Facts.

On 31 July 2018 the Applicants were appointed the receivers of the respondent, Ebert Construction Limited (EC), which was a large construction company.

The Construction Contracts Act 2002 (CCA) provides that in relation to commercial construction contracts entered into after 31 March 2017, a head contractor (i.e. EC) must hold sums required to be paid to a subcontractor (retentions), on trust for the subcontractor. This was implemented as a response to head contractors using subcontractor’s retentions as working capital, leaving subcontractors as effectively unsecured creditors for the retention amounts.

EC had a Retention Account with a balance of approximately $3.6 million. However, at the date of receivership, EC owed its subcontractors approximately $24.5 million, of which $9.324 million was subcontractor retentions.

The general practice prior to 31 March 2017 was that EC would pay out subcontractor invoice after deducting amounts to keep for retentions, but would keep those deductions in their general account.

Subsequent to 31 March 2017, EC utilised a computer software to calculate the amount of monies to be held on retention, and the amount to be kept in their general account. However, in June 2018, the computer system malfunctioned, which led to the retention amount not being placed in the retention account, and subcontracts being incorrectly identified.

Legal issues.

There were three main legal issues in this case, namely:-

1. Whether the Applicants should be appointed by the Court as receivers to manage and distribute the Fund?
2. Which subcontractors have a claim to the Fund and on what basis?
3. How to distribute the Fund if, as expected, there is a shortfall?

Appointment of applicants.

The Court held that the Applicants were entitled to administer the Retention Fund based on the Court’s inherent jurisdiction to appoint receivers and managers, for the purpose of distributing retention funds. It held that if the receivers were not appointed, this would mean that the subcontractors would be affected in that they would not be able to recover any of what they were rightly owed.

Subcontractor’s claim/how to distribute fund.

There were three months of contentious retention funds (May, June, July 2018), and therefore, it had to be determined whether the subcontractors with invoices rendered for these months had a claim in the retention fund. In order to establish that a trust had been created/that the subcontractor for each specific month had a claim in the fund, the Court had to be satisfied of three certainties:-

1. Intention to create a trust;
2. Subject matters of the trust; and
3. Object or beneficiaries of the trust.

With regard to the retentions that were calculated but not transferred to the fund, the Court held that EC had no intention to transfer monies, as these would have been transferred had there been an intention to do so. With regard to the retentions that were uncalculated and not transferred to the fund, the reasons are the same as above, in that it lacked the element of intention. With regard to retentions that were reconciled and transferred to the fund, all elements could be said to be satisfied, and therefore these subcontractors did have an interest in the fund. With regard to the wrongly classified subcontractors, although EC intended to pay the funds into the retention account, the funds were never transferred. The difficulty was that while EC intended to pay the funds, they were never actually transferred into the account.

The Court agreed that as much as 75% of the retention fund could be distributed on a pari passu basis to the qualifying subcontractors. It is noted that even though most of this fund was distributed, around $21 million will still remain owing to the subcontractors. Overall, the retention provisions have achieved little in this particular instance in terms of protecting the subcontractors interests.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Facts. 

• 7 February 2016 Anderson and Volka (“the Owners”) entered into a written construction contract with Epsom Renovations Limited for work to be done to their Logan Terrace property.
• The nature of the work was rear site excavations, construction of retaining walls, internal works including installing a new stairwell, creating storage area, replacement windows and deck.  The estimated cost of these works was $453,200 subject to adjustments.
• The work commenced on 15 February 2016 and as at 31 May 2016 it was only 50% complete.  At this date, Epsom Renovations sold its business to McDowall Renovations Limited, absent any documents novating or assigning the building contract.
• Building work thereafter progressed for a short time before a dispute arose between the parties.  Anderson and Volka disputed their liability to pay the outstanding invoices and McDowall suspended work on the site until its outstanding invoices were paid.  The six invoices submitted by McDowall but not paid amounted to a total of $56,930.32.
• Anderson and Volka initially maintained that not only were they not liable to meet the invoices but that they were entitled to a counterclaim in excess of $100,000.
• On 16 November 2017 an Adjudicator was appointed, and by way of general summary these issues were referred to adjudication:-

i)                   Was McDowall entitled to be paid its $56,930.22?

ii)                 Had the Owners established its counterclaim of $47,161?

iii)               Who was liable to pay the Adjudicator’s fees and other legal expenses?

