Pay slip

It is generally fairly straightforward to apply the payment provisions of the Construction Act to contracts that provide for monthly interim payments crystallised by certificates issued by a third-party certifier.

Typically, the payee makes an application for payment that purports to reflect the value of the work carried out during the relevant period. At that point the certifier runs a rule over the application to establish “the amount due”. In deciding that amount, which will be reflected in the interim certificate issued, the certifier should take account of “abatement issues”. In other words, they should reduce the amount handed over to take account of work that has not been done or that has been done incorrectly. The idea is that the employer should not pay for something that has not been provided.

Although such matters should be reflected in the payment notice specified in the legislation, there is no effective sanction against a paying party that fails to give such notice. More importantly, the cases indicate that no withholding notice is required in respect of normal abatement issues. Ultimately, the amount due for the work properly executed becomes payable on the “final date for payment”, which should be specified in the contract.

The position is much less straightforward in the case of contracts that do not involve a certification procedure such as, for example, most consultants’ appointments for architects, engineers and surveyors. Normally, such appointments contain a payment schedule identifying particular amounts, or percentages of an agreed lump sum, as payable on completion of stages of the project. A similar approach tends to be adopted for agreements between consultants and design-and-build contractors.

This type of contract can raise all sorts of tricky issues in the context of payment. Does it matter, for instance, that rather than providing for regular monthly payments, these stage payments tend to be irregular and the date for payment unpredictable? The general wording of the act suggests that such an arrangement is compliant with the law. However, much more thorny issues arise in the context of when payments fall due and establishing the amount due for a stage payment. The contract tends to be silent about such matters and this may mean that there is no adequate mechanism for payment as required by the act.

In establishing what the “amount due” might be for a stage payment one might assume that it would invariably be the amount identified in the payment schedule. If so, it is that amount that would become payable, subject to any rights of the paying party to withold payment. But what about a situation where a consultant performs additional or varied services? How does that affect the amount due?

An even greater problem arises if the consultant fails to deliver the services expected, or those services are deficient. Can the paying party abate or reduce the value of the fees claimed in such circumstances? Although there is a question mark over the right to abate payment for the provision of professional services, my own view is that the relevant case law does support the existence of such a right.

However, the bigger issue is of a practical nature. How can one abate in circumstances where the services to be provided are in the most general of terms and there is no equivalent of a contract sum analysis to use as a yardstick for calculating the amount of the abatement? If the paying party wants to reserve the right to abate payment applications in appropriate circumstances it must ensure that these points are addressed in the agreement.

I anticipate that payment problems under this type of contract are likely to generate an increasing number of disputes in the future. To avoid this, clients and consultants would be well advised to take a much keener interest than they usually do in the drafting of their consultancy agreements.

Dominic Helps is a partner in Shadbolt & Co, dominic_helps@shadboltlaw.com