule within the required time, the builder can apply to a Court or a CCA adjudicator for a ruling that requires the funds to flow from the owner’s bank account into his bank account. This is regardless of any issues the owner might have about workmanship, delays, cost escalations, or anything else.
The intention is simply to stop the retention of genuinely owed funds being used as leverage in a building dispute. the money must flow down the line to enable subcontractors and suppliers to be paid, unless a credible reason is given in the form of a payment schedule by the deadline. the only way to stop that money flowing is by means of a payment schedule. But this was never intended as the final determination of the underlying issues in dispute. It is simply a mechanism to determine who gets to hold on to the money (and spend it) in the meantime.
An unanswered and unpaid payment claim (or a failure to pay the uncontested portion of a payment claim) creates a debt that can be recovered in Court, toge the r with the actual and reasonable costs of recovery. In that event the Court must not give effect to any counterclaim, set-off, or cross-demand (subject to one very limited exception).
Instead of going direct to a Court to enforce a payment claim, you can (as an intermediate step) obtain a similar ruling from a CCA adjudicator. If the adjudicator’s determination is not honoured it would still need to be enforced through the Court, but faced with the cost of a tenuous defence, many parties opt to voluntarily comply with the determination. Some commentators have questioned whe the r adjudicators have jurisdiction to rule on the validity of payment claims and payment schedules (as distinct from payment entitlements or rights and obligations arising under the construction contract), but there have been a number of High Court cases that have upheld the practice.
The advantages of the CCA adjudication process are as follows:
- Either party can force the other to submit to it, whe the r or not they agree, and whe the r or not the dispute is already being heard by a court or tribunal at the same time.
- There are strict time limits that must be observed, such that the parties can normally expect to get an answer within two months.
- The adjudicator is normally a lawyer, engineer, architect, builder, or quantity surveyor who is experienced in the construction industry, so the quality of the rulings is generally high.
- Adjudications cost significantly less than court proceedings or arbitration. there are very few preliminary steps, no hearings, and the parties get only one opportunity to submit their arguments, in writing.
- The parties pay their own legal costs and split the adjudicator’s fees and expenses between the m, unless one side has behaved particularly badly in which case they will pay a greater proportion.
- If the adjudicator rules that one party is owed some money, and the other doesn’t pay promptly, the successful party can ask a court to order that it be paid (which is reasonably straightforward if it is a commercial project), they can suspend work (unless it is a residential project), and they can ask the District Court to treat the adjudicator’s ruling as if it was a Court judgment, and enforce it using the Court’s powers (unless it is a residential project). If it is a residential project, the process is more convoluted, but it produces the same result in the end.
There are some downsides, of course. Because of its speed and informality, adjudication can sometimes produce the wrong result, and if a party does not like the result they can always ask a court to overturn it. Or, if the building contract makes arbitration mandatory, the unsuccessful party might be tempted to pursue that avenue in an attempt to get a different result. But in the meantime, any payment ordered by the adjudicator must be made.
Further Reform of the Construction Contracts Act
The CCA was a big step forward, but experience has shown it needs further improvement. This is particularly so now that the Government has determined that the CCA is to be the preferred method of resolving residential building disputes. the Government is the refore taking steps to make the CCA more effective, and amending legislation is in the pipeline.
The main problem is that although the CCA eliminated some of the abuses that were prevalent in larger construction projects, it has not done much for the residential construction sector as yet. This is largely due to the differentiation in the Act between commercial building projects and residential projects, and the cumbersome procedures applying to the latter.
Why the CCA is not as Effective For Residential Construction Contracts
When the CCA was first introduced it was felt that some of the protections given to head contractors would leave homeowners at a disadvantage if it came to a dispute. So many of the rules that apply to commercial contracts do not apply to residential contracts. Consequently, where at least one of the parties to the building contract is a “residential occupier” of the dwellinghouse in question, head contractors miss out on some of their normal remedies.
For example, unless there is an express provision in the contract (which there is in most written building contracts), head contractors cannot claim progress payments and they cannot suspend work when the owner defaults. they cannot obtain a charging order against the property to secure payment of what has been awarded to them by an adjudicator. And if they want to enforce an adjudicator’s payment award through the District Court they cannot simply have it enforced by entry as a judgment, as they can with commercial construction contracts.
