Sorting payment

By Ayleath Foote, Associate

First published in The Press, 29 April 2008

With several recent building company collapses, the High Court has issued a timely reminder of the need for contractors to get it right when submitting payment claims under the Construction Contracts Act 2002.

Failure to do it properly could jeopardise payment.

The legislation aims to improve cashflow between contractor and principal. It seeks to avoid payment delays, which result from unscrupulous principals claiming they are entitled to delay payment due to poor workmanship, or by the imposition of “pay when paid” terms.

The Act sets out the way in which contractors working on a construction contract must lodge their claims for payment, and provides a timeframe for disputes to be raised via a payment schedule. If a payment claim is issued, and no payment schedule is received, payment becomes due.

While, arguments about set off (deduction from the amount due) for poor workmanship can still be raised separately, the money, in the meantime, must be paid to the contractor. The cashflow cost pending final resolution is, therefore, borne by the principal rather than the contractor. Even if a payment schedule is used to dispute the claim or part of it, payment must be made of the undisputed portion.

While the Courts have taken the view that technical quibbles in terms of the wording or form of a payment claim will not render it void, the decision of Welsh v Gunac South AucklandLtd highlights the need for precision when issuing claims.

A payment claim must state that it is a claim made under the Construction Contracts Act. The building company in the Welsh case failed to specify this when submitting the first of three invoices to their client for payment. The later two invoices did meet this requirement.

The Court found that the failure to specify that the first invoice was a payment claim made under the Act was fatal. Consequently, the builder could not benefit from the protection of the Act. The builder would still be able to make a claim against its client through the Courts for payment, but the client could raise issues of poor workmanship against the builder. Until ultimate resolution, the money would remain with the client.

The case also reaffirms that contractors wanting to benefit from the protection of the Act have extra obligations when invoicing individuals for work on their homes. At the time of submitting a payment claim, the contractor must also serve a written outline of the process for responding to the payment claim, and an explanation of the consequences of not responding to it and not paying the claimed amount. A failure to follow this procedure means the money stays with the client until such time as any disputes are resolved.

The case should serve as a reminder to those in the construction industry to check their procedures for invoicing. Those who fail to comply with the requirements of the Construction Contracts Act do so at their peril.

Location http://www.duncancotterill.com/index.cfm/1,159,452,0,html