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Making the Construction Contracts Act 2002 work for you

Do you work in the construction industry? Is your business in demand because of the Christchurch Rebuild boom? Nevertheless, you may someday find your work unappreciated and that your client does not want to pay you ….  

The Construction Contracts Act 2002 (“Act”) applies to every contract where “construction work” is undertaken, whether the contract is in writing, or verbal, or both. When the Act came into force, its purpose was to reform the law relating to construction contracts. Its key aims are to simplify the process for regular and timely payments between parties to a construction contract; and to provide remedies for the recovery of payments under a construction contract.  

As a contractor you need to know about this legislation! 

So what sort of work is covered by the Act? 

“Construction work” can include a large number of things from building, alteration, maintenance, and repair work to structures, to work such as drainage, water, excavation, decorating, and landscaping work.   

We are finding that many contractors are not availing themselves of the Act’s procedure for facilitating timely payment, either because they are not aware of the procedure, or they are not complying with the formalities and cannot therefore rely on the Act’s protection against non-payment.  

To come under the legislative protection, the payee under the contract (often a subcontractor) must serve a Payment Claim on the head contractor or principal (the payer). In order for a Payment Claim to be valid, it must comply with certain requirements. It must:

  • Be in writing; and
  • Contain sufficient details to identify the construction contract to which it relates; and
  • Identify the construction work and the relevant period to which it relates; and
  • Indicate a claimed amount and the due date for payment; andIndicate the manner in which the payee calculated the  claimed amount; and
  • State that it is made under the Act.  

After a party has served a Payment Claim in line with the requirements, the payer must respond either with full payment of the claimed amount, or with a Payment Schedule. A Payment Schedule must:

  • Be in writing; and
  • Identify the payment claim to which it relates; and
  • Indicate a scheduled amount (essentially the amount the payer says is payable). If the scheduled amount is less than the  claimed amount (or withheld totally), it must show the manner in which that figure was calculated, and the reason (or reasons) for the difference. 

A payer must respond with a Payment Schedule within the period of time set by the relevant construction contract, or if the contract does not provide for a time period, within 20 working days after the Payment Claim was served. If not, the payee may recover from the payer in any court, the amount under the Payment Claim as a debt due.  

The Court has explained the rationale behind the process as follows:  

“Put colloquially, the payer is under an obligation to pay first and argue later. This, we are satisfied, is the intention of the legislation. No doubt it reflects the philosophy referred to earlier that cashflow is the very life blood of the building industry. Contractors (and their sub-contractors in turn) are entitled to be promptly paid where they have invoked the payment regime under the Act and the payer has not responded as the Act requires”. 

This process recently played out in the media where a subcontractor successfully defeated the head contractor’s appeal to the Court of Appeal, after the head contractor failed to pay a $300,000+ progress Payment Claim. The head contractor disputed the Payment Claim for a number of reasons, including its timeliness, the amount sought, and the fact the subcontractor had dug up the newly laid carpark in frustration. Both the High Court and Court of Appeal determined that even if the disputes the head contractor raised had merit, not paying the Payment Claim by its due date and failing to render a proper Payment Schedule put it in breach of the Act. The consequence of that breach was that subcontractor recovered the unpaid portions as a judgment debt. 

It is also important to note that if you wish to serve a Payment Claim on a residential customer, there are further requirements under the Act. A contractor wanting the advantage of the fast track procedure for recovery of debts in a domestic context must also serve, at the same time as the Payment Claim, a “Notice to Residential Occupier”. Not doing so can be fatal to a claim in court for recovery of the debt. 

An increase in protracted and costly court cases between principals, contractors, and subcontractors serves as a timely reminder to ensure you know the provisions of the Act. Those wanting to use the Act’s process to obtain regular and timely payments must remember that a failure to adhere to the Act’s mandatory requirements will likely result in their Payment Claims being deemed invalid. The courts take a strict approach to the application of the Act, and contractors must take care to ensure their Payment Claims meet the statutory criteria. 

There are other issues that may arise, both in terms of the Act’s process, and the interplay with your specific contractual terms. At Harmans, we have forms, tailor made contracts, and advice to guide you through this process. We recommend that our clients and others who are involved in construction work and who may be affected by (or wish to take advantage of) the Act, take expert advice at their earliest opportunity.  

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