Simpson Grierson - Litigation Predictions: Part 7

9/05/2024·2 mins to read

Litigation Predictions: Part 7 - Construction

Our prediction

Over the next 12 months, we expect to continue to see high numbers of project disputes relating to both time delays and costs.

Why?

In 2023 insolvency rates increased in the construction sector and this trend is predicted to continue into 2024.^[1] The number of construction businesses that became insolvent rose to 418 in the year ending June 2023, from 210 in the previous 12 year.^[2] As New Zealand is now officially in a recession; this will impact construction activity and predictions are that this will impact building more so than infrastructure, given the public investment in infrastructure in water and transport infrastructure projects, as well as cyclone Gabrielle recovery and rebuild efforts.^[3]

New Zealand, like many countries around the world, is facing economic uncertainty. Price increases, high interest rates and supply chain issues are having a significant impact. Further, skilled workers are in high demand with 46% of business owners or managers surveyed by Research New Zealand reported that they were having difficulty recruiting tradespeople.^[4] A recent New Zealand Institute of Economic Research report stated that 55% of firms anticipate further increase in overdue debtors over the next three months, exceeding the peak observed during the Global Financial Crisis.^[5]

Profit margins on projects are thin, and those thin margins are under attack due to rising costs for building materials and labour. This can lead to an increase in the number of disputes as parties take steps to protect their margins or budgets wherever possible.

What it means for you

The starting point is to make sure that parties to a construction project have a well drafted construction contract, that is tailored to the specific parties and the project. In the current economic climate, parties should pay particular attention to clauses relating to circumstances that give rise to an entitlement to variations and extensions of time, cost fluctuations for materials and liquidated damages. The aim is to take steps at the drafting stage to minimise the prevalence of disputes arising down the track.

If a dispute does arise however, parties that keep documents and records in a secure place and somewhere that can be accessed in a relatively short period of time are often in a better position, especially where a dispute is referred to adjudication (see below). If parties cannot resolve the dispute by way of negotiation between them in good faith in the first instance, the next step is either to refer the matter to adjudication or to mediation.

Adjudication under the Construction Contracts Act 2002 is a relatively quick process that is conducted ‘on the papers’(ie by the exchange of written submissions and witness statements rather than conducting oral hearings). The aim of the adjudication process is to keep the cashflow going on a project even when disputes arise (it is sometimes referred to as being ‘quick and dirty’). An adjudicator will issue a determination and that determination is binding until the dispute is finally determined in more traditional arbitration or court.