Buildlaw Issue20

BuildLaw - Issue No 20 March 2014 1

BUILDING DISPUTES TRIBUNAL www.buildingdisputestribunal.co.nz

Welcome to BuildLaw® Issue 20.

We are now well and truly into 2014 and a quick look at

recent statistics for the construction industry in New

Zealand shows how the industry is trending.

Building consents for both residential and non-

residential dwellings decreased in the last quarter of

2013 with a decrease of 1.3%. Despite this, January 2014 saw the highest trend

level for new dwellings since January 2008 being 79% higher than in March

2011 - the most recent low point – this is certainly a positive result but the

series maximum in September 2003 is still 24% higher than the current trend.

In dollar value, January 2014 saw $930 million of both residential and non-

residential work being consented. The majority of these (close to 60%) relate

to dwelling consents in Auckland and Canterbury. The increasing residential

construction in Auckland can be attributed to lack of housing supply for the

increasing demand of the rising population. Christchurch is obviously trending

high due to the rebuild.

Residential building prices rose 1.1% in the December quarter and non-

residential building prices rose 1.4% although the competition that results

from the Christchurch rebuild’s claim on industry resources affects the entire

national industry as these price increases are distributed nationally for

statistical purposes.

The only thing certain in this industry is change

With the industry statistics indicating no slowing down for 2014, progress of

the Construction Contracts Amendment Bill 2013 (the Bill) is lagging behind!

EDITORIAL

ISSUE 20 MAR 2014

BUILDLAW

CONTENTS

Editorial 1

THE NEW NZS

3917:2013

THE THIRD IN THE

TRILOGY

16

LEAKY VENDOR

WARRANTIES 20

NEW ZEALAND:

RESIDENTIAL BUILDING

CONTRACTS - IMPLIED

WARRANTIES

28

DANGEROUS AND

EARTHQUAKE-PRONE

BUILDINGS

– RECENT CHANGES

AND POSSIBLE

CHANGES AHEAD

31

BUILDERS DUTY OF

CARE TO SUBSEQUENT

OWNERS – RE-OPENING

THE DOOR

34

COURT BACKS

TAXPAYER ON

DEDUCTIBILITY OF

RESOURCE CONSENT

COSTS

40

HEALTH AND SAFETY REFORM BILL UNDER THE MICROSCOPE

45

BINGHAM’S CORNER

PUT A STOP TO IT!—PICK ON SOMEONE YOUR OWN SIZE

CONSTRUCTION 2025 –

GOVERNMENT WAFFLE! -YOU

CANNOT BE SERIOUS

48

50


Quarterly Newsletter of Building Disputes Tribunal (NZ) Ltd



The Bill passed its second reading in the House of Representatives on 20 March 2014 and two

Supplementary Order Papers have since been issued moving amendments to the Bill to deal with

how retention payments are held. However a further Supplementary Order Paper (SOP) needs to

be introduced to remedy defective drafting and the upcoming election will inevitably delay further

progress for some time yet.

I am pleased to report that sensibly, the Select Committee (the Commerce Committee) saw to the

removal from the Bill of the proposed pre-adjudication conferences and wrote into the Bill the

entitlement to a right of reply by claimants to an adjudication response.

The proposed adjudication conference was not warranted (or wanted) on any basis and, contrary

to the stated intention of the Bill, would have simply added cost and delay to the adjudication

process.

The right of reply is important as it is a myth that all matters relating to a dispute are advanced

and thoroughly articulated prior to the claimant being entitled to refer the dispute to adjudication

– often referred to as the “crystallisation” of a dispute. The ambit of an adjudication has the

possibility of being unavoidably widened by the nature of the defence or defences raised by a

respondent or owner in their response. The law is well settled that it is open to a respondent or

owner to raise any ground which would amount in law or in fact to an arguable defence of the

claim whether propounded before the adjudication or not, and they invariably and justifiably they

do just that!!!

The issue then becomes one of natural justice. The statutory right to reply to the respondent’s

response serves to put the claimant in the same position as the respondent in terms of procedural

fairness without the additional time and cost of making and responding to such applications.

Security for retentions

Unfortunately, some important issues were still not addressed in the Bill (including cumulative

payment claims, time for making a progress claim, interest, costs in relation to successful

jurisdictional challenges and withdrawal of claims) and the long-standing issue of retentions was

delegated to determination by the Minister for Building and Construction. While debating the Bill

during the second reading, MPs emphasised the importance of retentions and the appropriateness

of an SOP to determine the process for securing retentions. MP Shane Jones claimed “we have a

solution”, but the House was quickly reminded that no solution was found when Jones himself was

the Minister in charge 5 years ago. The retention issue requires a large overhaul of current industry

payment practice and it is hopeful that any steps taken in this regard will be well-thought out and

practically enforceable to ensure success.



On 17 April 2014, Clayton Cosgrove, Labour’s commerce spokesman, issued SOP No. 439 moving an

amendment to the Construction Contracts Amendment Bill that would require retention money for

commercial and industrial developments to be held in trust for the subcontractor entitled to the

money and requiring the head contractor to pay retentions into an independent trust account

established in accordance with regulations to be enacted.

While undoubtedly well intended, the SOP is singularly notable for its failure to recognise that all

contractors against whom retentions are held are at risk of losing those monies if the contractor or

employer refuses to pay or is unable to meet the payment on the due date due to insolvency – not

just those involved with commercial or industrial projects! It is simply inequitable to require head

contractors to pay subcontractors’ retention monies into trust when there is no comparable

requirement for retentions held against the head contractor by the employer to be held in trust.

The risk is no less for the head contractor. In the event of the employer’s refusal to pay or

insolvency, the head contractor could lose its own retentions and still be required to pay the

subcontractors’ retentions. Neither does it make sense to exclude residential projects under the

Act. The value of many residential projects is often hundreds of thousands of dollars and multi

million dollar residential projects are not uncommon. Once again it is proposed to unfairly treat

residential building contractors under the Act – you will remember they have no statutory right to

suspend work or obtain a charging order against a construction site in the event of non-payment.

Contrary to the underlying premise that is said to support this distinction, owners of residential

property are not unsophisticated persons without means or without access to proper legal advice.

They own property which in many cases is held in complex trusts for the express purpose of

protecting assets from creditors such as building contractors. It is a fact that residential property

owners also feature significantly in adjudications as respondents against whom contractors are

forced to initiate adjudication proceedings to recover monies properly due and owing under

construction contracts.

Green List MP Julie Anne Genter made a much better fist of it when she introduced SOP No. 446 on

7 May 2014 moving amendments to the Bill that would require a payer to hold retentions in trust

for the benefit of the payee and permit a payee to post a bond in lieu of retentions. She should be

applauded for her work - for one thing the language used is the language of the Act and for

another there is no attempt to draw an artificial distinction between different types of

construction contracts – the obligations on the payer and the rights of the payee are common to all

construction contracts and so they should be!

Strangely enough in our submissions on the Bill, BDT proposed that provisions be added to the

Construction Contracts Act 2002 to deal with the issue of retentions as follows:



( ) If a payer withholds payment from a payment claim for the purpose of ensuring future

performance of the payee’s obligations under the construction contract (the retention),

the retention must be paid by the payer, on or before the due date for payment of the

relevant progress payment, into an independent trust account administered by a trustee

nominated for that purpose by the payee (the trustee).

AND to ensure procedural certainty and cashflow in accordance with the purpose of the Act:

( ) The trustee must:

(1) hold the retention on trust for the parties on such terms as may be agreed in

writing with the payee; and

(2) release the retention to the parties in terms of:

(a) the written agreement of the parties; or

(b) a determination of an adjudicator; or

(c) the award of an arbitrator; or

(d) an order of any court or tribunal of competent jurisdiction.

AND a further amendment to section 72 of the Act is required such that a contractor has the right

to suspend work under the contract if –

“the retention is not paid to the trustee in full by the due date for payment”

AND the definition of ‘dispute’ under section 5 of the Act should also expressly include claims in

relation to retentions, bonds, securities, warranties, guarantees, and damages claims.

I don’t think we are poles apart – must be something in the name! But while some conditions may

be prescribed in regulations there do need to be some additional amendments/provisions in the

Act to draw the various threads together that are necessary for the effective operation of the

retention trust mechanism in the context of the Act overall.

We have considerable experience in this area - we recognised the need to provide security for

retentions (and deposits and other payments under construction contracts) and established the

BuildSafe® Security of Payment Scheme some five years ago (www.buildsafe.co.nz). We

introduced the BuildSafe® Retention Trust Fund specifically to hold and protect retention monies -

the process is simple and the cost minimal but in order for it to be truly effective, legislation is

required. Without it employers and head contractors alike are simply unwilling to give up what

they see as their just entitlement to hold, access, and use other contractors’ retention monies for

their own purposes.



The position in Australia

In Australia, the Building and Construction Industry Security of Payment Amendment Bill 2013

(NSW) amends the Security of Payment Act 1999 (NSW) with one change being that regulations can

be made to require retention money from head contractors to be held in trust accounts for

subcontractors. A regulation is yet to be drafted and it will be interesting to see how the

regulations propose to operate the trust accounts and what additional burdens (if any) are placed

on head contractors.

Changes to the NSW Act will take effect from 21 April 2014. These changes include less time for

payment of payment claims by head contractors and principals, removal of the need to refer to

the Act in payment claims, and the requirement for a supporting statement (regarding payment of

subcontractors) with a payment claim and penalties for non-compliance by head contractors.

The Queensland government has also announced changes to its BCIPA 2004, with the changes

currently being finalised. Some of the proposed changes include; abolishment of ANA’s into a sole

Adjudication Registry within the Queensland Building and Construction Commission as the sole

appointer of adjudicators to ensure adjudicators act impartially and independently of their own

interests or the interests of a particular sector within the industry (it would seem that under the

appointment regime that has existed in Queensland to date a culture has allegedly developed

among ANAs where industry sector groups have been targeted by ANAs for marketing on the basis

that those ANAs have a track record of determinations in favour of claimants from those sectors),

claims for return of security may now be made as opposed to only claims for return of retentions,

extensions of timeframes for payment schedules and adjudication responses, and a right of reply

for claimants. The target for implementation of the changes is 1 September 2014.

I am pleased to report that no such problems have occurred in New Zealand that I am aware of.

Thankfully our legislation is sufficiently different to preclude those problems arising here where all

parties to construction contracts are entitled to refer disputes arising under those contracts to

adjudication and that of course includes owners - who additionally are not restricted to defences

raised in payment schedules when defending claims brought by contractors. Also our BDT

adjudicators are highly qualified and experienced and consistently deliver determinations of a very

high standard whereas a large percentage of determinations that were challenged in East Coast

Australian courts in 2013 were quashed with breach of natural justice being an unwelcome and

frequent cause.

Construction sector particularly susceptible to cartel or price-fixing conduct

The Commerce Commission is continuing to promote competition law compliance within the



construction industry with the launch of its new ‘Construction Site’ website at http://

construction.comcom.govt.nz/. This follows the indication from the Government as part of the

Residential Construction sector options paper issued in November 2013 that the Commerce

Commission would be increasing its interest and activity in the construction sector.

The Commerce Commission has stated that it is concerned that the sector is particularly

susceptible to cartel type conduct (price fixing, bid rigging, market allocation and output

restrictions) and is trying to raise awareness of competition and consumer laws.

