The Court of Appeal in Demasol Limited v South Pacific Industrial Limited [2022] NZCA 480 has overturned the earlier High Court judgment from last year, shutting the door on suggestions that those who fail to follow the payment procedures mandated by the Construction Contracts Act 2002 (CCA) can resist making payment or set aside associated statutory demands.

In doing so, the Court of Appeal affirmed the foundational “pay now, argue later” principle underlying the CCA, and provided a strong, clear re-statement of what is required of parties to construction contracts by the CCA’s payment procedures in sections 19 – 24.

Facts

South Pacific Industrial Ltd (SPI) was the head contractor to demolish a redundant gas facility. In December 2020, SPI engaged Demasol Ltd (Demasol) as a subcontractor to demolish a large bin tank which contained asbestos.

The subcontract works took longer than expected. Demasol claimed that the scope of its works had increased and sought payment for the additional work as variations to the subcontract.

Demasol served two payment claims on SPI. SPI neither disputed the claims by issuing payment schedules, nor paid the amounts claimed. Demasol served a statutory demand on SPI for the claimed amounts, and SPI responded by applying to set aside the statutory demand on the grounds the payment claims were invalid. Subsequently one of the payment claims was paid, leaving only one in issue.

High Court Decision

The High Court set aside the statutory demand under s 290(4)(a) of the Companies Act 1993. It did so after concluding it was reasonably arguable the second payment claim was not valid on the basis that:

  • A single payment on completion was agreed, precluding progress payments.

This decision was surprising in that it appeared to allow courts to look beyond the technical compliance of payment claims and consider at least some merits-based arguments. This seemed to contravene the CCA’s “pay now argue later” principle, which was intended to keep cashflow (being “the very lifeblood of the building industry”[2]) flowing.

Court of Appeal Decision

The Court of Appeal unanimously held that the High Court erred when embarking on an enquiry into the terms of the contract and the quantum and merits of the payment claim. The underlying merits of Demasol’s payment claim were not open for consideration and were irrelevant to whether the CCA’s payment procedures had been complied with, or indeed in the context of the resulting statutory demand.

The sole relevant consideration was whether the parties had complied with the statutory requirements under CCA ss 20 (for a valid payment claim) and 21 (for a valid payment schedule).

Applying this test, the Court found that the payment claim was valid[3], and SPI had failed to comply with s21 of the CCA by not providing a payment schedule after the payment claim was served or paying Demasol the amount claimed. As a result, Demasol was entitled to recover from SPI, as a debt due to it, in any court, the unpaid portion of the claimed amount and its actual and reasonable costs of recovery (once awarded by the court).

It followed that the statutory demand should not have been set aside (whether under s 290(4)(a) of the Companies Act or otherwise).

Demasol was also entitled (under s23(2)(ii) and the court’s inherent discretion on costs) to its actual and reasonable costs of recovering the claimed amount as SPI’s arguments did not engage with the plain meaning of the CCA or the well-established authorities in the High Court and Court of Appeal. Rather, SPI’s arguments were primarily directed at the merits of the payment claim, which was not a relevant factor under the CCA.

Comment

The Court of Appeal’s decision marks a return to the orthodox interpretation of the CCA’s payment procedures, following a brief flirtation in some recent cases that suggested other, more merits-based factors (such as compliance with specific contract terms that did not form part of the CCA’s payment mechanisms) might be relevant in deciding whether payment claims have been validly made.

The decision re-affirms that all parties to construction contracts (whether principals, consultants, contractors, or subcontractors) must strictly follow the payment procedures set out in CCA ss 20 to 22, or otherwise face the consequences set out in s23, which can lead to the service of statutory demands for payment.