Construction

Construction Management – a report from the first session of the IBA ICP Committee in Sydney

In October 2017, the International Bar Association held its annual conference in Sydney.  I was tasked, along with Jaime Gray from Navarro Sologuren, Paredes & Gray in Lima, Peru, with chairing the first session of the International Construction Projects Committee, on Construction Management – A Path to a Good Outcome or a Sure Way to Blow the Budget?

The task of the session was to examine the risks and benefits of adopting construction management as a procurement model for major projects.  The panel comprised internationally recognised construction lawyers and advisers Peter Scott Caldwell (from Hong Kong), Eduardo Koch (from Nicholson y Cano, in Argentina), Randy Hafer (from Kilpatrick Townsend in Atlanta, Georgia, USA), Yasemin Cetinel (from Cetinel Law, in Istanbul, Turkey and Rome, Italy) and Bill Barton (from Barton Legal in Leeds, UK).

The consensus of the discussion was that, while direct contracting using a construction management model may have advantages, they are not for the faint hearted.  Managing the various interfaces between the construction manager, the designers, main contractor and specialist suppliers and subcontractors can get messy, and the ability to lay off liability between each project participant is limited.

In order to capture the benefits potentially on offer through construction management, the owner needs to be very disciplined in the core requirements for all successful projects:

  • engaging the right resources at appropriate times;
  • investing time in defining the scope of the project and each appointment before it is made;
  • using risk registers and proactive project management techniques to identify project risks at a time when they can properly be avoided or at least mitigated;
  • properly establishing a reasonable project cost and monitoring progress of costs against budget at a time and in a manner which enables blow-outs to be avoided; and
  • including a disputes avoidance regime which maintains a collaborative relationship throughout the project team.

The conclusion was that any procurement method alone is insufficient to achieve this.

The published report is here.

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Public Sector Procurement after the Court of Appeal decision in Problem Gambling

On Tuesday, 14 November 2017, I was asked to present a paper at a Legalwise seminar on Public Decision Making and Reason Writing.  The focus of my paper was on the relevance of the Government Rules of Sourcing, the WTO Government Procurement Agreement (GPA), which New Zealand acceded to on 13 July 2015, and recent case law on importing public law issues into challenges of Government procurement projects.

The accepted position, outlined by Lord Hoffman in Pratt Contractors v Transit [2003] UKPC 83, is that internal government rules are a matter of compliance for the procuring body, but are not a basis for challenge by disappointed contractors.  That position was largely confirmed by the NZ Court of Appeal in 2008 in the case of Lab Tests v Auckland District Health Board [2008] NZCA 385.  In relation to the availability of judicial review, the Court of Appeal held that such review was really only available in cases of fraud, corruption and bad faith.

In Ririnui v Landcorp [2016] NZSC 62, the Supreme Court opened the door slightly on judicial review, however that case would seem to be relatively fact specific.

This approach was confirmed by the Court of Appeal, in A-G v Problem Gambling Foundation of New Zealand [2016] NZCA 609, overturning the decision of Woodhouse J in the High Court (Problem Gambling Foundation v A-G [2015] NZHC 1701).  Winkelmann J made a number of important findings in the Court of Appeal:

  • the narrow test for judicial review outlined by the Court of Appeal in Lab Tests is to be preferred, being available only in cases of fraud, corruption, bad faith and similar circumstances, and not as an avenue for disappointed bidders to challenge procurement processes
  • the Government Rules of Sourcing may bind Government agencies, but they do not impose a procedural obligation enforceable by potential contractors
  • fairness and good faith are requirements in procurement processes, however they only require honesty and a willingness to consider information which might change a reasonable and honestly held view – those evaluating tenders are not required to leave their previous experience at the door
  • if a request for proposals excludes the intention of creating legal relationships during the tender procedure, then a process contract cannot be implied
  • in order to establish a breach of legitimate expectation, the claimant must establish – (1) the nature of the commitment by the public authority, whether by promise, settled practice or policy; (2) that the reliance on the promise, practice or policy was legitimate; and (3) the appropriate remedy

Notably, the Court of Appeal has widened (slightly) the grounds for judicial review from the narrow test proposed in Lab Tests by the reference to similar circumstance, but that will really be factually specific for each case.  The Problem Gambling Foundation failed, in the Court of Appeal’s view, to make out that case.

In relation to the Government Rules of Sourcing, while they cannot be used a basis for challenge, as outlined by Winkelmann J, if a process contract can be implied, and if those Rules are incorporated into the tender procedures, either directly or by reference, then clearly they can be used as a basis for challenge.  That challenge would, then, be in contract, rather than by judicial review.