The website is targeted specifically at the construction industry and includes user-friendly

guidance on competition law, consumer law and consumer credit law compliance.

The launch of the Commission’s website follows a High Court decision in March this year which

resulted in a $1.85 million penalty being imposed on Carter Holt Harvey for its role in the

Auckland timber market price fixing that was discovered last year.

The conduct at issue related to an understanding that ran for six months, that the parties would

price MSG8 timber at cost plus an 8% margin. The penalty of $1.85 million was the final figure

agreed which included a discount for admitting guilt and cooperatively assisting the regulator. The

maximum penalty that may be applied under the Commerce Act 1986 is presently $10 million.

While the cartel was formed with Fletcher Distribution, a division of Fletcher Building, no

proceedings were taken against the company due to the cartel leniency policy. This policy granted

the company immunity for making the Commission aware of the activities and cooperating with the

investigation.

The risks associated with participating in cartel conduct are set to increase further when the

Commerce (Cartels and Other Matters) Amendment Bill is passed into law. The Bill, which is

expected to be passed in to law later this year, includes a number of amendments to the

Commerce Act. In particular the Bill:

• introduces a new cartel prohibition, which replaces the current prohibition on price fixing

• provides three exemptions to the cartel prohibition for vertical supply contracts, joint buying arrangements, and collaborative activities

• enables parties involved in a collaborative activity that enter into an arrangement containing a cartel provision to seek clearance from the Commission for that arrangement

• makes engaging in cartel conduct a criminal offence, although criminal sanctions will not be available until two years after the Bill is passed.

The Commission has already published draft Competitor Collaboration Guidelines which outline the



Commission's approach to assessing collaborations between competitors and are designed to assist

the business community with its preparation for the upcoming amendments to the Commerce Act

1986, proposed in the Commerce (Cartels and Other Matters) Amendment Bill. The Commission will

finalise these guidelines ahead of the new law coming into force.

Recovery of adjudication costs as damages

A recent decision of the UK Technology and Construction Court has confirmed that legal and other

costs incurred during an adjudication may be recovered from the losing party as damages in a

litigation proceeding. National Museum and Galleries on Merseyside Board of Trustees v AEW

Architects and Designers Ltd [2013] EWHC 3025 was a case concerning work for the plaintiff, the

Museum, by the defendant architects and also a third party contractor.

In this case AEW, the Contractor, had referred a dispute to adjudication seeking a declaration from

the adjudicator that AEW were not responsible for certain defective designs. The adjudicator

agreed with AEW in this regard and issued the declaration to that effect and also determined that

the Museum should pay the adjudicator's fee for the adjudication.

The Museum then brought proceedings against the architects concerning defects in the works, and

also a claim for damages concerning the Museum’s costs arising out of the adjudication with the

contractor. The damages claimed included the adjudicator’s fees and the Museum's legal and

expert costs incurred in defending the adjudication.

The Museum argued that the adjudicator’s fees were caused by AEW’s breach of contract. AEW

argued that the court proceedings should not be allowed as a backdoor method of recovering legal

costs.

The judge decided that there was a sufficient causative link between the defaults of AEW and the

costs of the adjudication and held AEW liable for the Museum’s costs. The Judge found it was the

architects’ failure to perform their obligations under the contract that led to the adjudication

between the contractor and the Museum, and if the architects had performed their obligations

correctly, there would have been no grounds for adjudication.

The judge formed the view that as adjudication was "a fact of life" in construction contracts it was

reasonably foreseeable that an adjudication could be initiated by AEW in relation to the dispute

over design responsibility.

I am not aware of any cases in New Zealand where this argument has been run in the courts,

although now of course it will likely only be a matter of time before some enterprising lawyer



engages the argument in reliance on “persuasive” UK authority. Watch this space!

NZS 3917 finally released

Sherwyn Williams of Kensington Swan guides through the benefits of the new NZS 3917 standard

and the potential benefits for the industry in ‘The new NZS 3917: 2013: the third in the trilogy’.

The standard applies to fixed term projects, removing the need to rely on Appendix C of the old

NZS 3910 that was inadequate.

A notable difference in NZS 3917 is that while the contractor has occupancy of the site from

commencement to expiry date, the contractor does not have exclusive possession of the site. The

programme requirements differ from what is required under NZS 3910 and delay will be the only

opportunity where time-related costs can be claimed due to the fixed term nature of the contract.

Additionally, a certificate of expiry is required that lists obligations still to be performed, rather

than a certificate of practical completion. If the listed obligations are not performed, the

contractor can be charged the expense for someone else to complete them.

The interaction of winding up proceedings and determination enforcement

The Technology and Construction Court in England has recently had to re-look at what actions are

possible in regards to enforcement of adjudicators’ determinations when the successful party is in

financial difficulty.

In Alexander & Law Ltd v Coveside (21BPR) Ltd [2013] EWHC 3949 (TCC), A&L issued

proceedings seeking to enforce the determination by way of summary judgment - the adjudicator

decided in favour of A&L and determined that Coveside was to pay A&L around £215k (including

retention monies and interest). Coveside resisted the enforcement application on the basis that

A&L would be unable to pay on account of on-going winding-up proceedings against A&L which

remained to be decided.

Coulson J affirmed that if a successful party has been put into liquidation prior to enforcement of

the adjudication determination, the courts will not order summary judgment for the determination

as decided by Straw Realisations (No. 1) Ltd v Shaftsbury House (Developments) [2011] BLR 47.



However, in this case no declaration of liquidation had yet been reached.

On consideration of the relevant authorities, the Judge disagreed with Coveside that the existence

of a winding up petition was an absolute defence to summary judgment. Following the unreported

decision of HHJ Seymour QC in Harwood Construction Ltd v Lantrode Ltd 24 November 2000,

Coulson J found that it is the duty of the courts to order summary judgement to enforce the

adjudicator’s decision. Otherwise the courts would be pre-empting the success of the winding up

petition.

The Judge granted summary judgment to A&L but was persuaded that A&L would not be in a

position to repay the judgment sum. Issues of insolvency were to be properly considered on a

cross-application for a stay of enforcement and the Judge therefore ordered a stay of execution

until "all the disputes between the parties" had been resolved.

His Honour held that in order for the court to grant a stay of execution of the judgment, the

following criteria must be satisfied:

A) there is a high risk of the financially questionable party’s inability to repay at the time when any repayment is due to be made, and

B) the poor financial position of the successful party is not due wholly or in significant

part to the unsuccessful party’s failure to pay the sums determined as due by the adjudicator.

The leading New Zealand case on this issue is Kariiti Ltd v Donovan Drainage & Earthmoving Ltd

HC Whangarei CIV-2010-488-613, 19 November 2010. At [17], this case found that the payers

obligations under ss 23, 24 and 59 of the Construction Contracts Act 2002 will only be considered

to be relieved if the payer can prove:

A) there is a high degree of likelihood that the payee will not be able to repay if a determination after a dispute resolution procedure under s 26(1) goes in the payer’s favour, and

B) it has a good arguable case that it will succeed under the dispute resolution

procedure under s 26(1).

Being statute barred from seeking repayment of a determination payment in the UK

In Aspect v Higgins [2013] EWCA Civ 1541, the question as to when the statute of limitation

starts running in adjudication proceedings was asked. The unsuccessful party claimed for

repayment of the enforced determination. This claim was not within 6 years of the date from



when the cause of action for adjudication arose.

On appeal, the court found that for claims concerning determinations, time runs from the

adjudicator’s determination, rather than the date on which the initial cause of action arose. This

is due to the interpretation of paragraph 23(2) in The Scheme for Construction Contracts (England

and Wales) Regulations 1998.

The paragraph states that the decision of an adjudicator is binding until finally determined by

subsequent proceedings. The court found that this paragraph allows a term to be implied into

construction contracts to the effect that once a dispute has been referred to adjudication and

payment of the subsequent determination is made, the payer is entitled to repayment if the

dispute is subsequently determined in its favour.

The New Zealand Limitation Act 2010 also has a statutory time bar on claims of 6 years. The

difference in New Zealand is that s 60 of the Construction Contracts Act 2002 does not state that

an adjudication determination is binding until further review, it just states that it is binding. While

there is the possibility of further review under ss 52-55 of the Act, subsequent review is not a

condition of the determination as stated in the English statute.

This is only a technical difference - in practice New Zealand adjudication determinations regarding

the payment of money are also binding subject to further review by the courts or arbitration. But

due to the difference in clear wording in the statutes, it is most likely that New Zealand courts

would find that the time bar starts to run from the date of the initial cause of action instead of

the date of the determination as in Aspect.

China’s New Development for Auckland’s skyline

Resource consent has been granted for potentially the tallest skyscraper in the Auckland CBD. New

Development Group of Shanghai have obtained resource consent for the project concerning 106-

108 Albert St, corner of Elliot Street, Albert Street and Victoria Street. The height of the building

is proposed at 209m making the 52 level skyscraper second only to the Sky Tower. No building has

occupied this site since the demolition of the Royal International Hotel in the 1980s.

The target for building consent is next year and completion by 2020. The building is planned to

include a hotel, apartments, entertainment and shopping facilities as well as a sky deck. The

building is lauded by the Auckland Council office to affirm the City Rail Link Project. While not



determined to house offices, the project will create job opportunities and contribute to

Auckland’s GDP.

The REINZ/ADLS agreement ‘Leaky Vendor Warranties’

There have been numerous cases concerning vendor liability for faults in properties that have been

sold to the purchaser prior to the fault being discovered. The disputes centre on the definition of

[6.2] of the REINZ/ADLS agreement; particularly the 7th, 8th and 9th editions, the majority of these

cases being from the Weathertight Homes Tribunal. In ‘Leaky Vendor Warranties’, Gareth Lewis

of Grimshaw & Co canvasses some of the case law dealing with interpretation of vendor warranties

and provides insightful comments as to the principles to be taken from them.

One aspect that the article looks at is vendor warranties in respect of whether certain work

requires consent. The cases are fact specific which makes a consistent interpretation difficult.

In terms of finding liability in respect of work’s lack of compliance with a building consent, Lewis

shows the difficulty for courts to find that compliance with consent requires compliance with the

code. Lewis indicates that compliance with consent as opposed to the code is likely to be the

future interpretation of this issue as consent plans are now legally able to have specifications that

do not comply with the code.

The courts have found that for building work to comply with the consent, a clear directive is

required stating that work must comply with the consent provisions and any other provisions

agreed to. Lewis concludes that courts choosing which consent conditions are expressly provided

for leads to uncertainty.

The courts have reached conflicting decisions regarding vendor liability for obligations under the

Building Act. Lewis sets out his views on vendor liability and expansively reviews the relevant

cases, ultimately proposing the need for a Court of Appeal case to settle the divergence of

interpretation by the courts.

Implied warranties from the Building Amendment Bill (No. 4)

In ‘New Zealand: Residential Building Contracts - implied warranties’ Karen Overend from

Duncan Cotterill overviews the new changes to the Building Amendment Act 2013 by Bill (No. 4)



passed under urgency on 20 November 2013 and discusses the expansion of implied warranties for

residential building work.

The new warranties are mandatory for residential building contractors, house-building companies,

developers offering house-and-land packages and sellers who, for the purpose of on-sale personally

build or arrange for building, or buy a dwelling from someone who built or arranged for the

dwelling to be built.

