THE ASSOCIATION OF CONSULTING ENGINEERS NEW ZEALAND INC

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THE ASSOCIATION OF CONSULTING ENGINEERS NEW ZEALAND INC Level 8, Hallensteins House, 276 Lambton Quay, PO Box 10 247, Wellington, New Zealand Tel: +64-4-472-1202, Fax: +64-4-473-3814, Email: service

1 THE ASSOCIATION OF CONSULTING ENGINEERS NEW ZEALAND INC Level 8, Hallensteins House, 276 Lambton Quay, PO Box , Wellington, New Zealand Tel: , Fax: , Secretariat Commerce Committee Parliament Buildings Wellington July 2013 SUBMISSION ON CONSTRUCTION CONTRACTS AMENDMENT BILL (BILL NO. 97-1) (THE CCA BILL) - ASSOCIATION OF CONSULTING ENGINEERS NEW ZEALAND INC (ACENZ) 1 This submission on the CCA Bill is made by ACENZ. The members of ACENZ are directly affected by the proposed changes and ACENZ believes it has an important perspective on the merits of the reforms. 2 In summary, ACENZ: 2.1 Does not support widening the definition of construction work to include design or engineering work in respect of construction work, except as in 2.4 below. 2.2 Does not support removing the distinction between enforcement of payment determinations and enforcement of rights and obligations determinations. This is because it is much more difficult (and potentially impossible) to unwind the enforcement of determinations relating to rights and obligations in the event that a different outcome prevails following an arbitration or court hearing. 2.3 Supports the proposed removal of most of the distinctions between residential and commercial construction. 2.4 Supports the inclusion of design and engineering work where it is part of the scope of work of a construction contract, whether it be a head contract or a subcontract (for example, as in the case of a design and build contract). 2.5 Submits that if the scope is widened to include design or engineering work in respect of construction work (despite the concerns expressed in this submission), then significant adjustments will need to be made to the adjudication processes. 3 ACENZ wishes to appear before the Committee to speak to our submission. Our contact is: Kieran Shaw, Chief Executive T: M: E: ksceo@acenz.org.nz Post: PO Box Wellington ACENZ - overview of our organisation 4 ACENZ serves over 190 member firms which collectively employ over 9,400 engineers, architects, surveyors, planners, project managers and support staff. These firms range in size from single person specialist consultants, to multi discipline firms employing over 1000 people. Many of the firms have overseas offices. Over 95% of engineering consultancies are members of ACENZ.

2 5 Most engineering design and much architectural design is undertaken by consulting engineers in New Zealand. ACENZ represents the professional services industry for engineers and related professionals working in the built and natural environment. 6 ACENZ regards itself as a leader in promoting consulting engineering within New Zealand and internationally. Its members pride themselves in being at the forefront of innovation and professional engineering and provide services to government agencies, local bodies, industries, businesses, architects and residential clients. 7 ACENZ has, through its membership, the benefit of a vast amount of professional experience in the New Zealand construction industry. That experience includes all manner of projects and the full spectrum of project outcomes. It also includes many years of experience assisting our members and their clients with project management and design of projects, including dealing with payment issues, professional indemnity claims and ethical issues. 8 This submission represents the views of ACENZ as a whole. ACENZ has consulted its members and acknowledges that, with such a large membership, there may be some diversity of views amongst its members, notwithstanding the great majority supports this submission. 9 ACENZ notes and endorses the submission made by the Institution of Professional Engineers New Zealand (IPENZ), in particular, their support for strengthening of the regulatory regime. ACENZ has consulted with the New Zealand Institute of Architects (NZIA) whose views are similar to ours and we support the substance of NZIA s submissions. Current working arrangements 10 ACENZ believes that the Act is working reasonably well in terms of serving the construction industry. It will work even better if many of the distinctions between residential and commercial construction are removed. There is also a need for improved enforcement processes. ACENZ does not believe, however, that there is well reasoned support for the view that the scope of the Act should be expanded to include independent professional design services provided by architects and engineers. 11 The Act was promoted with the support of ACENZ to protect contractors and subcontractors from lack of cash flow and increased financial risk caused by unfair lack of payment by clients and head contractors respectively. Generally, design engineers and architects are engaged directly by the owner and most of their work is done prior to the contractors being appointed. They are not part of the contractual payment chain (except in cases of design and build procurement methods covered by paragraph 2.4 above). If there is a dispute regarding their fees or services it does not hold up payments to contractors. With regard to payment of their own fees, there are provisions in their contractual arrangements to deal with slow or lack of payment. In widely used standard agreement forms, these arrangements include mediation and arbitration, but almost invariably, resolution of any difference is reached through discussions and agreement. 12 In their role of Engineer to the Contract, engineers make decisions regarding payments to contractors and these payments are already subject to the CCA. 13 Both ACENZ and IPENZ records show a very small number of such complaints about fees. IPENZ records indicate about 4 in the last year and ACENZ even fewer. Disputes on other matters are well covered by other legislation which applies specifically to engineers, as noted in paragraph 16.1 below.

