Stuart Robertson (partner) and Anna Cho (associate) in Dentons Kensington Swan’s major projects and construction team.
You will be familiar with the payment claim process under the Construction Contracts Act 2002 (Act). Yet, it is still common for parties undertaking ‘construction work’ not to fully understand, or even use this process. The courts are, therefore, often asked to assess whether the payment claim or payment schedule complies with the Act.
We purposely referred to ‘construction work’ rather than construction contract, above. This is because since the 2015 amendments to the Act, those performing design, engineering or quantity surveying work are now covered by the Act. Accordingly, parties to a consultancy agreement for design, engineering or quantity surveying services, can also lodge payment claims under the Act. We refer to those contractors and consultants as ‘payees’ as under the Act.
Although it is not mandatory for payees to issue their invoices as payment claims, if there was ever a time to do so, it is now. Where a payee has served a payment claim under the Act, it gives them several remedies. If the payer (principal or head contractor) does not respond with a payment schedule or responds late, the whole of the claimed amount is a statutory debt due – this is described as the “sudden death” regime under the Act.
If the payer replies with a valid payment schedule, the scheduled amount is a debt due. If this is not paid on time, it becomes a statutory debt due. In either default situation, the payee can pursue the debt in court. The payee can also give notice of intention to suspend the works under the Act.
What makes up a valid payment claim?
A payment claim would usually be in the form of a detailed invoice for the prior work undertaken. For the payment claim to be valid under the Act, the following requirements must be met.
It must: Be in writing; contain sufficient details to identify the construction contract to which it relates; identify the construction work and the relevant period to which the payment relates; state a claimed amount and the due date for payment; indicate the manner in which the payee calculated the claimed amount; state that it is made under this Act; and be accompanied by the prescribed information (Form 1).
Although the courts have repeatedly noted that minor errors (called “technical quibbles”) will not invalidate payment claims, it is often seemingly minor errors or omissions that do, for example: Issuing a payment claim to the wrong party; failing to write “This is a payment claim under the Construction Contracts Act 2002” on an invoice; and failing to attach the prescribed information (Form 1).
If an invoice is issued without all of the above requirements, it will not be a valid payment claim under the Act. This means that if there is a dispute about the invoice, the contractor will not be entitled to rely on the “sudden death” regime under the Act.
Making up a valid payment schedule
Accordingly, it is equally important to ensure each payment claim is responded to with a valid payment schedule. The Act allows the parties to set the timeframes for serving a payment schedule and making payment, within their contract.
For NZS 3910:2013, these are 12 and 17 working days, respectively. Absent a date in your contract, the Act applies a 20-working day period for both. As with a payment claim, there are certain requirements with which the payment schedule must comply.
It must first: Be in writing; identify the payment claim to which it relates; and state an amount which it proposes to pay (possibly $0) (scheduled amount).
If the scheduled amount is less than the claimed amount, the Act imposes the following additional requirements on the payment schedule. It must: Indicate how the scheduled amount has been calculated; explain the reasons why the scheduled amount is less; and if the difference is because the payer is withholding payment, the reasons why payment is being withheld.
The payer needs to pay either the claimed amount or the scheduled amount; failure to do so means the contractor can issue court proceedings, or a statutory demand against a company for that amount as an undisputed debt.
Common examples of non-compliant payment schedules include: Failing to indicate how contra-charges were calculated; making significant deductions without any reasoning or information; and recording $nil payable in a global sense without addressing each of the payee’s items within the payment claim.
Remember to issue a payment schedule
The recent case of Nicholls Group Projects Ltd v Plan Design Build Homes Ltd [2022] NZHC 56 reiterates the importance of issuing a payment schedule in time.
Here, the payer did not provide a payment schedule in response to the contractor’s payment claims. The payee issued a statutory demand based on a debt due. The payer then applied to have the demand set aside on the grounds that the payment claims issued by the payee were invalid. The payer’s primary argument was that the payment claims did not set out enough detail as it failed to identify the individual workers.
The payer argued there were also other additional errors, including incorrect dates of work, incorrect payment due dates due to the delayed delivery of the payment claims, and omission of the description of the work.
The court held that the payment claims were sufficiently detailed and viewed some of these errors as a “trifling error” which did not invalidate the payment claim. Further, the payee had been engaged on a labour-only basis, so stating the number of hours and the rate for each builder was sufficient in the circumstances to comply with the Act.
Once the payer received the payment claims, it had sufficient detail to understand how the payment claims had been calculated and to provide a payment schedule in response. It could have entered the amount owing in the payment schedule as “nil” or base it on its estimate of the number of experienced builders on site.
Because the payer failed to issue payment schedules within time, the payee was entitled to rely on the “sudden death” regime under the Act to pursue the entire claimed amount, and the only way the payer could avoid the consequences was to establish before the court that the payee’s payment claims were invalid.
Payers should always remember to issue a payment schedule, even if the payment claim contains errors and may seem invalid.
• Dentons Kensington Swan offers 15 minutes of free advice on construction issues to CCNZ members. 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.