Disputing Payment Claims Under The CCA

– How Not To Be Caught Out By Adjudication Proceedings

By Helen Macfarlane

Frequently, contractors who are well aware of their rights when submitting payment claims of their own are less careful when it comes to handling payment claims they receive. This can be a costly error.

In an earlier article, it was recommended that in the current tough economic climate, a contractor should not allow unpaid payment claims to build up, thereby running the risk of insolvency of the other party.

However, as a contractor, you will also be on the receiving end of payment claims from your subcontractors and suppliers. You may be obliged to pay on your subcontract before receiving payment from your client. This places you at some economic risk. Where there is a question, for example, about the quality of the services or materials provided, you may be reluctant to take the risk of being left out of pocket if, down the line, your client disputes your payment claim in respect of that work.

While this may be in large part a business decision – balancing your own commercial relationships with your suppliers and subcontractors against the possibility of economic exposure if your client withholds full payment – it is also important to understand what you have to do if you wish to dispute a payment claim and how best to prepare for the risk of the possible adjudication proceedings that may eventuate as a result.

Disputing A Payment Claim

If you want to dispute amounts claimed by your subcontractor/supplier, the first thing you should do is look at the Construction Contracts Act (you can find it at www.legislation.govt.nz). This is because the CCA has very specific requirements for responding to payment claims.

There are four key requirements:

• You must submit a written ‘payment schedule’ within the timeframe set by your contract (if none is specified, the CCA prescribes 20 working days from receipt of the payment claim).
• Your payment schedule must indicate – and show how you calculated – an amount to be paid, even if that is nil.
• Your payment schedule itself must fully explain your reasons for not paying the amount claimed.
• You must pay any amount you acknowledge to be due.

If you do not respond with a payment schedule, or pay amounts you acknowledge to be due, within the time set by the CCA, you may find yourself facing a summary judgment action for the amount claimed, against which you cannot raise any counterclaim or set-off.

If your payment schedule does not explain all your reasons for any deductions made, you may find yourself facing an adjudication claim against which you cannot raise those omitted reasons in your defence. The fact that you may have told your supplier of the reasons for non-payment in a phone call or email will not matter if these are not included in your payment schedule. So take the time to get your payment schedule right. Be over – rather than under – inclusive.

 

Time Is Of The Essence

You will probably be aware that adjudication is a rapid-fire procedure which, if you lose, will result in an award in the claimant’s favour that can be enforced against your company. Although you may bring other dispute resolution proceedings challenging the payment claim, the claimant will have the use of the disputed funds pending determination of these, and you will be left out of pocket (and bearing the risk of the claimant’s insolvency during that time).

Don’t assume that silence means acquiescence. Particularly where amounts are significant, a party whose payment claim has been denied may take the time to prepare detailed papers before serving a notice of adjudication.
–as you hope they will be – actively engaged in ongoing projects.

 

For Significant Disputes, Consult A Lawyer

Because the timing is weighted so heavily in favour of the party commencing adjudication proceedings, prudent contractors who dispute and withhold amounts from a supplier’s or subcontractor’s payment claim should do what they can to prepare for the possibility of an adjudication.

Obviously, in doing this, you want to keep costs down since it is not certain your supplier will pursue that route. On the other hand, particularly if the amount is substantial, proceedings under the CCA are a real risk.

Without incurring major expense, there are several anticipatory steps you can take.

Firstly, ensure there is a paper trail. You should have standard procedures to ensure that key communications with your supplier/subcontractor – orders for materials, instructions, requests for clarification – are documented and not merely verbal. You may wish to create standard forms to record these as a matter of routine practice.

Second, if the amount withheld is commercially significant to your company, before submitting a payment schedule denying the amount claimed, consult a lawyer. Too often parties consult counsel only when an adjudication notice hits them. This is a false economy – a brief early consultation can reduce costs down the line. If you have in-house counsel, use them.

Ask your lawyer to review your draft payment schedule to ensure it properly and fully states your reasons for withholding payment. If it seems likely your rejection will be disputed, ask them to tell you what type of supporting evidence you will need if the matter proceeds to adjudication – documents, people whose evidence may be important, and whether you may need any experts such as a quantity surveyor.

Based upon this, you can then do the following:

• Assemble the supporting documentation concerning the disputed matters in an organised form.
• Briefly dictate or write out a summary of the circumstances and events that support your reasons for not paying the amounts withheld. (This can be a bullet-point outline or verbatim account – the key is to provide information.)
• Ask potential witnesses (at least within your company) to do the same.
  If relevant, line up a quantity surveyor or other expert.

Because most of this is done by you, legal fees should not be substantial, nor need it take a huge amount of your time. The fact that issues are fresh in people’s minds will make your task less time-consuming than trying to recreate events some time after they occurred.

The documentation and statements you collect will form a dossier that should provide a jump-start for your lawyer if adjudication proceedings are commenced. This should, in turn, reduce their costs of preparing a response. Alternatively, if the expense of legal fees is an issue for you, advance preparation may enable you to put together the factual parts of an adjudication claim response yourself, and use lawyers only for guidance and to address any purely legal issues.

Summary
On receipt of a payment claim, if you have reason to dispute any part of it, you must follow the procedure in the CCA. Not every disputed claim will merit consultation with counsel – frequently the amounts will be insignificant or the issues readily subject to commercial resolution. However, where there is a genuine dispute and significant amounts withheld, it pays to get legal advice upfront and prepare in advance for possible adjudication proceedings down the line.

Helen Macfarlane is a senior associate at Hesketh Henry; for further information, visit www.heskethhenry.co.nz