Construction Contract Claims – Getting it right

To avoid these costly enforcement proceedings, anyone involved with a construction contract should familiarise (or re-familiarise) themselves with the Act’s key requirements for payment claims and payment schedules.

Payment claims

The statutory requirements for a payment claim are set out in section 20 of the Act.  A payment claim must:

• be in writing;
• contain sufficient details to identify the construction contract to which the payment relates;
• identify the construction work and the relevant period to which the claim relates;
• state a payment amount and due date for payment;
• indicate the manner in which the payee has calculated the claimed amount; and
• state that it is made under the Act.

The payee (party making the claim) is also required to provide the payer (party receiving the claim) with an outline of the process for responding to the claim and detailing the consequences of non-compliance with the Act.  There is a prescribed form that the payee has to use to convey this information.

The requirements of payment claims are mandatory and cumulative.  This strictness reflects the draconian consequences of the Act.  The Act operates a “sudden death regime” whereby any undisputed payment claim becomes a debt due.  Although this does not stop the payer from subsequently raising a dispute with the payee, it means that the payer has to pay the payee or face likely debt recovery action.

Although the Courts have repeatedly noted that “technical quibbles” will not invalidate payment claims, it is often seemingly minor errors or omissions that do.  Examples include:

• Issuing a payment claim to a wrong party – This can occur relatively easily, for example, where there are related companies with similar names.
• The very simple failure to write “This is a payment claim under the Construction Contracts Act 2002” on an invoice.
• In August 2019 the High Court set aside a statutory demand where the payee had failed to state a date due for payment on the claim and there was no formula by which the payer could work that out.

More complicated arguments might arise around whether or not a payee has provided the payer with sufficient information about how the claim has been calculated.  Generally, however, there has to be sufficient information provided to the payer so that the payer can understand the claim so as to be able to effectively respond to it.

Payment schedules

Section 21 of the Act sets out the requirements for payment schedules (which are the response documents to payment claims).  There is no set form for a payment schedule but it must be in writing, identify the payment claim that it is responding to and state a scheduled amount – that is the amount the payer agrees to pay.  If that scheduled amount is less than the sum claimed, the payment schedule has to show how the scheduled amount has been calculated, the payer’s reasons for the difference and, where the payer is withholding payment, their reasons for withholding payment.

If the payer agrees to pay a scheduled amount to the payee, it has to pay that sum.  That scheduled amount is also an undisputed debt that the payee can enforce in the event of any subsequent failure to pay.

Aside from ensuring that the content of a payment schedule meets the Act’s minimum requirements, the crucial issue for the payer is responding in time.  Often the construction contract will specify when a payment schedule is due.  If the construction contract is silent on this, however, then the compliance date will be 20 working days from the date of service of the payment claim.  A failure to respond to a payment claim within time will mean that the payer has to first pay the sum claimed and then argue about any dispute raised by issuing its own legal proceedings.

If a payment claim is not responded to in time, or a payment schedule is defective, the enforcement steps the payer is likely to use are the issue of statutory demand if the payer is a company, or summary judgment proceedings if the payer is an individual.  In any enforcement proceeding the payer is prevented from raising a counterclaim, set off or cross demand unless the payer has a judgment for a liquidated sum, that is not disputed, which can be set off.

Standing back it is very important for both parties to a construction contract to understand the Act’s processes and to use them properly.  In a disputed situation obtaining payment, or withholding payment, as the case may be, can be a crucial step in controlling the overall outcome of the dispute.  More often than not winning a dispute about payment has the practical effect of ending the dispute.  The lesson from the numerous cases appearing in the Court is “if in doubt get advice”.

Karen Shaw is able to provide you with specialist advice on the technicalities of the Act to ensure that you are in the best position to recover amounts due to you, or to defend a claim against you.

This article is current as at the date of publication and is only intended to provide general comments about the law. Harkness Henry accepts no responsibility for reliance by any person or organisation on the content of the article. Please contact the author of the article if you require specific advice about how the law applies to you.