“Dispute” has a broad definition in the Construction Contracts Act 2002 (CCA): “a dispute or difference that arises under a construction contract”.
Disputes are a regular feature in construction that range in value and complexity, from a mis-poured concrete driveway at a family home to unagreed variations in the construction of a multi-storey apartment building.
Delays as a result of unresolved disputes can have significant knock-on effects for a variety of stakeholders as in some situations, parties are able to cease work on a project until a dispute is resolved. Speedy and cost-effective dispute resolution benefits all parties to a dispute.
Dispute resolution processes
The various dispute resolution processes can be divided into two broad categories. The first category contains processes which a party may initiate without consent from the other. The second category contains processes that can only be used if the other party agrees.
Processes that can be initiated without consent from the other party include:
Court proceedings;
A claim in the Disputes Tribunal;
Adjudication under the CCA; and
Mediation under the Weathertight Homes Resolution Services Act 2006.
Processes that require consent of the other party before they can be initiated include:
Referring the dispute to the engineer under the contract;
Expert determination;
Mediation; and
Arbitration.
A range of the above processes can be accessed through the Building Disputes Tribunal.
Which dispute resolution process should you use?
The process you choose to resolve your dispute will depend on a range of factors, including:
The value of the dispute; and
Whether the contract specifies a process the parties must use. For example, the NZS 3910 contract requires parties to submit disputes to the engineer in the first instance. If the outcome of the engineer’s review is unsatisfactory for either party, the dispute can then be referred to an expert for determination.
Each process has its own individual characteristics and different processes are suitable for resolving different types of disputes.
Court proceedings
Court proceedings (also known as litigation) can be filed in the District Court for disputes up to $350,000.00 in value. The High Court will hear disputes for claims over $350,000.00 in value and matters that are appealed from the District Court. Courts are presided over by judges who release their decisions (known as judgments), which are enforceable. If a party wishes to appeal a decision of the High Court, the Court of Appeal and the Supreme Court are the next steps in the court hierarchy, although appeal grounds are limited. With some exceptions, parties are generally permitted to represent themselves in court proceedings, however, due to the complexity and risk, parties are recommended to consult or engage a lawyer.
Partly due to the sheer volume of matters that are progressing through the Courts at any given time, getting a decision from an application to the District Court or High Court can take years and cost hundreds of thousands of dollars. For these reasons, court proceedings tend to be viewed as a last resort once all other dispute resolution methods have failed.
Disputes Tribunal
The Disputes Tribunal, colloquially referred to as “small claims court”, offers an affordable, relatively informal and versatile dispute resolution process for disputes up to $30,000.00 in value. The Disputes Tribunal does not specialise in construction law, parties cannot be represented by lawyers, and there are no judges: a referee delivers a binding order which is enforceable as a civil debt in the District Court. A key feature of the Disputes Tribunal is that the referee determines the disputes according to the merits and the justice of the case as guided by the law, but is not bound by strict legal rights or obligations, giving it a distinct “fairness” element that is typically absent from other more formal dispute resolution processes.
The Disputes Tribunal offers limited grounds to appeal if a decision does not go your way, either by way of a rehearing or an appeal. Appeals can only be brought if the referee ran the hearing in a way that was unfair. Parties may be represented by lawyers at an appeal which is heard by a District Court judge.
Adjudication
Adjudication is the dispute resolution process prescribed by the CCA. It is intended as a speedy and affordable alternative to litigation, with strict, short timeframes and a binding and enforceable determination delivered by the adjudicator. Speed and certainty of outcome are attractive features of adjudication.
The CCA enables parties to a construction contract to access other dispute resolution processes simultaneously, such as court proceedings or mediation for the same dispute. Parties can be represented by lawyers in adjudication (although it is not compulsory). Adjudicators are often experts in the subject matter which can be beneficial to all parties. Parties typically share the costs of the adjudicator, though the CCA enables an adjudicator to award costs in favour of one party in specific circumstances. We will be publishing a more in-depth article on adjudication later this year.