• The adjudication was determined on the papers and was issued on 31 January 2018.  The key finding was that the invoices rendered by McDowall were not responded to by method of compliant payment schedules, and these became payable by operation of the deeming provisions of the Construction Contracts Act 2002.  As regards the counterclaim brought by the Owners for delay, he denied this claim on the basis that delay had been raised late in the contract, and that they had allowed the contract to be extended by allowing the interior works to be started at or around the same time (I take it he meant at the time the delay was raised by them.)  The Adjudicator did find in favour of the Owners in terms of two minor defective works and ultimately ordered that they pay to McDowall the sum of $37,728.97 (less the deposit held) plus legal fees and interest of approximately $8,000.

The Owners sought judicial review of this decision primarily upon the basis that the Adjudicator had acted outside of his jurisdiction by deciding the McDowall claim on the basis of a non-responded payment claims.  The Owners argued that this aspect was never part of the matters that were referred to him for determination.  The Owners argued that they had never been afforded the opportunity to put submissions to the Adjudicator on this point nor the corollary point of whether in fact the invoices were in fact compliant payment claims for the purposes of section 20 of the Act.  In addition the Owners argued that:-

• he had failed to take into account relevant considerations;
• had taken into account irrelevant considerations;
• failed to give coherent and adequate reasons for his findings; and
• failed to make findings on the important issues that were raised for determination.

High Court findings. 

As a preliminary point, Justice Davison noted that the Owners faced a high legal hurdle and must demonstrate that the adjudicator had made a significant and substantial error of law or that there had been a fundamental and substantial breach of natural justice to warrant the Court exercising its discretion to grant judicial review relief.

He then found that the Adjudicator had never been asked to determine whether in fact the Owners had ever responded to the invoices in the form of compliant payment schedules, which was outside of his reference.  He noted further that the principles of natural justice had been seriously breached, in that neither party had been given the opportunity to prepare submissions on this aspect.  Furthermore, this had a compounding effect in that he then did not gone on to decide on whether in fact McDowall had completed the work represented by the invoices and was entitled to payment.

In addition he found that the Adjudicator’s reasons were inadequate and, in some instances, cryptic, and that he had in fact taken irrelevant considerations into account in making his decision.  In addition he had failed to take into account relevant evidence of a building expert as to time delays and building costs on this project.

The Adjudicator’s determination was quashed and the Owners were entitled to an award of costs.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

The background factual matrix to this proceeding was a leaky building repair contract on a multi-unit complex that had gone well over budget.  Naylor Love was the contractor, and it had successfully taken the Body Corporate through two adjudication determinations.  These two determinations left the Body Corporate owing near on $4,000,000.00.

Ultimately the adjudication determinations were only interim decisions as the construction contract referred matters in dispute to arbitration for final determination.  In fact, despite the two determinations, the Body Corporate had issued arbitration proceedings as against Naylor Love.

The Body Corporate openly admitted the Court that its purpose in bringing the judicial review proceedings was to avoid paying the determinations whilst arbitration proceedings were pending.  Having been prepared to concede that point, the Body Corporate argued the Court ought to intervene by way of judicial review for the following reasons: -

• Aspects of the dispute ruled upon by the adjudicator were time barred by the contract such that they were no longer capable of dispute;
• The Adjudicator had ruled on disputes that were not referred to him;
• The contract precluded the Adjudicator from deciding upon rate escalation;
• The subsequent Adjudicator had wrongly considered issues decided in the earlier adjudication (res judicata), and was not prepared to reconsider these issues.

The thrust of this High Court judgment was that it would be reluctant to allow judicial review proceedings to upset the philosophy of the Act.  Its intervention ought to be rarely used.  Early in the decision of Brewer J he quotes this passage as setting out the difference between appeal and judicial review.

“Review is concerned with the legality of the decision, whether it was reached “in accordance with law, fairly and reasonably”.  A reviewing court must address the process and procedures of decision-making and ask whether the decision should be allowed to stand.  Appeal, in contrast, entails adjudication on the merits and may involve the court substituting its own decision for that of the decision-maker.  “

Whilst the Court was willing to entertain judicial review of a determination, it was weary of the fact that the matters in dispute in this instance were to be resolved in another forum.  Accordingly, it ruled that the Court would be sparing in the exercise of its discretion.  It then cited the Court of Appeal decision of Rees v Firth which said very much the same thing about not allowing the review process to cut across the regime of the Act.  The Court quoted this telling segment from the Court of Appeal decision:-

“[27} The Courts must be vigilant to ensure that judicial review of adjudicators’ determinations does not cut across the scheme of the CCA and undermine its objectives.      In principle, any ground of judicial review may be raised, but an applicant must demonstrate that the court should intervene in the particular circumstances, and that will not be easy given the purpose and scheme of the CCA.  Indeed, we consider that it will be very difficult to satisfy a court that intervention is necessary.”

The Court then turned its attention to each of the grounds put forward by the Body Corporate which it argued was reviewable by the Court.  On every count, the High Court ruled that the proper process for the final determination of the point was in the concurrent arbitration proceedings.  Or put another way, these were arguments that were properly dealt with on appeal rather than by way of review.

In respect of the argument that the second Adjudicator was wrong to consider the prior adjudication as having already decided arguments put (res judicata (in latin)), he ruled that it would make no procedural nor statutory sense for the same issue to be repeatedly determined by adjudication

Accordingly, the judicial review proceedings failed on every ground, and this Body Corporate was left liable for not only the $4,000,000.00 worth of adverse determinations, but also High Court costs.

This is an important decision to start the new year because it demonstrates the Court’s unwillingness to fetter the pay now argue later philosophy of the Construction Contracts Act 2002.

Post note.  This article should not be considered or relied upon as legal advice, and at all times specific legal advice ought to be sought. 

The starting point for this discussion is the Construction Contracts Act 2002.  Section 80 sets out the usual methods of service such as personal service, last known business address or post.  However section 80(d) opens up the possibility of an alternative method of service as stipulated in the Construction Contract Regulations 2003.  In particular Regulation 9 provides that any document prescribed by the Act can be served by email or other means of electronic communication so long as Regulation 10 is adhered to.

Regulation 9(3) then addresses what must be established to prove service via method of electronic communication, and when service is to have effect.  It records that where the recipient has designated an information system for the purpose of receiving email or other electronic communications, it will be deemed received/served at the time the email or communication enters that information system, or alternatively at the time the email communication comes to the attention of the recipient.  It is to be noted at Regulation 9(4) information system is defined to mean a system for producing, sending, receiving, storing, displaying or otherwise processing emails or other electronic communications.

Regulation 10 states that a document may be sent by email or other electronic communication only if the information contained within the notice/document is readily accessible, and the recipient has consented to being served in that manner.  However Regulation 10(2)(b) goes on to explain that consent may be inferred from a person’s conduct.

Potentially the provisions contained within the Contract and Commercial Law Act 2017 which absorbed the provisions on electronic communications formerly included in the Electronic Transactions Act 2002 (now repealed) are of application, however they add nothing to the position under Regulations 9 and 10 of the Construction Contracts Regulations 2003.

So to summarise, the Construction Contracts Act 2002 and its Regulations contemplate service by way of email.  However service by email must be consented to either expressly or by route of inferred consent through a party’s conduct.  In order to establish service is complete, the email must have entered the recipient party’s designated information system or failing that, be brought to the attention of said recipient.

Is it still problematic proving service by email?

It is apparent though, that Regulation 9(3) creates a potential difficulty in terms of proving service of an email.  Whilst the sender may be able to establish that the email was sent to a specific email address, this is not the same as establishing that the email sent entered the recipient’s designated information system.  In particular there are a whole host of reasons why an email would not ultimately reach the prescribed information system.  By way of example there may be a problem with the host server where emails are not being dispersed or alternatively a virus scan may prevent an email/attachment being delivered.  This list of reasons why an email sent may not reach an intended recipient is not meant to be exhaustive.

Full proof method of service via email. 