In relation to the GPA, while this is a State to State agreement, the NZ Government is required to establish a review board to hear complaints from suppliers from other States over breaches of the GPA.  The review board has the power to direct the contract to be set aside, the procurement process to be run again and/or to award damages for breach of the GPA.  While the Government Rules of Sourcing are broadly consistent with the GPA, the latter is more prescriptive.  Much like the current discussions over ISDS, it will be interesting to see if any foreign corporates take the opportunity to challenge a public procurement process in NZ.

A copy of my paper is available here:

Government Procurement – Legalwise

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Dispute Resolution of Construction Disputes

On Monday, 13 November 2017, AMINZ ran a one day seminar on resolving disputes in the construction industry.

The day was chaired by Derek Firth, and presentations were made by Stuart Robertson, from Kensington Swan in Auckland, on the role of the Engineer; Janine Stewart, from Minster Ellison Rudd Watts in Auckland, on adjudication under the Construction Contracts Act 2002; Michael Weatherall, from Simpson Grierson in Auckland, on the use of disputes boards; and I rounded out the day on the use of arbitration.

The panel discussion discussed each process and issues arising from all perspectives, including acting for owners, acting for contractors and acting as adjudicator/arbitrator, and provided valuable information on the topic.  The papers will be loaded on the AMINZ website shortly.  In the interim, my paper is attached:

Arbitration of Construction Disputes

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Bonds Revisited

Two recent cases in the High Court, Richina Pacific v AAI (formerly Vero Insurance) & Samson [2017] NZHC 1686 and Custom Street Hotel v Plus Construction [2016] NZHC 3049 shine the light on the use of bonds in New Zealand.

The first, Richina v Vero, concerned a development in Parnell.  The work had been practically complete, apart from a car stacker (which was being problematic), when Mainzeal Property and Construction went into receivership.  The project manager issued a practical completion certificate on the basis that the car stacker was outstanding work, and the property owner, Samson, made demand under the bond.  There were two difficulties with the demand – first, that the bond was (yet again) unclear as to whether or not it was on-demand or conditional; and the second, whether or not the bond had been released by the issue of the practical completion certificate.

The High Court held that the bond was clearly not on-demand and, in more difficult to follow reasoning, that as the contract did not provide for sectional completion, the practical completion certificate had not, in fact, been issued.

A clear lesson can be learned from the case is that if a bond is to be on-demand, then it must clearly be stated as such.  Interestingly, Justice Hinton accepted the UK position, outlined in IIG Capital LLC v Van Der Merwe [2008] EWCA Civ 542 and in Vossloh Aktiengesellschaft v Alpha Trains (UK) Ltd [2010] EWHC 2443 (Ch), that a bond will be presumed to be conditional, unless there is clear wording to the contrary.

In the second case, Custom Street Hotel  v Plus Construction, Plus had procured a bond in favour of Custom Street Hotel clearly in on-demand form; payment was expressly to be made “on demand without proof or condition.”  However due to the substantial amount secured by the bond (25% of the contract price), any such demand had to be accompanied by a certificate from the Engineer that the contractor was in default and the amount claimed properly due under the contract.  In the ordinary course, following the decision of Justice Ramsay in AES-3C Martiza East EOOD v Credit Agricole Corporate and Investment Bank [2011] EWHC 123 (TCC) and the seminal decision of Lord Denning MR in Edward Owen v Barclay’s Bank [1978] QB 159 (CA), if a demand appears to be correct on its face, under an on-demand bond the amount demanded must be paid up without further investigation.

The position in the Custom Street Hotel case, however was significantly different in that Plus Construction did not try to prevent the bond issuer, ANZ, from paying on the demand; it injuncted the Engineer from issuing his certificate and Custom Street Hotel from making demand, following the approach taken in Simon Carves v Ensus [2011] EWHC 657 (TCC).  The injunctive proceedings were settled in favour of arbitration, at which Plus Construction prevailed.  Custom Street Hotel appealed to the High Court (with leave), and Justice Gilbert concurred with the arbitrator that there was no basis for demand under the bond.  The matter was heard by the Court of Appeal (Kós P with Harrison & Clifford JJ) in October, and its decision is awaited with interest.

Attached is a paper delivered to the New Zealand Institute of Quantity Surveyors in Wellington and Auckland in September of this year.

Bonds (NZIQS)

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Direct Payment Agreements and s292 – Ebert Construction v Sanson

There is growing acceptance across the construction industry, particularly among financiers and owners, that payments need to flow down the contract chain to those actually doing the work.  This has seen a growth in construction contracts requiring head contractors to prove payment of their subcontractors, if cashflow is to continue; and in financiers also requiring proof of such payment.  Similarly, head contractors are seeking direct payment obligations from project financiers to protect themselves against developer default.