Arbitration
Arbitration is a process governed by the Arbitration Act 1996 that parties can access by agreement. The arbitration process is more flexible than adjudication; parties can agree on their preferred timetable and process. Arbitration also offers speed when compared to litigation. Parties can bring disputes of any value to arbitration. The arbitrator’s decision is known as an award, and like a judgment or an adjudicator’s determination, it can be enforced as a judgment of the Court.
Parties can be represented by lawyers in arbitration. Like adjudication, arbitration is speedier and more affordable than litigation. However, in some cases can be more expensive that adjudication. Parties typically share the costs of adjudication, though an arbitrator can award costs in favour of one party in specific circumstances.
Mediation
Mediation is a consensual and confidential process. The mediator’s role is to facilitate discussions between the parties and assist them in reaching their own mutually agreeable settlement. The terms of the settlement are recorded in writing and are binding on the parties, who can enforce the settlement by issuing court proceedings.
Parties can be represented by lawyers in mediation. Despite that, mediation is less formal and adversarial than litigation, adjudication, and arbitration, and can offer the additional benefit of preserving relationships between parties in what can be a small industry. Parties typically share the costs of mediation. Please see our website for more information on mediation, click here.
Expert Determination
Expert determination is a simple dispute resolution process in which parties refer the matter to an independent person (an expert in the specific subject matter that is in dispute) to decide. Prior to referring the matter, the parties agree whether they will be bound by the decision. An expert determination is an inexpensive, speedy and effective dispute resolution process that does not have the formality of the other processes described in this article, but still benefits from the input of an external party. Parties typically share the costs of an expert determination.
Negotiation
Negotiation is an affordable first step toward resolution of a dispute that parties can engage in themselves, without the assistance of an external independent facilitator.
As the parties are deciding the outcome of their dispute themselves, a successful negotiation will involve a good-faith approach and parties will likely be required to compromise on their position to reach an agreement. If parties are entrenched in their position and no headway can be made, parties might need to engage with a more structured and formal process, with an external third party.
Engineer under the contract
Certain contracts require parties to refer a dispute to the engineer under the contract as the first step in resolving any dispute. Either party to a contract can request a formal decision regarding a dispute from engineer by giving them written notice. The engineer must then provide a decision within 20 working days (or other timeframe specified under the contract) of receiving the written notice. Usually, the contract makes the engineer’s decision binding unless it is challenged within the timeframe specified in the contract.
Conclusion
Disagreements or differences of opinion can quickly become disputes, which can result in delays, increased costs, and stress for all parties. Early intervention typically reduces cost and stress associated with construction disputes and enables parties to progress the project.
Contact us if a dispute has arisen or you think a dispute may arise in your construction project. Our lawyers at Norling Law can review your dispute and advise which dispute resolution process is suitable and discuss strategies on how to progress your project 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/.
If the contractor is unable to achieve completion within the contractually agreed time for completion (or if the contract does not state a time for completion, within reasonable time), then the principal is entitled to claim damages from the contractor.
Liquidated damages
Damages could be expressly stated in the contract as a fixed sum payable at set intervals, typically per day or per week of delay. This is known as liquidated damages and represents a predetermined quantum of damages payable based on the estimated loss that a principal will suffer as a consequence of the contractor’s delay.
The purpose of setting the liquidated damages in a contract is to avoid the need for the principal to prove its actual loss as a result of failure by the contractor to complete the contract by the date for completion. For the contractor, liquidated damages may also be beneficial as it limits and makes known the contractor’s liability for late completion.
Before entering the contract, contractors should carefully consider the rate specified for liquidated damages. Liquidated damages should be based on a genuine pre-estimate of damages likely to be suffered as a result of delay by the contractor. To mitigate the effects of liquidated damages, contractors could negotiate a lower rate for liquidated damages or insist that liquidated damages be capped at a certain amount.
Prohibition against penalties
Liquidated damages must not operate as a penalty as penalties are not enforceable; this is based on the rule against penalties which states that a secondary obligation in the event of a breach of contract will be considered a penalty unless the clause amounts to a genuine pre-estimate of damages.
In simple terms, the Courts distinguish between a contractual term which provides for a genuine pre-estimate of damages in the event of a breach (which is enforceable), and a penalty for breach of contract (which is not enforceable). The rational is that punitive provisions in contracts should be constrained and their remedial function confined to achievement of performance expectations, of which punishment formed no part.
