One of the main purposes of the Construction Contracts Act 2002 (Act) is to facilitate regular and timely payments between parties. The Act provides a standardised mechanism for dealing with payments through its payment claim and payment schedule regime. Amendments to the Act mean the payment claim and payment schedule regime applies to both residential and commercial building work. Therefore, it is more important than ever that the clients, contractors and subcontractors understand the requirements and consequences of payment claims and payment schedules.
Requirements of a payment claim
The requirements for a valid payment claim are set out in section 20(2) of the Act. A payment claim must:
- be in writing;
- contain sufficient details to identify the construction contact to which the payment relates;
- identify the construction work and relevant period to which the payment relates;
- state a claimed amount and due date for payment;
- indicate the manner in which the claimed amount was calculated;
- state that the claim is made under the Act; and
- be accompanied by the prescribed form which outlines the process for responding to that claim and provides an explanation of the consequences of not responding and not paying the claimed or scheduled amount in full.
These requirements are strict, and the courts have been ready to strike down payment claims if they fail to contain the exact details required. For example, in Auckland Electrical Solutions Ltd v Warrington Group Ltd a payment claim was held to be invalid because it was unclear whether the claim contained the correct reference to the Act.
Requirements of a payment schedule
If the payer disputes an amount is properly due then they must respond with a payment schedule under section 21 of the Act. A payment schedule must:
- be in writing;
- identify the payment claim to which it relates; and
- state the amount the payer is willing to pay (called the "scheduled amount").
If the scheduled amount is less than the amount in the payment claim then the schedule must indicate:
- the manner in which the payer calculated the scheduled amount;
- the payer's reason or reasons for the difference between the scheduled amount and the claimed amount; and
- in a case where the difference is because the payer is withholding payment on any basis, the payer's reasons for withholding payment.
It is also crucial that a payer ensures that they pay the scheduled amount by the due date for payment.
What happens when a payment schedule is not provided and the claimed amount is not paid?
A payer is liable to pay the full amount stated in a valid payment claim if no payment schedule is provided within the timeframe specified in the construction contract (or within 20 working days if no timeframe is specified). If there is no payment made by the due date for payment then:
- the outstanding amount becomes a debt that can be recovered;
- the actual and reasonable cost of recovery are also payable by the payer; and
- notice of intention to suspend construction work can be served on the payer.
In the event that a payer disputes a claimed amount they must ensure they respond using a valid payment schedule within the allocated timeframe. The consequences for a payer not meeting these requirements are reasonably severe, the payment claim will become a debt due and the ability to withhold payment is lost.
It is important to get payment claims and payment schedules right. However, people often fall short and serve payment claims or schedules without the correct form and content, or worse, they are not even aware of the requirements or consequences.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.