3.05.2018

Responding to Progress Payment Claims: Lessons from the Court of Appeal

Two recent Court of Appeal decisions, SOL Trustees Limited v Giles Civil Limited and Watts v Hughes Construction Limited v Complete Siteworks Company Limited highlight potential pitfalls when responding to payment claims under the Construction Contracts Act 2002: a payment schedule must comply with s 21 to prevent a payment claim falling due, and the exercise of a contractual right of election to extend the due date for responding to a payment claim must be communicated to the other party.

SOL Trustees Limited v Giles Civil Limited [2014] NZCA 539

SOL engaged subcontractor Giles in the construction of a 20 lot subdivision in Auckland.  The project experienced significant delays.

The subcontract provided that Giles was to submit payment claims for work done, and SOL was required to respond with a payment schedule within a specified timeframe.  If SOL failed to do so, then it became liable to pay the claimed amount.

SOL responded to payment claims 10, 11, 12, 13, and 14 by email, stating they were in dispute.  In response to payment claim 10, SOL also attached a spreadsheet named “Project Overrun Costs” which contained the costs it was claiming as a result of the delays.  The other responses provided no other information.  When Giles did not receive payment for the payment claims, it served two statutory demands.  SOL applied to have the statutory demands set aside.  The High Court dismissed the application and SOL appealed.

The Court held that merely stating that the amount claimed was in dispute did not fulfil the requirements of section 21 of the Act.  In particular, the responses did not indicate a “scheduled amount” (the amount the contractor proposed to pay to the subcontractor in response to their payment claim).

Further, the spreadsheet sent with payment claim 10 appeared to be SOL’s calculation of a potential counterclaim or set-off for delay. Section 79 of the Act provides that in proceedings for the recovery of debts due under the Act, the Court cannot give effect to any counter claim, set-off or cross-demand.  This is in line with the purpose of the Act to “pay now and argue later”.

The Court upheld the High Court decision to strike out the application to set aside the statutory demands.

Watts v Hughes Construction Limited v Complete Siteworks Company Limited [2014] NZCA 564

Watts & Hughes contracted with Complete Siteworks for the construction of a supermarket car park in Ferrymead, Christchurch.

Complete Siteworks was required to submit its payment claim on the 25th day of each month.  If Complete Siteworks submitted a late payment claim, Watts & Hughes could, under the terms of the contract, elect to treat the late payment claim as being received on the due date for the following month.

Complete Siteworks submitted its February payment claim on 28 February 2014, three days late.  Watts & Hughes did not respond to the claim.  When the due date under the contract for payment of a February claim passed, Complete Siteworks issued a statutory demand.

Watts & Hughes argued that it had made a valid election to treat the payment claim as having been received on the due date for the following month (25 March).  On that basis, the payment schedule was not due.

The Court of Appeal analysed the relevant authorities and held that an election “consists of making an unequivocal choice and communicating that choice to the other party to the contract”. The Court found that Watts & Hughes had not communicated its election before the due date for a February claim, and the right of election had accordingly expired.  Failure to serve a payment schedule was not in itself unequivocal notice, nor were previous warnings of the potential consequence of a late claim effective notice in respect of the February claim.  The Court emphasised that a right to make an election may be taken away, if it is not exercised within a reasonable time.

The Court of Appeal upheld the High Court’s refusal to set aside the statutory demand.  Hesketh Henry acted for Complete Siteworks in the proceedings.

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