Given that delays are common in the construction industry, it is also common for contractors to challenge liquidated damages on the basis that it is a penalty. In considering whether a clause amounts to a penalty, the Courts will take into account the following factors:
The type of construction and context at the time the contract was made;
Whether the secondary obligation is out of all proportion to any legitimate interest in the enforcement of the primary obligation, or is exorbitant or unconscionable, having regard to the interests of the innocent party. The degree of proportionality between the contractually stipulated consequence and the loss likely to be suffered will inform the assessment of disproportionality;
The commercial context of the clause, including the relative bargaining power of the parties and whether they were commercially astute;
Whether the predominant purpose of the impugned clause is to punish rather than deter non-performance; and
Whether the clause protects a legitimate interest.
These requirements are not easily satisfied. In Honeybees Preschool Limited v 127 Hobson Street Limited [2020] NZSC 53, a landlord covenanted with a prospective tenant to install a second lift in the building that was to be leased by the tenant by a certain date. If the lift was not installed by that date, the landlord agreed to indemnify the tenant for all obligations under the lease.
By the time the matter reached trial, the lift was 14 months overdue. The Court held that the indemnity provided by the landlord was not an unlawful penalty as its purpose was not to punish non-performance. Further, the amount claimed, approximately $550,000.00, was not all out of proportion to the tenant’s legitimate performance interest in securing a second lift.
The commercial context of that case was that the second lift was important to the tenant who was seeking to run a childcare centre at the property. It had a licence for only 24 children, but after 14 months the rental liability would be fixed by reference to a fully licensed facility of 50 children. The lack of a second lift precluded the tenant’s eligibility for a full license of 50 children and by extension, the commercial viability of the entire business. This was known to the landlord, and both parties were commercially astute.
In ACM Removals Limited v Southern Demolition and Salvage Limited [2019] NZHC 124, Southern was engaged to demolish a building in Christchurch. It subcontracted with ACM to carry out the removal of asbestos discovered in the walls. ACM submitted an initial quote for the work on terms which provided for a late payment fee including “a daily charge of 0.125 percent of the contract value”.
The contract value was agreed at $461,000.00. Southern paid 75 percent of the contract value and refused to pay the rest as the parties disagreed over whether the asbestos removal was complete. Southern cancelled the contract and engaged another contractor to complete the works.
ACM claimed a daily rate of $663.00 in damages. When applied to the period of alleged default, the claim for liquidated damages was $454,000.00, slightly less than the contract value. While the Court held that ACM failed to complete the asbestos removal and therefore not entitled to claim liquidated damages, the Court went on to analyse whether the liquidated damages clause was a penalty.
The Court considered that the parties had similar bargaining power, and the daily rate of $663.00 was relatively minor when compared to the contract value. However, the Court found that the clause was a penalty as there was a “lack of relativity between the late payment fee provided by the contractual term and the potential loss or risk arising from non-payment”.
In essence, the Court considered that the fee would apply equally whether $1.00 or $100,000.00 was owed. This indicated that the formula was penal. Had the clause been drafted in a way such that “its application and effect could, at least in some moderate or broad way, be calibrated to take into account the amount owing on the contract which it is seeking to recover”, then such a clause may have been legitimate.
Conclusion
Courts will interpret each liquidated damages clause on its own particular facts. Apart from whether the rate in question is a genuine pre-estimate of damages, the parties should also carefully consider the words used in the liquidated damages clause. For example, inserting “N/A” in a clause to describe the liquidated damages rate may be interpreted to mean that nothing is payable or liquidated damages do not apply and general damages are payable. If the word “nil” is used, this could indicate that the clause was intended to be an exhaustive statement of the principal’s entitlement to damages for late completion, being zero, including general damages.
Where liquidated damages are not provided for in a contract, the principal is still able to seek its actual loss from the contractor provided that it is able to prove such losses. However, this could be a costly exercise and is likely to be disputed by the contractor. Accordingly, it may pay to utilise the liquidated damages clause to avoid costly disputes.