The Bill altered the remedies available for breach, effectively imposing a one year mandatory

defects liability period. A code of compliance certificate is required upon settlement of sale of a

residential unit, with a penalty of up to $200,000 if not complied with, and certain subsequent

purchasers are now subject to implied warranties also.

Policy change for earthquake-prone buildings

The Building (Earthquake-prone Buildings) Amendment Bill (Bill) was introduced into Parliament

in December 2013. Although only having completed its first reading, the Bill instigates changes for

building owners and councils that should be noted.

Heather Ash, Duncan Laing and Ann Maddox of Simpson Grierson provide a review of the proposed

changes in their article, ‘Dangerous and earthquake-prone buildings: Recent changes and

possible changes ahead.’ The article also covers changes to the Building Act 2004 by the

amendments in November 2013.

The changes to the Building Act 2004 now mean that councils’ powers in regard to dangerous

buildings extend to “affected buildings” which are defined as a building adjacent to, adjoining, or

nearby a dangerous building (as defined in the Act).

The Bill mainly proposes changes for council response to earthquake-prone buildings and local

policies are proposed to be replaced by a central, nationally consistent policy originating from the

government. The affect of this in being able to adequately assess the individual local needs of

different areas of New Zealand is questionable however. The Bill also requires local councils to

undertake seismic capacity assessments within a five year period of non-residential buildings,

multi-unit and multi-storey residential buildings.



Non-contractual duty of care upheld between builder and body corporate

In “Australia: Builders’ duty of care to subsequent owners – re-opening the door”, Stephen

Pyman and Joshua Kemp of Holding Redlich discuss the watershed case of Owners Corporation

Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1219 ('Brookfield No. 2').

In that case, the NSW Court of Appeal found a duty of care was owed by a builder to a body

corporate of commercial premises. There was no contractual relationship between the parties but

the builder was held liable in negligence for defects posing a risk to health and safety. The case is

groundbreaking as the body corporate was not in existence at the time of construction.

The Court of Appeal overruled the primary judgment of McDougall J of the NSW Supreme Court.

Basten JA gave the primary judgment of the Court of Appeal and discussed, among other things,

the importance of vulnerability in identifying the scope of a duty of care, and that Perre v Apand

Pty Ltd [1999] [HCA 36] had removed the necessary requirement for proximity, despite still being

an important consideration.

The Court found that contractual detail concerning the parties’ obligations did not prevent a

tortious duty and there was no basis under the Home Building Regulation for holding that the

legislature intended to exclude a common law duty of care outside of the stated protection for

owners of dwellings.

The Court of Appeal’s findings rested on there being a duty of care between the builder and the

developer. Many criticized the decision as unwarranted and the case has been granted leave to

appeal to the High Court of Australia.

The expense of a resource consent – deductible expense or an asset?

In the case of TrustPower Ltd v Commissioner of Revenue CIV 2011-404-007140 [2013] NZHC 2970

the court found that the $17.7 million TrustPower spent over a period of three years applying for

and securing resource consents for four potential power sites was deductible. Chapman Tripp

provides an in depth overview of the legal points in the article: ‘Court backs taxpayer on

deductibility of resource consent costs’.

The main point at issue in the case was whether the resource consents were assets. If they were

not assets, expenses from acquiring the consents are then part of the adjudication of feasibility of

a project and are deductible. Andrews J did not deem the consents to be assets due to their



uncertain value when regarded separately from the projects they related to.

His Honour further considered whether the consents would be revenue or capital assets if the

expenditure was found to be assets, and what would constitute the cost of the resource consent.

The division of revenue and capital assets was based on the purpose for incurring the expenditure.

The expenditure to be treated as the cost was to be determined by the commitment of TrustPower

to the consents.

It is important to note that the result in this case was fact specific - in Milburn v CIR (2001) 20

NZTC 17,017 consents were not deductible due to committal to the project before application for

the consents.

Health and Safety at Work Bill

Another legislative change to take note of is the new Health and Safety at Work Bill. The Bill is

modelled on the Australian Model Work Health and Safety Act and will replace the Health and

Safety in Employment Act 1992.

In the article: ‘Health and Safety Reform Bill under the microscope’ Marie Wisker and Vonda

Hodgson of Chapman Tripp discuss the major changes and effects that the Bill will have.

Of quick note, the Bill:

• creates a new legal duty holder, the PCBU; • replaces the ‘all practicable steps’ test with a test for compliance ‘so far as

reasonably practicable’, which presumes in favour of safety when balancing against costs; and

• imposes a directorial due diligence obligation.

One important change is that prospects of penalties increase for owner-operated businesses due to

the availability of simultaneous prosecution for directors, officers and PCBUs. Additionally, the

maximum penalties for breach of obligations have increased. For example, for reckless conduct in

Category 1, the proposed penalties are $3 million for a corporate and $600,000 and/or five years’

imprisonment for an individual.

The effect on businesses could be significant if the provisions of the new Bill are not understood by

company owners, directors and board members. A close watch needs to be kept on the

developments of this Bill.



Put a stop to it!

Bullying, threatening and representatives getting ‘shirty’ with adjudicators are actions that Tony

Bingham is fed up with. He tells complainers in his latest article to go mouth off at a High Court

judge instead or otherwise wait for adjudicator’s to simply prick them until they bleed...

Construction 2025 – Government Waffle

The UK Government report titled ‘Government and Industry in Partnership: Construction’ is spot-

lighted by Tony in this article. Needless to say, Tony finds the ‘aspirations’ of the report largely

misguided, and that it implies the construction industry is “duff, inept, too expensive and idle.”

We are most grateful as always to our local contributors and for the support that we receive from

dispute resolution professionals and law firms around the globe that allows us to bring you a broad

perspective on dispute resolution and construction law generally.

I do hope you find this Issue of BuildLaw® interesting and useful. Please feel free to distribute

BuildLaw® to your friends and colleagues – they are most welcome to contact us if they wish to

receive our publications directly.

Kindest regards,

John Green

Director



Standards NZ has just released the new NZS 3917, the third Standard to emerge from the ‘limited

technical review’ of the old NZS 3910:2003.

Significant differences in approach and terminology

NZS 3917 is intended to be used when the contract is for the provision of work or services over a

fixed term, as distinct from a fixed scope of work. As a consequence, there are a number of

significant differences from 3910 in terms of approach and terminology.

The new document is able to be used for all fixed term contracts—not just maintenance contracts,

which were the focus of the old Appendix C in 3910:2003. For this reason, it incorporates some,

but not all, of the old Appendix C, and references to contracts in public places and road contracts

(including Appendix B) have been removed.

The basic approach of the document is as follows:

• The Contract Works Period (for the whole of the Contract Works or for any Separable Portion) commences on the Date of Commencement stated in the Special Conditions and ends on the Date of Expiry stated in the Special Conditions.

• Clearly, because this is a fixed term contract, extensions of time do not arise (other than in the sense of extensions of the term by the agreement of the parties).

• The Contractor must be given occupancy of the Site on the Date of Commencement, when the Contractor must commence work. If the Principal does not give occupancy on the Date of Commencement, the Engineer must suspend the commencement of work.

• The Contractor’s occupancy means only the non-exclusive occupancy, with the Principal and other Persons having the right to use the Site and the Contract Works pursuant to their normal rights of access or passage. It follows that there is no such thing as early occupancy for the Principal, as there is in 3910.

On the Date of Expiry, the Engineer issues a Certificate on Expiry and the Contractor ceases work

and leaves the Site. If any of the Contractor’s obligations remain outstanding, the Engineer has the

option of having those obligations completed by another contractor or of allowing the Contractor

to complete them: see below.

THE NEW NZS 3917:2013

THE THIRD IN THE TRILOGY

- Sherwyn Williams



Certificate on Expiry

Within 5 Working Days following the Date of Expiry, the Engineer must issue a Certificate on

Expiry. The certificate may list any obligations of the Contractor which remained unperformed or

not properly performed as at that date.

In respect of any one or more of such outstanding obligations, the Engineer may elect either:

• to have others undertake the outstanding work (e.g. the new contractor taking over the work), at the Contractor’s Cost

• to allow the Contractor to return to the Site for the purpose of completing the outstanding obligations, failing which the Engineer can have another contractor do so at the Contractor’s Cost .

A form of Certificate on Expiry (which replaces the Practical Completion Certificate under 3910) is

provided in Schedule 15.

Remedying of defects

The Contractor is required to remedy any defects notified by the Engineer during the Contract

Works Period, within five Working Days of receiving the Engineer’s notice or within such other

reasonable time as agreed. If the Contractor fails to do so, the Engineer may have others

undertake the work at the Contractor’s Cost.

The Engineer issues the Final Completion Certificate once any outstanding obligations the

Contractor was required by the Certificate on Expiry to complete have been completed.

Retentions

Retentions remain an option, if specified in the Special Conditions, although the guidelines note

that they will not always be appropriate in a fixed term contract. Any retentions must be released

as to one half following the Date of Expiry (less the Engineer’s assessment of the Cost of any

outstanding obligations which the Engineer has required the Contractor to complete), and the

remainder as part of the Final Payment Schedule. Alternatively some other formula may be

specified.

The Contractor may provide a bond in lieu of retentions, unless otherwise provided in the Special

Conditions.



Contractor’s Bond

The Contractor’s Bond is released on the issue of the Final Completion Certificate. The bond under

3910 is released on Practical Completion but, unless there are retentions, under 3917 the Principal

would have no security for outstanding work if the bond were released on the Date of Expiry, so

the date of the Final Completion Certificate is the logical date for release of the bond.

Care of the works and Site

The Contractor is responsible for the care of any part of the works and Site from commencement

of work on that part until that work is completed. The Contractor’s responsibility ceases on the

Date of Expiry, except in the case of any of the Contract Works which the Engineer requires to be

completed following that date.

Because early occupancy or use of the Site or Contract Works does not arise under 3917, paragraph

(d) of the excepted risks under 5.6.6 has been deleted.

Programme

Understandably, the programme provisions are different from 3910. Under 3917 the Contractor

must provide a programme within 10 Working Days following the Date of Acceptance of Tender,

and at intervals thereafter as stated in the Special Conditions. The programmes must be provided

in detail for the period stated in the Special Conditions following the relevant programme revision

date, and at an overview level for the remainder of the Contract Works Period.

Time-related overheads and profit

Because time extensions do not arise under 3917, the Contractor’s ability under 3910 to recover

time-related overheads and profit as part the valuation of a Variation entitling the Contractor to

an extension of time has been omitted from 3917. However, the ability to recover time-related

Cost where part of the Contract Works has been delayed has been retained.

Insurance

Clause 8.8 in 3910 relates to where the construction insurance is arranged by the Principal, and it

incorporates provision for the insurance of any other structures in the vicinity. Under 3917, clause

8.8 has been split into two clauses, 8.8 and 8.9, which (unless otherwise provided in the Special



Conditions) require the Principal to effect both the construction insurance and insurance of the

existing structure or property, and any other structures or property in the vicinity. This reflects

the fact that typically a contract under 3917 will involve work to be performed on existing assets.

However, the guidelines make it clear that the insurance arrangements will need to be tailored to

each individual contract.

