The Court of Appeal has recently overturned a decision of the High Court, issuing a reminder that if a valid payment claim is issued under the Construction Contracts Act 2002 (CCA) it must be challenged under the CCA with a payment schedule if payment is to be avoided (Demasol Ltd v South Pacific Industrial Ltd  NZCA 480).
Demasol entered into a construction contract with South Pacific Industrial Ltd (SPI) for the demolition of a large tank. The quoted price of $100,000 plus GST included a note that “the only thing not included is the asbestos we cannot see”. The demolition work was undertaken, but took far longer than either party had envisaged. Demasol said that the scope of works had increased during the contract, and claimed those as variations. Demasol issued two payment claims totalling almost $400,000.
SPI did not pay the amounts claimed, not did it respond with payment schedules. Instead it wrote to Demasol disputing the variations, and later paid part of the amount claimed.
Demasol served a statutory demand for the unpaid amounts, and SPI applied to the High Court to have the statutory demand set aside.
The High Court
In the High Court, the Associate Judge looked at the substance of the payment claims, and decided that it was arguable that they were invalid because the variations may not have been approved. She therefore set aside the statutory demand.
The Court of Appeal
The Court of Appeal took a different view. It said that:
“If SPI wished to contend that Demasol was not entitled to serve a payment claim on it when Demasol did so, that was a point it could and should have taken by way of response in a payment schedule.”
The Court of Appeal decided that any disputes raised by SPI were irrelevant in the current context:
“In our view, the only enquiries required in relation to SPI’s application to set aside the statutory demand were:
(a) whether the payment claim complied with s 20 of the CCA [which sets out the formal requirement for a payment claim]; and
(b) whether SPI had provided a payment schedule contesting its liability or paid the amount claimed by the due date.
The general merits of Demasol’s payment claim were not open for consideration and were irrelevant in the statutory demand context. In our view, the Associate Judge erred when she embarked on an enquiry into the terms of the contract and the quantum and merits of payment claim 2.”
This result is “mandated by the CCA”, which sets out a strict procedure for responding to a payment claim. This meets with the CCA’s objective of securing timely cashflow to contractors and subcontractors. This will not prevent SPI from disputing Demasol’s claims, but having not responded with a payment schedule SPI will now need to pay the amount claimed, and then issue proceedings to recover amounts that SPI believes it should not have been charged. As the Court of Appeal noted:
“The CCA deems an amount claimed to be a debt, if no payment schedule is issued and the amount claimed is not paid. It requires that payment be made in such circumstances. The payee is entitled to enforce that debt. The CCA does not however shut the payer out from disputing the amount claimed. Rather, it requires that the payer pay first and argue later.”
The Court of Appeal overturned the High Court’s decision, and reinstated the statutory demand meaning payment had to be made or an act of insolvency would be committed.
This decision is a useful reminder to parties to construction contracts to ensure that they follow the procedures set out in the CCA. These procedures have been set up to ensure the speedy resolution of disputes, and ensure that payments remain flowing in an industry that is often prone to insolvency. Failing to follow the CCA’s requirements won’t prevent a dispute from being raised, but a claim will need to be paid before the dispute is resolved.
Thank you to Special Counsel Jonathan Forsey for preparing this article. If you have any questions about payment claims and statutory demands, or about the CCA generally, please contact a member of our Construction & Projects Law team.
Disclaimer: the content of this article is general in nature and not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.