If you have received a payment claim, you must respond with a payment schedule within the prescribed timeframe or pay. If you fail to do so, s 23 of the Construction Contracts Act 2002 (the Act) states that:
A payment schedule must set out the undisputed amount which the payer acknowledges should be paid (if any), and also set out any disputed amount (if any) with reasons for the dispute.
A payment schedule is designed to allow a contractor to receive the funds that all parties acknowledge are due. This way, the contractor continues to receive cash flow and is notified of reasons why a certain payment is not received. This was summarised by the Court in Marsden Villas Limited v Wooding Construction Limited HC Auckland CIV-2006-404-809, 1 March 2006:
The Act therefore has a focus on a payment procedure, the results that arise from the observance or non-observance of those procedures, in quick resolutions of dispute. The processes that it sets up are designed to sidestep immediate engagement on the substantive issues such as set-off for poor workmanship which in the past were so often used as tools for unscrupulous principals and head contractors to delay payments. As far as the principle is set up, the regime is ‘sudden death’. Should the principal not follow the correct procedure, it can be obliged to pay in the interim what it was claimed, whatever the merits. In that way, if the principal does not act in accordance with the quick procedures of the Act, that principal, rather than the contractor and subcontractors, will have to bear the consequences of delay, in terms of cash flow.
A payment schedule has no set form. However, s 21 of the Act states that a payment schedule must:
A payer is allowed to dispute 100% of the claimed amount by stating that the scheduled amount is zero.
A variety of different payment schedules scenarios have been before the Courts, with varying outcomes.
In Westnorth Labour Hire Limited v SB Properties Limited HC Auckland, CIV-2006-404-1858, 19 December 2006, the payer responded to a payment claim by providing the contractor with a detailed letter on the various issues, cost overruns and a suspicion that work had been improperly charged for. The letter concluded with:
I must advise that we do not agree with your charges for the reasons noted above and until you provide the breakdown requested and until we have had suitable time to consider the information you provide, no further payments will be made …
Whilst not in any particular form, the Court held that the letter was a valid payment schedule. The Court held that the letter was in writing, it indicated that the scheduled amount was nil and provided reasons as to why the scheduled amount was less than the claimed amount.
The Court’s decision in Westnorth can be contrasted to the decision in Metalcraft Industries Limited v Christie HC Whangarei, CIV-2006-488-645, 15 February 2007. In that case, in response to the payment claim, the payer’s solicitors informed the contractor that:
In any event our client disputes liability for payment, and advises that she is unable to specify if any payment is to be made to your client, until she receives invoices for the remedial work undertaken by her replacement contractors. This, and our earlier correspondence, is to be regarded as our client’s reason for withholding payments. The cost of the remedial work is expected to exceed your client’s invoice.
Any summary judgment proceedings on the basis of your claim that the sum is a debt due, or otherwise, will be defended and costs will be sought.
The High Court held that the above statements, when read together with earlier correspondence, could not be construed to mean that the scheduled amount was nil. On the contrary, the above statements show that the payer was not in a position to specify the scheduled amount and there was no unequivocal denial of liability for all of the payment claim. Rather, the payer indicated that she would review her position at a later date.
Importantly, the Court held that:
… An assertion that remedial work is required at a cost which would exceed the payment claim could never constitute a valid reason either for the difference between the scheduled amount and the amount claimed or for withholding payment. General and unspecified allegations of defective workmanship are insufficient unless quantified within a reduction for the claimed cost of remedial work. Similarly a claim that excess materials were supplied is not enough; Ms Christie would have to identify them and their value to justify a further reduction in the scheduled amount. Delays in completing the work and consequential damage caused by leaking and water damage may give rise to a counterclaim for special damages, but even if quantified they could not be taken into account in the scheduled amount: s 79. None of the reasons given in Pegg Ayton’s correspondence justified withholding payment of any part of Metalcraft’s claim.
The Court in Metalcraft was of the view that the decision of Westnorth can be distinguished on the basis that the correspondence in Westnorth contained all the information required for the contractor to understand its position and make the appropriate decision. In particular, the Court noted that the correspondence:
…contained a number of arithmetical calculations, beginning with the amount of the invoices, their relationship to projected budgets and total previous payments and figures for materials returned – in substance a calculation indicating why no money was considered to be then payable.
In essence, a payment schedule must state a scheduled amount regardless of how detailed the complaint is. This is reinforced by the Court’s decision in Charles Beckhan v Betty DC Whangarei CIV-2007-090-2424, 21 February 2008. In that case, the Court rejected a letter from the payee’s solicitors as a payment schedule, claiming that the payee had already paid more for the value of the work and the materials, and further claimed that the invoices did not correspond with the time spent or the materials provided to site. The Court reasoned that there was no calculation at all as to how and by how much the payee claimed to have overpaid.
It is also worth noting that in Cube Buildings Solutions Ltd v King HC Christchurch CIV-2009-409-34, 17 December 2009, the High Court held that the inclusion of a deduction for amounts that had already been paid does not invalidate a payment schedule. The Court came to this conclusion because s 79 of the Act permits the Court to take account of a counterclaim, set-off or cross-demand in circumstances where there is no dispute in relation to the claimed amount.
It is less clear whether a payer is able to raise a set-off, crossclaim or counterclaim in a payment schedule in relation to items outside of the payment claim itself. For example, a contractor is contracted to construct a building. It starts this process by laying the foundations before proceeding to erect the frames. The contractor submitted monthly payment claims for the foundations and while erecting the frames, defects appear in the foundations which had already been claimed. The payer then issues a payment schedule in response to the payment claim for frames containing a deduction for remedial work to the foundations.
While there is no direct authority on point, the Court in Canam Construction Limited v George Developments Limited HC Auckland CIV-2004-404-3565 observed that s 21 “makes it clear any payment schedule is confined in scope to claims raised upon the payment claim.” If the payment schedule is restricted to the confined scope, then it could be argued that deductions for works not within the scope of the payment claim are inappropriate.
Additionally, the Court of Appeal in SOL Trustees Ltd v Giles Civil Ltd [2015] 2 NZLR 482 indicated that it would be inconsistent with s 79 of the Act if a counterclaim or set-off could be relied on as a response to an earlier payment claim. It is noted that the Court of Appeal’s statement is obiter as the issue was not fully argued before the Court.
These decisions can be contrasted to the holding in Metalcraft where the Court held that a payment schedule that “properly quantifies the amount incurred by a principal in remedying the allegedly defective workmanship by a contractor may … constitute a valid reason for withholding payment for that amount”.
Our view is that the holding in Metalcraft is likely to be the correct position. The High Court recently took guidance from Metalcraft in The Fletcher Construction Company Limited v Spotless Facility Services (NZ) Limited [2020] NZHC 1942 decision, where Justice van Bohemen echoed Harrison J’s words:
The specific purpose of the payment schedule is to give the contractor full and unequivocal notice of all areas of difference or dispute to enable it to properly assess its future options.
However, a payer must still be able to provide sufficient details of its counterclaim or set-off which can be difficult given that relevant information may not be available at the time.
Contact us if you have received a payment claim and need to respond with a payment schedule. Our lawyers at Norling Law can review your payment claim and discuss strategies to respond to your payment claim as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
Brent is the Director of Norling Law. He has a wealth of experience in the District Court, High Court, Court of Appeal and Supreme Court. Brent is passionate about negotiating favourable outcomes for his clients and able to implement this in his daily negotiations.
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