Contact us if you have experienced delays in your construction project. Our lawyers at Norling Law can review your delay circumstances and discuss strategies on how to progress your project 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/.
The starting point of any construction project is the building contract. In some situations, no special formalities are required; the building contract could be written or oral, or a combination of the two.
From 1 January 2015, it has become mandatory to have a written contract for all residential building work that costs $30,000.00 (including GST) or more. This does not apply to subcontracts between a main contractor and a subcontractor.
Regardless of whether the construction work costs more or less than $30,000.00, it is strongly recommended that a written building contract is used. This is because disagreements in the construction industry are common. The consequences of not having a contract could include costly disputes on what the terms are or non-payment of work performed.
A well-drafted contract may protect you in difficult situations. For example, for contractors, a clause that allows you to apply the deposit towards the final invoice could mean the difference between making a profit or incurring a loss on the project. For owners, a clause that provides for liquidated damages could help you efficiently recover your losses due to delays.
So where can you find a building contract?
Unfortunately, building contracts can be expensive to draft. Thankfully, there are various standard form contracts out there. One of the most used building contracts are from New Zealand Standards, also known as NZS.
In general, the NZS contracts are widely considered to strike a fair and balanced approach between the parties and tend to be the default choice for most construction projects in New Zealand. They contain “tick box” type options for special conditions making it relatively easy to use for the parties. The three main contracts are:
NZS 3910 for construction;
NZS 3916 for design and construct; and
NZS 3917 for fixed term.
In this article, we will look at the important clauses in NZS 3910 contracts. Even if you do not use NZS 3910, all building contracts should address the points discussed below.
NZS 3910
NZS 3910 is one of the most widely used form of contract for building and civil engineering construction in New Zealand. Generally, NZS 3910 is more suitable for major works as it contains detailed processes and the incorporation of an independent engineer to the contract. The role of the engineer has been discussed in the previous “Parties to a construction contract” (https://norlinglaw.co.nz/parties-to-a-construction-contract/) article.
Fixed price/cost reimbursement
NZS 3910 allows the parties to contract on fixed price or cost reimbursement basis.
If the parties wish to adopt a cost reimbursement basis, this will need to be expressly incorporated within the special conditions. Clause 2.4 clarifies how the contract price is calculated under a cost reimbursement basis, by either:
The net cost of the items used in the contract works (being plant, materials, labour, and sub-contractor costs) plus allowances for on-site and off-site overheads and profit at the percentages stated in the special conditions; and/or
Where and to the extent that the contract contains rates related to any item, the rates are to be used instead of the net cost of the item. Allowances are provided for on-site and off-site overheads and profit can only be added if they are not already included in the rates, which must be stated in the special conditions.
Clause 2.4 prohibits certain costs from being claimed, including:
Costs which are not justified from the contractor’s records;
Costs that were not reasonably and actually incurred; or
Costs incurred due to default by the contractor.
The contractor is required to maintain records of its costs and allow the engineer to the contract to inspect these.
Construction programme
Clause 5.10 requires the contractor to submit a “simple” programme for the works within 10 working days of the tender being accepted. In general, this would be a timeline from the contractor specifying the due date for completion of each stage of the project and the subcontractors involved. The programme must demonstrate how the contractor proposes to meet the due date for completion.
Alternatively, the contractor may be required to submit a “comprehensive programme” within 20 working days. This must include:
The proposed sequence of works and the dates for commencement and completion of the various activities, dates by which access to the site, or materials, services or work, is to be provided;
A critical analysis providing an estimated duration for activities and any dependencies between the activities;
The dates by which access to the site, or materials, services, or work, is to be provided; and
The dates by which the contractor reasonably requires any materials, services, or work to be provided by the principal or any separate contractors.
The timeframe for submitting either kind of programme is short. For the contractor, the contract states that the contractor is not entitled to payment until the programme is provided. However, the time for providing the programme can be extended by agreement between the parties.
Advance notification
Clause 5.21 acts as an early warning system. It requires the contractor and the engineer to notify each other in writing as soon as they become aware of any matter that is likely to:
Materially alter the contract price;
Materially delay completion; or
Result in a breach of statutory duty.