It seems to me that in light of the potential difficulty with the interpretation of Regulation 9(3), the sender of a required document under the Construction Contracts Act 2002 is vulnerable to an argument to the effect that the said document was not received in my designated information system.  In order to prevent any possibility of such an argument on service being raised, the full proof method so as to prove service is for the sender to activate the “delivery receipt and “read receipt” tools in its own information system as it sends the email, and to print the confirmations when they arrive.  In this way, the proof requirements of email set out in Regulation 9(3)(a) and (b) are easily met.  It is noted that on some systems though the reader receipt tool can be controlled by the recipient.

It is not surprising therefore some construction contracts expressly require the additional steps (“read receipt” and/or “delivery receipt”) before service is deemed effective.  However these express terms contained in the contract would still be subject to the less specific wording contained in section 80 of the Construction Contracts Act 2002 and Regulations 9 and 10.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Background

The applicant, Lot 8 Investment Limited (Lot 8) applied to the High Court to have RPS Construction Limited (RPS’) statutory demand set aside, which claimed an amount of $54,067.07, in relation to the first and second payment claims issued by RPS.

RPS was contracted to do building work for Lot 8. RPS completed work between 28 November 2016 and 31 December 2016. RPS issued their first payment claim on 1 January 2017 for $48,034.58, and its second payment claim on 7 February 2017 for $32,494.24 (which was before the first payment claim was due, being 9 February 2017). The first payment claim was incorrectly required to be paid by 30 January 2017 but because the parties had not made a prior agreement as to the due date, the Construction Contracts Act 2002 (CCA) required that payment be made within 20 working days, being 9 February 2017.

The parties building contract was terminated on 31 January 2017.

The purpose of the CCA was recorded in the judgment as being to ensure that payees’ payment obligations are complied with, except for good reason properly authorised by the Act. A payment claim is to be paid in full unless a valid payment schedule is issued in response within 20 working days. The schedule is required to contain a sufficient explanation of why the payer is paying less than invoiced.

The payment schedules

On 9 February 2017, Lot 8 provided a single payment schedule in response to both of RPS’ payment claims (1 and 2). The payment schedule was issued within the correct amount of time as required by the Act, being within 20 working days from the date that the first payment claim was issued, and provided reasons for Lot 8’s payment of $34,796.63.

On 6 March 2017, Lot 8 emailed RPS with a second payment schedule in relation to the second payment claim which supported its first payment schedule. The latter payment schedule identified a recent discovery of boxing and foundation work which was incorrectly located and would need removing/replacing.

Submissions

RPS argued that Lot 8’s single payment schedule referred to both payment claims 1 and 2, stating that the Act requires a payment schedule to relate to only one claim. Because Lot 8’s single payment schedule referred to two payment claims, it was impossible for RPS to determine what amount was being paid by Lot 8 in relation to each payment claim.

Lot 8 in response submitted that the payment schedule was compliant because it was in writing, identified the payment claims to which it related, and indicated the amount for which it accepted liability. The email that the schedule was sent with further identified Lot 8’s complaints concerning defective work, poor workmanship and overcharging of RPS. 

The Court looked at the purpose of the CCA, being to prevent claims of poor workmanship without reason. Therefore, unless the payment schedule is compliant with section 21, liability for payment cannot be avoided. These rules were created for the purpose of protecting payees, and ensuring prompt and proper payment.

The Court then examined section 21 together with Loveridge Ltd v Watts & Hughes Construction Ltd, which implies that there should only be one payment schedule responding to each payment claim because of the confusion that would arise if this position were not complied with.

Findings

The Court held that section 21 does not prevent someone from using a single payment schedule to answer two payment claims so long it is delivered within the requisite time frame for responding, and it clearly identifies the work and cost issues affecting both payment claims. This is to ensure that the scope of any deduction claims are clearly shown and can be understood. Lot 8 was required to have responded to RPS’ first payment claim on 9 February 2017. It received RPS’ second payment claim on 7 February 2017. Because Lot 8 received the second payment claim within the initial 20 working days, it was allowed to issue a single payment schedule in response to both claims so long as it complied with section 21.