In addition, the payment claim enforcement process has proved ineffective in the context of small residential claims. In a residential context, most of these disputes arise towards the end of the building project and involve disputed sums which to the parties the mselves are large amounts, but are relatively small amounts to litigate over. As with commercial disputes, a debt recovery action has to be commenced in Court, and a judgment obtained (unless the claimant obtained an adjudicator’s determination instead and the debtor voluntarily complied with it).
An owner who has failed to provide a payment schedule on time generally has some reason for defaulting in payment, so the omission to provide the payment schedule is usually inadvertent. It is extraordinary how often even well educated homeowners neglect to read the fine print on the back of the payment claim. the reason for defaulting in payment usually relates to some issue the owner has about workmanship, delays, cost escalations, etc. So faced with the prospect of having the unanswered payment claim enforced against him and having to temporarily part with the money, the owner might choose to accelerate the resolution of the actual underlying dispute, and so render the enforcement of the payment claim superfluous.
The quickest and most cost-effective way of doing that is to use the CCA adjudication procedure and obtain an adjudicator’s ruling as to how much is owed to whom. That ruling will invariably be issued long before the payment claim enforcement action comes up for hearing. So even if the builder wanted to persevere with the hearing, the question of who is temporarily entitled to the money will be academic. the adjudicator will already have ruled on who is permanently entitled to the money. If the payment claim was then enforced, logically the one amount would be netted off against the other, so it will turn out to have been a pointless exercise anyway. That is, unless either party chooses to challenge the adjudication determination through the courts or through the dispute-resolution procedures prescribed by the building contract.
Often the homeowner will simply contest the payment claim enforcement action rather than resolve the underlying dispute. Prior to the 2009 District Court Rules the builder could apply for summary judgment and expect to have an outcome within, say, 4 months. But under the 2009 Rules it is necessary to undergo the claim, counterclaim, response, and mutual information capsule process, before hopefully being directed to a short trial ( the reby by-passing the JSC). Alternatively the builder can seek leave to go straight into the formal trial process by way of statement of claim or originating application, and hope to be granted leave.
All the while the homeowner, who is usually incensed at the thought that he might he might have to pay the builder’s final instalment when he has a list of grievances as long as his arm, fights every step of the way. So you have the situation where the building project is largely finished, the builder has what is effectively an entitlement as of right to be paid the funds on an interim basis, but the cost of the proceedings is out of all proportion to what is at stake, the builder is facing a potential 8-12 month delay to obtain a judgment, and still the underlying disagreements remain to be resolved. So in a small residential project, enforcing a payment claim generally doesn’t make sense.
Apart from those logistical difficulties, the uncertainty of the eventual outcome makes it even more of an impractical exercise. This is because in some residential disputes the Courts have permitted the spirit and intent of the payment claim enforcement process to be defeated. Many District Court Judges, faced with a defendant homeowner with a list of grievances as long as his arm, unfamiliar with the concept underlying the payment claim process, and steeped in the tradition that summary judgment-type claims are only appropriate when there is no defence, simply cannot bring the mselves to order the homeowner to pay the builder.
So we have situations arising where technical flaws in the payment claim process are relied upon to defeat the claim, or judgment on the payment claim is granted, but stayed pending the resolution of the underlying dispute.
For example, problems arise when the builder omits to attach the required residential occupier notice to the payment claim, or includes a notice that has errors in it, or is uncertain whe the r the project is defined by the CCA as a residential or a commercial one and the refore elects not to attach the notice. That leads to some unfairness. Some owners who receive the notices are already well-informed about the CCA and place no reliance on the notice whatsoever. And yet they sometimes manage to avoid their legal responsibilities by later discovering some defect in the notice, often by luck. In one case, the builder discovered he had forgotten to attach the notice a day after the payment claim was given to the owner. So he remedied the oversight the same day, still well within the period within which the owner had to respond. And yet the Court ruled that the day’s delay was deemed to be fatal.
Current Problems with Adjudication
There are also problems with adjudication in general under the CCA. Although it is an ideal system for low-medium quantum disputes, it currently suffers from a number of flaws, including the following:
- The competence of the adjudicators is variable, and there needs to be a more uniform standard.
