The Construction Contracts Act 2002:
·
The Act applies to
all
·
It is intended to
facilitate regular and timely payments in construction
contracts.
·
It sets out
defaults for the processing and payment of payment
claims.
·
It requires
contract disputes to be submitted to adjudication.
·
It applies
differently to residential contracts and commercial contracts.
·
A Construction
Contract includes ‘head’ (or main) contracts and sub contracts.
·
Construction Work
includes construction of all kinds, but does not include materials suppliers,
unless they are supplying pre-fabricated components custom-made for the site,
for example joinery. It does not
include contracts for professional services.
·
The provisions
will affect Main Contractors in two ways:
their contracts with the Principal, and their contracts with
Subcontractors (in which case the Main Contractor will be the “Principal” or
“Payer”).
·
Subcontractors are
now able to “leverage” timely payment because “Pay if paid” and “pay when paid”
clauses are now illegal.
·
Payment claims not
made in accordance with the requirements of the Act may lead to difficulties in
collection.
·
Architects and
others administering progress claims need to be aware that failing to either
process them in due time or to use the correct procedure may expose their
Principals to a liability for “overpayment”.
1. Progress Payments: Parties are free to agree on the number,
interval between, amount of, and due date for payment of progress payments. For the main contract, these terms are
set out in the standard (usually NZIA or NZS) conditions of contract. For a subcontract, the terms will be set
out in the subcontract agreement.
Where there are no such terms or agreements, the Act provides the
default: monthly claims, based on
the period of work, the value of work done (including variations), the contract
sum and any set rates in the contract, with payment within 20 working days after
the claim is served.
2. Payment Claim
Procedures: A payment claim
must be in writing, identify the contract, the work done and the period to which
it relates, indicate the claimed amount and the date on which it is payable,
indicate how the amount was calculated, and state that it is made under the
Act. In the case of residential
contracts, the claim must be accompanied by a copy of Form 1 as set out in the
Regulations.
3. A Payment Schedule is the
payer’s response to a payment claim.
A payment schedule need not be issued if the payer pays the payment claim
in full. Otherwise, it must be in
writing, identify the claim to which it relates, indicate the amount being paid,
and the reasons for the difference.
A payment schedule must be issued by the payer within the timeframe set
out in the conditions of contract (where there is no such agreement, the Act
provides the default of 20 working days), failing which the payer will be liable
for the full amount claimed.
4. The Architect’s (or Engineer’s)
Role: The CCA provides that the
agreed terms of a contract can include a means of calculating a progress
payment. That might have been
intended to cater for the role of the architect or other independent person
administering the contract.
Historically, such a role was important in ensuring that the main
contractor’s claim and the principal’s payment were assessed on a fair and
equitable basis. With the advent of
the CCA, the situation is now that whilst the architect still has the task of
checking and certifying the main contractor’s claim, the principal now has the
right to reject that assessment and to then set the amount to be paid.
A progress payment certificate issued by the architect under the main
contract will almost never equate to the main contractor’s claim, unless that
claim has already deducted the usual contract retentions. That being so, a payment schedule will
nearly always be required, and that payment schedule can only be issued by the
payer.
This has made the processing of progress claims rather more awkward for
the architect, but the procedure that is gaining general acceptance, and which
has been incorporated in both NZS 3910 and NZIA SCC 2005 is as
follows:
·
The contractor
submits a payment claim to the architect with a copy to the principal (i.e. the
“payer” under the CCA”.
·
The architect
checks it, makes an independent assessment to arrive at the payment due, and
issues a payment certificate, together with reasons supporting the
assessment. The terms included on
the certificate provide that it may operate as a “provisional” payment
schedule.
·
This is forwarded
to both the contractor and the principal.
·
If, within due
time, the principal does not alter the architect’s assessment, that
“provisional” payment schedule is deemed to be the payment schedule as required
to be issued by the principal under the CCA. The sum thereon becomes the sum
payable.
·
If, within due
time, the principal wishes to alter the architect’s assessment, reasons must be
given, and advised to the architect.
The architect - acting as agent for the principal and not in the
independent role required by the terms of the contract - then issues the payment
schedule setting out the sum that is to be paid.
·
It is usual for
the Contractor to issue a GST invoice for the amount of the payment schedule,
but in all cases the due date for payment is set by the terms of the contract,
or by the defaults in the CCA if the contract does not stipulate a time.
5. Subcontracts: In the case of a subcontractor’s
payment claim, the main contractor will be the “payer” under the CCA, and to
whom the subcontractor will be forwarding the payment claim. The main contractor either pays the full
value of the subcontractor’s payment claim, or issues a payment schedule setting
out the lesser payment, with the reasons therefore, and makes payment of that
sum. In all cases the due date for
payment is set by the terms of the contract, or by the defaults in the CCA if
the contract does not stipulate a time.
6. Failure to pay in part, or on
time: Where a claim has been
short paid without specifying the reasons in a payment schedule, or is unpaid by
the due date, then the sum claimed becomes a debt due enforceable in court. Where the sum set out in the payment
schedule is short paid or is unpaid by the due date, then the sum set out in the
payment schedule becomes a debt due enforceable in court. In addition, except in the case of
residential contracts, the party whose claim has not been met is entitled (after
giving five days notice) to suspend work and to a corresponding extension of
time, but not to the costs related to this.
7. Pay-if-paid, and pay-when-paid
provisions: The Act bans any
such provisions in a construction contract (or subcontract).
