The importance of communicating clearly when choosing whether to exercise a contractual election in a construction contract has been reinforced by the Court of Appeal in a decision which was welcomed by the subcontractor as “a win for the little boys”.
We look at the Court of Appeal judgment and reprise the history of the case.
At issue was a disputed payment claim in relation to the construction of a supermarket carpark in Christchurch. The claim had been submitted by Siteworks to the head contractor (Watts & Hughes) three days after its “Due Date” on the 25th of the month.
Under clause 5(c) of the Master Builders Standard Form of Subcontract, Watts & Hughes had a discretion to treat a late payment 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.
Watts & Hughes, however, had failed to provide a payment schedule to Siteworks by the Due Date and had also failed to make the claimed payment of $306,077.23.
• re-entered the site and (until stopped by Police) dug up metal that had been laid for transport to another site, and
• issued a statutory demand to Watts & Hughes to recover the outstanding money.
The High Court found that Watts & Hughes had immediately to pay the outstanding amount to Siteworks because they had failed to communicate to Siteworks that the late payment claim would be treated as if submitted in the next monthly “round”. (See Chapman Tripp’s commentary here).
Watts & Hughes appealed to the Court of Appeal.
Watts & Hughes made various arguments on appeal, primary among which was that, because the payment claim had been submitted late, it was invalid.
Watts & Hughes therefore did not need to communicate that the invalid claim would be treated as if submitted in the next monthly round because the onus was on Siteworks to do so. To submit the claim validly, Siteworks itself had to include it in the next monthly round.
The Court rejected this argument and found that a late payment claim was still a valid one (according to the Subcontract and provisions of the CCA). Otherwise, the election which the Subcontract gave Watts & Hughes would be rendered null and void.
The onus remained on Watts & Hughes to communicate clearly to Siteworks whether it would be treating the claim in the next monthly round or not. Siteworks was entitled to know where they stood on any given date and whether or not Watts & Hughes owed them money.
The Court of Appeal went on to affirm an earlier decision of Justice Asher in the High Court in which it was said “severe consequences” could result if head contractors failed to issue payment schedules in time.
The work which had been dug up
Watts & Hughes further tried to argue that because Siteworks had dug up some of the metal it had laid in the carpark, it was debarred from submitting a payment claim in respect of it because the work dug up had not been “carried out” under the Subcontract.
The Court again rejected this argument on the grounds that Watts & Hughes had not disputed this work when they had eventually issued a payment schedule and because the dug up work (valued at $70,000) was only a fraction of the total work claimed (valued at over $300,000).
Clear communication is still essential
The Court of Appeal’s judgment confirms our earlier advice that parties must clearly communicate the choices they make to exercise (or not) contractual elections to affected parties like subcontractors.
Otherwise, the Court may take the matter out of the electing party’s hands.