Getting your hands on the money

Lisa_Curran.jpgCharlotte_Fox.jpgBy Charlotte Fox and Lisa Curran
Simpson Grierson

The Construction Contracts Act (CCA) has gone a long way to improving contractor’s (and subcontractor’s) rights to payment. However, obtaining the right to payment under the CCA is only the beginning.  If the payer refuses to pay, there are several options for “getting your hands on the money”.  Each options brings with it a different set of decisions and risks, highlighting that even when you have a successful decision in your favour, it doesn’t mean you will get paid. 

Suspending works

Any unpaid contractor should suspend works. A contractor often has two mechanisms available to it to suspend works – the contract provisions and the CCA.

Under NZS3910: 2003 where there has been a default by the principal, a contractor must notify the engineer and if the default is not remedied the contractor can then require the engineer to suspend works (clause 14.3.3). The grounds for default are set out in clause 14.3.1 and include a failure to pay any amount due (a ground that is becoming more common in the current climate).

However, where failure to pay is the basis for suspension, a contractor should utilise the “fast track” process provided under the CCA. Sections 23 and 24 of the CCA provide the contractor with the right to suspend works and deem the outstanding amount “a debt due and payable”. 

In the current economic climate, we are seeing an increase in suspension notices being issued.  In order for these to be effective they need to be issued before the works are completed and as soon as the default arises. The more the outstanding debt grows, the less likely a payment becomes. Once works are suspended it is time to examine how best to enforce your right to payment. 

Enforcing a debt due under sections 23 and 24 of the CCA

A debt under these sections is a “mere debt” and it does not give rise to any right to security over land or chattels. This type of debt arises where there has been a valid payment claim issued and either no payment schedule has been issued in time (section 23) or no payment of the scheduled amount has been made (section 24).

Where this has occurred, enforcement can be via a number of different avenues depending on the situation. Putting adjudication to one side, a party could enforce its rights by way of summary judgment or statutory demand. The summary judgment process can take longer than the demand process but should be used when you are uncertain of the solvency of the payer (e.g. the payer may well be solvent and simply refusing to pay). The process involves filing a claim with evidence by way of supporting affidavits and a short hearing if required.

The statutory demand process is fairly straight forward and cost effective and the payer has 10 working days to oppose the demand. Opposition can be raised on the following grounds: there is a substantial dispute as to whether or not the debt is owing; the payer has a counterclaim, set-off or cross demand which exceeds the amount claimed in the demand or any other grounds determined valid. The opposition grounds are therefore very wide and a payer may oppose in order to delay any further action being taken. If no opposition is filed then the payer has 15 working days to make payment.

Both of these processes can be fairly quick and cost effective, and in many cases are sufficient to get a claim paid. However, a debtor wanting to cause the contractor significant cost and delay can also use these processes to delay payment, by raising an opposition to the demand.   When this occurs, there will be an exchange of evidence by way of affidavit and a hearing to determine whether the opposition succeeds. Even if the opposition fails and payment is held to be due, payment does not always follow. 

A “successful” result in the above situation is often an acknowledgment that the debt is due and as it remains unpaid a right to proceed with bankruptcy/liquidation proceedings.  However, the reality is that after engaging in one of these processes a contractor can still be left without a cent as the debtor may well have no money left in the company.

So, given that these options may well give rise to nothing more than an acknowledgement that money is owed, how can a contractor protect itself and what security is available? 

Adjudication

Adjudication when successful, can provide security over land to the contractor which is valuable when payment may not be forthcoming. Once an adjudicator’s determination has been obtained, it can be registered as a judgment then subsequent enforcement steps are more straight forward. Getting a determination entered as a judgment is a quick and easy process, which can only be opposed on three grounds – the sum awarded has been paid, the determination related to a contract which is not a construction contract, or a condition of the determination has not been met.

Once a determination has been entered as a judgment then a contractor can enforce its rights.  This can be done through forcing a sale of land, oral examination as to the assets of the debtor and subsequently sending the court bailiff to seize assets.

A contractor can also issue a bankruptcy notice or statutory demand at this stage and because the adjudicator’s determination has been entered as a judgment, the grounds for opposition are limited.

The recent case of Laywood & Rees held that where an adjudicator’s determination had been entered as a judgment the debtor could not raise any counterclaim, set off or cross demand, even if it had a meritorious claim. This applied even if the counterclaim related to events after the adjudication decision.

It is clear that when there is a doubt that payment will be made, a contractor would be wise to use adjudication first to ensure it had security over land. Otherwise, it may be left with a significant legal bill without ‘getting its hands on the money’.

Where a debtor does not want to pay, it won’t. A contractor may need to use more ