A builder who was relatively new to the building business sent an invoice to a home owner for some large-scale renovations he was carrying out for the home owner.

The home owner didn’t pay, so the builder tried to enforce his rights by saying the non-payment was a breach of the Construction Contracts Act. 

He was shocked to discover that because his invoice did not meet the requirements to be a ‘payment claim’ under the Act, he had to follow a different process to chase up payment than the process detailed in the Act.

The Construction Contracts Act has important provisions regarding payment arrangements and claims in construction contracts.

The definition of ‘construction’ in the CCA is wide and can include the following:

• Construction, erection, installation, carrying out, alteration, repair, restoration, renewal, maintenance, extension, demolition, removal, or dismantling of any building, erection, edifice, or structure;
• The installation in any building or structure of fittings including heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply, fire protection, security, and communications systems;
• The internal or external cleaning of buildings or structures carried out in the course of construction;
• Site clearance, laying foundations, and excavation;
• Erecting, maintaining, and dismantling scaffolding or cranes;
• Painting or decorating;
• Design or engineering work carried out in respect of the construction; and
• Quantity surveying work carried out in respect of the construction.

Conditional payments

The CCA prohibits conditional payment provisions, commonly referred to as “pay when paid” or “pay if paid” clauses.

A common example of this is where the obligation of one party (Party A) to pay an amount owed to another party (Party B) is conditional on Party A receiving payment from a further party (Party C).

Default payment arrangement in the absence of express terms

If there is no written contract, or if the contract does not specify a payment mechanism including the method of calculating payment, a payment schedule, due dates for payment, or fixed payment figures, the CCA provides a default mechanism which applies.

The default arrangement under the Act gives the contractor the right to progress payments.

The amount of a progress payment must be calculated by reference to

• The relevant period for that payment;
• The value of the construction work carried out, or to be carried out during that period; and
• Any relevant provisions in the construction contract (i.e. retention of money).

The relevant period for a progress payment is a period calculated from the day the construction work begins to one month afterwards (“first period”). Subsequent progress payments will be each month after the first period.

The value of the construction work should be calculated with regard to:

• The contract price for the work or any other rates/prices set out in the contract (if there is one);
• Any variation to the construction work authorised under the contract; and
• If any work is defective, the estimated cost of rectifying the defect.

If there is also no clause in the contract regarding the due date for payment, the due date for a payment will be 20 working days after a payment claim in respect of the work is served to the client.

Payment claims

A valid payment claim must:

• Be in writing;
• Contain sufficient details which can identify the construction contract to which the payment relates;
• Identify the construction work and relevant period of payment;
• State a claimed amount with a due date for payment;
• Indicate the method of calculating the payment; and
• State that the claim is made under the CCA.

Alongside the payment claim, the contractor must provide an outline of the process of responding to the payment claim, and consequences in the event the debtor client fails to respond or pay the claimed amount.

If the client fails to pay

If the client fails to pay the claimed amount or does not make effort to engage in a process to do so, contractors are entitled to start proceedings in any court to recover the claim plus legal fees.

The contractor will also have a right to suspend work if payments are not made, but only after providing notice to the client. The notice must state the grounds on which the proposed suspension is based, and that the notice is provided under the CCA.

It is important to know that this will not amount to a breach of the contract, and therefore the contractor will not be liable for any loss or damage suffered by the client due to the contractor suspending work.

No exclusion of payment rules

The rules under the CCA cannot be excluded from any contracts, even if both parties try to agree to exclude them. Any provision in a contract which tries to do so will be void and ineffective.

The effectiveness of payment arrangements are crucial to ensuring a successful result for your project. It is imperative you seek legal advice early in the process to make sure you are covered in any event.

Leading law firms committed to helping clients cost-effectively will have a range of fixed-price Initial Consultations to suit most people’s needs in quickly learning what their options are.  At Rainey Collins we have an experienced team who can answer your questions and put you on the right track.