3 Why ACENZ does not support expanding the scope of the Construction Contracts Act (the Act) to include professional services 14 ACENZ appreciates that it is a valid question to ask why does the Act cover physical building work carried out by contractors and not capture related services such as design work? ACENZ strongly believes the scope of the Act was limited for good reason and that this limit has helped, rather than hindered, the Act s success. The work undertaken by professional designers in the construction industry is very different to the work undertaken by contractors. The professional designer s duty is to provide reasonable skill and care and there are an extraordinary number of acceptable outcomes to one brief, whereas a contractor or subcontractor must build what is fully drawn and specified for which there is only one acceptable outcome. As a result, when it comes to dispute resolution one size does not fit all. We summarise these differences below: 14.1 The nature of the work: architectural and engineering design work ranges from relatively simple designs through to design work of the utmost complexity and detail. The design input into a complex project can take months or years to complete and will often involve thousands of hours of professional time from many disciplines or sub-disciplines within the engineering and architectural professions. Every design requires a unique combination of compromises to achieve a best fit solution to the customer s stated needs. There cannot be a guarantee of success any more than a surgeon can guarantee an outcome. In the event of a dispute, assessing whether the professional was negligent or not does not lend itself to very tight timeframes and decisions on the papers. There is also no need for such tight timeframes as the designer is not part of the construction contract chain and slower resolution does not delay payments to others The nature of the legal duty: the legal duty assumed by most providers of professional services in the construction industry is a duty to exercise reasonable care. The duty is normally incorporated into the contractual terms of engagement and in tort means that a plaintiff has to prove negligence. Any disputes therefore, are of a quite different nature to normal construction disputes involving contractors. The latter typically involve issues regarding compliance with plans and specifications, the quality of physical workmanship, and delay claims. In contrast, a dispute as to whether or not reasonable care was taken by say, an architect or structural designer, potentially involves a consideration of months if not years of work, a vast quantity of highly technical documents, and the views of independent expert witnesses as to whether the work performed met a reasonable standard. Such assessments take time and should not be by people drawn from a general pool of construction adjudicators There is an additional stakeholder the rights and interests of professional indemnity insurers must be taken into account: engineers and other design professionals in the construction industry will carry professional indemnity insurance. Such insurance exists for the benefit of both the professional Insured and the client. It should be noted that to be a member of ACENZ a consulting engineer must have Professional Indemnity Insurance. This is largely to provide a brand of substance as many consulting engineers do not have or need much capital in their businesses nor is much capital needed to operate in a partnership Professional indemnity policies respond on a claims made basis and require the Insured to notify the insurer of any claim or circumstances which may give rise to a claim. The Insured is obliged to avoid taking any step which could prejudice the interests of the insurer. This is the commercial and legal reality internationally. What it means, is that no material step can be taken by an insured professional in relation to a claim which is subject to adjudication without the prior approval of