- The ability to appeal an adjudicator’s determination is very limited.
- Adjudication determinations about the parties’ rights and obligations under the construction contract (as distinct from payment awards) are not enforceable, and in residential disputes there is no voluntary compliance with those determinations.
- The enforcement of payment awards is a two step process that requires the original adjudication followed by the District Court proceedings, so it is even more impractical than the process for enforcing unanswered payment claims directly through the District Court.
- The dispute-resolution procedures that apply under the building contract can be run in parallel to the adjudication, or subsequent to it, with the result that any party aggrieved by the outcome of the adjudication can have a second bite at the cherry and effectively double the cost of resolving the dispute.
- The supply of building materials and professional services are excluded from the ambit of the Act, which means that building owners and contractors with relatively few resources are deprived of the ability to resolve disputes with those suppliers, through adjudication.
More often than not it will be the builder who initiates the adjudication, rather than the owner who is in possession of the house and the money. And invariably in a residential project, adjudication to obtain a payment award is a better alternative to attempting to enforce an unanswered payment claim. But having obtained his adjudication award, if the owner does not abide by it, the builder needs to go to the District Court in order for it to be enforced. In the case of a commercial construction contract there are three options for enforcement of an adjudication payment award (suing for recovery of the debt, suspension of work, or entry as a judgment), but in the case of a residential construction contract only suing for recovery of the debt is available.
The Initial Reform Proposals
In November 2010 the DBH issued a discussion document which outlined their proposals for reform of the CCA. In summary, they were:
- Remove the limitations on how the CCA applies to residential construction contracts.
- Require a “notice to occupier” to accompany all payment claims (not just residential payment claims as is currently the case) that explains how to respond to the claim and what the consequences are of not paying or not paying in full.
- Provide that adjudication orders made under the CCA can be enforced as if they were orders of the District Court or High Court.
- Allow adjudication orders about residential construction contracts to be enforced in the same way as commercial construction contracts.
- Allow adjudication orders about rights and obligations disputes to be enforced in the same way as payment disputes.
- Enable adjudication orders made under the CCA to be appealed if a party thinks the decision was wrong (ie. on points of law or fact).
- Enable adjudication orders made under the CCA to be appealed if a party thinks the process was unfair.
- Enable appeals to go to the District Court in the first instance.
- Remove the requirement for adjudication orders to be kept confidential.
- Retain the exclusion for related goods and services contracts from the CCA payment provisions.
- Permit parties to related goods and services contracts to use the adjudication process set out in the CCA.
Following the release of the discussion document, the Government consulted the public and various people within the construction sector, and then on 6 April 2011 the Cabinet Economic and Infrastructure Committee announced the changes it had decided to make. Those changes are more conservative than the initial proposals, but are worthwhile none the less. the draftspeople at the Parliamentary Counsel Office will be grappling with them at the moment.
However the Minute of the Committee’s decision and the explanatory paper that supported it, are nowhere near as sophisticated an analysis as the discussion paper that preceded the m. It is the refore difficult to make sense of some of the decisions, and it is likely they will be modified with the benefit of further thought and consultation. the decisions, and their limitations, are as follows.
- The most important change is to get rid of the distinction between residential and commercial construction contracts, apart from the inability to use CCA charging orders as a remedy for non-payment.
- In the residential context, the ability to have an adjudicator’s ruling enforced by entry as a judgment of the District Court, rather than being limited to suing for recovery of the debt, is a big step forward. However, there remain the problems associated with inappropriate preliminary exchanges of allegations and information, delays and expense under the 2009 District Court Rules. It will be critical that the District Courts recognise that enforcement of an adjudicator’s determination by entry as a judgment of the District Court is one of those situations where leave to proceed by way of statement of claim or originating application (and then by way of summary judgment) should be automatically granted.
