Avoid Disputes and Maintain Cash flow by Complying with the Construction Contracts Act

by Daniel Hunt - Rainey Collins

The purpose of the Construction Contracts Act 2002 is to provide a simple process for how and when payments are due for construction work. You can maintain crucial cash flow and avoid time-consuming and costly disputes by following the simple processes of the Act.

The construction work covered by the Act is wide ranging and includes most work carried out in building, altering and maintaining a house, larger structures and infrastructures such as roads and utilities. It also includes most work carried out by plumbers.

Getting paid – payment claims

When entering into a construction contract you can either:

  • Negotiate the terms of payment as a part of the contract; or
  • Rely on the default payment provisions in the Act.

It is important to ensure that the payment obligations in your contract are clearly set out.

If you do not negotiate the terms of payment under your construction contract the default payment provisions in the Act will apply. These entitle the party who is owed payment for construction work to be paid in instalments as the work is completed.

To ensure you get paid and avoid disputes you must issue a valid payment claim under the Act. To be considered valid a payment claim must:

  • be in writing;
  • include sufficient details to identify the construction contract to which it relates;
  • identify the construction work and relevant period to which it relates;
  • state the amount claimed and provide a due date for payment;
  • state how the amount was calculated by you; and
  • state that the payment claim is made under the Act.

The payment claim must also be accompanied by a written notice which outlines the process for the payer to respond to the claim. The notice must also explain the consequences of the payer failing to respond to or pay the claimed amount in full.

The Building Disputes Tribunal provides standard payment claim forms which simplify the process of issuing a valid payment claim. The forms are available at the Tribunal’s website - http://www.buildingdisputestribunal.co.nz/. You can also contact us for further advice.

Failing or disputing payment – payment schedules

A payer served with a valid payment claim must pay the claimed amount in full or, if they dispute the amounted claimed, issue a valid payment schedule to the contractor within 20 working days.

To be considered valid and comply with the Act a payment schedule must:
  • be in writing;
  • identify the payment claim to which it relates; and
  • state the scheduled amount the payer is willing to pay.

If the scheduled amount the payer is willing to pay is less than the amount in the payment claim, the payment schedule must also state:
  • how the payer calculated the scheduled amount;
  • why there is a difference between the amount claimed and the scheduled amount; and
  • the party’s reason why they are withholding payment.

If the payer fails to pay the payment claim in full by the due date or issue a valid payment schedule, the contractor may suspend work and enforce the claimed amount as a debt due as well the legal costs of enforcement.

Resolving disputes – adjudication

If there is a dispute between parties to the construction contract they can refer the dispute to adjudication. An adjudicator can make a decision which is binding on all parties to the contract that is enforceable as a Court judgment. Adjudication is a fast track resolution process. However, the Act does not prevent a party from filing a claim in the Courts or for arbitration of their dispute.

Any party to the construction contract may initiate the adjudication process by serving written notice on the other party. For further information on referring a dispute to adjudication see the Building Disputes Tribunal’s website at http://www.buildingdisputestribunal.co.nz/ or contact us for further advice.

Construction contracts and associated work are usually complex and involve large sums of money. Therefore, it is often prudent to obtain legal advice in order to, first, ensure that payment claims and schedules comply with the Act and, second, ensure you avoid disputes and maintain cash flow.

For more information on this topic, please contact the Rainey Collins office (04 4736850) or the article author - Daniel Hunt. 

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