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Following the departure from the fundamental principle of the Construction Contracts Act 2002 (CCA) “pay now argue later” in South Pacific Industrial Ltd v Demasol Ltd [2021] NZHC 3597, the Court of Appeal in October 2022 clarified that parties to construction contracts must either respond to payment claims with valid payment schedules or be prepared to pay the claimed amount, even if that amount is capable of being disputed. If no payment schedule is provided the claimed amount becomes a debt due.[1]
Since the Court of Appeal’s decision in Demasol, there have been three recent decisions from the High Court regarding the ‘pay now argue later’ principle. In summary, the payment provisions mandated by the CCA are clear. The industry can expect the Court to uphold these strict principles and “pay now, argue later”.
Dem Home Ltd v New Gate Ltd [2023] NZHC 2709
Dem Home Ltd v New Gate Ltd closely follows the orthodox principles underpinning the Court of Appeal’s decision in Demasol.
Dem Home Ltd (Dem Home) engaged New Gate Ltd (New Gate) to build five terrace houses in Point England. Dem Home purported to cancel the contract for breaches by New Gate before construction was complete. New Gate issued a payment claim for $242,500.50, however Dem Home did not respond with a payment schedule. As a result New Gate served a statutory demand on Dem Home for $242,500.50. Dem Home applied to set aside the statutory demand claiming there was a substantial dispute as to whether the amount claimed was a debt due (and owing).
Dem Home attempted to challenge New Gate’s entitlement to issue the payment claim, but the Court held (following Demasol) that because a valid payment claim had been issued this challenge needed to have been raised in a payment schedule (and it had not been). Dem Home’s application to set aside the statutory demand was dismissed.
Keith Bullock Contracting Ltd v Genesis Residential Ltd [2023] NZHC 2887
In Keith Bullock Contracting Ltd v Genesis Residential Ltd Associate Judge Skelton identified a difficulty with Keith Bullock Contracting Ltd’s (KBC) claim for summary judgment, in relation to the “pay now argue later” principle.
Genesis Residential Ltd (GRL) engaged KBC to carry out bulk earthworks at a residential development in Lower Hutt. Issues arose and both parties sought to cancel the contract. KBC commenced proceedings against GRL seeking summary judgment in respect of three payment claims and an invoice for retentions. For payment claim 16 totalling $1.2 million, KBC sought summary judgment on the basis that it was a debt due under the CCA. GRL issued a payment schedule, certifying an amount payable of $773,758. As GRL did not make payment of $773,758, KBC sought to enforce payment as a debt due.
The key issue was whether the payment schedule was served in time to comply with s 22 of the CCA. It was issued four days later than the 12-day window mandated by the contract. GRL argued that if the contract was already terminated, the 12-day period for payment schedules no longer applied and GRL could follow the default 20 working day window under the CCA. Ultimately the Court decided this would need to be determined at trial and dismissed KBC’s summary judgment application relating to enforcement of payment claim 16.
Although well-reasoned, this decision clashes with the “pay now argue later” principle because GRL managed to avoid paying anything in the interim for payment claim 16, despite acknowledging by its payment schedule that it owed a minimum of $773,758. KBC appealed the decision. In the application for leave to appeal (see Keith Bullock Contracting Ltd v Genesis Residential Ltd [2024] NZHC 105) KBC said that the Court had allowed GRL to avoid the strict “pay now argue later” regime of the CCA through its own default. It also said the delay in enforcement was causing significant financial strain. Associate Judge Skelton was not satisfied that KBC had identified an arguable error of law in relation to the dismissal of its claim for summary judgment. However, recognising the importance of the issue he granted leave to appeal noting the precedential value and importance in relation to the effect of termination on the payment regimes under NZS3910:2013, the CCA, and the application of the Court of Appeal’s decision in Demasol.
Triple Connection Limited v Concept Builders Queenstown Ltd [2024] NZHC 1049
In May 2024 Associate Judge Paulson upheld the “pay now argue later” principle. In this case Triple Connection Ltd (TCL) applied to set aside a statutory demand served by Concept Builders Queenstown Ltd (Concept). The debt arose from an adjudicator’s determination under the CCA, where the adjudicator awarded Concept approximately $130,000 in unpaid invoices.
Concept’s grounds for applying to set aside the statutory demand were that:
- There is a high degree of likelihood that Concept would not be able to repay the interim award if a subsequent determination goes in TCL’s favour; and
- TCL has a good arguable case that it would succeed on a substantive claim.
Contrary to TCL’s case, Associate Judge Paulson found this was not an exceptional case. TCL was found to owe Concept a sum in adjudication proceedings under the CCA in which it fully participated, conducted by an expert adjudicator and resulted in a fully-reasoned decision. He noted that while TCL may find this harsh, it is the result mandated by the scheme of the CCA.
Our Comment:
Following Demasol the High Court has attempted to resolve payment disputes by applying the sudden death regime consistently with that Court of Appeal decision. Dem Home Ltd v New Gate Ltd shows that parties can expect a consistent approach where a valid payment claim is not responded to with a valid payment schedule. Triple Connection Ltd v Concept Builders Queenstown Ltd also upholds the fundamental principles underlying the CCA of “pay now, argue later” and maintains confidence in the enforceability of adjudication decisions.
While Keith Bullock Contracting Ltd has identified fresh factual difficulties that may arise in relation to the “pay now argue later” operation of the CCA (at least following termination), the CCA could not reasonably be expected to surpass all enforcement challenges. It is also helpful for the industry to see the Court analyse different factual scenarios (such as consideration of termination), as no two situations are identical. The substantive decision from the Court of Appeal can be expected to provide further clarity on this issue.
Industry participants must take note of the importance of ensuring that contractual timeframes for issuing payment claims and payment schedules are clear in the construction contract and strictly adhered to if they wish to avoid the “sudden death” CCA payment regime.
If you have any questions about the payment regime under the CCA, 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.
[1] See Hesketh Henry article A return to orthodoxy: Demasol Limited v South Pacific Industrial Limited affirms the CCA’s “pay now, argue later” principle | Hesketh Henry.
