Payment schedule challenged – Commercial Bay

The Fletcher Construction Company Limited v Spotless Facility Services (NZ) Limited

In this month’s article, I want to review the recent High Court decision where Van Bohemen J was asked to consider whether a payment schedule served upon Spotless by Fletcher, satisfied the requirements of section 21 of the Construction Contracts Act 2002. 

Facts. 
Precinct Properties Ltd has been building the Commercial Bay office tower and retail precinct in the Auckland central business district which was nearing completion in the early months of 2020 prior to the arrival of Covid 19. Fletcher is the head contractor and Spotless was a subcontractor for the provision of mechanical services required for the heating and cooling of the buildings.

On 24 January 2020 Spotless issued Payment Claim No 44 seeking payment in excess of $2m. 

On 21 February 2020 (within the timeframe allowed for by the subcontract) Fletcher issued Payment Schedule 44 which instead of certifying monies were owed to Spotless, asserted that Spotless owed it in excess of $4m. As a consequence no payment was made by Fletcher to Spotless. The difference between payment claim and payment schedule was the sum of $6m which comprised a difference in certification of current works amounting to approximately $1.3m and contra charges of near on $5m. 

By letter dated 26 February 2020, Spotless informed Fletcher that it considered Schedule 44 to be invalid and reserved its rights to pursue the amounts claimed in Claim 44 as a debt due. It did not set out its reasons why it considered the payment schedule to be defective. 

By letter dated 18 March 2020 Spotless served notice in accordance with section 23(2)(b) of the Act, of its intention to suspend work under its subcontract with Fletcher. The notice stated that the grounds of its suspension were that Fletcher had failed to issue a valid payment schedule within the time required by the subcontract and had failed to pay the claimed amount. 

Ultimately through injunction proceedings issued by Fletcher, Spotless’ suspension notice was lifted and they completed their subcontract, but only after sufficient security in terms of the amounts being owed under their Payment Claim was paid by Fletcher into an independent stakeholders account pending final resolution of the payment claim/payment schedule dispute. 

The central issue at stake in the decision that came before Justice Van Bohemen, was whether Fletcher had satisfied sections 21(3) of the Act by showing the manner in which it had calculated its scheduled amount, and the reasons for the difference in the scheduled amounts or for withholding payment.

The Court found that Fletcher had substantially substantiated the lesser scheduled amount as regards the original contract works section of Schedule 44, and parts of the the variations component. 

The Court found however that in respect of 14 significant items in the variations component of the payment schedule, insufficient information had been provided by Fletcher for the lesser scheduled amount. Furthermore, Fletcher was not entitled to decline payment of an amount sought in a payment claim simply because it had not got round to assessing its value. 

The contra charges.
Fletchers claimed contra charges of $2.5m based upon cost relating to Black and Alaska. The only information given in the comments column of Schedule 44, was the statement, “Refer to Aconex correspondence for breakdown of claim….”. No document numbers were given to indicate which Aconex correspondence was being referred to. Whilst there was an attempt by Fletcher to provide more details of these charges in the affidavits filed, the Court ruled that this further information made no difference. Fletcher had not reached the threshold of satisfying section 21(3) in terms of setting out the reasons why it was withholding payment. It was not enough for Fletcher to point to previous advice to Spotless that it was going to apply delay charges, it had an obligation to indicate with some clarity how those charges arose and the basis upon which they were calculated. 

Liquidated damages. 
The Court ruled that the reliance by Fletcher on liquidated damages being applied separately that equated to a value of $2m, satisfied the requirements of section 21(3). 

The overall judgment however ruled that $2.9m worth of Schedule 44 did not meet the requirements of section 21(3) of the Act. This was over half the value claimed by Fletcher in its payment schedule. The Court therefore ruled that the payment schedule as a whole did not comply with section 21(3) of the Act and was invalid. The effect of this ruling was that the whole of Spotless payment claim was valid, and the suspension notice issued by it was valid. 

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co. Barristers / Solicitors to anyone who relies on the information contained in this article. All copyright in this article is retained by TM Bates & Co.