Wednesday, 7 October 2009

Construction Contracts and Counting angels on Pinheads

Payment Schedules Again

It appears that knowledge of the requirements of the Construction Contracts Act is still not widely known, despite six years passing from the date it came into force. In addition, cases are being litigated in the District Court and High Court which could have been disposed of by a construction adjudicator much more rapidly and efficiently.

The recent Christchurch decision Foggo And Ors v R J Merrifield Limited 21 September 2009, Justice Christine French, HC Christchurch CIV-2009-409-000605, records the setting aside of a summary judgment obtained in the District Court, on the basis that the section 20 schedule was clearly inadequate, despite the more liberal approach encouraged by George Developments Limited v Canam Constructions Limited [2006] 1 NZLR 177. The history of the case was that the builder sent the owner a number of payment claims, with the usual time to respond. No schedule in the form in the Act was sent in reply, although a dispute was raised and a payment made on account. There were three principal errors in the payment claims provided by the builder to the owners. The first, which was an error in the heading, was that “payment of schedule” instead of “payment schedule” was used. This was considered not to be anything more than a typographical error. However the other two errors, proved fatal to the District Court judgment. The word "not" was erroneously included in the first line in two parts. These are worth quoting, and are as follows, emphasised:-

" If you do not respond to the payment claim by providing a payment schedule, but indicate in the…"

and the second:-

“If you do not respond to the payment claim by providing a payment schedule but do not pay the…”

The effect of this error was of course to make the payment claims confusing. While there was no evidence that the owner was confused, the court held that this was not important because of the effect of Welsh & Anor v Gunac South Auckland Ltd HC Auckland CIV-2006-404-007877, 11 February 2008, Allan J. In that case it was held that because the requirements of section 20 are mandatory, it is not necessary to then explore whether the errors did cause confusion. The errors alone were sufficient to make the payment claim bad. Justice Allan did consider in that case that some errors might not be fatal where the principal had not been misled or not in any doubt as to what was intended, giving as an example a failure to include the necessary statutory reference from the Act. This is in reality a restrictive view of the act, and with respect to the learned judge, not the sort of approach intended by the Court of Appeal in George Developments Limited v Canam Constructions Limited.

Although the building contract was for a residential dwelling house, it was clearly substantial because the total contract price appears to have exceeded $600,000. The payment claims referred to were numbers 12 to 15 and in common with most building disputes it was the payment for the end of the job which was left unpaid.

The owners did respond to the payment claim number 12 with an e-mail which the parties accept was sent on time if it was a schedule, but the builder challenged the form claiming it did not comply with the Act as a proper payment schedule. No proper response was made to the other three claims, but a payment of $70,000 was made on account, leaving about $100,000 owing. It was argued that the e-mail had to be read in the context of prior discussions, but regrettably there was little evidence as to what had been discussed. Justice French considered that the liberal approach in George Developments Limited v Canam Constructions Limited could only be adopted where there was evidence of prior written communications between the parties, so that the schedule could be read in the context of those discussions. In addition, she referred to the failure to indicate a final amount in the schedule, and following other decisions such as Westnorth Labour Hire Ltd v SB Properties Limited HC Auckland CIV-2006-404-001858, 19 December 2006, Rodney Hansen J, refused to accept the e-mail as an adequate schedule. Because the builder engaged in discussion about the email, the owners sought to raise an estoppel in relation to the subsequent rejection of the e-mail as a sufficient payment schedule, but this was also rejected by the judge.

The case illustrates a tension between the clear intention of the Court of Appeal in the George Developments Ltd v Canam Construction Ltd, that a relatively liberal approach should be taken to the documentation, and the particular approach taken by this judge. I rather doubt that the owners ever read the fine print in the payment claim. It would have been clear, or should have been clear, that they had a certain period of time to respond, and had a proper form to use if they wished to respond with a schedule. The errors in the payment claim did not inhibit them from responding by their email, and really answers the issue of whether they were confused. The addition of the words was clearly the same sort of typographical error as the name on the form. It may be that rejection of the email as the schedule was intended to be a consistent strict approach. With respect, her approach is too particular and narrow. If we are to have a practical construction litigation procedure, this sort of approach is unhelpful. But, anyone building a house of this value should be aware of the time periods in the Act and the required forms.

In the end, the summary judgement was set aside and the matter referred back to the District Court. The payment claims were dated in 2006. If the parties had engaged in a construction adjudication in 2006, they would have had a result in 2006 rather than being in the unsatisfactory position of a partial result in 2009.

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