Payment claims – the fine line between substantive non-compliance and technical quibbles
The Construction Contracts Act 2002 (CCA) contains mandatory requirements for claiming and certifying payment under construction contracts as part of its “pay now/argue later” regime.
Substantive non-compliance with the CCA regime is not acceptable. However, minor errors can be forgiven as courts will not allow “technical quibbles” to vitiate a payment claim that substantively complies with the requirements of the CCA. This article reviews the substantive non-compliance/”technical quibble” distinction and also considers how courts have treated repeated or reissued payment claims.
Section 20(2) of the CCA sets out six mandatory requirements for payment claims. Payment claims must:
“(a) be in writing; and
(b) contain sufficient details to identify the construction contract to which the payment relates; and
(c) identify the construction work and the relevant period to which the payment relates; and
(d) state a claimed amount and the due date for payment; and
(e) indicate the manner in which the payee calculated the claimed amount; and
(f) state that it is made under [the CCA].”
Whilst subsections (a) and (f) must be strictly complied with, requirements (b) to (e) are satisfied if substantially complied with (Complete Construction Limited v Lyon Electrical Limited  NZHC 3116 at ). The concept of “substantive compliance” has been debated for over 10 years, since the Court of Appeal rejected a pedantic, “technocratic” interpretation of section 20 in favour of an approach which would advance the purpose of the CCA to facilitate regular and timely payments between parties and secure “cash flow” in the industry (see George Developments Ltd v Canam Construction Ltd  1 NZLR 177 at  to ). Since George Developments, the lower courts have been grappling with what constitutes a “technical quibble” and what falls short of substantive compliance with the mandatory requirements for payment claims. The decisions at times contradict each other which leaves parties uncertain as to which approach courts will adopt.
Technical quibbles vs substantive noncompliance
Courts will generally not allow minor or trivial defects in payment claims to frustrate a contractor’s entitlement to payment under the CCA.
Such defects have included:
- an error in the date of the payment claim itself (see Complete Construction Limited v Lyon Electrical Limited  NZHC 3116 at , where the invoice claiming for work done in July 2014 was erroneously dated 23 June 2014);
- failing to use the words “payment claim” (Herbert Construction Co Ltd v Tuck Contractors Ltd (in liq) HC Napier CIV-2011 441-54, 22 July 2011);
- erroneously referring to the CCA as the “Construction Contracts Act 2003” rather than the “Construction Contracts Act 2002” (Invent Solutions Ltd v Chan Developments Trustee Ltd  NZCCLR 37 (HC) at ); and
- an error in a due date for payment, in that it is contrary to what is specified in the contract (Pedestal Limited v City Build Construction Ltd  NZHC 1783 at ; CMP Construction Ltd v Aluminium Technology Ltd  NZHC 2481 at  to ; and Invent Solutions Ltd v Chan Developments Trustee Ltd  NZCCLR 37 (HC) at ). Interestingly, a failure to include a due date at all invalidates a payment claim as this completely breaches the “obvious” requirement in subsection 20(d) (Loveridge Ltd v Watts & Hughes Construction Ltd HC Tauranga CIV-2011- 470-275, 29 September 2011 at ) and Herbert Construction Co Ltd v Reinforcing Steel & Mesh Ltd  NZHC 376 at ).
Indeed, where there has been no compliance at all concerning one of the section 20(2) elements, a claimant’s position cannot be salvaged by invoking the “technical quibble” principle and courts are likely to hold that the claim does not substantively comply with the requirements. Associate Judge Doogue noted in Loveridge at  that “it would be surprising if a statutory mechanism which was designed to put the payer on notice that a claim was being made … could be ignored”. Other than the failure to include a due date for payment, examples include a bald statement of hours spent by listed people on various dates in breach of the requirement to identify the construction work (s 20(2)(c)), and a bald claim that 1184.75 hours (presumably, as there was no mention of hours) had been put into the contract (Can Build Ltd v Kirkpatrick  NZHC 1161 at  and ).
A persuading factor that has influenced courts’ findings on the substantive noncompliance/“ technical quibble” distinction is the degree to which the payer has been or is likely to be prejudiced or misled by the payee’s apparent failure to comply with section 20(2) (see Pedestal at  to  and CMP Construction at ). As part of this, courts are willing to look at the context in which payment claims are made and the knowledge of the parties involved in assessing compliance with section 20(2). Courts have even gone as far as using this reasoning to justify complete non-compliance with a mandatory requirement as not invalidating the payment claim. For example, in McAlpine Hussmann Ltd v Cooke Industries Ltd HC Auckland CIV-2011-404-5663, 16 March 2012, the Court held that a tax invoice without any explanation of how the invoiced amount was calculated met the requirements of section 20(2)(e) in the context of the payer’s knowledge of the background circumstances. In Herbert Construction Co Ltd v Reinforcing Steel & Mesh Ltd  NZHC 376, the Court held that while the invoices submitted as “payment claims” failed to identify the period to which they related, this error did not vitiate the claims as the payer would have been aware of when the relevant material was supplied and would accordingly know the period to which the invoices related. With respect, these decisions risk rendering redundant the need to comply with sections 20(2)(c) and (e) at all, so long as all parties are familiar with the surrounding circumstances.