- The definition of “residential occupier” is to be amended and clarified. How and why this is to be done is not entirely clear. the CCA defines a residential construction contract as a contract for carrying out construction work in which one of the parties is the residential occupier of the premises. A residential occupier is an individual who is occupying, or intends to occupy, the premises wholly or mainly as a dwellinghouse. A dwellinghouse is any building that is occupied as a residence. Presumably the amendments will confirm that a bach, crib or time share is a residence, and that even if the contract is between the builder and an entity such as a flat-owning company or a corporate trustee that is the registered proprietor on the title to the property, the person who effectively controls that entity and has the right to occupy the premises, is effectively a party to the contract.
- The CCA currently does not include design, engineering and quantity survey services in the definition of “construction work”. So architects, engineers and quantity surveyors cannot serve payment claims on their clients to recover their fees. But at the same time their clients cannot resolve disputes with them using CCA adjudication. So the definition of “construction work” is going to be widened to include those types of professional services, although only for the purpose of adjudication, and not for payment claims.
- Currently the CCA differentiates between adjudication determinations relating to a party’s liability to make a payment under the construction contract, and adjudication determinations relating totherights and obligations of the parties under that contract. Only the first type of determination (a “payment” determination) is enforceable. If any party fails to comply with the second type of determination (a “rights and obligations” determination), any other party may bring proceedings in court to enforce their rights. In that event the court must have regard to, but is not bound by, the determination. That distinction is about to be abolished, and both types of determination will be enforceable. Rights and obligations determinations are relatively rare in any event, but they can arise, for example, where the owner is seeking a declaration that it is entitled to terminate the building contract and hire a substitute builder.
- There are tight time frames for adjudication under the CCA, including five working days for the respondent to provide a written response to a claimant’s adjudication claim. the adjudicator can grant the respondent a reasonable extension of this time period, and the new rules will clarify the process (and presumably the criteria) for applying for one.
- Adjudicators will also be required to hold a pre-adjudication conference to answer any questions the parties may have about the process, unless both parties agree to dispense with it. Although such a conference often occurs already (to deal with such issues as consolidation of related claims, rights of reply, etc.), the combination of these measures is likely to slow the process down a little.
- It appears that the DBH has taken on board the concerns about the cost and delays inherent in enforcement of adjudication payment awards. there are three principal enforcement methods (soon to be available for both commercial and residential projects) - suing for recovery of the debt, suspension of work, or entry as a judgment. the proposed solution relates only to the entry as a judgment option, and it is to reduce the time during which the debtor can apply to the District Court to refuse entry as a judgment, from 15 working days to 5 days. Quite how this will significantly speed up the dispute-resolution process when the combination of the 2009 District Court Rules, more liberal extensions of time for adjudication claim responses, and pre-adjudication conferences are likely to slow it down, remains to be seen.
- The ability to appeal, challenge, or re-hear an adjudication ruling are going to be clarified. there is no indication in the cabinet Minute or supporting paper as to how or why this is to be done, but neither is there currently any guidance in the CCA, so some clarification would be welcome. the fundamental problem with adjudications is that they do not create any issue estoppel and the res judicata doctrine does not apply. In other words, they are not determinative of the issues in dispute and a party who is disenchanted with the outcome can re-litigate the issues all over again through the courts or whatever method the building contract prescribes. That is a hopeless situation for parties to low value contracts who simply want an affordable, informal and expeditious resolution that is final and binding in the absence of manifest error or unfairness. there should be the same limitations on re-hearings, appeals or judicial review as there are in the Disputes Tribunals.
- The Construction Contracts Regulations 2003 are going to be amended to prescribe the minimum qualifications, expertise and experience adjudicators have to have. Section 34(1) of the CCA always contemplated such provisions, but they were never adopted. This will be useful to prevent the parties agreeing to appoint someone who is totally unsuitable. However where they cannot agree on someone, an authorised nominating authority (“ANA”) makes the choice. the three current ANAs already have relatively stringent criteria for qualification as one of their adjudicators sotheregulations are unlikely to improve the calibre of their adjudicators. Probably only publication of their determinations, more extensive appeal and judicial review rights, and a dilution of their statutory limitation of liability under section 70 would have that effect.