Where any of the above occurs, either the contractor or the engineer may require the other to meet to explore proposals to lessen the impact or avoid the matter altogether.
Failure to give advance notice may affect the value of any variation arising out of the matter but does not affect the contractor’s right to claim a variation.
Insurance
NZS 3910 allows the parties to elect in the special conditions the risks that are to be insured and who is to arrange the relevant cover. Generally, the contractor is responsible for contract works, public liability and plant insurance for the duration of the project. Where the special conditions require the contractor to arrange plant insurance, it shall insure:
Specified items that are critical to the performance of the project (i.e., items that could delay the works if lost or damaged); or
Plant above a specified market value.
This allows the contractor to reduce insurance costs in respect of hired plant and equipment.
Variations
NZS 3910 provides that variations are to be determined by the engineer. The engineer may order variations that:
Increase or decrease the quantity of any work;
Omit any work;
Change the character or quality of any material or work;
Require additional work to be done; or
Change the level, line, position, or dimensions of any part of the contract works.
Clause 9.2.3 provides a process whereby if the contractor considers any matter should be treated as a variation, the contractor must, as soon as practicable, give written notice to the engineer of the proposed variation.
Within 1 month of receiving notice, or as soon as practicable thereafter, the engineer shall give notice in writing, either to confirm or disallow the variation. If the variation is disallowed, the engineer must give reasons for doing so. This process reduces disputes about whether a matter was a variation.
Where the contract includes a schedule of prices that contains prices or rates applicable to the nature of the variation (or have a sufficient relationship to the nature of work involved in the variation), or part of the variation, the base value shall be determined by applying those prices or rates. Where there is no schedule of prices and it would not be reasonable to derive new prices or rates, then the value of the variation shall be determined on the basis of net cost.
Clause 9.3.2 allows the contractor to propose a value. The proposal must be made within 1 month, or as soon as practicable, after the variation is ordered or confirmed by the engineer. The contract encourages the contractor and engineer to agree on the value of the variation. If an agreement cannot be reached, the value shall be determined by the engineer together with reasons for the valuation.
Defects liability
The contractor is to remedy defects and damage that result from defective workmanship or materials. Where there are defects, the engineer may issue notice of a defect to the contractor, after which the contractor has a specified time to rectify them. Defect notifications may be issued for a period of 3 months after the date of practical completion, unless otherwise stated in the special conditions.
If the contractor fails to remedy the defect, the engineer may instruct another to complete the work after giving the contractor 5 days’ further written notice. The reasonable cost of the work undertaken by the alternative contractor is recoverable from the original contractor.
Payments
NZS 3910 requires the contractor to issue payment claims in accordance with the contract to the engineer and the principal. The default provisions provide that payment claims may only be submitted for work carried out during periods of not less than 1 month. The contract imposes additional requirements that are in addition to the statutory requirements under the Construction Contracts Act 2002 (the Act), in that the payment claim must provide:
The estimated value of the contract works which have been carried out, excluding variations;
The estimated extent and value of all work performed or other cost that is claimed for variations;
Any advances for the estimated value of materials delivered to the site which are intended to be incorporated in the contract works but are not yet incorporated, are provided in the special conditions;
Any advances for temporary works or plant or materials not yet on site for which payment is provided in the special conditions;
The estimated value of cost fluctuations; and
Any bonus to which the contractor claims to be entitled.
The scheduled amount
Once a payment claim is received, the engineer must provide a payment schedule within 12 working days. Within 7 working days, the engineer must provide a provisional payment schedule. It must:
Identify the payment claim;
State when the payment claim was served;
State the due date for payment;
Show the sum certified by the engineer, which shall comprise of the value of the payment claim, less previous sums certified by the engineer and less any deductions required under the contract or by law;
Show the manner in which the certified sum was calculated;
State the reasons for the difference between the certified sum and the claimed amount;
State that the certified sum is provisional; and
State that the provisional sum is provisional only until the expiration of 12 working days after date of service of the payment claim, after which it shall become the scheduled amount unless a replacement progress payment schedule is provided.
The contract permits the principal to have a say in the scheduled amount. In particular, clause 12.2.4 provides that the principal has 10 working days after receipt of the claim to notify the engineer in writing of any amendments or deductions that the principal intends to make from the provisional sum certified by the engineer. The principal must include reasons for any amendments or deductions.
