If a construction contract gives you a choice whether to exercise a contractual election, then you need to communicate clearly your decision to affected parties like subcontractors. Otherwise the Court may take the matter out of your hands.
That is the lesson from a recent High Court case1 about the construction of a supermarket carpark in Christchurch.
The subcontractor, CSC, had submitted five payment claims to the head contractor, Watts & Hughes. Four of those claims had been received after the “Due Date” of the 25th of each month.
Under clause 5(c) of the Master Builders Standard Form of Subcontract, Watts & Hughes had a discretion to treat each late claim as if it had been received on the 25th of the following month (the next Due Date), postponing its obligation to issue a payment schedule by a month.
In each of the first four instances, Watts & Hughes had chosen not to do this and had treated the claim as having been received on time. It had then issued a payment schedule to CSC within the required 22 working days.
Watts & Hughes had, however, warned CSC about the possible consequences under the subcontract of submitting late payment claims.
Payment claim No. 6
Payment claim No. 6 (due on 25 February 2014) was treated differently. That claim was also not submitted on time – it was received by Watts & Hughes three days late on 28 February 2014. But this time, Watts & Hughes did not provide a payment schedule within 22 working days of 25 February 2014. Nor did it make the claimed payment to CSC of $306,077.23.
CSC served a statutory demand on Watts & Hughes to recover the outstanding amount.
Watts & Hughes applied to set the demand aside saying it was entitled to treat the due date for receipt of payment claim No. 6 as being 25 March 2014, even though it had not formally communicated this decision to CSC.
How the Court saw it
The issue for the Court was whether Watts & Hughes had an obligation formally to advise CSC of its decision to activate clause 5(c).
Watts & Hughes argued that no formal communication was required as the claim had been submitted late and it had warned CSC about the consequences of doing so on numerous past occasions.
The relevant clause of the Master Builders Standard Form Subcontract provided:
“Where a Payment Claim is received after the claim Due Date, the Contractor may at its sole discretion elect to treat that Payment Claim as having been received (and having been due for receipt) on the next claim Due Date.”
The Court referred to various authorities about the doctrine of election and found the following three principles to be the most relevant to the case:
- communication of the decision to the other party is an essential part of a valid election
- an election may in some cases be imputed by law, irrespective of the electing party’s actual intention, and
- a right of election may be lost if it is not exercised in a timely way.
The subcontract did not automatically deem a late progress claim to have been received on the next monthly date for submission. It gave Watts & Hughes a choice. Further, both the subcontract and the Construction Contracts Act provide mechanisms whereby subcontractors can recover outstanding payments in situations where contractors fail to respond to their payment claims.
It would have been improbable that the framers of the Standard Form of Subcontract intended that Watts & Hughes did not need to communicate their election to CSC. Subcontractors are entitled to know where they stand on any given date and whether or not contractors owe them money.
The practical effect of this was that, by failing to communicate with CSC before the applicable date for timely claims, Watts & Hughes had lost the ability to treat the claim as submitted in the next monthly “round”.
Accordingly, Watts & Hughes failed in their bid to set aside the statutory demand and were ordered to pay the outstanding amount in full within seven days.
Clear communication is essential
The judgment demonstrates that parties must clearly communicate the choices they make to exercise (or not) contractual elections to affected parties like subcontractors. Such communications can be by way of email, written correspondence or telephone.
A failure to communicate the outcome of elections runs the risk that the Court will take the matter out of the electing party’s hands, and deprive them of their choice.