The Construction Contracts Act 2002 ushered in a new approach to construction contracts and changed the balance of power between principal and contractors. The purpose of the Act is:
- to facilitate regular and timely payments between the parties to a construction contract; and
- to provide for the speedy resolution of disputes arising under a construction contract; and
- to provide remedies for the recovery of payments under a construction contract.
In particular, the Act sets out the procedure for requests for payment and responses and imposes harsh penalties on a principal if a response is not made within the period specified in the Act. Despite the Act having been in force since 1 April 2003, errors are still regularly being made in both the timeliness and service of notices. This was illustrated recently in the case of Marsden Villas Limited v Wooding Construction Limited, Asher J, HC Auckland, CIV-2006-404-002136, 25 May 2006, in which the consequences for the principal for failure to comply with the time limit in the Act were severe. Listed below are some simple yet serious pitfalls that parties to a construction contract (“contract”) should take care to avoid.
Response To Payment Claims
The Act sets out a procedure under which a sub-contractor may serve a notice upon its principal (ie the contractor who has engaged it to do the work), requiring payment for work done to date. This notice is called a “payment claim”. If a payment claim is disputed, the principal needs to respond to the sub-contractor with a notice called a “payment schedule”. The time for responding to a payment claim is the period set out in the contract, or if no period is set out in the contract, then the Act specifies a default period of twenty working days. This time limit is strictly enforced; provision of a payment schedule even one day late means the principal must (in the interim) pay the full amount of the payment claim, regardless of the correctness of that claim. In Marsden Villas, the effect of the principal serving a payment schedule two days late was that the principal had to pay the contractor $2,747,000 more than the amount set out in the payment schedule. Accordingly, it is crucial that each construction contract is carefully reviewed and a note made of the time frame to respond to a payment claim.
Method Of Delivering Notices
Given the consequences above, it is essential that both contractors and principals understand how to correctly serve payment claims and payment schedules on the other party and the effect of various forms of service. The Act and the Construction Contracts Regulations 2003 set out ways in which a notice may be served and it is not permissible to specify other methods of service by contract. While other methods of service may be valid if the court is satisfied that the document has come to the attention of the receiving party, we do not recommend this approach due to the uncertain outcome. Instead, we suggest always following the methods set out in the Act and the Regulations, regardless of any methods listed in the Contract.
If the methods of service prescribed in the Act and the Regulations are relied upon, both payment claims and payment schedules may be served in the following ways:
- in person (or if a company on the registered office);
- left at the usual or last known place of residence or business;
- posted by mail addressed to the person (or if a company to the address for service);
- by facsimile; or
- in certain circumstances, by email.
Service by fax is effective if the sender’s fax machine generates a record of the transmission and the sender receives no proof to the contrary that it has not been received. This means that a payment claim or schedule can be served on a party by fax regardless of whether that party’s fax machine is out of paper or toner or even if the fax gets misplaced or overlooked. In the case of email, documents may be served by email if the recipient consents to such service. It is unclear at the present time, what exactly constitutes consent. The Regulations state that consent may be implied from conduct and, as yet, there has been no case law on what conduct constitutes consent.
It is essential that the principal under a contract is aware of the timeframe set out in the contract for responding to a payment claim. Failure to respond in time has the result that the principal has to pay the full amount stated in the payment claim, regardless of the merits. All parties to a contract should have procedures and systems in place for receiving notices. It is essential to make sure that all machines are maintained in working order and that notices are given to the relevant team member. In the case of absences from the office, there must be systems in place to make sure “out of office” notification is used and the people’s email and facsimile messages checked regularly. Due to the current uncertainty regarding service by email, we do not recommend that notices be served by email, and further, we recommend that each party specifically notifies the other, that they do not accept service by email, unless they are satisfied that they have appropriate systems in place to deal with service by email.
While many of these recommendations may seem obvious and repetition of earlier advice, the fact remains that three and a half years after the introduction of the Construction Contracts Act, cases decided in the courts clearly demonstrate that simple errors made by either party in not following the timeframe and method of service of documents is resulting in serious, unwanted consequences for parties to a contract.
Joanne Chilvers and Joanna Pidgeon