Victoria Young: No winners in construction industry blame games

When it comes to construction companies, disputes are too often the straw which breaks the camel's back.

At least, that's the view of BDO liquidator Jessica Kellow.

She shared some observations about her work as the administrator for Arrow International and liquidator for Ebert Construction at the Conferenz Building and Construction Regulation and Law Conference last month.

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Kellow says Ebert fell after being told of a $9 million dispute which it didn't have the money to fight, while Arrow had a $5m ruling against it.

"It seems every time we are appointed as administrator or liquidator, the company believes they are going to win a dispute," the corporate undertaker told about 40 delegates.

More recently it's become evident even the big boys aren't immune to costly disputes.
Fletcher Building's $7.5m High Court stoush with electrical subcontractor Electrix over the Christchurch justice precinct isn't going to break the bank at the $8.3 billion revenue company, but is a symptom of an unruly industry.

Lawyers spent four weeks arguing over whether or not there was a contract with a set price, and if not, what then was the value of the job.

An outsider might observe that agreeing to a price for a job seems pretty obvious, but anyone in the industry will tell you contracts aren't properly understood and within the sector there's a culture of mistrust between parties.

Contested briefs of evidence in the case suggest Fletcher panicked when liquidated damages were applied by the Ministry of Justice, and the listed firm says its subcontractor didn't have the resources to do the job.

The fallout from the $300m project does not stop with Electrix, which is supported by a French parent company. Last August, Maven Interiors was also moved into liquidation and its involvement on the project is said to have caused cashflow problems.

The High Court at Auckland also heard there was a disagreement between Fletcher and another partner on the project, Opus, but the listed builder's lawyer denied that too.
Other subcontractors on the project might've had a problem with Fletcher but not the cash to take it further. Or they may have quietly dealt with the issues through mediation or arbitration.

Given its size, Fletcher is unsurprisingly feeling the pinch on other fronts.

It's in a $30m arbitration with the government over the delayed and unopened Greymouth hospital. Documents from the supervising body show ongoing delays and meetings with Fletcher executives over staff turnover and the treatment of consultants.

The supervisor recommended that liquidated damages be applied from August last year, but it isn't clear whether this eventuated.

Fletcher won't talk about the project, but it's big enough to be tagged as a contingent liability on the government's books.

On other fronts, Fletcher also has liquidated damages held on the SkyCity convention centre and Precinct Properties' Commercial Bay CBD mall and high-rise project.

In both cases the client's right to the money is disputed.

Fletcher's latest annual report shows contingent liabilities at $333m, down from $402m in 2018 but above $309m the year prior.

Construction lawyer Polly Pope says a rising tide of disputes corresponds with a lift in activity.

Russell McVeagh research from 2018 found 70 per cent of survey participants expected a rise in disputes, and that about 60 per cent of disputes came from not understanding the contract properly.

Pope says most construction contracts have a clause referring them to arbitration before heading to court, while adjudication has become more popular as a cost-efficient, albeit non-binding, way to find a solution without airing dirty laundry.

To this end, disputes lurk over construction companies like a cashflow-sucking virus, and it's difficult for outsiders to see how a firm manages these risks.

Just ask Mainzeal's directors, who scrambled for cash following two decisions that went against them totalling $23m over their work for Siemens on its upgrade of Transpower's high-voltage link across Cook Strait.

That resolution was described as settling with a gun to one's head and executives said they were blindsided.

It's early days here, but the rising tide of litigation funding for construction disputes could level the playing field for smaller subbies and change the cashflow dynamics if the issues are taken off-balance sheet.

Ironically, as BDO's Kellow discussed the warning signs for construction firm collapses, delegates smelled smoke from the burning International Convention Centre nearby.

While covered by insurance, it will no doubt add another layer of complexity to Fletcher's dispute with SkyCity and adds its own questions. Investigators will want to know what started the fire, what fire safety measures were in place, whether a call was made to let the roof burn and so forth. Fingers will be pointed. Legal bills will mount.

We all know that in disputes only one side wins. Unfortunately, everybody thinks it will be them.