Payment claim vs. Counterclaim – a common point of contention in the Construction Contract Act’s payment regime
Janine Stewart & Helena Hallagan
The Construction Contracts Act 2002 (CCA) has been in force for well over a decade and has contributed to much litigation during that time. The CCA advances a “pay now/argue later” regime and prevents set-off, cross-claims or counterclaims being raised to any debts which become due under the CCA (i.e. by virtue of an unanswered and/or unpaid payment claim, unpaid payment schedule or adjudication determination). However, a more complicated issue which arises is whether a payer is entitled to raise any set-off or counterclaim in its payment schedule responding to a payment claim. This article examines whether the regime set by the CCA accommodates claims for set-off or counterclaims at the payment schedule stage.
Summary of the CCA payment regime
The CCA codified a process for claiming and certifying payment in construction contracts whereby the party who carries out the work claims for payment in a “payment claim”, and the party paying for the work serves a “payment schedule” in response. The point of the payment schedule is to verify the amount the payer agrees to pay the payee. This process is largely mirrored in most standard form construction contracts.
Parties must comply with strict requirements in s 20 for payment claims and s 21 for payment schedules in order to benefit from the CCA’s default provisions for progress payments. This process for making and responding to payment claims can be viewed as the first stage of three in the CCA’s payment regime (Stage 1). The function of Stage 1 is to determine what is payable under the contract and ensure payment of that amount to the payee. If the payer does not pay, the CCA provides avenues for debt recovery (Stage 2). If the parties disagree about what is payable or dispute other rights and obligations under the construction contract, the CCA offers adjudication (Stage 3). Mediation, arbitration and civil proceedings outside the CCA remain an option for parties in dispute.
The benefits of the regime for the payee include: immediate entitlement to the claimed amount as a “debt due” if the payer either fails to provide a payment schedule within the time required by the contract or the CCA (20 working days as per s 22), or fails to pay the claimed amount within the time required (s 23). The payee is also entitled to the amount in a payment schedule if the payer fails to pay the scheduled amount in time (s 24). The payee can go to court to recover the unpaid amount (Stage 2) or refer the matter to adjudication (Stage 3) (or both).
The benefits of the regime for the payer include: the ability to assess and certify the amount it considers payable (which could technically be nothing) or indicate what it will pay instead of the claimed amount (i.e. the “scheduled amount”). If the scheduled amount is less than the claimed amount, the payment schedule must indicate how it calculated the scheduled amount; why the amount is different to the claimed amount; and the reasons for withholding payment on any basis (s 21(3)).
Can payment schedules include a counterclaim, set-off or cross-demand?
While section 79 prevents parties from raising set-off or counterclaims once a debt has arisen, it does not address whether set-offs, cross-claims or counterclaims can be raised in a payment schedule, particularly where those matters concern areas of a project outside of the items claimed for in the payment claim itself.