4 the insurer. The practical difficulties in the context of adjudication and the timelines it imposes are very significant and include: (a) (b) (c) (d) (e) the insurer must be notified (via the broker) and be briefed on the nature of the claim/potential claim; the insurer may need to make a decision about cover; the insurer may well be based off-shore (for example in London) and large claims may involve many layers of insurers; the insurer may wish to be separately represented legally and this can take time to implement; and no material step can be taken in preparing for and defending any claim without the insurer s approval An inherent assumption in the Act, namely that decisions are binding but interim and can be unwound if necessary, is false when it comes to many disputes involving design professionals: it is well known that the adjudication process under the Act provides a form of quick and dirty payment dispute resolution and the parties are free to pursue more formal court or arbitration processes to have the dispute resolved in a more thorough fashion if they wish. At its heart, the process was designed to release cash flow within the industry on the basis that even a quick and dirty process was better than simply defaulting to one where the party with the money (typically a client or head contractor) could simply hold on to it and force the claiming party to go to all the trouble and expense of litigation. In most payment disputes involving contractors, the logic of the Act works. An expedited assessment of the merits enables payment claims to be processed and in the event that an adjudication determination is overturned in due course, money can normally be repaid (in the absence of an insolvency) That same logic simply does not apply in relation to the work of professional consultants. In particular: (a) (b) in relation to payment claims or cash flow concerns by consultants, there has been no widespread demand from ACENZ members for them to have the benefits of the adjudication process; and more importantly, if the adjudication process is used to determine rights and obligations in relation to the work of consultants, then many of the decisions made by engineers simply cannot be unwound, or unwound easily, downstream. Design related decisions by the Engineer to the Contract regarding such matters as work quality, fitness for purpose, Practical Completion, the right to suspend work and the right to terminate provide good examples Timing of the claim: The issues are compounded further when you consider the nature of, for example, disputes relating to alleged poor performance of design services, ie matters other than payment. Such claims can arise many years after the design services were performed, adding a whole layer of practical complexity due to the need to retrieve old records and potentially track down professionals who may well have long since dispersed, including internationally The Engineer to the Contract role: This role is a long standing feature of the construction industry in New Zealand. It is highly undesirable for the independent engineer to be faced with making decisions under the contract at the same time as

5 facing adjudication claims and the threat of liability involving the same issues. The only sensible exception is decisions relating to progress payments, which are already covered by the Act Having regard to the differences between physical construction work and the provision of professional design services, the processes in the Act are neither necessary nor appropriate: (a) (b) (c) the timeframes set unrealistic expectations, even after the proposed insertion of s37(4) to the Act regarding the timing of adjudication response times, having regard to the kinds of issues which may need to be addressed when assessing whether the professional designer applied reasonable skill and care, the evidence which would often be required to address them and the need to accommodate the interests of professional indemnity insurers; there are boundary issues around defining which forms of design and engineering come within any expanded definition. For example, feasibility studies, comparisons of options, tendering advice and engineering reports on building or infrastructure design and operation; and if there is a dispute regarding professional design or engineering services it very often involves a third party such as another engineer or architect, contractor or other professional advisor such as a peer reviewer. The adjudication process does not allow for third parties to be joined or for consolidation of multiple adjudications (and nor would it be practical to do so within the kinds of timeframes the adjudication process envisages). As a result, there is a real risk of inconsistent outcomes. What is different about the relationship between professional design services providers and their clients? 15 ACENZ believes it is a mistake to assume that payment or other disputes between contractors or contractors and their clients are similar to payment or other disputes between professional services providers and their clients. 16 There are important differences in the nature of the relationship between our members and our clients, including the value placed on the trusted advisor relationship between us, which has been a key ingredient of the relationship between professional engineers and their clients for decades. That relationship differs to the normal relationship between contractors and their clients in several important respects, including: 16.1 the professional nature of the relationship between Chartered Professional Engineers and Clients is largely determined by the minimum standards of competence and ethical behaviour set by the Registration Authority under the Chartered Professional Engineers Act 2002; 16.2 there are imbedded disciplinary processes within ACENZ and IPENZ, which have been well respected and effective in mediation and resolution of complaints the feedback to ACENZ does not suggest otherwise; 16.3 professionals such as engineers often have an advisory and ongoing role throughout and after actual construction; and 16.4 terms of engagement which are regarded as reasonably balanced have been in use for many years.

