LEGAL

Proceed With Caution – Residential Construction Contracts

By Stuart Robertson, partner, Kensington Swan

Recently several contractors have contacted us with concerns regarding the type of contract they thought they had entered into, assuming they had entered into a commercial construction contract under the Construction Contracts Act 2002 (‘CCA’). In fact, they discovered that they had entered into a residential construction contract, as defined in the CCA. The usual reaction from many contractors is that they don’t do work for homeowners and therefore why is this important? The answers are set out below and highlighted in a recent case in the Auckland High Court of Berg v Franix Construction Limited (HC, 24/9/2008; Wylie J, Auckland, CIV 2008-404-3421).

Under the CCA a construction contract is either commercial or residential. To understand which contract you have entered into requires a reading of section 5 of the CCA and in particular the definitions of ‘commercial construction contract,’ ‘construction contract,’ ‘residential construction contract,’ and ‘residential occupier’. In simple terms a residential construction contract means a construction contract for carrying out construction work in which one of the parties is an individual who occupies or intends to occupy the premises, the subject of the construction work, wholly or mainly as a dwelling house. The term ‘premises’ is not defined, but taking guidance from such legislation as the Building Act 2004, this would include features or immenities to a property associated with a dwelling house such as the utilities, site works, driveways and associated out-buildings.

While not definitive, a simple way to assess whether your contract is residential or commercial is by assessing the ownership and use of the property. For example, a developer building a residential apartment tower block, retaining several apartments for itself, is not a residential occupier. It is essentially engaged in a commercial activity. Similarly, a developer subdividing a block of land and retaining a section cannot claim that the civil contractor is under a residential contract. However, where a farmer is seeking to asphalt his driveway to the family home, as distinct from roading works on farm accessways, then there is a possibility that you are entering into a residential contract. It would come down to whether the farm (as a business) owns the family home or whether this is owned by the farmer personally.

Why is the distinction between residential and commercial construction contracts important? It is because while the CCA sets out specific rights and remedies applicable to commercial construction contracts, which many of you are familiar with, many are not available under a residential construction contract. These include:

• The contractor does not have the benefit of the default payment provisions under the CCA. If it has failed to agree some or all of the usual provisions, such as a right to progress payments, how those payments are to be calculated, and the due date for payment, then it cannot rely on the default provisions of the CCA. It is left with whatever has been agreed between the parties
  

• When serving a payment claim on a residential occupier (Payer), it must be accompanied by an outline of the process for responding to that claim (that is the payment schedule process) and an explanation of the consequences if the residential occupier does not respond to the payment claim and/or does not pay the scheduled amount in full. This ‘statement of rights and obligations’ must be in writing and in the prescribed form, set out in Schedule 1, Form 1 to the Construction Contracts Regulations 2003
  

• Even if the residential occupier does not pay, the contractor does not have the ability to issue a notice of intention to suspend or indeed suspend the works, as is provided for under the CCA
  

• While the right to adjudicate disputes is preserved, the contractor is not entitled to seek the issue of a charging order over the construction site
  

• Even if you obtain a favourable adjudication determination, you are not able to utilise the fast track enforcement of determination as entry of a judgment in the court if it involves a residential occupier
  

• Finally, should an ordinary summary judgment proceeding be brought on the basis of an adjudicator’s determination, section 79 no longer applies, meaning that the residential occupier is entitled to raise counterclaims, set offs and/or cross demands.
  

In the appeal case referred to above (Berg v Franix Construction Ltd), the High Court had to consider on a summary judgment CCA debt claim whether the failure by the contractor to attach the statement of rights and obligations to its payment claim rendered the payment claim void. In considering the words ‘it must be accompanied by it’ contained in section 20(3) the Court held that the failure to attach the statement of rights and obligations was not merely a ‘technical quibble’. It held that it was imperative that residential occupiers have before them all relevant information so that they can make an informed decision on how they should respond to any payment claim. Justice Wylie went on to state that:

‘The Act uses mandatory language ‘must’ in s20(3) and in my view for very good reasons. Persons served with what purports to be a payment claim should be able to ascertain from the document itself what steps he or she has to take and what happens if they are not taken.’

Section 20(3) and this decision avoid the assumed power imbalance between commercially astute contractors (with extensive knowledge of the CCA) to the lesser residential occupier. Whilst this may be the case in some situations, many of the individuals contractors deal with are indeed very commercially astute. Notwithstanding this, the wording of section 20(3) is clear and with this court decision it is essential that on each and every occasion that a payment claim under a residential construction contract is served on the payer/residential occupier, it is accompanied with the statement of rights and obligations prescribed under the CCA.

Stuart Robertson is a partner at Kensington Swan, specialising in building and construction matters. For further information visit: www.kensingtonswan.com