Underground and above-ground utilities

Unlike 3910:2013, but consistent with the old Appendix C of 3910:2003, it is the Contractor’s

responsibility to search relevant records for utilities on or about the Site. If a utility is not shown

on the records, any consequential extra work is a Variation.

Maintenance records

In addition to the 3910 requirement for as-built drawings and operation and maintenance manuals,

there is a requirement for the Contractor to keep maintenance records.

Final payment claim

The Contractor must submit its final claim not later than 1 Month after the issue of the Final

Completion Certificate.

Where the duration of the Contract Works exceeds 12 Months and there are Separable Portions,

separate final claims are required. They must be submitted by the Contractor within 1 Month after

the issue of the Certificate of Expiry for each Separable Portion.

Performance payments

Where provided in the Special Conditions, performance payments may be made by the Principal (or

the Contractor) in respect of actual performance against performance indicators specified in the

Contract. Bonuses for early completion of the Contract Works of course do not arise.

Liquidated damages

Where provided in the Special Conditions, liquidated damages may be payable by the Contractor

for any failure to meet any obligations specified in the Contract. Liquidated damages for delay in



completion of the Contract Works do not arise.

Sherwyn has over 40 years’ experience as a lawyer,

specialising in construction and arbitration law. He was a partner in the law firm Kensington Swan for over 35

years, and is now a consultant with that firm.

The focus of Sherwyn’s practice has been claims and dispute resolution within the construction industry. In

New Zealand, most disputes in this industry are ultimately referred to arbitration or to adjudication under the Construction Contracts Act 2002. Arbitration is also

a very common means of dispute resolution in commercial contracts.

Sherwyn acts as both an arbitrator and an adjudicator and is a principal panelist with the Building Disputes Tribubal.

Sherwyn was named as a leading lawyer in New Zealand by the international

publication AsiaLaw in 2014.

Author Profile: Sherwyn Williams

LEAKY VENDOR WARRANTIES - Gareth Lewis

Gareth Lewis —Partner, Grimshaw & Co

He has represented leaky

home owners in trials before the High Court, District Court

and Weathertight Homes Tribunal ("WHT") and regularly attends mediations and judicial

settlement conferences in these forums.

Gareth also represents clients

in adjudications under the Construction Contracts Act,

building dispute arbitrations and body corporate disputes.

Gareth Lewis considers recent case law on the interpretation of vendor warranties in relation to building work under the REINZ/ADLS agreement for sale and purchase.

A property owner arranges for a building to be constructed on his or

her property. The owner then sells. The issue of who as between

vendor and purchaser bears the risk of the building being defective is

of fundamental importance to the parties.

The vendor warranties in the REINZ/ADLS agreement are drafted in

such a way that purchasers of leaky homes have been able to argue

that some or all of this risk lies with the vendor. However, the

correct interpretation of these warranties has been a matter of

significant debate and the outcome of the vendor warranty claims is

difficult to predict. With so much at stake, the way in which the

Courts interpret these warranties is worthy of examination.



REINZ/ADLS agreement

In New Zealand the principle of caveat emptor applies to contracts

for the sale and purchase of land. This principle is subject to the

terms of the agreement between the parties.

The seventh edition (2) July 1999 of the REINZ/ADLS agreement

includes the following warranty:

“6.2 The vendor warrants and undertakes that at the giving and

taking of possession:

(5) Where the vendor has done or caused or permitted to be

done on the property any works for which a permit or building

consent was required by law:

(a) the required permit or consent was obtained;

and

(b) the works were completed in compliance with

that permit or consent; and

(c) where appropriate, a code compliance

certificate was issued for those works; and

(d) all obligations imposed under the Building Act

1991 were fully complied with.

In the seventh edition (3) July 1999 clause 6.2(5)(d) was amended to

read: "all obligations imposed under the Building Act 1991 and/or the

building Act 2004 (together the "Building Act") were fully discharged."

Otherwise, clause 6.2(5) remained the same.

The eighth edition 2006 states at clause 6.2(5):

“(5) Where the vendor has done or caused or permitted to be

done on the property any works:

(a) Any permit, resource consent, or building

consent required by law was obtained; and

(b) The works were completed in compliance with

those permits or consents; and

(c) Where appropriate, a code compliance

certificate was issued for those works.

In New Zealand the principle of caveat emptor

applies to contracts for the sale and purchase

of land. This principle is subject

to the terms of the agreement between the

parties.



In the ninth edition 2012 clause 6.2(5)(b) was amended to read: “to

the vendor’s knowledge, the works were completed in compliance

with those permits or consents.” Otherwise the clause remained the

same as the eighth edition.

Work requiring building consent

An issue which can arise in vendor warranty claims is whether work

requires a consent. In Newton & Ors v Stewart & Ors [2013] NZHC

970 the Court considered whether work fell within an exemption in

schedule 3 of the Building Act for the lawful repair of a component or

assembly that has not failed the durability requirements of the

building code. Justice Williams decided:

• the work was a “repair” as it was an attempt to prevent

water pooling on window moulds.

• in order to be “lawful” the repair had to meet the

performance requirements of the building code, including

clause E2 (external moisture), and the repair did meet

code requirements.

• The moulds had not failed the durability requirements of

the code (clause B2). They continued to serve their

decorative purpose with or without the repair

Accordingly, the work did not require building consent and the

vendor warranties did not apply.

Interestingly, in Ford v Ryan (2007) 8 NZCPR 945 (HC) Justice

Mackenzie decided that the warranty in clause 6.2(5)(d) (seventh

edition) applied to building work which did not require building

consent (a retaining wall) as it was part of a wider project for which

a building consent was required.

Compliance with building consent

The issue of whether building work complies with the consent has

proved to be a difficult issue.

An issue which can arise in vendor

warranty claims is whether work

requires a consent. In Newton & Ors v

Stewart & Ors [2013] NZHC 970

the Court considered

whether work fell within an

exemption in schedule 3 of the Building Act for the lawful repair of a component or assembly that has

not failed the durability

requirements of the building code.



In Aldridge & Ors v Boe & Ors (HC AK CIV-2010-404-7805 [10 January

2012]) Justice Potter considered an appeal from the Weathertight

Homes Tribunal regarding an agreement which contained clauses 6.2

(5)(a) and (b) from the seventh edition (but not (c) and (d)). There

was also a clause which excluded liability “in respect of the condition

of the property” including the “condition or structural soundness of

the buildings”.

Justice Potter decided:

• it followed from the provisions of the Act that a warranty

that building works were completed in compliance with a

building consent includes a warranty that the works comply

with the building code because the consent has been issued

on this basis.

• the intention of the parties was not such that the clause

should be read down.

However, the work was covered by the exclusion clause so the

vendor warranty did not apply.

Justice Woodhouse considered the meaning of clause 6.2(5)(b) in

another appeal from the Weathertight Homes Tribunal, Keven

Investments Ltd v Montgomery & Ors [2012] NZHC 1596. The

agreement was the eighth edition of the REINZ/ADLS agreement

(which does not include clause (d)). At issue was whether clause (b)

required compliance with the building code, in addition to the

building consent plans. Justice Woodhouse held:

• the house only had to be built in accordance with the

consented plans. Although the consent stated the work was

to be undertaken in accordance with the plans and

specifications “so as to comply with the provisions of the

building code”, this was merely an objective and not a

directive.

• it is possible for a building to be constructed in accordance

with the consented plans but not meet the building code so

it would be unfair to require the vendor to comply with both.

Justice Woodhouse considered the

meaning of clause 6.2(5)(b) in

another appeal from the

Weathertight Homes Tribunal,

Keven Investments Ltd v Montgomery & Ors [2012] NZHC

1596. The agreement was the eighth edition of the REINZ/ADLS

agreement (which does not include clause (d)). At

issue was whether clause (b) required compliance with

the building code, in addition to the building consent

plans.



• if the parties intended to warrant compliance with the

building code or more broadly all obligations imposed under

the Building Act, they would have inserted an express

provision to that effect.

In Brebner & Ors v Collie [2013] NZHC 63 Justice Peters considered

an appeal from the Weathertight Homes Tribunal relating to a vendor

warranty in the eighth edition of the REINZ/ADLS agreement. She

agreed with Justice Woodhouse that compliance with the building

consent did not require compliance with the building code. The

consent means the consent itself, the consent conditions and the

plans and specifications. Justice Peters decided that clauses in the

specification regarding the standard of work, including conformity

with good trade practice, did not form part of the consent as they

were matters of concern to the contracting parties only.

Justice Asher addressed the issue of what forms part of the building

consent in another appeal from the Weathertight Homes Tribunal,

Saffioti v Ward & Ors [2013] NZHC 2831. The consent stated that

“all endorsements on plans form part of the building consent and

must be adhered to”. The plans included “Architectural Notes”, one

of which required compliance with the building code. Justice Asher

decided the architectural note was not part of the consent as it did

"not have the flavour of a condition or endorsement, and was no

more than a general observation as to the standard to be observed by

the builder”. An “endorsement” in this context meant an

endorsement imposed by Auckland City or where relevant the private

certifier.

All obligations imposed by Building Act

The vendor warranty at clause 6.2(5)(d) of the seventh edition is

drafted in very wide terms. The ADLS subcommittee which removed

clause (d) in the eighth edition of the agreement stated:

“The subcommittee considered, particularly in light of the

litigation arising out of the “leaky home” crisis, that it is

inappropriate for a vendor to give a blanket warranty that all

In Brebner & Ors v Collie [2013] NZHC 63 Justice Peters considered an

appeal from the Weathertight

Homes Tribunal relating to a

vendor warranty in the eighth edition of the REINZ/ADLS agreement. She

agreed with Justice Woodhouse that compliance with the building consent did not

require compliance with

the building code. The consent means the consent itself,

the consent conditions and the

plans and specifications.



obligations under the Building Act have been fully

discharged, especially as the obligations...are not limited to

those imposed on the vendor...”.

The first High Court decision on a vendor warranty which included

clause (d) was Ford v Ryan. The purchaser in that case was unaware

that a code compliance certificate had not been issued but was

aware of significant building defects. Justice Mackenzie held there

was a breach of clause (c) only. In his discussion of whether the

defective exterior cladding system constituted a breach of clause (d)

he stated that where a consent is required for the building works

clause (d) only concerns building code matters to the extent that it

prevents the issue of a code compliance certificate.

Justice Ronald Young reached a different conclusion in Hooft v

Woodley & Ors [2012] NZHC 2685, another appeal from the

Weathertight Homes Tribunal. He stated there was no reason to

read down clause (d) so that it only related to the vendor's

obligations regarding building consents and code compliance

certificates. The narrow approach would render clause (d)

superfluous. Irrespective of whether there was compliance with

clauses (a)-(c) the vendor warranted compliance with the Act, and

therefore through section 7 of the Act, compliance with the building

code.

Justice Ronald Young expressed concerns that vendors may be liable

for a leaky home which shows defects the vendor has no knowledge

of many years after construction. He stated there was an inherent

restriction in clause (d) in that the vendor only warrants the work

meets the building code as judged by the knowledge of construction

work at the time. He decided the work in that case met that

standard and there was no breach of warranty.

In Saffioti v Ward Justice Asher also considered the issue of whether

clause (d) includes a warranty by the vendor that the work complies

with the building code. He decided:

• clause (d) only refers to the obligations specifically placed

on owners under the Building Act.

