THE PAYMENT REGIME

INTRODUCTION TO THE PAYMENT REGIME

When the Construction Contracts Act 2002 (the Act) came into force on 30 April 2003, it significantly reformed the law relating to construction contracts and sought to dramatically change the way in which cashflow occurs in the industry by facilitating regular and timely payment between the parties to a construction contract and by prohibiting conditional payment provisions in construction contracts.

In particular, the Act rendered conditional payment provisions such as “pay when paid” and “pay if paid” clauses in a contract ineffective and established a new regime for making and responding to progress payments so that the lump sum contracts devoid of the entitlement to progress payments became a thing of the past.

Previously, contractors could defer payment to subcontractors until the contractor was paid or exclude it entirely in the event of the contractor not being paid, and unless the contract expressly provided for the right to progress payments, the contract was deemed ‘entire’ and the whole of the contract works were required to be completed prior to any entitlement to payment.

Under the Act, parties to construction contracts may agree to any terms and conditions regarding the number of progress payments, the interval between those payments, the amount of each of those payments and the date by which those payments become due.

The Act establishes a statutory right to progress payments in commercial construction contracts but not in residential construction contracts.

If the parties to a commercial construction contract fail to agree on a mechanism for determining the number of progress payments, the interval between those payments, the amount of each of those payments and/or the date by which those payments become due, the Act provides a default mechanism for calculating the amount of a progress claim and the due date for payment.

The default date for payment of a progress payment is 20 working days after the payment claim is served.

To view the progress payment provisions under the Construction Contracts Act as a flow chart click here...

PROGRESS PAYMENTS

The Act establishes a statutory right to progress payments in commercial construction contracts but not in residential construction contracts.

The default provisions are set out in sections 16 to 18 of the Act and include:

the party who has agreed to carry out construction work under the construction contract is entitled to claim for work performed each month; and
the amount to be claimed is to be calculated having regard to the contract price, the rates or prices set out in the contract or the reasonable value of the work, the cost of any variations and the cost of rectifying any defective work; and,
the default date for payment of a progress payment is 20 working days after the payment claim is served.

Most of the standard forms of contract such as NZS3910:2003 and Registered Master Builders Contracts incorporate a mechanism for determining the timing and quantification of progress payments. In those cases the express terms of the contract will supersede and replace the default provisions of the Act for progress payments.

To view the progress payment provisions under the Construction Contracts Act as a flow chart click here...

PAYMENT CLAIMS

Payment Claims are formal demands for payment made under the Act and include progress claims and final claims.

Under section 20 of the Act, a payee (the party to a construction contract who is entitled to a progress payment) is entitled to serve payment claims on the payer (the party to a construction contract who is liable for that payment) for progress payments, including any final payment under the contract. In order to qualify for the default payment entitlements under the Act, the payee must first serve a valid payment claim. A valid payment claim must include the following mandatory requirements:

be in writing
contain sufficient details to identify the construction contract to which the progress payment relates; and
identify the construction work and the relevant period to which the progress payment relates; and
indicate a claimed amount and the due date for payment; and
indicate the manner in which the payee calculated the claimed amount; and
state that it is made under the Act.

If a payment claim is made on a residential occupier it must be accompanied by a written notice outlining the process for responding to the claim and explaining the consequences of not responding if payment of the claimed amount in full is not made by the due date for payment. To view the form required to be served on a residential occupier with a payment claim please click here.

The procedure for making claims is commenced when a payee serves a payment claim on the payer for a progress payment. The claim must be made at the end of the relevant period to which the claim relates which is typically the end of the month unless otherwise specified in the contract.

Download a sample payment claim here. You will note that notice to a residential occupier is attached to the sample payment claim. We strongly recommend that if you are unsure as to whether the payer is a residential occupier, you should include the notice to a residential occupier with every payment claim.

PAYMENT SCHEDULES

The service of a valid payment claim sets in motion the provisions of the Act which provide a statutory right for the contractor to enforce payment in the event that the payer does not respond within the mandatory period with a valid payment schedule.

If you receive a payment claim under the Act and you do not agree with the way in which the payee has calculated the progress payment you must respond by providing a valid payment schedule specifying the amount that you propose to pay to the payee in response to the payment claim (the scheduled amount).

A payment schedule informs the party making the claim as to the amount that you propose to pay on the due date for payment and your reasons for any difference between the scheduled amount and the claimed amount.

Under section 21 of the Act, a valid payment schedule must:

Be in writing; and
Identify the payment claim to which it relates; and
Indicate a scheduled amount.

If the scheduled amount is different from the claim amount it must also indicate:

The manner in which the payer has calculated the scheduled amount; and
The reasons for any difference between the scheduled amount and the claimed amount; and
Where the difference is due to the payer withholding payment on any basis, the reasons for withholding payment.

A payment schedule must be served within 20 working days of receipt of the payment claim unless the parties have agreed to a different period in their contract.

If no payment schedule is provided within the mandatory period, the payer is deemed to accept that the full amount claimed by the payee in the payment claim is due and payable and that amount must be paid in full on or before the due date for payment.

Download a sample payment schedule here

CONSEQUENCES OF NOT PROVIDING A VALID PAYMENT SCHEDULE OR NOT PAYING THE CLAIMED AMOUNT OR THE SCHEDULED AMOUNT

One of the main purposes of the Act is to encourage cashflow in the industry.

As far as the payer is concerned the payment regime set up under the Act is ‘sudden death’. Should the payer not follow the correct procedure within the mandatory time, it can be obliged to pay in the interim all of what is claimed by the payee, whatever the actual merits of the claim.

If a payer fails to provide an effective payment schedule, being one that satisfies the requirements of section 21 of the Act, within the time required by the relevant construction contract or if the contract does not provide for the matter, within 20 working days after the payment claim is served, the payer becomes liable to pay the whole of the claimed amount on the due date for the progress payment to which the claim relates pursuant to section 22 of the Act.

To be an effective payment schedule to resist the harsh consequences of section 22 of the Act, the payer must indicate unequivocally an amount that the payer proposes to pay the payee in response to a payment claim and all areas of difference or dispute to enable the payee to properly assess its future options.

Failure to pay within the required time results in the amount claimed (or any unpaid scheduled amount) becoming a debt due for which the payee can immediately sue together with the payee’s actual and reasonable costs of recovery.

In such cases there can be no deduction, no dispute and no set-off from the amount claimed.

In addition, a payee under a commercial construction contract is entitled to serve a notice of the payee’s intention to suspend work and to suspend work if payment is not made. A payee under a residential construction contract may suspend work for non-payment only if the contract expressly provides that right and only then, after complying with the notice procedures prescribed under the contract.

Download a sample notice of intention to suspend work here

To view the procedure for recovering Progress Payments as a flow chart click here