A recent Court of Appeal decision has reaffirmed the “pay now, argue later” provisions of the Construction Contracts Act 2002 (CCA) as the predominant force in construction contract payment disputes. It serves as a valuable reminder to both contractors and employers to have their payment processes in order – both in the receiving and making of payments – to limit exposure to avoidable payment complications.
After some ambiguity in recent years over the treatment of payment claims vs payment schedules and the ability to withhold payment on the basis of invalidity, the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480 has stepped in to say that a party to a construction contract must issue a valid payment schedule if it wants to withhold payment whilst disputing a payment claim.
The CCA
The CCA provides strict procedural framework for the issuing of payment claims by a contractor and the dispute of the claimed amount if a payer takes exception. As Wylie J reminds us in Demasol[1], the purpose of the CCA is paramount:[2]
To facilitate regular and timely payments between the parties to a construction contracts;
To provide for the speedy resolution of disputes arising under a construction contract; and
To provide remedies for the recovery of payments under a construction contract.
Sections 20-23 of the CCA mandates the “pay now, argue later” scheme.
Section 20 provides the framework for payment claims:
Section 20 provides the framework for payment claims:
(1) A payee may serve a payment claim on the payer for a payment-
(a) if the contract provides for the matter, at the end of the relevant period that is specified in, or is determined in accordance with the terms of, the contract;
(b) if the contract does not provide for the matter in the case of a progress payment, at the end of the relevant period referred to in section 17(2); or
(c) if the contract does not provide for the matter in the case of a single payment expressly agreed under section 14(1)(a), following the completion of all of the construction work to which the contract relates.
(2) A payment claim must-
(a) be in writing; and
(b) contain sufficient details to identify the construction contract to which the payment relates; and
(c) identify the construction work and the relevant period to which the payment relates; and
(d) state a claimed amount and the due date for payment; and
(e) indicate the manner in which the payee calculated the claimed amount; and
(f) state that it is made under this Act.
Section 21 provides the guidelines for payment schedules:
(1) A payer may respond to a payment claim by providing a payment schedule to the payee.
(2) A payment schedule must-
(a) Be in writing; and
(b) Identify the payment claim to which it relates; and
(c) State a schedules amount.
(3) if the scheduled amount is less than the claimed amount, the payment schedule must indicate-
(a) the manner in which the payer calculated the scheduled amount; and
(b) the payer’s reason or reasons for the difference between the scheduled amount and the claimed amount; and
(c) in a case where the difference is because the payer is withholding payment on any basis, the payer’s reason or reasons for withholding payment.
Section 22 provides for the consequences of not issuing a payment schedule:
A payer becomes liable to pay the claimed amount on the due date for the payment to which the payment claim relates if-
(a) a payee serves a payment claim on a payer; and
(b) the payer does not provide a payment schedule to the payee within-
(i) the time required by the relevant construction contracts; or
(ii) if the contract does not provide for the matter, 20 working days after the payment claim is served.
Demasol – the facts
Demasol Ltd (Demasol), a specialist asbestos removal company, was engaged by South Pacific Industrial Ltd (SPI) as a subcontractor for the demolition of an large, asbestos contaminated concrete tank.
The contract in question was formed over an exchange of emails which sought to establish the scope of work and correlating costs. The emails would become a point of contention, however, with SPI arguing that the contract was for a fixed price of $100,000.00, exclusive of GST. Demasol, on the other hand, held that the $100,000.00 figure it had offered was given as an estimate only and allowed for variations.
Demasol then undertook the works, which took considerably longer than expected, and issued the first of two payment claims, for $114,425 (incl. GST), with an explanation that the demolition was 90 per cent complete and claiming $90,000.00 of the total contract price.
SPI did not pay the amount claimed, nor did they issue a payment schedule by the due date recorded on the invoice.
A month following the due date, an SPI representative wrote to Demasol responding to the payment claim, taking issue. Three days later, Demasol issued a second payment claim for $276,572.29 (incl. GST), which included a number of variations to the contract.
The amount claimed by Demasol across the two payment claims totalled $390,997.29.
The following month, Demasol’s solicitors wrote explaining that no valid payment schedule had been received, the payer was therefore out of time to dispute the payment claim, and the amounts were now due and owing under the CCA. SPI refused, and a statutory demand shortly followed.
The High Court judgment[3]
AJ Sussock took the view that the context and intention of the $100,000 estimate from Demasol was critical. In assessing the conduct of the parties, and especially the correspondence forming the contract, the Court found that it was difficult for Demasol to argue that the quote was an estimate only. It was more likely that the contract was a fixed price, single-payment term contract. It was therefore reasonably arguable that the payment claims were invalid under the CCA, and the statutory demand should be set aside.
The Court of Appeal judgment
The following questions were raised on appeal:
1. Was it reasonably arguable that the payment claims served by Demasol were not valid payment claims under the CCA?
2. Should the statutory demand be set aside on the basis that SPI has a genuinely arguable dispute as to whether it is liable to pay the amount claimed?
3. Should the statutory demand otherwise be set aside?
In its assessment, the Court of Appeal noted ss 20-23 of the CCA, and the impetus of the “pay now, argue later” that they place on parties to a construction contract. That is, if a property owner does not respond to a payment claim by serving a payment schedule, the contractor is entitled to recover the amount claimed as a debt due.[4]
Overall, the Court considered that the payment claim complied with all of the statutory requirements relating to form. It sufficiently explained what the claim was for, the basis on which it was made and the steps SPI had to take to contest. The Court therefore concluded that the debate before the High Court as to the validity of the payment claim was irrelevant. If SPI wished to contend that Demasol was not entitled to serve the claim, it should have done so at the time it was issued by way of a payment schedule.[5]
Conclusion
Although the consequences can at times be harsh, the payment provisions mandated by the CCA are clear. If a payee in a construction contract wishes to dispute the validity of a payment claim or the amount which is claimed, it must issue a payment schedule in accordance with CCA within the relevant timeframe.
[1] Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480 at [31].
[2] Construction Contracts Act 2002, s 3.
[3] South Pacific Industrial Ltd v Demasol Ltd [2021] NZHC 3597.
[4] At [38].
[5] At [40].