McDonald Vague handles numerous construction industry insolvencies, ranging from large businesses employing dozens of staff to 'one-man' operations. These assignments present some very industry-specific challenges, which require specialist knowledge and expertise if there is to be any chance of recovering amounts due.
There are various reasons why collecting money in the construction industry can be more challenging than in other industries:-
- Projects are invariably high value and can last for months or even years
- Any construction project is by definition complex and will always involve uncertainty
- The client is often highly leveraged, and reliant on being paid by its own customer
- Margins are frequently slim and can be eroded completely if something goes wrong
- Delays in payment by the main contractor can affect numerous subcontractors within the supply chain
- Projects can be adversely affected by external factors such as the wider economic climate, weather conditions and Resource Consent issues
- Final payments are tied up in retentions which can be withheld for the flimsiest of reasons
- The Construction Contracts Act is often not properly understood
Many of the problems we encounter involve non-payment of retentions. Typically, projects proceed with a good working relationship between the contractor and its customer, until work is complete. It is in both parties' interests for problems to be resolved quickly so that the project can complete on time. However, the relationship often changes once practical completion is reached.
At this point the contractor loses its previous leverage, and can find that disputes which were thought to have been resolved long ago are revived. On one of our liquidations, the debtors ledger contained unpaid retentions from virtually every job the company had done in the last three years.
The Construction Contracts Act 2002
The law governing construction contracts is the Construction Contracts Act 2002 ("the CCA"). It is essential that anyone seeking to recover construction industry debts understands the CCA. Prior to the CCA, contracts were typically on a 'pay when paid' basis. This meant that customers could delay all payments until they themselves had been paid. It followed that, if the main contractor could not pay, all the subcontractors were also not paid. This led to various high profile insolvencies, and recognition that the 'pay when paid' approach was flawed.
The CCA introduced a new and very strict, but straightforward, regime. Essentially it says that, provided the right documents have been issued, payment must be made within 20 working days of being demanded, regardless of whether the customer has itself been paid. Contractors can therefore usually be assured of regular payments throughout a project, rather than waiting nervously for the main contractor to be paid before funds flow through to subcontractors.
The CCA has improved cashflow for construction companies and provided a degree of certainty that did not previously exist. However, it is essential to fully understand the CCA's provisions. A key requirement is that each period (usually monthly) the contractor issues a 'payment claim'. Section 20 of the CCA sets out very specific requirements as to what a payment claim must contain. If these are met, payment is automatically due 20 working days later. The only exception is where the customer responds with a 'payment schedule' setting out any objections. However, this assumes the payment claim was issued correctly. The Courts have made it clear they regard the payment claim requirements as essential, and will not overlook any deficiencies unless they are very minor.
In one case we handled, the company's invoices did not even refer to the CCA, a key requirement of Section 20. We were therefore unable to enforce payment through the CCA. In another case the customer was subdividing his family section and was therefore technically a 'residential' customer. As the contractor had not complied with the additional payment claim requirements for residential contracts, we had to issue a new payment claim. This allowed the customer to raise issues not previously documented.
Practical issues with recovering amounts due
We find that construction company owners often don't understand the legal status of payment claims and regard collecting unpaid retentions as 'too hard'. This is unfortunate, as the law is often on their side.
On one occasion we sent our initial letter requesting payment of a three year old retention. Within a week we were offered $17,000 against a debt of $28,000 which the company had simply abandoned. Often the customer and also its lawyers don't understand the CCA, and proceed as if a 'pay when paid' regime still applies.
Companies also sometimes ignore legal advice. In a recent case we recovered $100,000 from a nearly two year old debt which had been the subject of unsuccessful court proceedings. On carefully reviewing the legal files it was clear the company had ignored advice, and sued another party who the customer alleged had taken over the contract. There was no evidence for this and the claim was abandoned. We reinstated the proceedings against the original customer and obtained an out of court settlement in under a month.
Another problem relates to 'serial non-payers'. Such companies exploit any actual or perceived defect to avoid payment, hoping the contractor will eventually run out of patience, or money for legal costs. As liquidators we issued a statutory demand to a customer who had failed to comply with payment claims and had no genuine dispute. We were even advised by that party's own customer that it had long ago paid all sums due and had no issues with the work done.
Nevertheless, the customer applied to have the statutory demand set aside. The High Court threw out this claim. Naturally we then expected to receive a cheque. To our astonishment the customer instead applied to appeal the decision to the Court of Appeal! Eventually we negotiated a settlement. After paying legal fees, the customer ended up paying more than the original debt. However, this is a 'percentages game' tactic many companies employ, knowing that most suppliers will not pursue them through the courts.
This article touches on a few issues which tend to crop up in construction industry insolvencies. A key factor is that insolvency practitioners can only successfully recover these debts if they have the necessary industry knowledge, and a thorough understanding of the Construction Contracts Act.
Please contact the author or any of our Partners should you, or a client, be experiencing difficulties in this area.
Note: This article was written by Jonathan Barrett who has subsequently left the firm.
This article is intended to provide general information and should not be construed as advice of any kind. Parties who require clarification on issues raised in this article should take their own advice.