By Maria Cole
A decision issued by the High Court last year caused a “head in hands” moment in the construction industry in relation to the payment claim regime. The High Court set aside a statutory demand which had been filed to enforce a payment claim as a debt due even though no dispute had previously been raised by way of a valid payment schedule.[1] The Court of Appeal has now overturned that decision and confirmed that if a party to a construction contract wants to challenge a payment claim, they must issue a valid payment schedule.[2] Let’s look at what happened.
Background
Demasol Ltd (“Demasol”) and South Pacific Industrial Ltd (“South Pacific”) entered into a construction contract for Demasol to carry out works at an old gas facility. The works involved demolition of a large bin tank which contained asbestos. The quoted price for the works was $100,000.00 but excluded the asbestos we cannot see. The works were carried out but took longer than the parties expected. Demasol claimed the scope of the works had increased during the course of the contract. It sought payment for the additional works, claiming them as variations to the contract. It served two payment claims between January and March 2021, totalling just over $390,000.00.
On receipt of service, South Pacific did not pay the claimed amounts, or issue payment schedules under the CCA indicating it disputed the claimed amounts. Instead, in April 2021 it wrote to Demasol advising it rejected all but one of the seven variations in payment claim 2 and asserted it had its own claims against Demasol for non-performance.
There was to-ing and fro-ing between the parties and the end result was that in May 2021, Demasol served a statutory demand on South Pacific for just under $305,000.00.
South Pacific responded by filing an application in the High Court, seeking to set aside the statutory demand on the basis the payment claims were invalid. By the time the matter came before the High Court, payment claim 1 had been paid in full.
A rabbit hole moment…
The Associate Judge was persuaded by South Paficic to look into the merits of its defence, being that the payment claims issued by Demasol were not valid under the terms of the contract. After looking into the substance of both payment claims, the Associate Judge found that it was reasonably arguable that payment claim 2 was not valid because much of the amount claimed related to variations that were arguably not authorised. The Associate Judge then found that in any event, it was reasonably arguable that both payments claims were invalid on the basis that they were not issued in accordance with an expressly agreed term which provided for a single payment on completion.
On that basis, the Associate Judge set aside Demasol’s statutory demand.
Demasol appealed.
The Court of Appeal to the rescue!
Fortunately, the Court of Appeal was having none of it. It was unanimous in finding that the Associate Judge was in error when she looked into the terms of the contract to decide whether Demasol was entitled to serve payment claim 2.[3] The Court of Appeal said:
[41] The Associate Judge sought to consider the contract between Demasol and SPI to determine whether Demasol was entitled to serve the claim. In our view, she erred in undertaking this enquiry. Section 20(1) of the CCA deals with when a payee may serve a payment claim. If the construction contract provides for the matter, a payment claim can be served at the end of the period specified in or determined in accordance with the contract. If the contract does not provide for the matter, in the case of a progress payment, a payment claim can be served at the end of the relevant period referred to in s 17(2) — that is, the period commencing on the day of the month on which the construction work was first carried out and ending on the last day of that month, and each month thereafter. In the case of a single payment expressly agreed under s 14(1)(a), if the contract does not provide for the matter then a payment claim can be served following the completion of all of the construction work to which the contract relates.
[42] There was considerable debate before the Associate Judge as to which of these various provisions applied. We are not persuaded that it makes any difference for present purposes. If SPI wished to contend that Demasol was not entitled to serve a payment claim on it when Demasol did so, that was a point it could and should have taken by way of response in a payment schedule. However, SPI failed to file a payment schedule, and instead sought to raise the issue, along with others, only when Demasol took steps to enforce the debt in reliance on s 23(2)(a) of the CCA.
Once it had reached this conclusion, the Court proceeded to look at payment claim 2. It found the claim met each of the statutory requirements under section 20 of the CCA for a valid payment claim. It noted that a payer becomes liable to pay the claimed amount if they do not serve a payment schedule on the payee within the time limit specified in the CCA.
South Pacific became liable to pay the claimed amount when it failed to provide a payment schedule by the due date. Demasol was therefore entitled to recover the unpaid portion of the claimed amount as a debt due in any court, plus costs.
In closing, the Court of Appeal stated that South Pacific was not shut out from the CCA’s adjudication processes or from other proceedings. It could prosecute the various disputes it had put in issue notwithstanding payment to Demasol. It simply had to pay now and argue later.[4]
Conclusion
The purpose of the CCA is to keep cash flowing and the Court of Appeal has reconfirmed that loud and clear. If a party to a construction contract is served with a payment claim which it wants to dispute, it has to follow the procedures set out in the CCA. It must provide a payment schedule that sets out what it will pay, what it won’t pay, and explain why. It then needs to pay what it agrees is owing. If the claimant wants to argue the toss, it can head off to adjudication to settle things on the merits of its claim.
[1] South Pacific Industrlal Ltd v Demasol Ltd [2021] NZHC 3597.
[2] Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480.
[3] The Court of Appeal only considered payment claim 2, as payment claim 1 had been paid in full.
[4] Para [57].