The first High Court decision on a vendor warranty which included clause (d) was

Ford v Ryan. The purchaser in that case was unaware

that a code compliance

certificate had not been issued but was aware of

significant building defects. Justice Mackenzie held

there was a breach of clause (c) only.



• section 7 of the Act, which states all building work is

required to comply with the code, sets out a general

purpose and principle and does not place any obligation on

the owner to ensure compliance with the building code.

Clause (d) cannot not create such a duty. In addition, the

code is a schedule to the Act and not part of the Act.

• If the parties intended a radical departure from the caveat

emptor principle they would have inserted an express

warranty requiring compliance with the code.

Comment

The argument that compliance with a consent requires compliance

with the code has been losing ground in the High Court. The main

difficulty with the argument is that consented plans and

specifications may depict construction that does not comply with the

building code.

Under the 1991 and 2004 Building Acts the way in which the building

is to achieve compliance with the building code is determined at the

consent stage. Thereafter the focus is on compliance with the

consent. Under both Acts the Council "inspection" means checking

compliance with the consent. Under the 2004 Act Councils issue

code compliance certificates based on compliance with the consent,

not the code.

Accordingly, it will not be surprising if the final word on this topic is

that a building consent does not automatically incorporate the

requirements of the building code.

The approach of the Courts by which they decide parts of the plans

or specifications do not form part of the consent, either because

they only appear relevant to the contract between the parties or

because they do not have the “flavour” of a consent condition, is

likely to be problematic. It requires that judges and adjudicators

engage in an arbitrary exercise which is likely to create significant

uncertainty.

The argument that compliance with a consent requires compliance with

the code has been losing ground in the High Court.

The main difficulty with the argument is that consented plans

and specifications may depict

construction that does not comply with the building

code.



The consent is granted on the basis of the plans and specifications so

the full content of both should be regarded as part of the consent. If

the specification contains contractual provisions the Council does not

wish to be included in the consent, it is free to require that these be

removed before consent is issued. To the extent that the content of

the consent may be internally inconsistent, the Court is able

interpret the consent as a whole as it often does in the case of

contracts with inconsistent provisions. As for onerous requirements

in the plans/specifications, the vendor has the ability to check for

these and delete clause 6.2(5)(b) if necessary.

It remains to be seen which reading of clause 6.2(5)(d) in the seventh

edition will prevail. If Justice Ronald Young is correct that the

clause requires compliance with the building code, it is submitted

that the building work should be judged by the performance

requirements of the building code not the "knowledge of construction

work" at the time. Contrary to popular belief, the building code

requirements relating to external moisture (E2) have not changed in

any significant way since 1992.

There are a number of discussion points arising from Justice Asher's

interpretation of clause (d) in Saffioti:

• In stating that clause (d) only applies to the "vendor's"

obligations the Court did not follow the ordinary meaning

of the clause. There does not appear to be anything in

clause 6.2(5) as a whole or the reported facts of the case

to warrant the clause being read down in that way.

• It is true that section 7 of the Building Act 1991 is within

the "purposes and principles" in the Act and does not

place a specific obligation on any party. However, "all

obligations" under the Act relating to the building work

need to be taken into account. If the Council complies

with its obligations in issuing consent and the code

compliance certificate and the owner and builder comply

with their obligations to build in accordance with the

consent one would ordinarily expect the building to

comply with the building code.

It remains to be seen which reading of clause 6.2(5)(d)

in the seventh edition will

prevail. If Justice Ronald Young is correct that the clause requires compliance with

the building code, it is submitted

that the building work should be judged by the performance

requirements of the building code

not the "knowledge of

construction work" at the time. Contrary to

popular belief, the building code requirements relating to

external moisture (E2) have not changed in any significant way

since 1992.



• The Court effectively said the obligations of the vendor in

statute and the common law suggested an intention by

the parties that was contrary to the wording of the

clause. This appears to run counter to the freedom of

the parties to reach their own agreement as to the

allocation of risk between them.

If an appropriate case comes before the Court of Appeal many of

these issues may be resolved. Claims which originate in the

Weathertight Homes Tribunal cannot be appealed beyond the District

or High Court, so it will require a High Court claim which is appealed

to resolve these areas of contention. As time passes, further rulings

on clause 6.2(5)(d) become less likely because of the removal of

clause (d) in the eighth edition of the REINZ/ADLS form and the 6

year limitation period. The change to clause 6.2(5)(b) in the ninth

edition will significantly restrict the ability of purchasers to claim. In

the meantime, leaky building claims will continue to generate debate

as to how the vendor warranties should be interpreted.

If an appropriate case comes before

the Court of Appeal many of these issues may

be resolved. Claims which

originate in the Weathertight

Homes Tribunal cannot be

appealed beyond the District or

High Court, so it will require a High Court claim which

is appealed to resolve these

areas of contention.

NEW ZEALAND:

RESIDENTIAL BUILDING CONTRACTS - IMPLIED WARRANTIES

-Karen Overend

Implied warranties for residential building work have now been greatly expanded.

These changes will impose greater liability on you, if you are:

• a residential building contractor;

• a house-building company;

• a developer offering house-and-land packages;

• someone (on seller) who, for the purpose of on-sale:

ο builds a dwelling yourself;

ο arranges for a dwelling to be built; or

ο buys a dwelling from someone who built it or arranged for it to be built.



Implied warranties

The Building Amendment Bill (No.4) was passed into law under urgency on 20 November, and is

now the Building Amendment Act 2013. This Act imposes consumer protection obligations on

anyone building or selling household units. It expands the implied warranties regime for residential

building contracts so that they are also implied into every sale and purchase contract entered into

by an on-seller.

These warranties are mandatory – it is not possible to contract out of them. They apply to all

contracts entered into after the Act comes into force by Order in Council (likely to be early 2014).

The warranties are that:

• the building work is carried out properly, in accordance with the plans and specifications in the contract and the building consent;

• materials used are suitable for their purpose and new (unless otherwise stated in the contract);

• the building work complies with the Building Code and all other legislation;

• the building work will be completed by the date specified in the contract (or, if no date is specified, within a reasonable time);

• the household unit is suitable for occupation on completion of the building work;

• the building work and any materials are reasonably fit for any purpose stated in the contract for which they are required.

Remedies for breach

A key change to the current implied warranties regime is that, if there is any defect in the building

work within one year of the building work being completed, the client can require either the

building contractor or the on-seller to remedy the defect.

During this period, the onus of proof is on the building contractor and on-seller -- that is, the

client merely needs to claim a defect exists and do not need to prove a breach. It will be for the

building contractor or on-seller to prove no such defect exists if they dispute this.

In our view, this effectively imposes a mandatory defects liability period of one year in all

residential building contracts.

After the initial one-year period, if there is a defect, the client may:

• require the building contractor to remedy the breach;

• if the building contractor fails to do so in a reasonable time, have the breach remedied by someone else and recover the reasonable costs of doing so from the building contractor;



• recover from the building contractor damages for reasonably foreseeable loss resulting from the breach.

Subsequent purchasers

Building contractors and on-sellers will have liability to not only the original owner of the

household unit for breach of the implied warranties, but also any subsequent purchaser of the

property, whether or not they were party to the original contract.

Code compliance certificates

The Bill also contains a new provision where it is an offence, with a penalty of up to $200,000, for

an on-seller to settle a sale of a residential unit without a code compliance certificate being issued

for the building work.

It is possible to contract out of this requirement with the purchaser's agreement, but the

contracting out agreement must be in a particular form prescribed by the regulations.

Our recommendations

We recommend that you:

• include in your contract a clear mechanism for determining when the building work is completed in order to determine when the one-year defect remedy period starts;

• provide clients documentation setting out detailed maintenance requirements for the building work. This will assist in excluding your liability where the building work isn't maintained properly;

• ensure your arrangements with subcontractors (if a building contractor) and contractors (if an on-seller) enable you to claim against them if their actions breach these implied warranties:

• check your insurance policies to ensure that you are covered for these implied warranties;

• ensure your business is properly structured to take account of this potential liability;

• don't attempt to contract out of these implied warranties or advice a client that they don't apply - that will be a breach of the Fair Trading Act.

Author Profile, Karen Overend, Associate, Duncan Cotterill

Karen is an associate in Duncan Cotterill’s Christchurch commercial property team. She has over 13 years’ experience advising on property issues, both in law firms and in-house. She specialises in all aspects of property development, from acquisition, structuring and project funding, construction and development, right through to sales and leasing.



DANGEROUS AND EARTHQUAKE-PRONE BUILDINGS

RECENT CHANGES AND POSSIBLE CHANGES AHEAD

-Heather Ash, Duncan Laing and Ann Maddox

Authors

Heather Ash

Duncan Laing

Ann Maddox

www.simpsongrierson.com

In November last year, the Building Act 2004 (Act) was amended

to extend councils’ dangerous building powers to include "affected

buildings". If you own or occupy a building you need to be aware of

these new powers as they could impact on your ability to use the

building for a period of up to 60 days.

In December, the Building (Earthquake-prone Buildings) Amendment

Bill (Bill) was introduced into Parliament. It proposes a "revised

system" for the management of earthquake-prone buildings,

particularly the role of councils. Whether or not the Bill remains in

its current form, both building owners and councils should be aware

that changes may be coming.

This FYI discusses the newly acquired powers councils have in

relation to affected buildings, and the proposed changes to

earthquake-prone buildings set out in the Bill.

What are affected buildings?

If a building is adjacent to, adjoining, or nearby a dangerous building

(as defined in the Act) it is now an "affected building" with a council

being able to:

(a) erect a fence or hoarding around it; (b) attach a notice warning people not to approach it; and (c) issue a written notice restricting entry to particular

persons or groups of persons for a maximum of 30 days. A council can reissue the notice once for a further maximum period of 30 days.

This means owners of buildings adjacent to, adjoining, or nearby

buildings which have been classified as dangerous (as opposed to

earthquake-prone), should be aware that the council could restrict

or prevent entry to their building for up to 60 days while the danger



The Bill proposes further

amendments to the Act relating to earthquake-prone

buildings. Currently a building is

earthquake-prone if it would be

likely to collapse in a moderate earthquake

causing injury or death or damage to other property.

In practice an earthquake-prone building is defined as one that is less than 34% of the new building

standard (NBS).

associated with the nearby building is being rectified.

The new provisions also require councils to amend their existing

dangerous, earthquake-prone and insanitary buildings policy to

address affected buildings. This must be done at the latest within a

reasonable period "following the next review of its policy". The Act

requires reviews at 5 yearly intervals from the date the original

policy was adopted. The reasonable period allowed for amending an

existing policy is therefore likely to commence from the date of the

last 5 yearly review.

What does the Building (Earthquake-prone Buildings) Amendment Bill propose?

The Bill proposes further amendments to the Act relating to

earthquake-prone buildings. Currently a building is earthquake-

prone if it would be likely to collapse in a moderate earthquake

causing injury or death or damage to other property. In practice an

earthquake-prone building is defined as one that is less than 34% of

the new building standard (NBS).

Under the current system, each council has a dangerous,

earthquake-prone and insanitary buildings policy that sets out the

approach it will take in performing its earthquake-prone building

functions, prioritises performance of those functions and states how

the policy will apply to heritage buildings.