Lot 8’s payment schedule clearly referred to each payment claim separately, including its calculation of the valuation of works completed by RPS. The schedule provided sufficient details and reasons in response to the payment claim.

The Court further noted that a payment schedule is not required to provide a line-by-line assessment, or to link each aspect of challenge to an analysis of charges made, or to literally comply with section 21.

Accordingly the Court ruled that the payment schedule did comply with section 21 such that the amount sought in the statutory demand was not a debt due by operation of section 23 of the CCA, but rather a disputed amount. The statutory demand was therefore set aside.     

Postscript

This case is High Court authority recording that you can use one payment schedule for 2 payment claims so long as you  comply with the requirements of section 21 of the CCA.  

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Background/Dispute

Floorman Waikato Limited (F) was engaged by Mr McRae (M) to sand and coat his floors. F said that different options and pricing for flooring were discussed and said that he could not determine which option was best until he had seen the condition of the floor (solvent based polyurethane costing $5,535 and water based polyurethane costing $6,150). M said that the different options and prices were not explained to him, and he was told that it would cost him no more than $5,500. On this basis, M told F to go ahead with the work.

On completion, F and M inspected the floors, and although he did not communicate it at the time, M was dissatisfied with the overall quality of the job.

Shortly after the final inspection, M received an invoice for the total amount of $7,072.50 ($6,150.00 plus GST of $922.50). At the back of the invoice, information regarding payment claims and payment schedules were attached, which M did not read. There was further dispute surrounding whether/when F and M had contact after the invoice was issued. F’s solicitors demanded payment for which M replied saying that he would pay a portion of the invoice as he was dissatisfied with the quality of work.

District Court

In the District Court, Judge Ingram declined the application for summary judgment on two bases: that M had a defence to the claim as it was arguable that there was no contract between F and M; and further, that there were concerns surrounding the application of the Construction Contracts Act 2002 (CCA). Judge Ingram commented that the work undertaken by F, namely sanding and polishing was not a construction job and therefore did not fall within the ambit of the CCA.

Submissions

F raised three issues to determine on appeal, namely:

1. Is it reasonably arguable that there was no construction contract?
2. Whether floor sanding is within the jurisdiction of the CCA?
3. Is it appropriate for the court to exercise discretion to decline entering summary judgment if there is no defence to the Acts ‘pay now, argue later’ statutory regime?

Evaluation

Did the Judge err in finding that there was no concluded contract?

The High Court held that since both the parties had agreed for the work to be carried out, a contract existed between them. This was affirmed through M instructing and engaging F to undertake the work.  Although the price for the work was not decided at the time the contract was entered into, this made no difference in determining whether there was a contract between the parties, as the price would depend on the material chosen thereafter.

Did the Act apply to the work in question?

The High Court agreed with F that the CCA did apply to the works undertaken by F.   There was nothing in the CCA to suggest that it only applied to jobs of new work, or to jobs over a certain worth, or to jobs involving professional tradespeople.

Did Mr McRae have another defence to the claim?

M submitted a variety of other defences to the claim, including that F’s payment claim was not sufficiently itemised in terms of differentiating between the different materials used and labour costs. Section 20 of the CCA requires a payment claim to indicate the manner in which the payee calculated the claimed amount. In this case, F had calculated the invoice amount based on m2, which constituted an adequate calculation method.

Another issue raised by M was that he was never told that the payment schedule must be in writing. F’s payment claim contained all of the necessary information along with the words ‘please refer to the attached notice, (form 1 of the Construction Contracts Regulation 2003)’. M acknowledged that he did not read the notice. If he had, he would have seen the requirements of a payment schedule.

Did the judge err in exercising his discretion not to award summary judgment?

The High Court considered that Judge Ingram was plainly wrong by taking irrelevant matters into account, namely that the CCA should not apply to residential renovations. This view was contrary to the legislative intention which provides that the CCA applies to both residential and commercial construction contracts.

The purpose of the CCA is to ensure that people who perform construction works are not frustrated in recovering payment for their work done. It provides that where a claim is issued and no steps are taken by the party from whom the payment is sought, the payment claim amount is recoverable as a debt due and owing.

