The case of Templeton Kingsland Ltd v Dominion Constructors Ltd concerned the construction of an apartment complex in Kingsland, Auckland, under an amended version of the NZS3910:2013 standard form construction contract.
At the time the dispute arose, the project was at an advanced stage, with the contractor having already been paid over NZ$47 million. On 30 November 2020, the contractor issued a payment claim for amounts totalling approximately NZ$6 million. On 9 December 2020, the engineer to the contract issued a provisional payment schedule certifying a further payment of approximately NZ$300,000 which was then paid by the principal.
The letter attaching the provisional payment schedule recorded that the “full details of this draft certification of Progress Payment are as set out in the attached… Advice No 50” (the advice note). The advice note had been prepared by the quantity surveyor for the project engaged by the principal. On 15 December 2020, the engineer issued the final payment schedule, which again attached the advice note, as well as a new summary table (the summary table).
The contractor argued that the provisional payment schedule was invalid because it did not comply with certain contractual requirements for payment schedules and did not contain the information required by the CCA.
Under the CCA, if no valid payment schedule is provided in response to a payment claim by the due date, the principal is liable to pay the full amount claimed in the payment claim and the contractor may recover the unpaid portion of the amount claimed as a debt due under the CCA.
The contractor issued a statutory demand for a portion of the unpaid amount (totalling approximately NZ$1.5 million) arguing that the relevant portion comprised “invalid deductions” under the CCA. The principal applied to set aside the statutory demand.
What does this mean for the preparation and assessment of payment schedules?
When assessing whether to set aside a statutory demand, the Court considers whether or not there is arguably a genuine and substantial dispute as to the existence of the debt (it is not required to finally determine the issues in dispute). In this case, the Court held that it was arguable that the payment schedule was valid and set aside the statutory demand.
In setting aside the statutory demand, the Court rejected a number of arguments put forward by the contractor as to why the payment schedule was not compliant with the CCA. The Court’s reasoning contains useful reminders for contractors and principals on the requirements for a valid payment schedule under the CCA. In particular:
- The courts will take a “pragmatic, common sense and contextual approach” to assessing whether a payment claim or payment schedule complies with the CCA. Applying previous case law, the Court reaffirmed that what is required in a particular case may “vary according to the circumstances of the contract and practice of the parties”.
- An engineer is not required to personally issue the payment schedule, or value variations claimed in a payment schedule, in order for it to be validly issued under the CCA. In this case, the contractor had taken issue with the fact that the engineer had not necessarily valued all of the variations, and the fact that the advice note which formed part of the payment schedule had been prepared by the quantity surveyor, not the engineer personally. The Court held that, although there may be a contractual requirement for the engineer to perform tasks in relation to the payment schedule, a “failure to do so is a breach of contract, not a failure to meet the requirements [of the CCA]”. It said the CCA specifies “what the payment schedule must include; not who must issue it (or give reasons or make calculations)”.
- It may be permissible to set out reasons for deductions in a separate annexed document. The Court saw no issue with the fact that the reasons for the deductions were set out in the separate advice note prepared by the quantity surveyor or in the supporting summary table. The Court noted that the “purpose of the CCA is not to allow contractors to recover amounts as debts due through technical arguments rather than genuine difficulties caused by a failure to indicate reasons”. It was “artificial” to suggest that the contractor would not have considered the advice note together with the payment schedule.
- A payment schedule may refer back to other documents and is not required to be read in isolation. The contractor took issue with some of the relatively brief explanations in the payment schedule and references to prior correspondence. The Court did not accept those criticisms, noting that where the parties “share a common understanding”, it may be sufficient to refer to other documents or correspondence between the parties.
- A payment schedule may not be invalid merely because an incorrect reason is given. The contractor argued that some of the reasons given in the payment schedule were wrong or incomplete because they did not address certain matters. On that issue, the Court noted “the regime brought in by the CCA does not create a system whereby the payment schedule becomes invalid if an incorrect reason is given”. For example, the court considered that a “failure to update a comment to reflect recent correspondence cannot be a basis for invalidating a payment schedule”.
- Recording a claim as “under review” may be permissible. Some of the variation claims in dispute were listed in the payment schedule as still being “under review” by the engineer. In the circumstances of the case, the Court held that this description was arguably sufficient, including because in one case the relevant variation claim had been made only 10 days before the payment schedule was issued.
- A payment schedule may be still valid where insufficient reasons are provided for only a small number of deductions. The Court held that the reasons for all of the disputed deductions had been sufficiently particularised but was more tentative in its conclusion for a group of 20 claims. Although the Court did not need to decide the issue, the Court noted that there may still be substantial compliance with the CCA when a small proportion (5.9% in this case) did not indicate sufficient reasons for deduction.
Although the principal was successful in setting aside the statutory demand in this case, the judgment demonstrates the importance of ensuring that payment schedules comply with the provisions of the CCA and the risks for principals if they do not comply. It is a timely reminder for contractors and principals alike of the care that needs to be taken when issuing, and assessing, payment documents under the CCA.
If you have any questions about the matters raised in this article please get in touch with the contacts listed or your usual Bell Gully advisor.