What it means for payment claims to be ‘reasonably arguably’ invalid under the Construction Contracts Act 2002

By Stephanie Collins, solicitor, and Lavi Abitbol, summer clerk, at Dentons Kensington Swan

A recent High Court case, South Pacific Industrial Ltd v Demasol Ltd, is a helpful reminder to ensure parties carefully calculate payment claims in accordance with contractual arrangements, or, where the contract is silent, in accordance with the default provisions of the Construction Contracts Act 2002 (‘CCA’). 

South Pacific engaged Demasol to undertake demolition works.  Email correspondence at the time confirmed the parties understood there was a $100,000 fixed price for the work.   South Pacific issued Demasol a purchase order which attached South Pacific’s standard terms. These allowed variations to be claimed at Demasol’s discretion.  Demasol submitted two payment claims totalling $390,997.29, of which $240,000 was for variations.  South Pacific did not respond with payment schedules for either.  Subsequently, Demasol served a statutory demand on South Pacific, seeking to rely on the standard terms to value the variations.

Assessing the payment terms

In assessing the validity of the payment claims, for the purposes of enforcing a statutory demand, the Court’s analysis was twofold:

  1. Whether the parties had agreed on a single payment term in accordance with s 14(2) of the CCA.
  2. If they had not, did the default provisions, s 16 – 17, of the CCA apply, and did the second payment claim comply with these provisions?

In respect of both payment claims, the Court found it was reasonably arguable that a single payment term was expressly agreed in accordance with s 14(2). Because both payment claims were not issued in accordance with this the method of calculation, as agreed by the contract, it was reasonably arguable both claims were invalid.

In respect of payment claim 2, which contained the variations, the Court found that it was reasonably arguable that s 17(3)(c) did not apply. This was because it was reasonably arguable that it was a fixed price contract and that the standard terms that ‘authorised variations’, were not incorporated into the contract.  Therefore, it was reasonably arguable that payment claim 2 was invalid on another basis as it had not been calculated in accordance with s 17(1), being a fixed price contract.

Key takeaways

  • If the contract does not provide for price for the work or any other rates or prices, the value of the work must be calculated with regard to the reasonable value of the work or of any variation to the construction work authorised under the contract.
  • Even if all other requirements of a payment claim are correct, the value of the payment claim must be properly calculated such that it takes into account all contractual agreements to be compliant with the CCA. 

Disclaimer: This article is not a substitute for specific professional advice on any matter. No warrant or guarantee whatsoever is given as to the accuracy of any information contained in the article, nor is any liability accepted for any actions taken based on this information.

Dentons Kensington Swan has New Zealand’s largest team of construction lawyers and we have worked on many of New Zealand’s largest construction projects. We are experts in both front end and back end construction matters.  

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