For example, where a homeowner has contracted with a builder to construct a new garage and pool, the builder may submit monthly payment claims for the pool works and the homeowner would issue payment schedules in response. The pool is completed within 5 months and the builder moves on to the garage. During the first month of the garage works, cracks appear in the pool tiles. Unhappy about what appears to require remediation, the homeowner responds to this month’s payment claim (PC6) with a deduction in payment schedule #6 (PS6) for pool works invoiced and paid for in payment claim #1 (PC1). Can the homeowner reduce the claimed amount of $50,000 in PC6 to a scheduled amount of $25,000 in PS6 by way of set-off?
There is High Court authority for the proposition that a payment schedule is not invalidated by the inclusion of a claim for set-off (Cube Buildings Solutions Ltd v King HC Christchurch CIV-2009-409-34, 17 December 2009). The principal in that case purported to deduct nine sums in the payment schedule for amounts already paid to the contractor in earlier invoices, including two set-off claims. Associate Judge Osborne recognised that in the context of developing discussions between the parties, it may be that a payer does not know whether the set-off is disputed until it provides for it in a payment schedule. The Court did not accept that claiming a set-off of itself invalidates a payment schedule, particularly given that s 79 permits a court to give effect a counterclaim/set-off/cross-demand where there is not in fact any dispute between the parties in relation to that claim (at [62]).
Cube is helpful for the homeowner in the pool example, as it confirms that, at least in some circumstances, claims for set-off can fall within the legitimate ambit of the Stage 1 payment claim/payment schedule process. The homeowner should be clear that it is not seeking to enforce the
set-off of $25,000 against the builder’s claim as such; rather, the existence of a counterclaim for defective works is the “reason” for paying less that the claimed amount (s 21(3)(b)). The “manner” of calculating the scheduled amount of $25,000 is indicated by way of deduction for set-off against PC1 (s 21(3)(a)). Provided PS6 is a valid payment schedule in all other respects (i.e. served in time), it is difficult to establish, from the perspective of s 21, how s 79’s general prohibition on courts giving effect to a set-off in Stage 2 proceedings prevents payers from raising set-off as a “reason” in Stage 1.
However, PS6 would probably be invalid according to Associate Judge Christiansen’s reasoning in Canam Construction Ltd v George Developments Ltd HC Auckland CIV 2004-404-3565, 10 November 2004. In His Honour’s opinion, s 21 “makes it clear any payment schedule is confined in scope to claims raised upon in the payment claim” (at [46]). PS6 has not cross-referenced to items of garage works claimed in PC6 and instead alleged deductions relating to pool works claimed in PC1. A court following the “confined scope” reasoning might consider the set-off of $25,000 to be a “broadly cast claim relevant to the contract as a whole” and therefore not a proper or appropriate deduction (at [45]).
The Court of Appeal commented on this issue in SOL Trustees Ltd v Giles Civil Ltd [2015] 2 NZLR 482 at [43]-[44]. Without hearing the full argument on the point, the Court considered that it would appear to be inconsistent with the purposes of the CCA if a counterclaim or set-off that is excluded by s 79 could be relied on as a response to a payment claim issued earlier. The Court cited Metalcraft Industries Ltd v Christie HC Whangarei CIV-2006-488-645, 15 February 2007 where Harrison J held that, in light of Parliament’s intention in enacting s 79, a principal’s denial of liability for a payment claim on the basis that a right of set-off exists is insufficient.