The Court of Appeal decision of C.J. Parker Construction Ltd (in liq) v Ketan  NZCA 3 recently favoured this “pragmatic, common sense and contextual approach” (at ), but also helpfully reinforced the need for substantive compliance if parties wished to take advantage of the statutory mechanisms of the CCA. There, the contractor’s “bare statement” of the amount claimed for each item comprising the total claimed amount where there was no contract between the parties, no agreed contract price or terms regarding payment did not substantively comply with section 20(2)(e) as, in light of the surrounding circumstances, the payer could not make sense of how the amount was calculated. Toogood J held that fundamentally, “a payment claim must be sufficiently detailed and comprehensible to enable a payer to understand the basis on which the claim is made” (at ). If this basic requirement is not met, courts are likely to consider it does not substantively comply with section 20(2).
Ultimately, what can be gleaned from the plethora of cases is that while courts will accommodate technical quibbles, a hard line will be drawn for substantive non-compliance, or no compliance at all, particularly where the evidence demonstrates that the party in receipt of the payment claim has no way of comprehending it. It is suggested that this is the correct approach. The CCA enables parties to utilise a statutory debt process that would not otherwise be available, and it is only appropriate that parties be required to comply with the statute if they wish to take advantage of it.
Repeated or reissued payment claims
The CCA does not prevent nor condone parties resubmitting previously declined or ignored valid payment claims by repeating them in subsequent payment claims (sometimes judicially referred to as “cumulative” or “escalating” payment claims) (Sol Trustees Ltd v Giles Civil Ltd  NZHC 1813 at ; George Developments at  and NCB 2000 Ltd v Hurlstone Earth Moving Ltd HC Auckland CIV-2010-404-8096, 23 June 2011 at ). The Court of Appeal in George Developments recognised that resubmitting claims was in line with common building industry practice and that it was not necessary for those claims to clearly identify which components of the claim had been claimed previously in order to be valid (at ). In such cases, the payee must issue a payment schedule in response to each repeated claim if it wishes to avoid the statutory consequences of failing to respond to a payment claim under section 22 of the CCA, even if this amounts to no more than a reiteration of the payment schedule previously issued to the same amounts claimed (Sol Trustees at  and Herbert Construction v Alexander at ).
This differs to when a party purports to amend or substitute a previously issued claim that had fallen short of the section 20(2) requirements. The High Court in Loveridge held at  that claimants cannot “cure a defect in an initial payment claim by serving subsequent amended or substituted payment claims” as unnecessary confusion would result if that position was not adhered to. As the CCA payment regime is designed to assist those engaged in the construction industry who are not lawyers, simplicity and not undue complexity is required. We note that Loveridge contradicts the District Court’s comment in Blenheim Building Centre Ltd v Dallas Hemphill DC Blenheim CIV- 2009-006-000034, 7 August 2009 at  that it was open to contractors to re-issue invoices in substitution for invoices that failed to constitute valid payment claims under section 20.
The Loveridge approach was recently upheld in Can Build Ltd v Kirpatrick  NZHC 1161, but in the context of the late provision of information which should have been provided with the originally defective payment claim. Associate Judge Matthews held at  that while Loveridge was concerned with the effect of issuing an amended or substituted payment claim, an attempt to “bolster” a defective payment claim after it had already been issued would have the same effect as that noted in Loveridge, in particular confusion around the applicable deadline for the responding payment schedule. This later provision of supporting materials therefore did not have the effect of retrospectively validating the payment claim issued beforehand.
What is less clear is whether contractors are permitted to revise or amend the substantive content of payment claim for a period of construction work in respect of which a valid payment claim has already been issued. This was commented on by Associate Judge D I Glendall in Herbert Construction Company Ltd v Toogood HC Auckland CIV 2010-441-283, 20 August 2010, where Herbert Construction had issued several payment claims for different amounts on different dates, all of which purported to be “final”. While his Honour did not decide on the issue either way, he considered it to be “at least reasonably arguable” that this was not permissible under the CCA. However, his Honour appeared to be influenced by the fact that under the contract, final payment claim was meant to represent “conclusive evidence” that the contractor had no other outstanding claims and that issuing multiple “final” payment claims risked undercutting this. Accordingly, it is arguable that this judgment should be confined to its facts.
In Herbert Construction v Alexander, Herbert Construction revised and re-issued one payment claim for a slightly lesser amount than that previously claimed and then reissued another by renumbering it. Interestingly, Associate Judge D I Glendall did not refer to his previous judgment in Herbert Construction v Toogood and merely noted that to do this was perhaps somewhat confusing. Ultimately, his Honour held that the principal’s failure to respond to the revised and re-issued payment claims with a valid payment schedule (even if it had done previously) meant that it was liable to pay the sums claimed as debts due.
Accordingly, if contractors omit to claim for certain items of work carried out in a particular period in a payment claim already issued for that period (because, for example, the late receipt of a subcontractor’s invoice meant that the contractor could not include it in that claim), or wish to revise the sum(s) claimed for previously claimed items, the best approach would be to include these new or revised items in the next payment claim, with clear reference to when these works were carried out and what they relate to with the necessary supporting information (George Developments confirmed at  that re-submitting claims with further supporting information is permissible). Indeed, the CCA does not require payment claims to only refer to work carried out in the same period (George Developments at ) and does not include any form of “limitation period” for claiming for work carried out in a particular period (Loveridge at ). However, claims that purport to replace previous payment claims (in particular “final” claims) or attempt to “cure defects” in previously non-compliant payment claims risk being considered invalid under the CCA.