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If working in the construction industry and hiring subcontractors wasn’t hard enough already, how do you ensure that you aren’t left out of pocket when a subcontractor overcharges?
This article explores a case where the McVeagh Fleming team represented a building ‘Project Management Company’ in the Building Disputes Tribunal against a building ‘’Contracting Company’ submitting invoices with miscalculations, unapproved variations, and not including an agreed discount.
This serves as a practical example of the complexities involved in construction-related legal matters, such as payment disputes, contract interpretation, and the importance of adhering to legal requirements in construction contracts.
The construction contract involved the "Retirement Village Entrance Canopy (Site)," where the Project Management Company issued a quote with attached "Subcontract Terms of Trade." Initially, a higher quote was provided but was negotiated down by the Contracting Company, resulting in a final contract price of $140,000 plus GST, inclusive of a $62,742.72 discount to align with the agreed budget. The contract specified considerations for cost overruns and a minimum margin on an open book basis, subject to agreement between the Project Management Company and the Contracting Company.
Regarding the Terms of Trade, conditions were outlined for when the Project Management Company could claim additional costs for variations and fluctuations. Express approval by the Contracting Company was required for variations.
As construction commenced, the Project Management Company submitted seven payment claims with invoices, and while three were paid by the Contracting Company, the remaining claims were contested. The grounds for dispute included incorrect calculations, unapproved variations, and the failure to consider the agreed-upon discount of $62,742.72.
Under the Construction Contracts Act 2002, section 20 outlines the criteria for a Payment Claim, a process adhered to by the Contracting Company; therefore, their payment claims were deemed valid, granting them a statutory right to issue such claims.
The Act places a premium on efficiency and cash flow in construction contracts, leading to the adoption of a "pay now, argue later" approach in payment claim litigation. Section 21 allows a payer to respond to payment claims with a 'Payment Schedule' within 20 working days. In this case, the Project Management Company failed to provide a proper payment schedule, resulting in their liability to pay the demanded amount in the payment claims.
As the construction work progressed, the relationship between the parties soured, leading the Project Management Company to claim that the Contracting Company had repudiated the contract by failing to meet specified deadlines, justifying the Project Management Company’s attempt to cancel the contract. However, it was determined that the Project Management Company lacked grounds to repudiate the contract, turning their effort to cancel it into an unintentional act of repudiation.
In the determination, the Adjudicator found that $140,000 plus GST was the starting point when calculating the sums to be invoiced by the Contracting Company in their payment claims.
The Adjudicator continues to find that there was nothing in the payment claims to indicate the Project Management Company was being given the benefit of the agreed reduction, or how the calculation was being done.
Further, very little detail and narrative was provided by the Contracting Company to justify the cost overruns and cost fluctuations being claimed. No information was provided by the Contracting Company to explain their alleged labour costs, thus the Adjudicator found that these could not be claimed.
The Adjudicator found two of the alleged variations were validly claimed, while one of them was not (due to lack of supporting evidence).
The Project Management Company alleged a number of Contra Charges against the Contracting Company in their counterclaim. This included ‘Access Equipment Usage’, ‘Painting to Steel Structures’, and ‘Screed Concrete Slab’. The Adjudicator found the Project Management Company had not satisfied the onus upon it to establish that it is entitled to these contra charges. There was not enough evidence provided to support their contractual right to claim these charges in principle and for the specific charges alleged.
Serving a payment claim in accordance with S 20 of CCA 2002 is crucial to enforcing payment. The formal requirements for payment claims are laid out stringently in the act, and require the addition of Form 1 requirements.
If a payer wants to dispute a payment claim, they must respond with a payment schedule under s 21 within 20 working days. If a payment claim is served and is not responded to with a payment schedule within 20 working days, the amount due becomes a debt owed, and is legally recoverable, whether the amount claimed is accurate or not.
Only after the “pay now” stage is settled, can the “argue later” discussions begin.
If you would like to talk to someone who can assist with matters relating to this article, please contact:
DDI: 09 966 3603
Email: jturner@mcveaghfleming.co.nz
DDI: 09 415 4477
Email: fryan@mcveaghfleming.co.nz
© McVeagh Fleming 2024
This article is published for general information purposes only. Legal content in this article is necessarily of a general nature and should not be relied upon as legal advice. If you require specific legal advice in respect of any legal issue, you should always engage a lawyer to provide that advice.