The main change the Bill proposes is that central government will

have a greater role in providing leadership and direction in relation

to earthquake-prone buildings. This is achieved by replacing local

council earthquake-prone policies with a new nationally consistent

policy. Accordingly, under the Bill any references to earthquake-

prone buildings in an existing dangerous, earthquake-prone, and

insanitary building policy will cease to apply when the new

legislation commences. Furthermore, councils will be required to

amend or replace their policies to remove references to earthquake-

prone buildings.

This proposed change means that councils will no longer have



individual policies on earthquake-prone buildings. Instead, within

five years of the Bill being passed all councils will have to complete

seismic capacity assessments of all non-residential buildings and

residential building that are multi-unit (3 household units or more)

and multi-storey (2 or more storeys). Local Government New

Zealand (LGNZ) has recently criticised this requirement saying "the

legislation needs to allow for variation across the different areas of

New Zealand instead of this ‘one-size-fits-all’ approach."[1] LGNZ

also advocates for a risk-based approach to assessment that takes

into account wider social and economic impacts and not just a

narrow focus on life safety.

The Bill requires seismic capacity assessments to be entered onto a

publicly accessible national seismic capacity register established by

the Ministry of Business, Innovation and Employment (MBIE). Written

notice of the outcome of an assessment will also have to be given to

the building owner together with a statement as to whether the

building is earthquake-prone and, if so, that seismic work is

required. An owner could respond to that notice by informing the

council of their intention to provide alternative evidence of a

building’s seismic capacity.

Importantly, under the Bill the level of strengthening work that can

be required to be carried out remains unchanged (based on current

caselaw on point). That is, a building (or its earthquake-prone part)

can only be required to be strengthened so that it is no longer

earthquake-prone (being 34% of the NBS, which is not proposed to be

changed by the Bill).

Owners will then have 15 years from the date of the assessment to

carry out the strengthening work. Owners of some buildings will be

able to apply for exemptions from the 15 year timeframe, for

example where the effects of the building failing are likely to be

minimal (this could include farm buildings with little passing traffic).

Owners of earthquake-prone Category 1 heritage buildings under the

Historic Places Act 1993 will also be able to apply for extensions of

up to 10 years to complete the work.

Subsequent regulations will, however, define some buildings as

Importantly, under the Bill the level of strengthening work that can be required to be

carried out remains unchanged (based on current caselaw on point). That is, a building (or its earthquake-

prone part) can only be required

to be strengthened so that it is no

longer earthquake-prone (being 34% of the NBS, which is not proposed to be changed by the

Bill).



"priority buildings". These buildings must be prioritised by council for

assessment and strengthening. This is likely to apply to buildings

that might collapse and impede a major transport route in an

emergency, or that are of particular significance in terms of public

safety.

The Bill passed its first reading on 5 March, and has now been

referred to the Local Government and Environment Select

Committee, who are likely to call for public submissions to be filed

in the near future. However, the Bill is unlikely to be passed before

the end of this year, unless it is given priority. Given the importance

of this Bill, it may be prudent for both councils and owners of

earthquake-prone buildings to monitor its progress through the

House and start considering whether to lodge a submission.

The NSW Court of Appeal recently held that a builder was liable in negligence to a body corporate

of commercial premises for defects which posed a risk to health and safety, despite there being no

contractual relationship between the body corporate and the builder and the body corporate not

being in existence at the time of construction.

Background

The Chelsea Apartments at Chatswood comprise 9 floors of serviced apartments and 12 floors of

residential apartments ('development').

Multiplex was engaged to design and construct the development. The developer had also entered

an agreement with three separate Stockland entities under which the serviced apartments could

be sold to investors by Stockland, which continued to manage the serviced apartment business.

The development comprised a separate body corporate for the served apartments ('Owners'

Corporation') from the rest of the development.

BUILDERS DUTY OF CARE TO SUBSEQUENT OWNERS

RE-OPENING THE DOOR

- Stephen Pyman and Joshua Kemp



Numerous defects became apparent to the Owners Corporation, and it brought proceedings against

Multiplex. As the Owners' Corporation did not have any contract with Multiplex, the proceedings

were based in negligence and the claim was for pure economic, being the cost of rectification of

defects. The defects were not from design but from faulty workmanship and materials not in

accordance with the plans and specifications.

The Owners' Corporation conceded that it was not entitled to the benefit of statutory warranties

under the Home Building Act (HBA) due to the exclusion of serviced apartments from the

definition of 'dwelling'.

Decision of McDougall J at first instance

At first instance in Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC

1219 ('Brookfield No. 2'), Justice McDougall of the NSW Supreme Court determined the existence

of a duty of care as a preliminary question.

In considering the issue, McDougall J explained that the statutory warranty scheme under the HBA

excluded buildings which were always intended to be used for commercial purposes. His Honour

reasoned that the Owners' Corporation was therefore "inviting the courts to go where the

legislature did not".

McDougall J observed that the exclusion of dwellings used for commercial purposes (including

overnight accommodation) from the HBA represented a "considered decision by the legislature

that the benefits of the regime established by the HBA should not be extended to those who

construct, for commercial rather than purely residential purposes".

Accordingly, His Honour rejected that a common law duty of care should be imposed primarily

because the legislature "appears to have withheld as a matter of deliberate policy choice".

McDougall J decided that it was therefore not necessary to consider the concept of vulnerability.

Court of Appeal decision

The New South Wales Court of Appeal allowed an appeal by the Owners' Corporation.

Analysis of authorities

Basten JA gave the primary judgment of the Court, which reviewed the development of the law in

relation to liability for pure economic loss, stemming from Caltex Oil (Australia) Pty Ltd v The



Dredge "Willemstad" [1976] [HCA 65]; Perre v Apand Pty Ltd [1999] [HCA 36] and Bryan v Maloney

[1995] HCA 17.

His Honour recognised the importance of 'vulnerability' as a key factor in identifying the scope of a

duty of care for pure economic loss (as set out by the High Court in Perre v Apand) and noted the

comments of McHugh J that "the vulnerability of the plaintiff to harm from the defendant's

conduct is therefore ordinarily a prerequisite to imposing a duty".

His Honour stated that "the inability of a Plaintiff to protect itself is an element of vulnerability"

and more specifically that 'vulnerability' may have three (3) aspects, namely the inability to:

• control or influence the physical event which gave rise to the loss

• negotiate a contractual arrangement imposing liability on the Defendant

• obtain insurance against the economic loss suffered

Other factors at stake in consideration of the existence of a duty of care are:

• the concept of "disproportion between the nature of the conduct and the culpability of the Defendant"

• the need to avoid the imposition of liability for "ordinary business conduct"

Basten JA also noted that Perre v Apand reflected the abandonment of the concept of 'proximity'

as a "touchstone of the existence of a duty of care". However his Honour noted that the factors

which were apt to be included in such an exercise remain relevant.

In considering the significance of Bryan v Maloney, it was noted by Basten JA that the majority

reasoning for finding a duty of care in that case involved the following factors:

1. An element of known reliance (or dependence) or the assumption of responsibility or a combination of the two (referred to by their Honours in Bryan v Maloney as a "special" relationship).

2. Recognition that the existence of a contractual relationship as between the builder and the original owner did not preclude the existence of a duty of care for the purposes of negligence.

3. Recognition that the duty of care extended to 'economic' loss suffered by the original owner. 4. That the plaintiff was a subsequent owner of the land was not a critical factor militating

against the continued operation of the duty.

Basten JA noted that two (2) factors had changed since Bryan v Maloney, namely:

• the High Court's abandonment of the concept of 'proximity' as the critical test or 'conceptual determinant' in identifying the existence of a duty with respect to economic loss

• the dismissal of the proposition that there is "a bright line between cases concerning the construction of dwellings and cases concerning the construction of other buildings".



In relation to the latter factor, his Honour noted that the plaintiff in Woolcock Street failed

because it did not bring itself within the principles established in Bryan v Maloney, not because

the building was a commercial building.

According to the Basten JA, the salient features in Brookfield No. 2 were the following:

1. The contractual relationship between the developer and the builder. The builder was fully aware of the arrangements between the developer and Stockland and was responsible for ensuring the registration of the relevant strata plan. The builder was also aware of the contractual arrangements by which apartments were sold. Therefore, the class of persons to which the builder may be liable was 'determinate'.

2. The contractual relationship between the developer and the entity managing the serviced apartments. At registration of the strata plan the developer controlled the Owners' Corporation and was in a position to impose obligations on the Owners' Corporation, as vendor of the properties. The contractual arrangements between the developer and the builder and between the purchasers and the developer contained no provisions dealing with latent defects or provisions limiting liability with respect to latent defects.

3. The statutory scheme with respect to strata plans. The provisions of the Strata Schemes Management Act vested the common property in the Owners' Corporation at registration of the strata plan and invested "principal responsibility for the management of the scheme in the Owners' Corporation". One of the key functions of the Owners' Corporation was to "maintain and repair the common property of the strata scheme"

4. The statutory scheme for protection of successive owners of residential dwellings. The statutory protections available to subsequent owners of residential buildings, did not apply to the Owners' Corporation due to the use of the service apartments as tourist, holiday or overnight accommodation.

Errors by primary judge

The Court of Appeal unanimously held (relevantly) that:

1. It was wrong to conclude that the parties' obligations having been dealt with in detail in the contract, precluded a finding that a tortious duty existed with respect to defects. Basten JA noted that the contract did not "purport expressly, or by necessary implication, to exclude any liability for defects or omissions which might arise otherwise than during that period, whether under contract or under the general law". The builder owed a duty of care to the developer, notwithstanding the superintendent's role, as the builder contracted to build in accordance with the plans and specifications and it is not reasonable, and cost prohibitive for the developer to check every detail of the work.

2. There was no basis to not impose a duty of care on the ground that such a duty affected the 'commercial basis' upon which the builder priced its work.

3. There was no basis to imply that the legislature intended, in enacting the Home Building Regulation, to exclude a common law duty of care outside of the regime of protection given in the HBA to owners of "dwellings".

4. Purchasers of the units were vulnerable because they could have insisted upon a contractual right as against the builder or the developer. They were also in a weaker position than the developer regarding inspections for defects or preventing latent defects.

The Owners' Corporation was in a weaker position than that of the developer and purchasers,



which may have had some opportunity to carry out inspections during the course of the

construction.

Scope of the duty of care to avoid pure economic loss

The Court of Appeal endorsed the view adopted by La Forest J in Winnipeg Condominium

Corporation No 36 v Bird Construction Co Ltd [1995] [1 SCER 85] that once the liability of a builder

for physical damage to persons or property is recognised, it is appropriate to accept liability for

economic loss, being the cost of steps reasonably taken to mitigate the risk of physical damage or

personal injury.

Importantly, the scope of the duty of care imposed by the Court of Appeal was limited to latent

defects which were either:

• structural in nature

• required urgent attention

• constituted a danger to persons or property in, or in the vicinity of, the served apartments

• made the apartments uninhabitable

The Court of Appeal decision once again confirmed the importance of the concept of 'vulnerability'

as a requirement to establish the existence of a duty of care to a subsequent purchaser to avoid

pure economic loss. Despite this, any other "salient features" of the case must be considered.

In the context of a strata title development, the ability of the Owners Corporation' or body

corporate to protect itself against the harm of the defendant's conduct is typically limited due to

creation of the Owners' Corporation or body corporate on registration of the strata plan and there

being no ability to discover latent defects or to obtain contractual protection against the

developer and/ or builder prior to creation.