Result

The appeal was allowed, and judgment was granted in favour of F in the sum of $6872.50 plus District Court costs.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

The final details of the new retention regime have been revealed by route of the Regulatory Systems (Commercial Matters) Amendment Bill.  This passed its third reading on 24 March 2017 and should receive royal assent making it law on or about 31 March 2017.

Key aspects to the retention regime brought in by the Construction Contracts Amendment Act 2015 and this soon to be passed Act are as follows:-

• It will only apply to construction contracts entered into before 31 March 2017 unless renewed after that date;
• It will only apply to commercial construction contracts, and by this it is meant that it will not apply to construction contracts entered into with residential occupiers;
• No minimum amount has been specified such that the regime applies to any amount withheld or payment arrangement that acts as a retention;
• Retention money must be held on trust in the form of cash or other liquid assets that are readily converted into cash;
• Alternatively a complying financial instrument can be used for example bond or guarantee or a combination of liquid assets and complying financial instrument;
• A complying financial instrument must be issued by a licensed insurer or registered bank;
• It must be issued in favour of, or endorsed with the interest of, the payee, require the issuer to pay retention money to the payee if the payer fails to pay when contractually due, and the payer is responsible for ensuring premiums are paid and up to date;
• The retention money need not be paid into a separate bank account and can be mixed with other funds;
• Proper accounting records must be kept of all transactions relating to retentions;
• The trust status of retention funds only ends when the retentions are paid out, the payee gives up its claim, or when the money otherwise is no longer payable under the contract or by law;
• Retention money held on trust is not available for payment of the payer’s debts and cannot be taken by a receiver of liquidator;
• Retention money can only be used by the payer to remedy defects in the payee’s performance of its contractual obligation;
• Retention money can be invested but is at the risk of the payer, and subject to the Trustee Act 1956;
• The financial obligation of administering a trust remains with the payer;
• Where a payer is late in making payment of retentions it will automatically be liable for interest at the contractual interest rate;
• Any term in a construction contract which make payment conditional upon anything other than the completion of the payee’s contractual obligations, or makes the retention release date later than the completion of the contractual obligations, or requires the payee to contribute to the cost of administering the trust, is void;
• Construction contracts that include milestone payments are most likely caught by the retentions regime.
• In the usual principal/head contractor/subcontractor scenario, it is most likely that retentions held up-stream by the principal will not satisfy the head contractor’s retention obligations for sub-contractors.  Specific provision of retentions on trust, must be made by head contractor for sub-contractor.

The most likely outcome from the introduction of the new retention regime is that we are likely to see less use of the retention regime so that construction parties can avoid costly compliance.  It is likely that most building contracts, (unless made with residential occupiers), or sub contract agreements, will need some adjustments/amendments to reflect the changes brought in.

The application of the new retention regime will impose challenges for the industry.  It is difficult to see exactly how these will play out, but inevitably one by-product of avoiding the difficulties created by collapses such as that of Hartner Construction, is going to be increased costs of construction.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

In the High Court, the summary judgment failed because the Court did not consider a valid payment claim had been served on the Respondents.  Woolford J found that there was no agreement as to the construction price and value of the progress payments.  Applying section 17(4) of the CCA, he said that the value of the construction work and any variation was calculated with regard to the reasonable value of the work.  He held that the purported payment claim did not meet the requirements for a payment claim under section 20 as it did not properly address the reasonable value of the work, and did not enable the Respondents to respond effectively.

The principal issue brought on appeal to the Court of Appeal was whether the purported payment claim met the requirements for a valid payment claim under section 20 of the Act.

In addressing the critical issue, the Court made some general comments upon the statutory scheme under the CCA.  At paragraph 16 the Court recorded the following:-

“It is sufficient for the purposes of this case to note that the Act focuses more on procedure than on proof, and that it establishes a draconian “sudden death” regime if its payment procedures are not complied with.  The scheme of the Act is to entitle a payee to prompt payment where the amount claimed is not disputed and to provide resolution procedures for disputed claims.”

The Respondents resisted summary judgment on the basis that the purported payment claim did not indicate the manner in which the payee calculated the claimed amount.  They said that several parts of the purported payment claim did not make sense, and it remained unclear how the amount claimed was calculated.