1. Adjudication is a confidential, binding,
and enforceable dispute resolution by an independent person. The determination must be acted upon
even if it is later reviewed by the District Court or by dispute resolution
provisions (eg arbitration) provided for in the contract. The parties to a contract cannot opt out
of adjudication
2. Any party to a construction contract has
the right to refer a dispute to adjudication.
3. An adjudicator can determine any
“dispute or difference that arises under a construction contract”.
4. Subject to natural justice, the
adjudicator may use whatever procedures are suitable in reaching a
determination.
5. An adjudication does not supplant other
remedies and dispute resolution processes where they are provided for in the
contract. There is no chronological
link between the dispute processes provided by the contract and adjudication –
they could run in parallel and concurrently - except that the former will
prevail over (i.e. may overturn) the latter.
6. An adjudication is initiated by written
notice served by the claimant on the other party or parties to the
contract.
(a) The notice
must be dated, describe the dispute, the parties, the contract, and the remedies
sought.
(b) In the case
of residential contracts, the notice must be accompanied by a copy of Form 2 as
set out in the Regulations.
7. The adjudicator is selected either
by agreement between the parties, or failing that, as set out in the Act. An agreement on an adjudicator is not
binding on the parties if the agreement was made before the dispute
arose.
(a) Within 5 working days of
receiving the adjudicator’s notice of acceptance, the claimant must submit the
claim to the adjudicator and the other parties.
(b) Within a further 5 working days,
or further time that the parties may agree or the adjudicator allows, the
respondent may respond likewise.
8. The adjudicator may, with the
written consent of all the parties, determine multiple related disputes at the
same time.
9. The adjudicator may
determine:
·
any monies payable
·
the dates by which payment is to be made;
·
any conditions to be satisfied prior to payment;
·
any rights and obligations of the parties arising out of
a dispute.
10. The outcome of the adjudication will need to be
followed through in other contract administration tasks unless or until it is
superceded by events or the outcome of other dispute processes.
Residential
Construction Contracts
1. A Residential Construction Contract is
where one of the parties to the construction contract is, or intends to be, a
residential occupier of the
building to which the contract applies. However, each subcontractor in a
residential contract will have a Commercial Construction Contract with the head
contractor.
2. A copy of Form 1 of the Regulations is required
to be submitted as part of the claim procedure.
3. Some provisions of the Act do not apply
to Residential Construction Contracts:
(a) The
default progress payment provisions in the Act do not apply: unless standard NZIA (or similar)
conditions of contract are in force the terms of progress payments must be
specifically described in residential construction
contracts.
(b)
Unless specifically provided for in the contract, a claimant (main contractor)
does not have the right to suspend work when payment is not made in full, or is
only partly made but without reasons given. NZIA standard conditions of contract
SCC1 provide for suspension but not the NZIA Small Works 2002 conditions
commonly used for residential work.
(c) A
contractor is unable to seek a charging order over the land to secure
payment.
1.
Main Contractors
will need to process claims from subcontractors properly, failing which they
will be exposed to liability for the
claimed amount irrespective of its justification.
2.
A Main
Contractor’s failure to pay a subcontractor in full without issuing a Payment
Schedule would give the subcontractor leverage over contract time, and (if an
adjudication follows) the subcontractor could seek a charge over the site. That may disrupt the financing
arrangements of the Principal, and bring considerable pressure on the Contractor
from the Principal.
3.
An architect or
similar independent contract administrator failing to process payment claims
properly, or in due time, may expose the Principal to liability for the claimed
amount irrespective of its justification.
The contractor also gains leverage over contract time, and (if an
adjudication follows) could seek a charge over the (non-residential) site: that may disrupt financing
arrangements.
4.
The Act denies a
Main Contractor on a residential project from suspending work for
non-payment; however, their
subcontractors can still suspend subcontract work because they have a
“commercial construction contract” with the Main Contractor.
5.
The Act refers to
suspension of “work” by the contractor, and thus allows the possibility of
suspension of particular work – rather than the whole job - to leverage
due payment. If this tactic is
used, it must be made very clear to all concerned, otherwise a dispute over late
completion is sure to follow.
6.
Main Contractors
should ensure that all their subcontractors are bound by the terms of the Main
Contract, in particular, to co-ordinate the timing and terms of progress
claims. This is usually specified
in the P&G section of a specification, but it would be sensible to reconfirm
it when seeking each subcontract quote.
7.
The Principal may
rightly avoid acting upon a non-conforming Payment Claim. Whilst the contractor may (eventually)
obtain recovery through adjudication, the quickest remedy would be to submit a
complying Payment Claim – whether it be for the same or a different
amount.
8.
Main Contractors
on residential contracts should ensure that they provide the Principal with a
copy of Form 1 of the Regulations when submitting a Payment Claim as a progress
claim, failing which their claim may not be recognised, nor be
enforceable.
Copies of the Act
and Regulations on the Web
The Act is
available on the web at:
The
Regulations are available on the web at:
http://www.legislation.govt.nz/browse_vw.asp?content-set=pal_regs
These notes are provided by Orchiston Architects Ltd, Architecture & Dispute Resolution, P.O. Box 9136 Wellington, ph 04 5627 438, based on information as at 20/08/06. They remain the copyright of Orchiston Architects Ltd, and may be copied and redistributed if and only if reproduced in full without any change in content whatsoever to the notes, letterhead/logo, and this footer. They are intended as a general guide only, and not specific advice: the author accepts no responsibility for persons acting or not acting upon the information herein, and specific advice should be sought from the author or other suitable professional in respect of particular issues as and when required.