Where notice is given by the principal to the engineer of any amendments or deductions, the engineer shall provide a replacement payment schedule to the contactor and the principal which must contain details of:
The amendments or deductions notified by the principal;
The reasons for the amendments or deductions;
The manner in which the payment schedule was calculated;
The scheduled amount; and
A statement that the progress payment schedule supersedes the provisional payment schedule.
It is important to note that failure by the principal in notifying the engineer of any amendments or deductions does not prevent the principal from requiring any amendments or deductions from subsequent payment schedules.
Broadly, the same process applies to final payment claims and payment schedules except for the timeframes.
Disputes
Clause 13 provides a process for disputes to be resolved. It provides that all disputes must first be referred to the engineer within 1 month after provision of the final payment schedule, or no more than 1 month after any relevant adjudication determination. Provided that all parties agree, the parties are allowed to appoint an expert to make a recommendation to resolve the matter.
The engineer shall give a decision within 20 working days of receiving notice in writing from the principal or contractor requiring a decision.
If either party is dissatisfied with the engineer’s decision, the parties may refer the dispute to mediation under clause 13.3.1. If the matter is not resolved at mediation, either party can then refer the dispute to arbitration. Either party can also refer the dispute to adjudication under the Act, which can run at the same time as arbitration.
It is important to note that under clause 13.1.1 of the latest version of NZS 3910, the engineer’s decision, valuation or certificate shall be final and binding after 3 months unless it has been referred to the engineer for review under clause 13.2.1, or to adjudication. It is therefore important for the relevant party to ensure that it takes steps before the time limit expires.
Summary
The above terms are some of the important terms in NZS 3910. Navigating NZS 3910 can be challenging especially in complex projects that require comprehensive special conditions to be drafted. It therefore pays to have your contract checked to ensure that you have adequate protection before entering a long-term project.
Our lawyers at Norling Law have the expertise to review your contract and discuss strategies to protect your position in a construction project. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
The Construction Contracts Act 2002 (the Act) codified a process for claiming and certifying payments under construction contracts whereby the contractor may claim for payment via a “payment claim”, and the payer may issue a “payment schedule” in response. If the payer fails to properly respond to the payment claim, or pay within strict statutory timeframes, the contractor can enforce the claimed amount as a debt due.
This is known as a “pay now, argue later” regime as it promotes recovery of payments for contractors irrespective of the dispute, and aims to uphold the stated purpose of the Act, that is, to facilitate regular and timely payments between the parties to a construction contract.
What is a payment claim?
Under the Act, this process is available to all construction work which has been defined broadly to include construction, erection, installation, carrying out, alteration, repair, restoration, renewal, maintenance, extension, demolition, removal or dismantling of any structure including infrastructure such as roads and utilities. It also includes design, engineering work, quantity surveying, painting, and plumbing.
A payment claim is more than a mere invoice.
For a payment claim to be valid, s 20 of the Act states that it must:
Be in writing;
Contain sufficient detail to identify the contract;
Identify the work and relevant period to which the payment claim relates;
State the amount claimed and the due date for payment;
Indicate how the payee calculated the claimed amount;
State that it is a payment claim under the Act; and
Be accompanied by prescribed information under the Act.
The process
Once issued, the recipient has 20 workings days to respond to the payment claim with a payment schedule, unless the contract specifies a different time. The recipient of a payment claim has two options:
Make payment in full by the due date; or
Issue a payment schedule to dispute the amount claimed and pay a lesser amount (if any).
If the recipient fails to do either, it is legally barred from raising a defence (except on certain narrow grounds). Additionally, the contractor has a statutory right to suspend work until payment is received in full.
The Act also provides that the issuer of a payment claim is allowed to seek payment of its actual and reasonable costs of recovery (including legal costs) to enforce payment. This means that if the issuer is successful, it may be indemnified for its legal costs in enforcing the payment claim in addition to payment of the claimed amount.
