The payment claim process under the Construction Contracts Act

Friday, February 3, 2017

The Construction Contracts Act 2002 (Act) governs all construction contracts that relate to the carrying out of construction work in New Zealand, whether the contract is in writing, verbal, or a mixture of both, and whether it is for commercial or residential construction.

Terms of payment

The Act allows the parties to the construction contract (the principal and the contractor) to agree on express terms for payment of the construction work. This can include a mechanism for determining the number of payments under the contract, the interval between them, the amount, and the due date of each payment. The parties to a construction contract may even expressly agree to the construction work being paid by a single payment.

Where there is no agreement about payments included in the construction contract, the default terms of the Act apply. The default terms allow the contractor carrying out the work to invoice for progress payments on a monthly basis.

Payment claims

All invoices for construction work should be issued in a format that meets the Act’s requirements for a payment claim.

This means that the invoice must:

  • be in writing;
  • contain sufficient details to identify the construction contract to which the payment relates;
  • identify the construction work and the relevant period to which the payment relates;
  • state the amount to be paid and the due date for payment (which defaults to 20 working days after the payment claim is served, unless the construction contract provided for a different due date);
  • indicate the manner in which the payee calculated the claimed amount; and
  • state that it is made under the Act.

A payment claim must also be accompanied by a written outline of the process for responding to the claim, and an explanation of the consequences of not responding to the claim and not paying the claimed amount.

If an invoice is issued without all of the above requirements, it will not be a valid payment claim under the Act. If there is no dispute about the invoice, the principal may still pay it in full. However, the consequence of not having a valid payment claim is that if there is a dispute about the invoice, the principal will not be required to respond with a payment schedule. What this means is discussed below.

Payment schedules

In a perfect world, after a contractor issues a payment claim, the amount claimed will be paid by the principal on or before the due date. However, if there is any dispute about the claim, or part of the claim, the principal must formally respond to the claim.

A payment schedule is the mechanism by which a principal responds to a contractor’s payment claim.

As with a payment claim, there are certain requirements for a payment schedule. The payment schedule must be in writing, identify the payment claim that it is responding to, and state a “scheduled amount”, being the amount that the principal proposes paying. If the scheduled amount is less than the claimed amount, the payment schedule must set out:

  • the manner in which the principal calculated the scheduled amount;
  • the reasons for the difference between the scheduled amount and the claimed amount; and
  • in a case where the difference is because the principal is withholding payment on any basis, the principal's reasons for withholding payment.

The principal needs to pay either the claimed amount or the scheduled amount; failure to do so means that the contractor can issue court proceedings (or a statutory demand against a company) for that amount as an undisputed debt. 

The principal will not be able to avoid paying the debt on the basis that they belatedly raise a dispute, whether it is a problem with the quality of the work, a set off relating to other matters, or anything else. The dispute can still be raised; however the claimed amount or the scheduled amount will still need to be paid in the meantime.

The Act also permits the contractor to suspend work after giving five working days’ notice of its intention to do so if the principal fails to pay either the claimed amount or the scheduled amount.

Is the payment claim process compulsory?

It is not mandatory for a contractor to issue their invoices as payment claims. However, if a contractor doesn’t utilise the payment claim process, they will not be able to rely on the provisions of the Act to make a principal to pay an undisputed portion of the invoice before the dispute is determined by the courts.

For more information, please contact a member of our Construction & Projects team.

 

Disclaimer: the content of this update is not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.