Why getting your payment claims right matters

The payment claim/payment schedule regime governed by the Construction Contracts Act 2002 (CCA) has operated successfully for 20 years now. By Stuart Robertson (partner) and James France (associate) in Dentons Kensington Swan’s major projects and construction team.

The CCA payment regime should be familiar to all operators within the construction industry. However, this does not mean that occasional oversights or slip-ups do not occur, and unfortunately for the parties involved, this often means facing the hard line consequences of the CCA.

The hard line – what the CCA payment regime does

The CCA payment regime treats the amount in a valid payment claim or payment schedule as a ‘special’ debt. Whereas ‘normal’ debt needs to be proved and requires the obtainment of a ‘judgment’ before it can be enforced, a court will enforce ‘debt due’ under the CCA without proof of the underlying merits.

The intention behind this is to ensure cashflow from the Principal/developer all the way down to subcontractors, who are so reliant on cash flow. The more fundamental arguments can be heard later on, once the project is completed.

Ensuring your claim or schedule is correct, and is served on time is critical. A mistake could see a payer being liable to pay the whole of the claimed amount, even though it has good reasons for not paying. Similarly a payer with a meritorious claim may be left with $nil, at least until the next month’s claim.

The money could later be recovered ‘on the merits’ but is likely to require legal support, or even proceedings (whether via adjudication, the courts, or arbitration). All of this is costly, and time consuming at a point when you are cash strapped.

Also remember – the CCA provides the right to suspend the progress of the work for non-payment, but only where your claims are valid.

What’s in a claim – what makes a valid payment claim or schedule?

Section 20 states that payment claims must:

• Be in writing;

 

• Contain sufficient details to identify the contract to which it relates (for example, by name or description);

 

• Identify the work and relevant period to which the payment claim relates (usually this is the prior month, but the contract may alter the frequency of claims);

 

• State the claimed amount and the due date for payment;

 

• Indicate how the claimed amount was calculated (for example, by incorporating a table);

 

• State on the document that it is a payment claim made under the Construction Contracts Act 2002; and

 

• Be accompanied by ‘Form 1’ – the prescribed information explaining the effect of the payment claim and the process for responding to it. Note that this applies to all claims, not only the first. It does not matter that your principal has read Form 1 a thousand times and can recite it backwards.

 

Templates for the payment claim, and copies of Form 1, can be found in the members area of the CCNZ website. Claim templates can provide a false sense of security, and so before using a template, consider for yourself whether the criteria in s 20 are met. If your current template is old, check it when you make your next payment claim.

The trouble with good systems is that we sometimes forget why we had them in the first place, and crucial parts can fall away over time.

 

There are fewer requirements of payment schedules (see section 21 of the CCA). They must:

• Be in writing;
• Identify the payment claim to which they relate; and
• State a scheduled amount and if less than the claimed amount, ensure you provide reasons for the difference. (Recent case law (2020) has confirmed that significant deductions require greater detail).

 

Recent cases serve as reminders to get payment claims/schedules right

Two recent cases stand as reminders of the power (and potentially, severity) of the CCA regime.

In Demasol Ltd v South Pacific Industrial Ltd (October 2022), the payer and head contractor (SPI) had failed to provide a payment schedule, but when it was pursued for the debt under the CCA, it alleged that the payment claim was invalid, including because the subcontractor (Demasol) was not contractually entitled to make a payment claim when it had. It seems the parties may not have had a clear understanding of when claims were to be made.

In a short, sharp reminder of the hard line approach, the Court of Appeal determined that SPI could and should have raised the claim date issue, and the other contractual arguments, in a payment schedule and that the claim satisfied the requirements of s 20. It was immaterial whether the claim met the contractual, non-CCA requirements. As the court observed: The general merits of [Contractor]’s payment claim were not open for consideration and were irrelevant in the statutory demand context. In our view, the [lower court judge] erred when she embarked on an enquiry into the terms of the contract and the quantum and merits of payment claim 2.

This should not be taken to suggest that you can throw your construction contracts out. The contractual requirements for claims (including their timing) will be relevant for CCA purposes where they relate to one of the matters in s 20. The key point is that the CCA is king, even though there may be underlying issues with the claim.

In Buchan Group NZ Pty Ltd v Gorge H Development Ltd (December 2022), the defendant payer and developer (Gorge / Redwood) attempted to resist payment claims (it had not provided payment schedules) on various bases which were all rejected by the Court as technical quibbles. The unsuccessful arguments were as follows:

• While the due date was expressed on the claim as the 20^th, there was a confusing alternative reference to the 14^th working day from service (this was not sufficiently confusing so as to invalidate the claim);
• The claims did not emphatically state that they were made under the CCA (they did however state that if work on the invoices was within the definition of the CCA, then that Act would apply – this was acceptable); and
• The payer’s legal name ‘Redwood Group Limited’ lacked the word ‘Limited’ on the claims (the Court quickly identified this as a technical quibble of no substance).

The claims were therefore valid. In the background, there was a dispute about whether or not the contract actually created a right to payments before the payer had secured funding. But for the reasons in the Demasol case above, the Court all but entirely ignored the merits of this argument while looking at the CCA issue.

This is why getting your claims/schedules right matters: the CCA can make the worst claim real, or turn the best claim into an expensive exercise in having to prove it.

This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Dentons Kensington Swan does not accept any liability other than to its clients, and then only in relation to specific requests for advice. For specific advice, contact your legal advisor or the Major Projects and Construction Team at Dentons Kensington Swan on (09) 379 4196.