The failure by purchasers to obtain contractual protection will not preclude a finding of

vulnerability on behalf of the Owners' Corporation or body corporate, at least in circumstances

where the sale contracts were agreed between the builder and the developer and where the

builder retains a right to approve any changes to the terms of the sale contracts.

What does this mean for builders?

Multiplex has filed an application in the High Court for special leave to appeal the NSW Court of

Appeal's decision.



Until the special leave application has been granted and a High Court judgment handed down, it

remains unclear if this decision will apply outside NSW or how residential warranty legislation in

other States will impact on the application of a duty of care on builders in other States.

However, it is now clear from the Court of Appeal decision that the non- application of the

statutory warranties under the HBA in favour of a subsequent purchaser will not necessarily

preclude the imposition of a common law duty of care. It remains to be seen whether a duty of

care will be imposed in favour of a subsequent purchaser of a residential building to which the

statutory warranties do apply.

The Court of Appeal recognised that the question of a duty of care to the subsequent owner does

not arise unless it has already been established that the developer was owed such a duty.

Therefore, builders should consider seeking an express limitation (either wholly or in part) of

liability in tort as against the developer, with respect to defects which might arise outside of the

contractual defects liability period.

If not limited, builders should be aware of potential liability for certain latent defects and obtain

advice from their insurance broker as to the availability of cover against such liability.

Each case will depend on its facts, the contract, vulnerability and the salient features. If you are

subject to a claim or the expense of latent defects, you should seek advice on each set of the

particular circumstances.

Author Profile—Stephen Pyman and Joshua Kemp

Stephen is a partner with Holding Redlich in Brisbane and has practised in the field

of building, construction and development law for more than 23 years. He has

extensive experience in pre-contract and tender negotiations, contracts and

subcontracts as well as construction litigation, alternative dispute resolution,

mediation, arbitration and adjudication under the Security of Payment Act.

Joshua is a Senior Associate in Holding Redlich’s Construction & Infrastructure

Group in Brisbane and is an experienced litigator in building and construction

disputes in all categories of construction, ranging from commercial, public

infrastructure, mining and resources to domestic building litigation.

www.holdingredlich.com



The case concerned $17.7 million spent by

TrustPower in the 2006-2008 years on applying for and

obtaining resource consents to four

potential hydro or wind power sites,

in relation to which TrustPower owned either none of the site, or only a portion of it.

November 2013’s High Court judgment in favour of TrustPower

against Inland Revenue is directly relevant to any business which

spends money on resource consents and may also apply to other costs

incurred in investigating the acquisition or development of new

assets, especially where an asset eventually is acquired or

developed.

The case emphasizes the tax benefit of treating as much as possible

of that process as investigation or feasibility. Formal or final

commitment should be delayed until the last possible moment, at a

point when failure is almost inconceivable.

But any business seeking to rely on this case will need to understand

the facts of it, before drawing any conclusions about how it might

apply. And Inland Revenue may appeal.

The facts

The case concerned $17.7 million spent by TrustPower in the 2006-

2008 years on applying for and obtaining resource consents to four

potential hydro or wind power sites, in relation to which TrustPower

owned either none of the site, or only a portion of it.

The judgment states that the company did not claim immediate

deductions for expenditure on consents in relation to power

generation assets which it already owned (though the expenditure in

this case would be depreciable). For her part, the Commissioner

accepted that expenditure incurred in relation to the four sites

before the company decided to apply for resource consents was

deductible, as feasibility expenditure.

As found by Justice Andrews, TrustPower was constantly engaged in

evaluating the feasibility of acquiring or developing power generation

COURT BACKS TAXPAYER ON DEDUCTIBILITY

OF RESOURCE CONSENT COSTS TrustPower Ltd v Commissioner of Revenue CIV 2011-404-007140 [2013]NZHC 2970



The first issue considered by

Justice Andrews was whether

resource consents could be treated

as assets at all for tax purposes. This

was seen as important

because, if they were not assets

themselves, then the expense of obtaining them

was simply part of the expense of considering the feasibility of the relevant site and

was therefore, the parties agreed,

deductible.

assets. Its evaluation process involved three steps:

• establishing a kind of in-principle feasibility, the last element of

which was applying for resource consents

• more detailed work such as the development of civil engineering

and designs, calling for tenders from manufacturers, and

analysing economic feasibility more carefully, and finally

• preparation of a business case for consideration by the

Board. Only once Board approval was obtained would TrustPower

be committed to a project.

Were the resource consents assets in their own

right?

The first issue considered by Justice Andrews was whether resource

consents could be treated as assets at all for tax purposes. This was

seen as important because, if they were not assets themselves, then

the expense of obtaining them was simply part of the expense of

considering the feasibility of the relevant site and was therefore, the

parties agreed, deductible.

Thus framed, the question itself is a useful judicial endorsement of

the theory that expenditure incurred by an existing business in

investigating the possible acquisition or development of a capital

asset is deductible up to and until the decision is made to commit to

the asset’s acquisition.

The judge held that resource consents were not capital assets in

their own right. In doing so, she dismissed the significance of various

rules in the tax legislation which are based on an assumption that

they are assets – e.g. the inclusion of fixed life resource consents in

the list of items of depreciable intangible property, and the special

provision allowing a deduction for costs incurred in seeking a

resource consent which is unsuccessful.

The basis for holding that the resource consents were not assets

appears to have been that they were of little or at least uncertain

value, particularly if regarded separately from the project they



The first issue was whether the

resource consents, if assets at all, were revenue or capital assets. In this respect the judge also found for TrustPower on

the grounds primarily that the real purpose of incurring the

expenditure was to assess the

feasibility of the projects, rather

than to obtain the consents

themselves.

related to.

Although the answer to the first question was sufficient to decide the

case in favour of the taxpayer, Justice Andrews went on to consider a

number of further issues raised in the course of the trial.

If they were assets, were the resource

consents capital assets?

The first issue was whether the resource consents, if assets at all,

were revenue or capital assets. In this respect the judge also found

for TrustPower on the grounds primarily that the real purpose of

incurring the expenditure was to assess the feasibility of the

projects, rather than to obtain the consents themselves.

She also found it relevant that the resource consents did not of

themselves produce any income for TrustPower. Interestingly, the

Judge did not discuss the length of term of the consents in any

detail, which is often a factor considered by advisors as being of

some relevance in this area.

What was the cost of the resource consents?

An issue which was only relevant if the resource consents were

capital assets was determining what expenditure should be treated

as their cost. This raised again, on a smaller scale, the issue of

commitment.

Even if the resource consents were capital assets, costs which were

incurred before TrustPower committed to applying for the resource

consents were feasibility expenditure (that is, incurred to determine

whether it was feasible to apply for a resource consent), and

therefore deductible.

Unsurprisingly, TrustPower argued that it was not committed to

applying for a consent until very shortly before it actually lodged its

application. Expenditure incurred in obtaining consultants’ reports

relating to the applications and undertaking the necessary



The TrustPower case sends a clear

signal to businesses seeking

to deduct expenditure

relating to the acquisition or

development of capital assets

additional to those they already own.

assessments, was incurred before that point. The fact that the

reports and assessments would be pivotal documents in the

application, and were prepared on the basis that they would be used

to support it, was neither here nor there.

The Commissioner on the other hand argued that TrustPower’s

decision to spend significant money in obtaining reports and

undertaking assessments demonstrated an intention to lodge an

application, which was a sufficient level of commitment to end the

feasibility period.

Justice Andrews held for the taxpayer on this point also, holding in

effect that “commitment” means real commitment. Although as a

business matter TrustPower clearly would not have spent the money

except in the hope that it would be used to lodge a consent, that fell

short of commitment.

Chapman Tripp comments

The TrustPower case sends a clear signal to businesses seeking

to deduct expenditure relating to the acquisition or

development of capital assets additional to those they already

own.

In Milburn v CIR (2001) 20 NZTC 17,017, resource consent

application expenditure was not deductible, primarily because

Justice Wild found that the taxpayer had committed itself to

the development of the relevant quarries before it applied for

the resource consents.

In TrustPower, the parties were agreed that there was no

commitment to the generation sites until well after the

resource consents were obtained. Since the resource consents

were not separate assets, this meant the expenditure was

deductible. Even if the consents had been separate assets, by

ensuring that the facts did not allow a conclusion to be drawn

that it was committed to lodging them until shortly before in



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fact it did so, TrustPower maximised the expenditure for which

it could claim an immediate deduction.

This article was authored by the team at Chapman Tripp

www.chapmantripp.com

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HEALTH AND SAFETY REFORM BILL

UNDER THE MICROSCOPE - Marie Wisker and Vonda Hodgson

The Health and Safety Reform Bill will become a key piece of legislation for every workplace –with

significant penalties, both reputational and financial, for non-compliance – and requires the

attention of senior management and board members.

We summarise the Bill’s contents and identify where it has been refined in response to the

feedback received on the exposure draft released last August. Submissions are due by

11 April 2014.

Key features of new regime

The Bill is modelled on the Australian Model Work Health and Safety Act, adapted as

necessary. This will have the advantage of allowing New Zealand to draw on the Australian

experience and on Australian case law.

At the centre of the new regime sits the PCBU (the person conducting a business or

undertaking). The PCBU owes duties to “workers” in a general sense when they are performing

work in relation to that business, and to workers whose activities are directed by or influenced by

the PCBU. Volunteer associations not employing anyone are excluded from the definition of a

PCBU.

There are also specific obligations on upstream suppliers of products or machinery to ensure that

the items are supplied, installed, stored and can be operated and inspected safely.

Company officers (directors and senior management) are subject to a new positive “due diligence”

duty to ensure that the PCBU eliminates risks to health and safety “so far as is reasonably

practicable” and, where risks cannot be eliminated, minimises them “so far as is reasonably

practicable”.

This new duty will require directors and officers, as an absolute minimum, to:

• understand the nature of the company’s operations and any associated risks and hazards, and

• ensure that there are appropriate resources, systems and processes to manage these risks.

In judging what constitutes an appropriate standard of care, the courts are likely to have regard to



the Good Governance Guidelines drawn up by the Ministry of Business, Innovation and Employment

(MBIE) and the Institute of Directors.

A large section of the new Bill is dedicated to worker participation, and engagement with

workers. There are significant penalties for non-compliance with these obligations.

New enforcement options available to WorkSafe as the regulator include:

• an ability to issue infringement notices without prior warning

• enabling judges to order wrong-doers to publicise their failures, take action to remedy those failures and pay for the regulator’s costs in bringing proceedings against them, and

• a comparatively long period for bringing prosecutions – up to two years after the breach first comes to WorkSafe’s notice and up to one year after the coroner releases findings indicating that an offence may have occurred.

Finally, there is a significant increase in the maximum penalties for a breach of any obligation

under the new Act:

• Category 1 (reckless conduct) – up to $3 million for a corporate and $600,000 for an individual and/or five years’ imprisonment.

• Category 2 (conduct causing, or exposing a person to serious harm) – up to $1.5 million for a corporate and $300,000 for an individual.

• Category 3 (breach of duty) – up to $500,000 for a corporate and $100,000 for an individual.