6 Where is the boundary? 17 ACENZ believes there is widespread and well founded concern regarding the lack of any definitions in the CCA Bill of what constitutes design or engineering work carried out in New Zealand in respect in respect of work of the kind referred to in subsection (1) (a) to (d). This lack of definition is highly undesirable. It will almost certainly lead to disputes over the scope of the Act and jurisdictional issues. Why ACENZ does not support extending the scope of the CCA to enforcement of rights and obligations determinations 18 An inherent assumption in the Act, namely that decisions are binding but interim and can be unwound if necessary, is false when it comes to many disputes in relation to construction contracts. It is well known that the adjudication process under the Act provides a form of quick and dirty payment dispute resolution and the parties are free to pursue more formal court or arbitration processes to have the dispute resolved in a more thorough fashion if they wish. At its heart, the process was designed to release cash flow within the industry on the basis that even a quick and dirty process was better than simply defaulting to one where the party with the money (typically a client or head contractor) could simply hold on to it and force the claiming party to go to all the trouble and expense of litigation. In most payment disputes involving contractors, the logic of the Act works. An expedited assessment of the merits enables payment claims to be processed and in the event that an adjudication determination is overturned in due course, money can normally be repaid (in the absence of an insolvency). 19 That same logic simply does not apply in relation to disputes regarding rights and obligations. In particular, matters such as work quality, fitness for purpose, Practical Completion, the right to suspend work and the right to terminate provide good examples of matters that cannot be easily unwound. If, in spite of this submission recommending against it, the scope of the Act is widened, ACENZ submits that a number of changes to the proposal are necessary. 20 In the alternative to its main submission, due to the concerns expressed above, ACENZ believes that a number of important changes should be made to the CCA Bill if design and engineering services are to be included within its scope in spite of this and other submissions to the contrary. These include: 20.1 the jurisdiction should be limited to claims in contract (this does not resolve the issue that the contractual duty in issue may still be one to exercise reasonable skill and care (which reflects the duty of care in tort), but it may still provide an appropriate focus for the purposes of adjudication); 20.2 the jurisdiction should cease within a stated timeframe after completion of the relevant project. This is probably best achieved by amending section 6(2) to provide that construction work does not include: (change noted in italics): (c) design, engineering or quantity surveying work where that work related to a project for which a practical completion certificate has been issued for more than 12 months ; 20.3 as already noted above, a definition is required of what constitutes design or engineering work and quantity surveying work. For the former we suggest something like the preparation of engineering and architectural design drawings, details and specifications intended to be used directly for construction by a builder or constructor ; 20.4 the definition of design or engineering work should expressly exclude all services performed by an engineer or other person in the course of carrying out other

7 services and a duty to administer a construction contract independently of the contracting parties, fairly and impartially; 20.5 the proposed new section 37(4)(a) should read (changes noted in italics): (a) must allow the respondent additional time to serve a written response if the adjudicator considers it necessary to complete the response, having regard to the size or complexity of the claim or to any related insurance issues (including the need for a respondent to consult with its insurer before completing the response). ; and 20.6 for design contracts between commercial parties, the parties should be able to opt out of the CCA by mutual agreement. This option would be most applicable to large complex engineering projects such as a pulp mill, a dairy factory or a major electricity substation where the adjudication process is inappropriate even with longer timeframes. An ability to opt out would be analogous to the ability to contract out of the Consumer Guarantees Act under section 43(2) of that Act. As any ability to contract out would require mutual agreement and the engineering/architectural design market is highly competitive, we submit the overall policy objectives of the Bill would not be subverted by allowing an opt out provision. Rather commercial parties would be exercising an informed decision that the CCA need not apply to them in relation to a design contract. Conclusion 21 We stress that our overriding submission is that the amendments to the Act to include professional designers and to remove the distinction between payment determinations and rights and obligations determinations should not occur. 22 However, if the amendments are adopted, we believe the changes outlined in paragraph 20 above are essential to ensure the concerns we have outlined in this submission are, to some degree, addressed. Yours Sincerely, KRShaw Kieran Shaw CHIEF EXECUTIVE Association of Consulting Engineers NZ

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