Construction Contracts - To Pay or not to Pay - A Dukesons Business Law Update

July 2016

This update isn't legal advice - if you want legal advice on any business law or commercial law issue, please contact me. I'm a contract lawyer in Auckland.

For those who don't know, where there is a construction contract, there is a payment regime under the Construction Contracts Act that has strict consequences for any client who doesn't comply with it. What contract lawyers will say is that while the regime is basically a simple one, it still gives rise to disputes, sometimes because of a lack of understanding of the regime.

Say there is a building contract. The builder will present the client with a payment claim. It will set out what the builder claims as payment for work done and must contain the information required by the Act. The client has 20 working days to pay the claim or, if they dispute the amount claimed, to provide a payments schedule. The client's payment schedule must set out what amount they consider to be payable and any other information required by the Act. If the client issues a payment schedule, then the client can have the dispute referred to adjudication (like arbitration).

It the client doesn't pay and doesn't provide a payment schedule within the prescribed time, the builder can recover the amount claimed as a debt - in those circumstances, the Act requires the client to pay the whole amount claimed by the builder. Amongst other things, that means that where the client is a company, the builder can serve a statutory demand on the company as a precursor to making an application to have the company liquidated.

If the builder serves a statutory demand and later applies to liquidate the client company, the company can't argue set offs and counter claims (though the company could still raise some matters that go to the very core of the matter like an argument that the builder didn't issue a valid payment claim). So "playing the game" by the rules is crucial.

I have had clients even with some experience in relation to construction contracts pay the price for not complying with the payment regime set out in the Act. The purpose of the payment regime is to provide a quick and simple payment mechanism, enabling any disputes to be identified early.

A client who fails to follow the correct procedure may have to pay and separately, issue proceedings to recover any over payment due to a valid grievance that they have.

Please contact me if I can help you with any business law or commercial law issue.

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