POINTS OF INTEREST
- Requirements for a valid payment claim under a construction contract, where it does not provide expressly for a contract price, labour rates or prices for materials and services, are more onerous.
- There have been some limited developments in relation to the new retention money regime, including a clarification that it will only apply to contracts entered into after 31 March 2017.
Requirements for a valid payment claim under a construction contract
Ensuring a payment claim meets the requirements of the Construction Contracts Act 2002 is key to obtaining the protection of the ‘pay now, argue later’ provisions under the Act. Where a construction contract does not provide expressly for a contract price, labour rates or prices for materials and services, the requirements for a valid payment claim may be more onerous than where the contract price or other prices are agreed.
In such cases, the Court of Appeal has observed that the payee must indicate to the payer an objectively understandable basis on which the value of the work claimed is said to be ‘reasonable’. Simply setting out general figures without some reference to ascertainable factors in their calculation will often not be enough as a payer must be provided with sufficient information to understand the manner in which a claim has been calculated. The payer needs enough information to be able to prepare a payment schedule, which complies with the obligation under the Act, to indicate the reasons for any difference between the amount claimed and the amount the payer considers ought to be paid.
The Court held that in circumstances where the price of construction work has not been agreed from the outset, an invoice for a progress payment which simply specified a single figure for labour costs without a reference to either the number of hours worked or hourly rates, was not a valid payment claim under the Act.
C J Parker Construction Ltd v Ketan  NZCA 3
Re-serving an old payment claim does not (necessarily) trigger the need to respond within 20 working day period
The High Court has previously acknowledged that a party could resubmit prior payment claims by repeating them in subsequent payment claims. However, it was recently held that re-serving old invoices with their original dates implied (in the particular facts of the dispute) that such invoices were provided as copies of an antecedent payment claim rather than a fresh one. This would trigger the need to respond with a payment schedule within a 20 working day period under the Construction Contracts Act 2002.
Auckland Electrical Solutions Ltd v Warrington Group Ltd  NZHC 2245
New retention money regime only applies to contracts entered into after 31 March 2017
Under the Construction Contracts Amendment Act 2015 (CCAA), retention money withheld under commercial construction contracts will be required to be held on trust from 31 March 2017. This is intended to better protect retention money owed to contractors and subcontractors in the event of a business failure.
The Regulatory Systems (Commercial Matters) Amendment Bill (RSB) (a copy of which can be found here) passed its third reading on 23 March 2017 and is currently awaiting royal assent. The RSB clarifies that the retention money provisions of the CCAA would apply only to commercial construction contracts entered into or renewed on or after 31 March 2017. It would also allow a payer who withholds retention monies by obtaining a financial instrument, such as insurance or a payment bond, to provide third-party protection of retention money, to comply with the new regime. The RSB prescribes certain requirements for such an instrument, although it seems unlikely that this option will be popular.
We also note that, although the CCAA anticipated that regulations would be issued to clarify the operation of certain aspects of the Act, MBIE has stated that no such regulations are currently proposed. This means, amongst other things, that the retention money provisions will apply, regardless of the amount of money involved, to ensure payment for small subcontractors is protected.
The CCAA requires holders of retention money to hold retention money in trust and to keep proper accounting records (although commingling of monies is allowed). As the CCAA is silent on this point, it is understood that a trust over retention money is not automatically created. This means that holders of retention money must create a trust over retention money and this trust must be properly documented. Holders of retention money will want to engage with their banks to ensure that in creating a trust to comply with the new regime, they are also meeting their obligations under their general security agreements, as well as complying with any loan to value ratio restrictions.
Given the uncertainty and increased compliance costs associated with the new regime, there is speculation we may see a move away from the use of retentions towards a greater use of performance bonds.
If you would like practical guidance on complying with the new regime, please click here to email Ed Crook.
Court of Appeal to consider issues relating to NZS3910 interpretation
In an upcoming case, the Court of Appeal is to consider a number of issues on the interpretation of the New Zealand Standard Conditions of Contract for Building and Civil Engineering Construction, NZS3910:2003. Issues for the Court include:
- whether the contractor’s breach had to be repudiatory in nature before the contractor would be disentitled from terminating the contract;
- whether the contractor had validly terminated the contract under clause 14.3.3 (which allows for suspension of the contract works before termination) or, if applicable, the Contractual Remedies Act 1979;
- whether, on a proper interpretation of clauses 14.2.4 and 14.2.5, the principal can recover the additional cost of completion prior to completing the contract works; and
- whether the principal can recover the additional cost of completion without first having its claim admitted or determined as to liability and quantum.
Custom Street Hotel Ltd v Plus Construction NZ Ltd  NZHC 2011
Custom Street Hotel Ltd v Plus Construction NZ Ltd  NZHC 2934
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