It was submitted for the Appellant that a bare statement of the amount claimed making up a total claim meets the requirements of the Act.  However in considering the said submission some analysis was carried out by the Court on what was required by the CCA in a payment schedule, which was required to properly respond to a payment claim.

The Court of Appeal ruled that a pragmatic, common sense and contextual approach ought to be adopted when assessing whether the purported payment claim complied with the section 20(2)(e) of the Act.

At paragraph 26 the Court held as follows:-

“A payment claim must be sufficiently detailed and comprehensible to enable a payer to understand the basis on which the claim is made.  Only then can the payer decide whether to accept it or put the payee on notice of a dispute by providing a payment schedule in response which explains the payer’s reasons for disagreeing with the claim.  This requirement is implicit in the payee’s obligation to provide a claim that indicates “the manner in which the payee calculated the claimed amount” and in the payer’s obligation to respond by giving reasons for the difference between the amount claimed and the amount the payer is prepared to pay.”

The Court went onto rule that in this instance the purported payment claim had parts of it that were incomprehensible, or insufficiently detailed to inform the payer about how it was calculated.  There was no agreed contract price and no agreed formula for calculating the price.  A single unit used for labour charges was insufficiently detailed to be capable of evaluation.  It held the purported payment claim did not satisfy the requirement of indicating the manner in which the payee calculated the claimed amount.  Accordingly the summary judgment application failed.

This Court of Appeal decision is notable for discarding the argument that the Respondent could have obtained clarification by using the framework of the Act.  It simply ruled that a payer who has not been provided with sufficient information to understand the manner in which a claim has been calculated, cannot be required to provide a payment schedule which complies with the Act.

The Court also made the observation at paragraph 27, that where a construction contract does not provide expressly for contract price, labour rates or prices for materials and services, the requirement for establishing compliance with section 20(2)(e), is more onerous.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Factual background. 

The Appellant (Auckland Electrical) sent a series of invoices to the Respondent (the Warrington Group Limited) between 30 April 2015 and 30 June 2015.  Whilst receipt of these invoices was not disputed by the Respondent, it did dispute whether these invoices contained the notation “This invoice is tendered under the Construction Contracts Act 2002”.

Subsequently, the Appellant engaged a debt collection company who in turn arranged for the service of a statutory demand upon the Respondent on or about 3 August 2015 seeking payment of the sum of $21,159.83.  A week or so later this debt collection company then emailed the Respondent with a set of five invoices which did reference the Construction Contracts Act 2002.

In response to the statutory demand and email sent, the Respondent paid the sum of $12,500 on 14 August 2015.  On 20 August 2015 a meeting took place as between the Respondent and the debt collection company with a view to resolving the dispute over the outstanding amount.  At that meeting the Respondent was given another copy of the invoices emailed previously to it.

The Appellant argued in the District Court that the Appellant had been served with complying payment claims, failed to respond in the form of a payment schedule and thus the remaining amount of the invoices/payment claims was a debt that was due and owing.  Conversely the Respondent argued that it had paid most of the invoices submitted but was not required to meet the balance because the underlying works were defective.  The Respondent also argued section 79 of the Construction Contracts Act 2002 had no application because the enactment had not been complied with.

In the District Court, Judge Lovell Smith ruled that in relation to service of the April, May and June invoices, there was a factual dispute as to whether these invoices contained the necessary reference to the Construction Contracts Act 2002, which could not be resolved without cross-examination of the deponents.  Accordingly it was deemed that summary judgment at least in respect of these invoices was completely inappropriate.

The High Court then went onto consider the alternative argument put by the Appellant which was that the re-service of the invoices as fresh payment claims in August by the debt collection company, amounted to service of payment claims.  The Appellant contended that the invoices when served in August 2015 did contain the reference to the Construction Contracts Act 2002 and in this way did amount to payment claims as at that point in time.

The High Court disagreed with this submission.  The Court considered whether the fresh payment claims complied with section 20 and noted that no “due date for payment” was included which was required by Section 20(2)(d).  The words “net 20” were used though and so this non-compliance was not deemed fatal as it was not an unreasonable assumption to assume this meant payment was due on the 20^th of the month following the invoice.