- Finally, some changes are to be made to the “notice to residential occupier” that must accompany a payment claim or a notice of adjudication in a residential project. these notices are intended to tell residential occupiers about the significance and legal consequences of the payment claim or the notice of adjudication. the present proposals are merely intended to “clarify” the notices for residential occupiers, but precisely what is wrong with the existing forms is unclear, as they are already written in user-friendly plain English. the real issue is that they should be included on all payment claims or notices of adjudication, regardless of whotherecipient is, and they should be simplified so that they merely alert the recipient to research or take advice on the CCA, urgently. Alternatively the issuer of the notice should be able to overcome typographical errors or minor service issues with the notices, by demonstrating that the recipient could not reasonably have been misled or prejudiced as a result.
The Weathertight Homes Resolution Service
During the 1990s, a popular preference arose for Mediterranean-style stucco houses with inadequate protection against the elements. This coincided with the advent of untreated framing timber to appease both the environmental lobby and the cost-conscious building industry. the combination of these factors resulted in the leaky building crisis, which will impose an unprecedented financial and emotional burden on New Zealanders (Christchurch aside) for at least the first two decades of this century, and possibly much longer.
The response to the leaky homes crisis was the Wea the rtight Homes Resolution Services Act 2002 which was later replaced by the Wea the rtight Homes Resolution Services Act 2006 (“WHRS Act”). these Acts established the Wea the rtight Homes Resolution Service (“WHRS”) and the specialist Wea the rtight Homes Tribunal. these provide yet another form of dispute-resolution service that is available exclusively to the building industry.
However it only applies in a relatively narrow set of circumstances. Those are where water has penetrated a dwellinghouse from the outside as a result of its design, construction or alteration, or the materials used, and damage has resulted. the design or building work must have been done within the past 10 years, and prior to 1 January 2012. there are similar criteria if the building in question is part of a multi-unit complex or a stand-alone complex. If those criteria are satisfied, the WHRS provides a prompt, cost-effective, and relatively informal system that is state-managed and state-subsidised to a much greater degree than the courts system, but which still arrives at a reasonably satisfactory result.
The attractions of the WHRS to homeowners are that they receive a free investigation and comprehensive report done by a qualified building consultant. they then get a free case manager employed by the Government who coordinates the whole process for them from beginning to end. An adjudicator is assigned to the case who they don’t have to pay for, and who is actively involved from the initial stages right through to the end when he/she delivers a determination. And they also get the services of a free construction expert who presides over a lengthy mediation which in almost all cases results in a settlement of the dispute by mutual agreement.
Although respondents to a WHRS claim do not usually welcome the prospect, the reality is that faced with the choice of defending the mselves in the High Court or District Court, they will find the WHRS and WHT to be more user-friendly, quicker and cheaper environments to defend the mselves in.
The only other options that would be more user-friendly, quicker and cheaper would be the Disputes Tribunals (subject to the $15,000 and $20,000 limitations), and adjudication under the CCA. Although CCA adjudicators are limited to making rulings about payments due or rights and obligations arising under construction contracts, that might encompass a claim by leaky homeowners against the designers, consultants, and tradesmen they contracted with (although probably not the Council). And even subsequent owners might be able to use the CCA to resolve a claim against those parties, if they relied on the implied warranties under the Building Act 2004 and successfully argued that they created a form of construction contract. But obviously each of those options has its limitations, as discussed above.
Admittedly, the WHRS isn’t for everyone. It delivers “quick and dirty justice” rather than the more careful, methodical and technically correct outcome that you expect to get from the courts, and it can only deal with external leaks (not other defects). It doesn’t have the full array of pre-trial procedures that are designed to stop evidence being withheld or half-truths being told, nor the full range of remedies, and if you are successful (either as a claimant or defendant) it is rare for the other parties to be made to pay some or all of your costs. Furthermore, a record of the claim goes on the Council files, and will appear on any LIM issued to a potential purchaser.
Consequently the owners of large apartment blocks or higher value homes often choose to go to court instead. But for most people, the WHRS gives them an outcome in less time and at less cost than the courts would, and even though the adjudicators of the Wea the rtight Homes Tribunal are not as qualified as Judges, they are specialists in leaky home disputes and their rulings are reasonably reliable. Most people adopt the “near enough is good enough” attitude and prefer to put the dispute behind them and get on with life, than to battle it out year after year at enormous expense.
