28.08.2020

Fresh guidance on payment schedule requirements

Payment schedule in Commercial Bay project fails to comply

The Court has delivered its judgment on the validity of a payment schedule in a dispute between Fletcher Construction Company Ltd (Fletcher) and Spotless Facility Services (NZ) Ltd (Spotless) in relation to the Commercial Bay project.  Fletcher’s payment schedule was found to be non-compliant with the Construction Contracts Act 2002 (CCA) because it failed to provide sufficient details of deductions in many respects.  The judgment highlights that those issuing payment schedules are not expected to provide fulsome details, but are required to provide some level of detail to indicate differences between their payment schedule and the payment claim submitted. 

This decision follows the Court’s earlier decisions in Fletcher Construction Company Ltd v Spotless Facility Services (NZ) Ltd [2020] NZHC 780 and 871 which considered an urgent injunction application to lift Spotless’ suspension of works and require Spotless to resume work.  Our article on those earlier judgments can be read here

Background

Fletcher is the main contractor for the Commercial Bay development on the old Downtown site in central Auckland.  Spotless is the mechanical services subcontractor.  The project, which involves the construction of new office and retail space, has been ongoing for several years and is within months of completion with some office and retail space recently being opened.

On 24 January 2020 Spotless submitted payment claim 44 (PC44) claiming approximately $2m.  In payment schedule 44 (PS44) Fletcher responded making deductions of $1.3m from Spotless’ claim and – for the first time – claiming contra-charges of close to $5m. 

The Court’s decision

The Court was asked to consider whether PS44 was valid under the CCA.  The parties accepted that the validity of PS44 was to be assessed in its totality, rather than being partially valid/invalid.  That said, there was perhaps a hint in the judgment that payment schedules could potentially be only partially invalid. 

Section 21(3) of the CCA requires a payment schedule to “indicate” the manner in which the scheduled amount has been calculated, and the reasons for the difference between the scheduled and claimed amounts.

The Court outlined that by using “indicate” rather than a more precise word (eg state) to comply with s21(3), payment schedules are not required to contain specific side calculations and reasons on a line by line basis – however they do need to “indicate” the reason or reasons for the deduction.  The practice of how parties record these reasons will vary between contracts, and the Court recognised this as an important factor in determining the validity of individual payment schedules.

Spotless’ claims of non-compliance for specific line items in PS44 were considered by the Court in three categories: original contract works, variations and contra charges.  Under each of these categories Spotless claimed that various line items did not meet the requirements of s 21(3) by either providing no indication of calculation method, insufficient information, or absence of any reason.

The Court considered Spotless’ claims within the three categories on an item-by-item basis.  The parties’ practice in submitting and responding to claims was to record the progress of each line item by a percentage of progress. 

Where PS44 complied with the CCA

The Court found that where Fletcher had scheduled a lower amount than claimed, and had recorded this as a slightly lower percentage of completed works than the progress Spotless had claimed, this could comply with the CCA as the scheduled percentage was only slightly below the percentage submitted and the total deduction was for a small amount (generally deductions less than $5,000).  The Court outlined that such a response could be interpreted by Spotless that some finishing work was required on that particular line of work.  

Similarly where Fletcher had responded to a claimed amount with a lesser monetary figure, rather than a percentage, this was viewed as complying with the requirements of s 21(3) – even if use of a calculator might be required to work out the percentage scheduled.  Again this practice could only comply where the deduction was for a small amount.

In PS44 Fletcher allowed several scheduled amounts and percentages to remain from previous payment schedules.  The Court outlined allowing previous comments to remain complies with the CCA as the inference to Spotless was that not all deficient works had been rectified.

Where PS44 did not comply with CCA

The Court found that where scheduled amounts amounted to a significant deduction in the form of either a percentage or monetary figure more was required than just scheduling a reduced amount, which could otherwise be considered as an arbitrary deduction.  It would not have been clear to Spotless what more was required to progress the claim than just finishing works on those line items.

There were instances in PS44 where Fletcher had not scheduled an amount.  The Court found that this did not comply with the requirements of the CCA as there could be various reasons why an amount had not been scheduled. 

Several claimed items were listed as “under assessment” by Fletcher.  This practice did not comply with the requirements of the CCA as the payer must have a definite reason for any variation from amounts claimed.   At a minimum Fletcher should have given some indication of purpose of its assessment.

In relation to contra charges claimed in PS44 Fletcher referred to communications between the parties as an indication for why those deductions had been made.  While reference to communications could be a sufficient indication in a payment schedule that indication would need to contain specific details and the communication itself must give a breakdown of the claim, indicate the sum of the claim, and how claim had been calculated. Here, the Court found that the communications referred to were not sufficiently detailed and Spotless lacked a common understanding of the reason for the deduction.  Where contra charges of significance were being applied for the first time, Fletcher had an obligation to indicate with clarity how the contra charges arose, and the basis on which they were calculated.

By concluding that the variation and contra charges sections of PS44 did not substantially comply with the CCA the Court determined that PS44 as a whole was invalid.  Accordingly Fletcher was required to pay Spotless the amount claimed in PC44 and, as Fletcher did not pay that amount by the due date, Spotless was entitled to provide notice of its intention to suspend its works under the contract and suspend those works.

Our comment

The judgment recognises the importance of compliance with the statutory requirements for issuing payment claims and schedules, particularly having regard to those documents being the tools by which parties facilitate cash-flow under a construction contract. 

Specifically in relation to payment schedules, payers need to apply a degree of caution when responding to payment claims.  Although the Court outlined that full explanations and detailed calculations are not expected – a compliant payment schedule:

  • will need to indicate the reasons for variations on each line item;
  • must have sufficient clarity setting out the reasons for the deduction and the manner in which it has been calculated. Greater detail and clarity will be required for significant deductions;
  • cannot simply refer to the claim as being “under assessment”;
  • may carry over reasons from a previous payment schedule; and
  • can refer to correspondence between the parties which explains the deduction, provided it is clear what correspondence is being referred to, and that correspondence itself clearly sets out the basis for deductions.

The consequences of issuing a non-compliant payment schedule can be significant.  Here, Spotless was entitled to issue a notice of suspension and suspend works.  The Court found both those actions were valid as a result of Fletcher’s failure to issue a compliant payment schedule.

If you have any questions about the issues raised by this judgment or payment claims and payment schedules under the Construction Contracts Act, please get in touch with our Construction Team, or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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