Legal Comment

CCA update: Demonstrating ‘reasonable value’

This article first appeared in Contractor March 2017.

By Kate Henderson, Solicitor, and Helen Brown, Special Counsel, Kensington Swan’s Construction and Infrastructure team.

WHILE WRITTEN CONTRACTS are mandatory for residential building works with a value of above $30,000, there is no such requirement for commercial contracts. The majority of commercial contractors will at least agree on a contract price or method of payment at the outset of a job, and record this agreement to protect their position.

But, what if this doesn’t occur – a written contract is never concluded and work progresses? Or key terms have not been resolved prior to the work being undertaken – how will payments be dealt with? The Court of Appeal considered these points in CJ Parker Construction Ltd (in liq) v Wasim Sarwar Ketan, Farkah Rohi Ketan and Wasim Ketan Trustee Company Ltd [2017] NZCA 3.

In this case, the trustees had engaged CJ Parker to carry out renovations to a motel. After some initial negotiations, works commenced without a written contract being executed. The parties had not agreed a contract price, or payment method. Near the completion of the first stage of works, the trustees engaged a quantity surveyor to inspect and value the works carried out to date – the QS valued the work undertaken as being worth $420,305. However, the trustees had already paid CJ Parker $505,000. After some communication, the trustees terminated CJ Parker’s involvement.

CJ Parker sent the trustees an email purporting to be a final payment claim, for $240,542.10. The trustees responded by email, refusing to pay the invoice and claiming that CJ Parker owed them for the overpayment.

CJ Parker commenced summary judgment proceedings on the basis that it had issued a valid payment claim under the Construction Contracts Act 2002 (CCA), and the trustees had failed to respond with a valid payment schedule.

The proceedings focused on section 17 of the CCA, which deals with how the amount of progress payments is calculated. Typically, this is with reference to the relevant period, the value of the work carried out, and any other relevant provisions in the construction contract. Section 17(4) says that where a contract does not expressly provide for a contract price or other rates and prices, the work will be calculated in accordance with its ‘reasonable value’. There is no mechanism in the CCA for assessing reasonable value.

The High Court found CJ Parker had not issued a valid payment claim, and on appeal, the Court of Appeal confirmed that decision.

CJ Parker had argued it was sufficient to claim a clear and exact amount, for a defined period. However, the Court of Appeal found that the requirements for a valid payment claim where there is no agreed contract price, or provision for labour rates or materials, may be more onerous than cases where the price is agreed.

CJ Parker’s claim, for example, included a single unit charged for labour costs – as there was no agreed price for labour, a statement of the total hours worked or hourly rates was necessary for the trustees to assess how the amount was calculated, and whether the value claimed was reasonable.

CJ Parker failed to demonstrate the amount claimed was reasonable, and therefore had not demonstrated the calculation of the amount payable and had not issued a valid payment claim.

This case illustrates several key points:

  • The CCA applies to both written and oral contracts, provided that the agreement relates to construction work, and you are not prevented from issuing payment claims if a contract price or other rates and prices have not been agreed;
  • If pricing and payment matters have not been agreed, you will need to provide sufficient detail for the Principal to be able to assess the reasonable value of the work;
  • It is always preferable to agree the fundamentals up front, in particular the contract price and method of payment, and to record these in a written contract to avoid any confusion down the line. This does not need to be onerous – there are many readily available standard form building contracts, in particular NZS3910:2013, that are fair, balanced, widely accepted by the industry and require limited amendment.

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