Compliance with statutory requirements before the Courts
The Courts have taken a pragmatic approach by affording a degree of flexibility to non-compliance with the requirements for the issuance of a valid payment claim. Historically, the Courts have held that requirements (a), (f) and (g) must be strictly complied with, while requirements (b) to (e) can be satisfied if they are substantially complied with. The High Court has recently extended the substantial compliance test to requirements (f) and (g) in Poly Wealth Trustee Limited v Van Vlerken [2020] NZHC 346.
In the past, technical quibbles (which the Court found did not invalidate the issued payment claim) have included:
An error in the date of the payment claim – Complete Construction Limited v Lyon Electrical Limited [2014] NZHC 3116.
Failing to use the words “payment claim” – Herbert Construction Co Limited v Tuck Contractors Limited (in Liquidation) HC Napier CIV-2011-441-54, 22 July 2011.
Mistakenly referring to the Act as the “Construction Contracts Act 2003”, instead of 2002 – Invent Solutions Limited v Chan Developments Trustee Limited [2009] NZCCLR 37 (HC).
An error in the due date for payment, contrary to the terms of the contract – Pedestal Limited v City Build Construction Limited [2014] NZHC 1783.
It is noted that the issuer of a payment claim is unable to claim that a defect is a technical quibble if there has been no compliance whatsoever. That said, the Courts have taken a flexible approach by looking at the context in which payment claims are made and the knowledge of the parties involved in assessing compliance. For example, in McAlpine Hussmann Limited v Cooke Industries Limited HC Auckland CIV-2011-404-5663, 16 March 2012, the Court held that a tax invoice without any explanation of how the invoiced amount was calculated met the requirements given the payer’s knowledge of the circumstances.
However, given the strict requirements under the Act, it is always recommended to ensure the statutory requirements are strictly complied with to avoid the risk of the payment claim being declared invalid.
Why should contractors utilise payment claims?
We were recently engaged by a contractor who was owed significant amounts of money from the principal under a construction contract. The contractor did not issue payment claims to the principal. The contractor was experiencing financial difficulties and the construction contract did not provide the contractor with a right to suspend work for non-payment. In those circumstances, the contractor was contractually required to continue working for the principal even though it was not getting paid. This worsened the contractor’s financial position.
Had the contractor issued a payment claim, it could have relied on the statutory right to suspend work for non-payment. It could have also relied upon a statutory demand to recover the debt. This could have preserved its financial position and act as leverage to obtaining payment.
Accordingly, it is definitely worth issuing payment claims as a matter of practice.
Conclusion
Failure to issue a valid payment claim could result in having to initiate costly and drawn-out court proceeding to pursue the debt.
It is therefore prudent to have your payment claim checked to ensure that it complies with the Act before it is issued.
Contact us if you would like to receive a free payment claim template. Our lawyers at Norling Law are also happy to review your payment claim or discuss strategies to enforce 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/.
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:
the payee may recover from the payer, as a debt due, in any Court, the unpaid portion of the claimed amount, and the actual and reasonable costs of recovery awarded against the payer by Court; and
the payee may serve notice on the payer of its intention to suspend construction work.
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.
Statutory requirements for a payment schedule
A payment schedule has no set form. However, s 21 of the Act states that a payment schedule must:
Be in writing;
Identify the payment claim to which it relates;
State the scheduled amount which it proposes to pay; and
If the scheduled amount is less than the claimed amount, the payment schedule must:
indicate how the scheduled amount was calculated;
explain 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.
A payer is allowed to dispute 100% of the claimed amount by stating that the scheduled amount is zero.
Payment schedules in the Courts
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”.
Conclusion
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/.
A contractor is not required to complete extra work and cannot expect payment for completing extra work that has not been specified in the original contract, without either a new contract, a variation of the existing contract, or an order made under a term in the contract that permits variation of the work.
A variation is an alteration to the scope of works in a construction contract. It could be an addition, substitution, or omission from the original scope of works. A variation should always be within the scope of works originally required. It should not be of such different character or quality as to be totally different to the works originally contemplated. If that is the case, then the contractor could argue that it is not a variation, but extra work.
Almost all construction projects, whether small or large, will have variations. The three critical aspects of a variation are:
What can be varied,
The process of claiming a variation, and
Valuing the variation.
