The recent High Court ruling in The Fletcher Construction Company Limited v Spotless Facility Services (NZ) Limited  NZHC 1942 has clarified the requirements for valid payment schedules under the Construction Contracts Act 2002 (the Act).
A payment schedule is the mechanism by which a principal or head contractor responds to a contractor’s or sub-contractor’s payment claim and the requirements for a schedule are set out in s.21 of the Act. There is no specified form.
This case involved a multi-million dollar dispute concerning the Commercial Bay office tower and retail precinct development in central Auckland. Fletcher, as head contractor, had entered into a subcontract with Spotless for the provision of mechanical services.
Spotless had suspended works on the project under s.23(2)(b) of the Act after Fletcher had failed to make payment as required following the issue of a payment claim. Fletcher had issued a payment schedule in response to the payment claim within the required period, so the central issue in the case was whether the payment schedule issued by Fletcher to Spotless was valid under the Act. If the payment schedule was valid, Spotless’ suspension of the works would be invalid.
The High Court found in favour of Spotless, finding Fletcher liable to pay $2.04m plus GST. The Court held that the payment schedule issued by Fletcher did not comply with the requirements of s.21 of the Act and therefore Spotless was entitled to suspend the works for non-payment. The basis of the decision was that payment schedules need to provide reasons for payment deductions on a line by line basis rather than just stating the overall amount being deducted and giving general statements as to the reasons for the deduction.
The case emphasized that the courts will take a strict interpretation of the technical payment provisions of the Act. Given the right to suspend works and take other steps under the Act for non-payment it is therefore vital to ensure that payment schedules comply with the Act.
Whilst the issuing of payment schedules is fairly common within the construction industry, the setting out of reasons for deductions on a line by line basis is far less common. Following this judgment, there will be a need to ensure that line by line responses and reasons are provided and systems are put in place to ensure this is done which may be challenging on large and/or complex developments, particularly where there are short periods prescribed for a payment schedule to be issued following receipt of a payment claim.
Whilst s.21 refers to the need to include reasons for any deductions in a payment schedule, it does not specifically state that this is to be done on a line by line basis. This case clarifies that this is in fact required in order for the payment schedule to be valid under the Act.
One consequence of this judgment may be for principals and head contractors to seek to amend their contracts to allow them a longer period to provide payment schedules to allow them time to assess and provide line by line responses and deductions. The decision also applies to all levels of construction contract where payment schedules are required, including between head and sub-contractors.
We are able to assist with both the putting together of and assessing the validity of payment claims as well as amendments that you may wish to make to contracts or your payment terms as a consequence of this decision. Please contact Jonathan Forsey or Julia Flattery for further assistance.
To view the full judgment, click here.
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.