Most Read Contributor in New Zealand, September 2016
If a construction contract gives you a choice whether to
exercise a contractual election, then you need to communicate
clearly your decision to affected parties like subcontractors.
Otherwise the Court may take the matter out of your
That is the lesson from a recent High Court
case1 about the construction of a supermarket
carpark in Christchurch.
The subcontractor, CSC, had submitted five payment claims to the
head contractor, Watts & Hughes. Four of those claims had been
received after the "Due Date" of the 25th of each
Under clause 5(c) of the Master Builders Standard Form of
Subcontract, Watts & Hughes had a discretion to treat each late
claim as if it had been received on the 25th of the following month
(the next Due Date), postponing its obligation to issue a payment
schedule by a month.
In each of the first four instances, Watts & Hughes had
chosen not to do this and had treated the claim as having been
received on time. It had then issued a payment schedule to CSC
within the required 22 working days.
Watts & Hughes had, however, warned CSC about the possible
consequences under the subcontract of submitting late payment
Payment claim No. 6
Payment claim No. 6 (due on 25 February 2014) was treated
differently. That claim was also not submitted on time – it
was received by Watts & Hughes three days late on 28 February
2014. But this time, Watts & Hughes did not provide a payment
schedule within 22 working days of 25 February 2014. Nor did it
make the claimed payment to CSC of $306,077.23.
CSC served a statutory demand on Watts & Hughes to recover
the outstanding amount.
Watts & Hughes applied to set the demand aside saying it was
entitled to treat the due date for receipt of payment claim No. 6
as being 25 March 2014, even though it had not formally
communicated this decision to CSC.
How the Court saw it
The issue for the Court was whether Watts & Hughes had an
obligation formally to advise CSC of its decision to activate
Watts & Hughes argued that no formal communication was
required as the claim had been submitted late and it had warned CSC
about the consequences of doing so on numerous past occasions.
The relevant clause of the Master Builders Standard Form
"Where a Payment Claim is
received after the claim Due Date, the Contractor may at its sole
discretion elect to treat that Payment Claim as having been
received (and having been due for receipt) on the next claim Due
The Court referred to various authorities about the doctrine of
election and found the following three principles to be the most
relevant to the case:
communication of the decision to the other party is an
essential part of a valid election
an election may in some cases be imputed by law, irrespective
of the electing party's actual intention, and
a right of election may be lost if it is not exercised in a
The subcontract did not automatically deem a late progress claim
to have been received on the next monthly date for submission. It
gave Watts & Hughes a choice. Further, both the subcontract and
the Construction Contracts Act provide mechanisms whereby
subcontractors can recover outstanding payments in situations where
contractors fail to respond to their payment claims.
It would have been improbable that the framers of the Standard
Form of Subcontract intended that Watts & Hughes did not need
to communicate their election to CSC. Subcontractors are entitled
to know where they stand on any given date and whether or not
contractors owe them money.
The practical effect of this was that, by failing to communicate
with CSC before the applicable date for timely claims, Watts &
Hughes had lost the ability to treat the claim as submitted in the
next monthly "round".
Accordingly, Watts & Hughes failed in their bid to set aside
the statutory demand and were ordered to pay the outstanding amount
in full within seven days.
Clear communication is essential
The judgment demonstrates that parties must clearly communicate
the choices they make to exercise (or not) contractual elections to
affected parties like subcontractors. Such communications can be by
way of email, written correspondence or telephone.
A failure to communicate the outcome of elections runs the risk
that the Court will take the matter out of the electing party's
hands, and deprive them of their choice.
1Watts & Hughes Construction Limited
v Complete Siteworks Company Limited  NZHC
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