A recent case between Spotless Facility Services (NZ) Ltd (Spotless) and The Fletcher Construction Company Ltd (Fletcher) serves as a timely reminder for parties issuing payment schedules to ensure that they comply with the requirements of section 21 of the Construction Contracts Act 2002 (the CCA).

Our team acted for Spotless and was successful in arguing before the High Court that Fletcher’s payment schedule was invalid due to a failure to explain how all deductions from the amount claimed for payment by Spotless were calculated and to provide reasoning for such deductions. Spotless’ suspension of the subcontract works pursuant to the CCA was therefore valid and Fletcher was ordered to pay the amount originally claimed by Spotless.

Background

Spotless was engaged as the mechanical services subcontractor to Fletcher for the Commercial Bay project in Auckland. During the course of the project, Spotless issued Fletcher with its monthly payment claims in the usual way. The payment claim in question totalled $2,067,715.86 (plus GST).[1] Fletcher responded with a payment schedule (Payment Schedule #44) that, due to numerous deductions and contra-charges (including delay costs and liquidated damages) totalling over $6million, showed Spotless owing Fletcher $4,058,703.65 (plus GST).[2]

Spotless considered Payment Schedule #44 failed to meet the requirements of the CCA on the basis that Fletcher did not (1) indicate how all deductions were calculated, and/or (2) provide reasoning for all deductions – it was therefore invalid. On the basis that no valid payment schedule was issued, the amount Spotless claimed in its payment claim became due for payment and, when Fletcher did not make that payment at the time required by the subcontract, Spotless notified Fletcher that it was suspending performance of the subcontract works in accordance with its statutory remedy under section 24A(1) of the CCA.

Fletcher disputed that Payment Schedule #44 was invalid and sought a declaration from the High Court that Spotless therefore had no right to suspend the works under the CCA. The central issue in dispute was the validity of Payment Schedule #44 under section 21(3) of the CCA. Section 21(3) of the CCA provides that if the scheduled amount is less than the claimed amount, a valid payment schedule must indicate the manner in which the scheduled amount was calculated and the reasons for the difference in the amount.

The High Court’s assessment of Payment Schedule #44

Spotless claimed that Payment Schedule #44 failed to meet the requirements of the Act, on the basis that there were numerous instances where Fletcher did not (1) indicate how all deductions were calculated, and/or (2) provide reasoning for all deductions.

Calculation of deductions

Payment Schedule #44 contained a number of deductions from amounts claimed by Spotless for completion of the subcontract works (including variations). The Court rejected Spotless’ claim that Payment Schedule #44 failed to contain sufficient explanation as to how the deductions were calculated.[3]

The Court found that it was common practice between the parties to calculate payments as a percentage of the work under each item, so it would have been readily apparent to anyone familiar with the payment process that the amounts scheduled represented percentage deductions (even if a calculator was required to ascertain the precise percentage).[4]

Reasoning for deductions

Spotless took particular objection to the lack of supporting details that accompanied the large contra charges that had been issued for the first time under Payment Schedule #44 – largely made up of delay costs totaling just over $2.5million. The only information accompanying these deductions was the statement “refer to Aconex correspondence for breakdown of claim.”[5] No Aconex document numbers were provided. Spotless’ submission was that this level of detail cut across the purpose of the CCA to facilitate cash flow pursuant to a straightforward payment claim-payment schedule process. The Court held that there was clearly no common understanding between the parties with respect to these charges. Fletcher had an obligation to indicate “with some clarity” how the charges arose and how they were calculated, given that the charges were so substantial that they offset Spotless’ payment claim in its entirety.[6]

In respect of payments claimed for the subcontract works, Payment Schedule #44 included a number of deductions without providing any reasoning. Whilst it should have been clear to Spotless that each of these were calculated as percentage deductions, they totaled $210,000 – a significant sum. The Court held that the absence of reasons for the deduction of this significant sum of money meant that this part of Payment Schedule #44 was not in compliance with section 21(3) of the CCA, as there was no way for Spotless to assess why the deductions had been made.[7]

The combined value of the above items was over half of the total value claimed by Fletcher. Consequently, the Court was satisfied that Payment Schedule #44, taken as a whole, did not substantially comply with section 21(3) of the CCA. Payment Schedule #44 was ruled to be invalid and Fletcher’s application was subsequently dismissed.[8]

Key takeaways

For principals and head contractors, this case serves as a timely reminder to ensure that their payment schedules comply with the requirements of the Act by indicating how a deduction was calculated (reference to percentage completion is likely to be sufficient) and, in particular, providing sufficient information to indicate the reasons for each deduction. This is especially important where the relevant deduction is significant. Common payment practices between the parties will be relevant in determining the level of detail and explanation required to be included in payment schedules.

Footnotes

[1] The Fletcher Construction Company Limited v Spotless Facility Services (NZ) Limited [2020] NZHC 1942 at [6].
[2] At [7].
[3] At [71].

[4] At [70].

[5] At [95].

[6] At [100].

[7] At [87].

[8] At [108].