Proposals for Reform of the WHRS Act
Even though the WHRS has advantages over the Courts in the context of small-medium leaky home disputes, too much time and money is still spent on deciding who was at fault. So the Government resolved that it and participating Councils would offer 25% of the repair cost each, in return for a comprehensive immunity from future liability. the Wea the rtight Homes Resolution Services (Financial Assistance Package) Amendment Bill was drafted to implement these changes, and it received its third reading on 12 July 2011. the package will become available after Royal Assent is granted and the contribution criteria are published in the New Zealand Gazette.
The essence of the Financial Assistance package (“FAP”) is that the Government will contribute 25% of the costs of repairing the damage and fixing the leaks. Those territorial authorities (Councils) that have opted into the scheme will contribute another 25% of the costs. But they will only do so if they are potentially liable – in other words when the y, and not a private certifier, assumed responsibility for the inspections and the code compliance certificate. Anyone else who might be liable for the defective designs or building work that caused the leaks, can contribute as well. In return for the above contributions, the contributing parties all get certain protections from liability, from being named or joined in civil proceedings, and from having remedies or relief sought from the m.
Once the scheme is launched, it will be restricted to eligible leaky home owners who have filed a claim with the WHRS within 10 years of the defective work being done, and who have applied for the FAP. If their claim appears to meet the criteria under the Act, an assessor will be appointed to inspect the house and prepare a “concise” report that specifies the work needed to make the dwellinghouse wea the rtight, and estimates the cost of that work.
The Government (and possibly the Council) will then enter into discussions with the claimants with a view to reaching agreement on the scope of work and the repair costs the Government is prepared to fund. the claimants will go out to the market and obtain quotes from architects and builders so that they can check how accurate the estimated cost was, and use this as a basis for negotiations. Once they have reached consensus, a “contribution agreement” will be prepared and signed by the claimants, the Government, and (if applicable) the Council and any other contributing parties.
The agreed repair costs can include not only the cost of the rectification work, but also associated costs such as a valuer’s report, design work, project management, building and resource consents, alternative accommodation, and storage of household effects. However they exclude the cost of obtaining legal advice and assistance in connection with the process. the contributors will also refuse to pay for any improvements, extravagant repairs, or work unrelated to the leaks and resulting damage.
The total cost the contributors are prepared to fund may vary depending upon whe the r the repairs turn out to be more complex than expected. Invariably in leaky home remediation the full extent of the necessary remedial work is not known until the defective parts of the house have been opened up. So if the original estimate proves inaccurate, adjustments to the agreed repair costs will be made.
The Government will want to ensure that its money is actually applied towards the agreed scope of work, and that it will only be paid out once the work has been performed, and performed satisfactorily. So there will be safeguards built into the contribution agreement, which will probably also be reflected in the remedial building contract, that enable the Government to review the work and approve or withhold payments.
The Amendment Bill also authorises the Minister for Building and Construction to give written guarantees or indemnities in support of loans made by approved financial institutions, to claimants, for the sole purpose of funding that portion of the repair costs that are not funded by the contributing parties. If the claimant is borrowing from an approved lender to fund the balance of the repair costs, and a Government guarantee or indemnity is to be applied for, then the contribution agreement will deal with this as well.
The parties to a contribution agreement can include anyone in addition to the claimants, the Government, and the Council, and they can contribute by paying money, or providing services, or supplying goods. the builder and the plasterer, for example, could agree to dotherectification work, with materials supplied at cost by their regular building supply merchant. the Amendment Bill has missed an opportunity, however, to create adequate incentives for all the potential respondents (previous owners, building surveyor, architect, project manager, builder, plasterer, joinery installer, roofer, building materials supplier, etc.) to join in the contribution agreement, and settle the whole dispute once and for all.
The difficulty for them is that these agreements will be entered into at the outset of the claim, before too much has been expended in legal fees and before any of the standard interlocutory procedures such as joinder and removal of parties, and exchange of evidence, has taken place. the refore the challenge for the developer, architect, project manager, builder, plasterer, roofer or other defendant will be to calculate what percentage of the agreed repair cost they will ultimately be found liable for (if any), at a stage when they have relatively little information.