However, notwithstanding the implication that payment was due on the 20^th of the month following, the debt collection company served these invoices with an associated demand for payment.  Nothing was said or done at the meeting to change that impression, or alter the demand.  Furthermore the debt collection company’s email of 11 August 2015 which contained the invoices, implied that time had already passed for serving a payment schedule.  Nothing was said or done at the meeting to correct that impression.

The Court ruled that on the evidence available, the resubmission of the invoices did not amount to submission of fresh payment claims, as the Appellant appeared to be relying upon the original invoices as tendered and liable for payment immediately.  Accordingly the Appeal also failed on this ground.  

This decision is authority for the premise that were fresh invoices/payment claims are reissued, then the timeframe for responding to them ought to be start running again from date of resubmission, and the issuer needs to act consistently with this. 

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Perhaps to start with, it is helpful to outline the Government’s policy objective which was summarised as follows:-

“This law change arises from the way some contractors misused these retentions as working capital for the next project.  This puts the subbies’ money at risk, in a way in which they had no control or ability to minimise that risk….It significantly changes the law on how retentions must be managed…The balance we have attempted to strike in this law is minimising the security of these payments for subbies while minimising the extra compliance costs that go with these provisions.”

Key aspects of the retention provisions are as follows:-

• The retention regime only applies to retention money withheld on a commercial construction contract where the retention amount exceeds a threshold (de minimis) amount to be specified in the regulations.
• Retention money must be held on trust by the payer in the form of cash or other liquid assets that can be readily converted into cash, however there is no requirement for a formal trust account or separation of funds to be used.
• The payer must keep proper and transparent accounting records of the monies held.  (N.B. methods of accounting may be the subject of further regulation).
• Retention monies can be invested by the payer, at their sole risk.
• Retention monies can be commingled with other money.
• Retention monies do not belong to the payer but if not paid out to payee, can only be used to remedy a payee’s failure to properly perform work or remedy defects.

   

The Act will regard an amount of money withheld by a payer as security for a payee’s performance of its contractual obligations as retention money.  However it is clear that the Act will not apply to a builder or subcontractor who withholds payment from a merchant supplier, nor a homeowner who withholds monies from a builder or a designer. 

It is clear that the retention provisions bring into play the statutory, implied duties, obligations and liabilities of a trustee including those under the Trustee Act 1956.  A payer must remain mindful of its obligations as trustee.  Retention money will be protected from the “claws” of a liquidator or the Official Assignee in the context of a payer falling into liquidation or bankruptcy, as these funds are not treated as an asset of the failed company/individual. 

Comment on criticisms of Mike Fox. 

I would tend to agree that the retention regime provisions could have been better served by further deliberation, and Mike Fox’s suggestion that a full and proper financial modelling by a major accounting firm be completed before the retention regime comes into force is sensible.  However, the law has been passed and unless some of the problems identified above are worked out between now and 31 March 2017 by method of further statutory amendment or by further regulations, a lot of the practicalities will have to be worked out by those in the industry “on the hop”. 

The criticism he makes which is the most compelling, relates to the fact that the layered requirement for unusable retention monies to be held on trust down the construction chain, will create the need for a significant sum of additional funds (no doubt from lenders) to prop up the construction industry.  Whilst this is something that contractors/subcontractors will need to work through with their respective lenders, there is guaranteed to be some initial pain which in some instances will bring about the financial demise of entities unprepared.  However the utility of this pain, is to avoid the Hartner Construction/Mainzeal collapses that previously fatally affected so many operating in the construction industry. 

Another and related flaw in the retention regime as identified by a key CCA commentator, is the lack of a transitional provision.  As the wording of the legislation now stands, from 31 March 2017 all retention money held will be deemed to be held on trust.  This part of the legislation was only intended to apply to contracts entered into from that date, nevertheless this will be the immediate impact of the retention regime provisions.  Consequently a significant amount of retention money shown as an asset on a company’s balance sheet, will all of a sudden be removed from the asset ledger.  Some companies may not survive that sudden change.  An immediate amendment before these provisions come into force  is required to avoid this sudden effect.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.