What can be varied?
The first step in identifying a variation to the scope of works is identifying the scope of works itself. The scope of works and services is defined by the contract, commonly by reference to documents such as plans and specifications or a project brief. If works or services are part of the scope of works, then they are not a variation.
A common dispute that arises in relation to variations is whether a variation is, in fact, a variation. These arguments are common where the scope of works is not clear. It is, therefore, important to define with as much precision as possible, exactly what the scope of works includes. Failing to do so could mean that work can be implied to be included within the scope of works if incidentally required.
For example, if a plan shows that the contractor is to install a door and the specifications do not specifically refer to any hinges on those doors, supplying the hinges are part of the scope of works as it is necessary for the completion of that work and likely to be the contractor’s responsibility.
The variation process
Most written construction contracts will specify a process for instructing or claiming a variation. This is because at common law, the principal does not have an automatic right to instruct variations. So, unless the contract empowers the principal to instruct variations, the contractor can refuse to perform the variation and insist on performing the original scope of works.
For example, in Ettridge v The Vermin Board of the District of Murat Bay [1928] SASR 124, a contractor was engaged by the principal to construct a fence along a railway line. During construction, the principal instructed the contractor to deviate from the original line. The contractor refused to accept the deviation and abandoned work claiming that the contract did not give the principal a power to vary the contract. The Court held that as the principal did not have the power to instruct variations, it had repudiated the contract by insisting on the deviation. Accordingly, the contractor was entitled to terminate.
Most written contracts allow the principal to instruct variations and the contractor to claim for variations. In respect of the former, the process will normally involve an instruction from the principal, which can be written or verbal, to vary the works. Depending on the construction contract, this power could be very wide and can represent a significant risk for the contractor.
For instance, the contractor could be required to undertake extra works even though it may not have the necessary resources, or the work may be uneconomic. Furthermore, instructions issued at a later stage in the project may entail extensive redesign and rework which can also force the contractor to remain on site for significantly longer than envisaged. Accordingly, contractors would be well-advised to seek advice on the extent of this power before entering the contract.
In respect of a contractor’s claim for variations, depending on the contract, it may provide specific instances when a variation is claimable. Under NZS 3910 for example, it provides that a variation is claimable where there is a significant discrepancy, late instructions, nominated subcontractor defaults, incorrect information supplied by principal, early occupancy by principal and etc.
In our experience, it is common for disputes to arise because the correct process prescribed by the contract in relation to variation is not followed. A common issue encountered by contractors is non-payment for variation works requested pursuant to verbal instructions from the principal. This issue is especially prevalent in residential building projects.
Typically, this scenario involves a verbal agreement between the principal and contractor for works to be varied. However, once the variations have been completed, the principal attempts to avoid payment by denying that it had instructed the contractor to undertake those variations. If the variation clause requires the variation to be recorded in writing, and the contractor fails to document this, the contractor takes on the risk of not getting paid for the variation as there would be no clear evidence of an agreement for the contractor to perform them.
This could lead to a costly and time-consuming dispute to establish the variation.
While it may seem unfair, the contractor is not entitled to payment if it cannot prove that the variation was instructed. This situation can be avoided by insisting that all variations, large or small, be documented before undertaking the variation in question or refusing to carry it out unless it is formally instructed in writing.
Valuing the variation
The written construction contracts will usually have clauses setting out how a variation is valued.
The variation could be valued by agreement and if so, such agreement should be documented to prevent disputes in the future.
If not done by agreement, the parties should be aware of the valuation procedure in the contract. Typically, the contract will include a schedule of rates that will apply to most variations. Contractors should therefore check how variations are valued and whether those prices are feasible before entering the contract. Failing to do so could mean that the contractor is obligated to carry out a variation at a loss.
Conclusion
In the next article, we will discuss potential avenues available to contractors outside of the contract where the variation process has not been complied with. They include quantum meruit, estoppel and the doctrine of free acceptance.
Variations are an inevitable component of many construction contracts, and to ensure a fair outcome for all parties involved, the scope of work in the contract needs to be comprehensive. Our lawyers at Norling Law can review your scope of works and variations, and can assist with dispute resolution, 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/.