The Building Act 2004
The construction industry’s solvency crisis and leaky building crisis at the turn of the century highlighted the industry’s inadequacies. This prompted the enactment of the Building Act 2004 to replace the 1991 Building Act and to lift the bar as far as standards in the industry were concerned. From a dispute-resolution perspective, two aspects of the 2004 Act stand out.
The need for higher quality thresholds in the building sector led to the introduction of the licensed building practitioner (“LBP”) regime which from 1 March 2012 will require all critical aspects of a residential building to be designed and built by qualified professionals or tradesmen. This was coupled with the imposition of a regulatory and disciplinary regime on LBPs, complete with periodic monitoring of a practitioner’s competence, continuing education requirements, a statutory code of ethics, a complaints procedure, an independent Building Practitioners Board (“BPB”) with disciplinary powers, and public disclosure of a practitioner’s disciplinary record.
It is the disciplinary regime that will have the greatest impact on dispute-resolution. Some commentators have already suggested that an aggrieved homeowner should file a complaint with the BPB as a precursor to any other resolution procedure. It will not only serve as a means of applying psychological pressure on the builder at an early stage, but it will also serve as a low cost “dry run” to test the strength of the homeowner’s case. the BPB can only impose sanctions on the builder rather than order specific performance of a building contract or payment of compensation to the homeowner, but the threat of those sanctions will be effective leverage none the less.
Arguably the BPB should not entertain complaints about licensed builders where the merits of the competing claims are yet to be established. That would mean pre-empting or duplicating the role and function of the arbitrator, adjudicator, Disputes Tribunal Referee or Judge, who are better equipped to weigh the competing arguments. But it remains to be seen whe the r a BPB that is eager to flex its muscles will resist the temptation to jump the gun.
The second dispute-resolution feature of the Building Act 2004 was the introduction of mandatory implied warranties into residential building contracts and agreements for sale and purchase of household units by residential property developers. these warranties impose minimum quality standards for the building work and for the homes the mselves.
The warranties appear to have had little impact to date, possibly because they are superfluous. To a large degree they duplicate the implied guarantees that are available to consumers of building services under the Consumer Guarantees Act 1993. However unlike the Consumer Guarantees Act, the Building Act warranties are not backed up by a defined process for enforcing the m, and defined remedies for their breach.
Even without the warranties, the common law would hold a builder or developer accountable for delivering essentially what he had promised, expressly or impliedly. And in any event a significant percentage of building projects are carried out under one of the standard written building contracts in common use, or a group home building company’s standard form of contract, which invariably impose obligations on the builder that are equivalent to if not greater than those implied by the Building Act.
Furthermore, the tort of negligence is so commonly relied upon in disputes concerning alleged defective workmanship, that implied provisions in building contracts (oral or written) are often not needed.
Perhaps the only unique feature of the Building Act warranties is that they can be enforced by subsequent owners of the building right up until the expiry of the relevant limitation period, so in that sense they attach to the building rather than the original contracting homeowner.
the Need For Further Reform of the Building Act
The 2004 Building Act has not yet solved the following two core problems in the construction industry:
- The industry has become bogged down by bureaucracy and inefficiency as Councils have (understandably) become very risk-averse, and there is no uniformity in how they go about doing things.
- Residential construction projects end up in disputes much more frequently than they used to. Those disputes are extremely expensive and time-consuming to resolve, because not enough of the projects are covered by insurance, not enough of the building contracts are in writing, and not enough of the homeowners and builders are good at resolving disputes rationally and dispassionately.
Accordingly, a new wave of reform is currently being undertaken.
How Leaky Homes Influenced the Current Reforms
One of the most significant legacies of the leaky building crisis was that it exposed many citizens to the stresses and financial burdens of serious litigation, for the first (and probably only) time in their lives. This was a very unwelcome experience, and understandably led to a communal expression of anguish about the (perceived and real) inadequacies of the justice system. That voice has been heard loud and clear by successive Governments since the turn of the century, and it has probably been the single most influential factor in moulding the future regulatory landscape in the building sector.
That is why almost all of the recent reforms and current proposals for reform in the construction sector are consumer-orientated. the Government and its advisers have accepted the arguments put forward by various consumer lobby groups that builders and other participants in the building industry are currently not accountable or fully accountable for their actions of omissions, and that homeowners are uniquely disadvantaged by a lack of readily accessible dispute-resolution mechanisms.
