By Tim Bates and Sabina Boyd, Legal Vision
In this month’s article we wish to review the High Court decision of NMHB Ltd v Concrete Structures (NZ) Ltd.
This was an application to set aside a statutory demand under section 289 of the Companies Act 1993, making demand for outstanding amounts owing pursuant to payment claims under the Construction Contracts Act 2002 (CCA).
The court was required to determine whether there was a substantial dispute as to whether or not the debt was due and owing, and whether NMBH retained a counter-claim or set-off for equal or more than the amount sought.
The court was also required to determine whether a party could claim for security under the CCA, where it has been allowed for in the contractual agreement — ie, payment in advance of commencement of construction works.
NMHB was a construction company which engaged Concrete Structures Ltd to manufacture and supply concrete panels for a building project.
Concrete Structures issued a statutory demand on NMHB on February 16, 2018, demanding the amount of $206,391.94 be paid, which comprised the two invoices, or payment claims, that were sent in September and December 2017.
The first payment claim attempted to secure payment for half the contract price of the concrete panels in advance of production.
CCA, Section 14
Section 14 of the CCA allows parties to a contract to modify the statutory terms, and to agree to their own “mechanism for determining” the “number”, “amount”, and “date” of payment.
Two specific contractual conditions required firstly, that the requested concrete panels would be delivered to the construction site on the week commencing November 6, 2017 and, secondly, that 50% of the total payment would be made in advance, with the final 50% being due on completion of final delivery.
‘Sudden death’ under the CCA
NMHB failed to issue a payment schedule in response to the two invoices that were sent. Under the CCA, if a payment schedule is not sent in response to a payment claim within the specified time, then the payer becomes liable to pay the claimed amount.
In other words, NMHB was required to either issue a payment schedule within the specified time frame or, alternatively, “pay now and argue later”.
In response to the “sudden death” principle, NMHB argued that the invoices fell outside the scope of the CCA, in that security sought (monies paid in advance) is beyond the Act’s contemplation and, therefore, they were not required to submit a payment schedule in the strict time frame provided for in the Act.
In particular, it argued that the payment claim must identify completed construction work, not security in advance of such work.
NMHB submitted that the language in section 20(2)(c) and Section 6 of the CCA is only concerned with actual work, rather than security for work.
If NMHB succeeded in this argument, then that part of the payment claim that related to future work would not require responding to by way of a payment schedule.
It would also be free to counter-claim against or set-off the amount sought in the statutory demand.
The judge disagreed with this argument, and said that a payment claim may still relate to future work and, therefore, NMHB was still required to submit a payment schedule within the prescribed time.
She held that the interpretation of the Act, as advocated by NMBH, would run counter to the wide discretion afforded by Section 14, whereby parties were afforded the opportunity of determining the exact content of their contractual arrangements.
NMBH’s interpretation would be contrary to the purpose of the Act, being to swiftly facilitate payments between parties to a construction contract.
Further, it is not uncommon for companies to request security in advance, so if the payment claims of Concrete Structures were prohibited, this may have negative implications on parties in similar contractual relationships.
The judge declined to allow the application to set aside the statutory demand, and ordered that NMHB pay $206,391.94 which was claimed by Concrete Structures.
For completeness sake, because the judge decided the payment claims by Concrete Structures were valid, NMHB was not able to make a counter-claim or set-off for the amount sought in the statutory demand, strictly applying Section 79 of the CCA.
Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision or Building Today to anyone who relies on the information contained in this article.