The difficulty with these arrangements is that, in the event of insolvency, preferring one subcontractor over other unsecured creditors (for the obvious reason that they are needed on site), thereby diverting those payments out of the creditor pool, runs the risk of being voidable insolvent transactions in terms of s292 of the Companies Act 1993.

The recent decision of the Court of Appeal in Ebert Construction v Sanson clarifies that position.  The attached article was published in the September edition of LawTalk and has been submitted to the International Bar Association’s publication Construction Law International.

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America’s Cup 2017 – New Development for Auckland?

Following the success of Team New Zealand’s America’s Cup challenge in Bermuda last month, there has been rather a lot of comment in the press over where the next Cup defence should be held, what will be needed, and who will pay for it.

Back in 1995, we were confronted with the same questions.  The erstwhile Auckland Regional Services Trust came to the rescue, and Auckland’s Viaduct Basin has seen the benefit since.

Here is an article I drafted for the latest edition of the New Zealand Law Society’s magazine, Law Talk, discussing that development –  LT 909 Americas Cup 2017

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AMINZ Arbitration Rules approved by Council

After more years and considerably more work than anticipated, on 22 June 2017 the AMINZ Council approved the AMINZ Arbitration Rules.

The Rules are intended for both domestic and international arbitrations, and they therefore tread a fine line between offering clarity, flexibility and apparent simplicity while addressing some of the more complex issues high value international arbitration requires.  To that end, the drafting committee has been ruthless in monitoring international trends in arbitration rules and adopting those concepts which seemed to us to be most relevant.  There have been a number of rules published since this project started (notably, the LCIA, SIAC and ICC); we have assessed each to consider how and to what extent they contain procedures which may be of benefit.

We hope that the new Rules will find favour, providing a New Zealand version of what is state of the art internationally while being user friendly.  An Emergency Arbitrator Protocol has also been provided for those wanting interim measures and/or preliminary orders without adopting the Rules and, of course, avoiding recourse to the High Court.

A PDF is available online, and hard copies will be published later in the year.

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Arbitrator appointment notices under clause 1 – a word of warning!

Where parties are unable to agree on the appointment of their arbitrator, or there is default in complying with the agreed procedure, clause 1(4) of the Second Schedule to the Arbitration Act 1996 provides:

… any party may, by written communication delivered to every such party, arbitrator or third party, specify the details of that person’s default and propose that, if that default is not remedied within the period specified in the communication (being not less than 7 days after the date on which the communication is received by all of the persons to whom it is delivered), a person named in the communication shall be appointed …

The normal practice is, once there is clear disagreement over the appointment of an arbitrator (usually within a time period specified in the agreement to arbitrate) either party may try to pre-empt further disagreement by naming their preferred arbitrator and giving the other party not less than seven days to respond.

In Body Corporate 200012 v Naylor Love Construction Limited Justice Muir was not convinced that there was in fact any disagreement or default, and he was not minded to follow the longstanding reasoning established by Justice Hansen in Hitex Plastering Ltd v Santa Barbara Homes Ltd [2002] 3 NZLR 695.  Interestingly, both parties issued notices against each other in the Naylor Love case – one proposing retired Justice Rodney Hansen QC and the other a Mr Walton, none other than the author of this post.

Regrettably, we both missed out on the appointment when the parties settled on Mr Tómas Kennedy-Grant QC.

Such is life!

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Related Services under the Construction Contracts Act 2002

The definition of construction work under section 6 of the Construction Contracts Act 2002 has, with effect from 1 September 2016, been extended to include related services, which are defined in the new subsection (1A) as including:

(1A)   construction work includes –

(a)    design or engineering work carried out in New Zealand in respect of work of the kind referred to in subsection (1)(a) to (d) and (f):

(b)    quantity surveying work carried out in New Zealand in respect of work of the kind referred to in subsection (1)(a) to (g)

For architects, engineers and quantity surveyors, the protections for progress payments under the Act now apply.  Similarly, the provisions relating to adjudicating disputes under their appointment agreements also apply.

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Court of Appeal considers payment claims, again …

On 3 February 2017, the Court of Appeal released its decision in the case of CJ Parker Construction Ltd (in liq) v Ketan [2017] NZCA 3.

Observing that the consequences for not complying with the scheme under section 23 of the Construction Contracts Act 2002 may be draconian, Justice Toogood observed that “a pragmatic, common sense and contextual approach” was required when considering the validity of a payment claim in terms of section 20.  More critically, the Court of Appeal has perhaps thrown a lifeline to owners who are unable to provide a valid payment schedule for an amount less than claimed, if the payment claim itself provides insufficient information.

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