Neither of the claimed rationales actually stands up to scrutiny, although that is not to doubt the sincerity of the beliefs of those consumer advocates and civil servants who espouse it. the reality is that the anguish expressed by the homeowners who have been forced to become novice litigants, is such that it requires a political response regardless of the merits.
the Case For Tilting the Playing Field
Regardless of the merits, the view that the playing field needs to be tilted in favour of homeowners has prevailed, and in many respects that is not necessarily a bad thing. It has been too easy for too long to strap on a builder’s apron and call yourself a builder. No qualifications are required. So one objective of the reforms is to encourage the “cowboy builders” to exit the trade. Similarly, too many residential building projects are done on a handshake, by homeowners and builders who do not appreciate the value of documenting the bargain between the m, and being more critical about who they choose to do business with. So the other objective of the reforms is to encourage greater attention to risk management and certainty in contractual relations, on the part of all parties.
Proposals for Further Reform of the Building Act
To address these concerns, the Building Act is being further amended. these amendments are to be incorporated into two Bills that may well be consolidated during the course of 2011.
Building Amendment Bill (No 3)
The first Bill – the Building Amendment Bill (No 3) - was referred to the Local Government and Environment Committee, which reported back on 28 June 2011 with some minor recommended changes. This Bill is intended to address the first of the core problems listed above, although just how successful it will be remains to be seen. the the ory is that Building Consent Authorities (referred to in this paper as “Councils” for convenience) will become less risk-averse and the refore less bureaucratic, if they are relieved of much of the liability they have previously been subjected to. the intention is to shift that liability from the Councils to the other parties involved in the construction process, with a corresponding reduction in the obligations of Councils to inspect building projects.
Building Amendment Bill (No 4)
The second Amendment Bill scheduled for later in 2011 will focus on the consumer protection measures. these measures will have much greater relevance to dispute resolution than those in the No. 3 Bill. they include the following, all of which received Cabinet approval on 2 August 2010:
- Mandatory pre-contract disclosures by builders to “building consumers”, detailing their skills, qualifications and licensing status, their “dispute history”, whe the r they can offer surety or insurance backing for their work, and information about their company (if applicable) including its trading history, the proposed roles of each of its directors in the project, and any previous breaches of regulatory requirements.
- Mandatory pre-contract checklists to be provided by builders to consumers, prompting the consumer to ask “important questions”, explaining the respective obligations of the builder and the consumer, outlining the risks of paying the builder in advance of the work, summarising dispute-resolution options, and referring the consumer to sources of further advice and information.
- Mandatory written building contracts for all residential building work exceeding $20,000 in price, that include express provisions dealing with a range of matters including the timeframe for the project, the contract price, the warranty and remedy obligations, the dispute-resolution process, and any third party surety or insurance backing that is available.
- Mandatory adjudication of disputes under the CCA, unless the parties mutually agree on some other process.
- Enhanced remedies for consumers with respect to breaches of express or implied warranties or obligations on the part of the builder, including the repair of defects by the builder or (on default) another builder, the replacement of defective building materials, and compensation where neither repair nor replacement is possible.
- A 12 month period immediately following practical completion of the project, during which the builder must repair defective work or replace faulty materials on an “on call, no questions asked” basis.
- Reciprocal obligations on consumers to avoid misuse or negligent damage, to carry out reasonable maintenance, and to advise the builder of any apparent defect within a reasonable period of its discovery.
- Mandatory provision by builders to consumers, on completion of the project, of details of any significant building maintenance requirements and of any significant product warranties.
- The 12 month defect repair liability and the other enhanced consumer remedies to also bind developers and owner builders when selling buildings to subsequent owners.
- Mandatory disclosure by homeowners to their territorial authorities on completion of the project, identifying who the builder, developer or owner-builder was, and providing details of any guarantee or insurance that was purchased for the building.
Although not necessarily part of the No. 4 Bill, the Cabinet has also directed the Department of Building and Housing to set up a state-provided dispute resolution helpline and mediation service for building consumers.