Collateral Securities

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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Securing Positive Project Outcomes using NEC3

The NEC3 suite of contracts is growing in use in New Zealand.  The contracts were used with apparent success for the development of the stadium and other facilities for the London Olympics in 2012, and it is the preferred form of contract by the Office of Government Commerce for all public private partnerships in the UK.

In NZ, the engineering and construction contract was used for the development of the Northland Events Centre for the Rugby World Cup in 2011.  At $16.5 million, the development was more modest that some others, but it was on time, within budget, and effective.

This paper was prepared for the NEC Users’ Group Australasia conference in Christchurch on 27 August 2013.

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Performance Bonds – Encouraging people to do what they said they would

As the latest round of revisions to NZS3910 nears completion, the topic of bonds has come up again, though perhaps not as a result of any change in the approach of the drafting committee.

This paper questions the need for requiring bonds using the standard for of performance security attached to NZS3910:2003

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Collateral Contractual Arrangements – reducing the impact of insolvency in construction contracts

It is not uncommon, when negotiating with consultants and with contractors, whether for large or small projects, to be reminded in tired statements, heavy with condescension, of the financial strength and fine reputation of the other contracting party.

In the current environment, this counts for little. Names like Barings Bank may now be tarnished with incompetence and corruption, but prior to their collapses, they were names that commanded trust and respect.  Similarly the recent collapses of Goldman Sachs, Bear Stearns and Lehman Brothers, and the apparently limitless underwrite accepted by the US Federal Government of Freddie Mac, Fannie Mae and the world’s biggest insurer (AIG) suggest that even the finest reputations can be worth little when the going gets tough.

It would be foolishly brave to suggest that we have the answers to events of such global impact, but there is a lot that can be done to improve practises and to reduce the risks in what is inevitably an uncertain industry.

This paper started life as a presentation at the New Zealand Law Society Intensive Seminar on Building and Construction Law on 6 & 7 November 2008.

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