Current maxima are $500,000 for a knowing breach of duty where there is a risk of serious harm

and $250,000 for any other breach.

Corporate manslaughter has not been adopted but Labour and the Greens have made it clear that

they see this as a significant gap in the Bill and we can expect further discussion on the topic

during the select committee process.

Refinements from the exposure draft

As the Bill is closely modelled on the Australian Model Law, we were not expecting the basic

design to change – and most of the changes which have been made are relatively minor or

technical.

The most significant change is that the definition of “officer” has been narrowed. The exposure

draft defined an “officer” as someone who makes “or participates in making” decisions that affect

the whole or a substantial part of the business, and expressly included the CFO. The Bill removes

the person who merely “participates” in decision-making, and removes the reference to the CFO.



This is a welcome change. However, we consider that a further narrowing is desirable to capture

only those people whose decisions either directly or indirectly affect health and safety, with

liability confined to those parts of the business for which the officer is responsible.

This may be an issue for submissions to the select committee.

Other changes in the Bill include:

• express exclusion of members of local community boards and local authorities from offences that would otherwise be imposed on an “officer” (this makes it clear that trustees of local schools will not be criminally liable for health and safety failures)

• changing the obligation to “consult” with workers to an obligation to “engage”, although the specifics of the obligations have not changed

• a new express exclusion from the duties of suppliers of plant, substances or structures where such products are sold second hand and “as is”

• doubling the maximum fines for failing to institute worker participation practices to $20,000 for an individual who owes a duty under the Bill and $100,000 for a body corporate

• new definitions of “hazard” and “risk”

• allowing a regulator to remove a health and safety representative who is deemed to be ineffective (with the ability for that decision to be appealed)

• a new positive obligation on a PCBU to provide information to a health and safety committee rather than just have that information “accessible”. (If this is interpreted as under the Employment Relations Act 2000 it will require a proactive approach to disclosure as opposed to simply responding to requests)

• an obligation on a PCBU to adopt a recommendation from a health and safety committee within a reasonable timeframe or provide reasons why not, and

• new sections regarding enforcement, prohibition notices, remedial actions, reviews and appeals.

Process from here

The Bill has been referred to the Transport and Industrial Relations Committee with submissions

due by 11 April 2014. The Select Committee is due to report back by 13 September 2014. This

timetable reflects the Government’s aim of having the Bill passed into law by the end of 2014 and

in force from 1 April 2015.

Author Profile

Marie Wisker - Senior Associate, Chapman Tripp Marie has significant court and dispute-resolution experience. She has represented clients in numerous mediations and Employment Relations Authority hearings, and has appeared in commercial disputes in arbitrations and courts up to the Court of Appeal. Vonda Hodgson - Senior Solicitor, Chapman Tripp Vonda specialises in employment law. She advises clients on a wide range of employment matters including restraint of trade issues, interpretation of employment agreements, disciplinary issues, health and safety and commercial negotiations.



PUT A STOP TO IT!

PICK ON SOMEONE YOUR OWN SIZE

It’s high time that some of you representatives in adjudication started putting your feet where

your mouth is. Go and read the first three lines of this Twintec Ltd and Volkerfitzpatrick Ltd case.

And now stop mouthing off at adjudicators telling them to clear off, to resign, and to go away;

mouth off instead at a High Court judge.

Flooring subcontractor, Twintec, received a notice of adjudication from main contractor

Volkerfitzpatrick, and didn’t like it. That was on Tuesday 2 December 2013. By Friday, Twintec

had turned up in court and asked, very politely, for an injunction to stop the affair. And lo, the

High Court judge said yes. There was a prima facie case to order a stop or pause, at least. So, that

stymied the service of a referral, barred the adjudicator and barred the claimant from doing nowt.

Then on 18 December a more detailed hearing took place. The same judge ordered the red light to

stay on. He then wrote a full judgment and – bingo – the Twintec enterprise got its way. They

stopped the adjudication.

Now let me tell you why I like all that. I like the greased-lightening action of the judge. An

application for an injunction does stir up the bodily functions. The whole idea of an injunction is to

put a super-quick spoke in someone’s wheel. And I like it because inviting, or sometimes bullying,

an adjudicator with a plethora of technical niceties about threshold jurisdiction and telling him to

sod off, doesn’t work too well. Better by far to not trouble the adjudicator, go direct to the

Some parties will go to great lengths – even so far as bullying the poor adjudicator – to get an adjudication stopped. Better by far is to go straight to the judge and argue your case

AN APPLICATION FOR AN INJUNCTION DOES STIR UP THE BODILY FUNCTIONS. THE WHOLE IDEA OF AN INJUNCTION IS TO PUT A SUPER-QUICK SPOKE IN SOMEONE’S WHEEL

BINGHAM’S

CORNER

TONY BINGHAM is an Arbitrator, Adjudicator, Mediator and Barrister.

As well as that, Tony is a renowned writer, commentator and lecturer.



judge. And do it as soon as that notice of adjudication turns up.

Look, let me be frank, it has become a music-hall joke asking an adjudicator to shoot himself in

the pocket. He is the last person to seek an impartial, independent decision about his own future.

He got the appointment and hell’s bells he is staying. In law the adjudicator is wholly biased.

That’s why he can’t or shouldn’t make a binding decision about the right or otherwise to stay on

the pitch. Worse, oh far worse, is that these so-called threshold jurisdiction points are lawyers’

shenanigans; we love them. It’s not the meat and veg of an architect adjudicator. His life is all

about the difference between architraves and elbows. He isn’t a lawyer.

Even worse is the idiotic tendency of some representatives to get very shirty with the adjudicator

if he pauses when being told he should resign. Bullying is now widespread. We even have some

very stupid representatives threatening the adjudicator that if he stays in place, he will not get

paid by the bully. Crude.

Wrong in law too. If a party stays on the pitch even under a flag of protest you are liable for the

adjudicator’s fees. You can’t play and not pay. And there is more. Some adjudicators become so

fed up with stupid bullies, that they take umbrage.

Don’t for heaven’s sake think or suggest that a fed-up, highly pressured adjudicator architect, can

somehow rise above the bullying. Prick the adjudicator, he bleeds, tickle him and he laughs… So

do you now see why it is ever so wise to carry your clever threshold arguments into court and

wheedle an injunction out of the old boy sitting on the bench? Oh, by the way, don’t try bullying

that chap!

That Twintec case is also useful for knowing what threshold jurisdiction challenges won’t work. I

go this far, Twintec squeezed home on a narrow point that could so easily have gone against them

on another day. Their shopping-trolley of objections was mostly thrown out. They argued that the

adjudication was only being brought into play to disrupt Twintec’s ability to abide by the

timetable in a parallel court proceeding (seemingly there is a concurrent piece of litigation for

some £170m).

The judge said “tough, get on with it”. So they tried another blast: Volkerfitzpatrick was only

trying to obtain a result refused in the main contract. The judge said “tough, get on with it”. So

another blast: Volkerfitzpatrick was putting an oppressive and unconscionable burden on Twintec.

“Tough”, said the judge. So Twintec hurled in: “The adjudication has no real prospect of success”.

You could almost hear the judge say “do me a favour”.



As to the last point, do you realize that some adjudicators become so fed up with overly robust,

half-baked representatives that there is a real chance that a poor case has a real prospect of

success. There are just a few thick-skinned adjudicators that are tickled pink by bullies trying it

on, but others will instead prick you until you bleed.

CONSTRUCTION 2025 – GOVERNMENT

WAFFLE!

YOU CANNOT BE SERIOUS

The cost of plastering is going to come down by 33%. So too is the cost of the piling and

groundworks, and superstructure, and roof and screeds, and M&E (wow, I bet you M&E folk are

pleased), and ceilings, and glazing and, well, all of it. The government, by “working together” has

“developed a clear and defined set of aspirations for UK construction … for 2025”.

Thank goodness the government used the word “aspirations” – for one tiny minute I thought they

meant it. The aspiration is a 33% reduction in the cost of constructing an office block, school,

house and hut. There’s more: this 75-page government story is telling us that we will save 50% in

the overall time from inception to completion of new build and refurb jobs.

I, for one, am excited. Let’s look at how these government folk are going to do it. Thumb the

pages with me. Begin with page 22.

Here are “Our joint commitments”:

(1) “Build the UK’s competitive advantage in smart construction and digital design through Digital

Built Britain Agenda.” That’s knocked £2 per square metre off plastering for a start.

(2) “Develop market and technology based plans to secure the jobs and growth.”

The industrial strategy for construction asks the industry to do a lot ‘in partnership’ with government. But why are we the ones being asked to do more

work for less money?

WE CAN GET THE TIME ASPIRATION DOWN BY 50%, IF THE LADS PLASTER TWICE AS QUICKLY AND WORK 28-HOURS A DAY AND EIGHT DAYS A WEEK – EASY



(3) “Identify global trade opportunities”. In other words go and do plastering in Cairo.

(4) “Improve the image of the industry by inspiring young people”. Inspire them to become

plasterers who plaster at twice the speed and a third of the price.

(5) “Address construction issues in a strategic manner”.

(6) “Develop and refine the pipeline of future work”. Are you keeping up?

(7) “Drive procurement efficiency and explore options for further efficiency”

(8) “Address access to finance”. Hooray!

(9) “Work with academic and research communities to bring forward research”.

(10)“Lead the transformation of the industry through the new Construction Leadership Council

with actions owned and delivered by industry bodies”.

So, what do you think of all that? Did we get the plastering down by six quid a square metre? I

mean to say that if we can massively speed up the lads doing the putter-uppering we can get the

time aspiration down by that 50%, if they plaster twice as quickly and work 28 hours a day and

eight days a week – easy.

No, I am not taking the mickey.

I admit the report starts badly. It comes from government, and you folk in that village haven’t got

it yet, have you? Don’t produce a report like this and think that folk will swallow it. The talk of

“strategic priorities”, “the action plan”, “the target dates”, the talk of “Drivers of Change”, it

doesn’t wash. What the hell do you mean when you say “develop a co-ordinated approach to

engage young people” (all by “Winter 2013”). Who writes this stuff? This is waffle.

The implication in this document is that our construction industry is duff, inept, too expensive and

idle. So, the government says get your prices down by 33%, and speed up your work.

So, let me tell them how to get their act right:

WHAT THE HELL DO YOU MEAN WHEN YOU SAY ‘DEVELOP A CO-ORDINATED APPROACH TO ENGAGE YOUNG PEOPLE’ (ALL BY ‘WINTER 2013’). WHO WRITES THIS STUFF? THIS IS WAFFLE



(1) You ask contractors to price the job when you haven’t made up your mind what you want. The

price given is for a guess. Then the contractor is utterly messed about by your change orders.

That’s where you, not the industry, cause 33% loss. Why do your jobs take 50% longer? It’s because

your change orders delay progress. Make no bones about it, it is you that is the root cause of

blowing the budget.

(2) Next, this industry can’t invest because it makes no profit. It never makes money out of

disruption claims and disputes. Let it make money from change-free works and then it will have

the cash to employ these kids, buy that plant, and have time to innovate and invent.

(3) The commercial risk in construction is massive. Hardly any job comes through without a

calamitous loss somewhere down the line. So the response is clear. HM Government, take your

woolly words in this “Let’s blame industry” document and start again. It’s you who have to get

your act right, not the plasterers.



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