Invalid Payment Claims

Marcus Beveridge.

By Marcus Beveridge and Tina Hwang

Timely payments in the construction sector is the bloodline for the sector.

A late (or no) payment is fatal to the contractor or subcontractor.  Section 20 of the Construction Contracts Act 2002 (“Act”) sets out the mandatory requirements for valid payment claims which, if unpaid, could provide the basis of a statutory demand or summary judgment.  However, if the prerequisites are not met, the payment claims are invalid and disastrous.  It is therefore imperative to issue valid payment claims, but so many parties in practise are creating void ones at their own expense.

What are the conditions and common issues?

A payment claim must be in writing and appropriately served to the recipient.  It must include adequate information to identify the construction contract, project, particular construction works, relevant period, which progress payment (if any), exact amount due, how that amount was calculated and the due date for payment. It must also clearly state that the claim is made under the Act or risk being treated as a simple invoice.

As of 1 December 2015 (with the introduction of the second phase of the Construction Contracts Amendment Act 2015) all payment claims (not just residential contracts) must attach in writing and in the prescribed form, an outline of the process required to respond to that claim and an explanation of the consequences of not responding to the payment claim.  This is compulsory, but is still being overlooked by many. This requirement (previously only applicable to residential contracts) was strictly applied by the Court where many claims were invalidated (e.g. Berg v Franix Construction Ltd HC Auckland CIV-2008-404-3421, 24 September 2008).

The Court of Appeal has rejected technical arguments to invalidate a claim (George Developments Ltd v Canam Construction Ltd [2006] 1 NZLR 177 (CA)).  The Courts have taken a robust approach and rejected “technical quibbles” (Complete Construction Ltd v Lyon Electrical Ltd [2014] NZHC 3116).  For instance, a claim that incorrectly referred to the Act as being in “2003” rather than “2002” was found to be a technical quibble and did not invalidate the claim (Invent Solutions Ltd v Chan Developments Trustee Ltd [2009] NZCCLR 37 (HC)).  One instance of a case that was more than a “technical quibble” was where a contractor failed to specify the applicable construction contract.  This was found to be invalid as there were five construction contracts for varying projects (Ellis Build 2008 Ltd v NZ Chemical Care & Storage Ltd [2013] NZHC 3204).

It seems that as long as the payment claim reasonably identifies the construction work, the claims will be valid.  A tax invoice without a reference date including an order number was held to be sufficient as was a case where the period of works was unidentified, but the Court found that the principal would undoubtedly know the period date as this was the material supply date in this particular case.

The Court has specifically stated that the claim must do more than just identify the contract (section 20(2)(b)) as the description of works is a specific and additional requirement under section 20(2)(c).  The Court recently undertook an examination of the level of detail required in the case of Can Build Ltd v Kirkpatrick [2015] NZHC 1161. Two out of three claims were rejected as the deficit information was more than “technical quibbles” and was required to understand the claim and meet the mandate under the Act.  The High Court recently approved payment claims in Stead Construction Ltd v Chillex Mid Island Ltd [2016] NZHC 594 as they were itemised, showed a breakdown of the different works and variations, percentage claimed and the amount of work completed. The fact that a payment schedule had been provided in response showed that the works could be adequately identified by the recipient.

Where an amount or due date for payment is missing, the Court have been somewhat unclear on whether it would be void.  Where the construction agreement lacks a workable provision, the Courts have applied the default provisions of the Act including the 20 working days timeframe (Suaniu v Hi-Qual Builders Ltd HC Auckland CIV-2008-404-1576, 26 June 2008).  Numerous cases have subsequently held payment date errors does not invalidate a claim.

The general resounding test is the “technical quibble”, but why risk this when so much is at stake? Contractors and subcontractors should ensure every payment claim meets all the requirements of the Act including the new requirements under section 20(3) which requires a specific prescribed form.

For further assistance, please contact Marcus Beveridge/Tina Hwang at Queen City Law 09 970 8810