Draconian Construction Claims - A War Story

Why do we send invoices to customers? The answer is simple: to get paid.

It follows that the best invoices are the ones that give you the best chance of getting paid. In this regard, the Construction Contracts Act 2002 (Act) allows anyone who is undertaking construction work to issue invoices that are second to none: Payment Claims.

A Payment Claims is an invoice issued under the Act and, unless the payee responds in the prescribed form (known as a Payment Schedule) which sets out the amount the client believes is payable within 20 working days:

• The claimed amount becomes a due debt
• No dispute, set-off or counterclaim can be raised as a basis for resisting payment
• The costs incurred in recovering the due debt are payable on an indemnity basis

The Courts have described this regime as “draconian”. How draconian? In one case, a building company issued a Payment Claim for construction work. The client responded with a Payment Schedule which disputed the works and said nothing was owing. The building company issued a further Payment Claim, for the same works, in the same amount, which the client ignored. The Court held that, in the absence of another Payment Schedule, the further Payment Claims was payable in full. It was irrelevant that the client had disputed the works on a previous occasion.

The client could challenge the payment at a later date, but it was a strict “pay now, argue later” regime. The client had to pay the claimed amount and then argue about the works. For anyone in the construction industry – those are the invoices you want to have on your side.

What happens if you do not issue a Payment Claim, or your Payment Claims does not comply with the strict requirements of the Act? It is still an invoice, and should still be paid, but the invoice will be subject to all the challenges non-paying clients can raise (set-off, counterclaim, or simply refusing to pay). For many clients it can be the difference between full recovery and a write-off.

Unfortunately, many (arguably most) in the construction industry do not utilise Payment Claims for one of three reasons:

• They do not know they can issue Payment Claims for the construction work
• Their Payment Claims are outdated and no longer comply with the Act
• Their accounting software cannot generate Payment Claims

Hopefully, we have now addressed the first issue.

As regards the second issue, many operators believe their invoices are Payment Claims but, in reality, they are missing a key component. The Act was amended in 2015 to require that every Payment Claim is accompanied by an ‘Important Notice’ which is prescribed by Construction Contract Regulations. Any construction companies that have not reviewed their invoices since 2015 are likely issuing invalid Payment Claims. They are invoices, but they are not Payment Claims, with the all rights discussed above.

Lastly, many are caught out by accounting software (such as Xero) that cannot generate valid Payment Claims. It is possible to do so, but it requires additional modules or licencing fees. So it is an easy fix once you recognise the problem.

If you are uncertain whether you are entitled to issue Payment Claims, or you are unsure whether your Payment Claims are valid, please contact specialists Stephen Caradus or Jessica Manson in our litigation team.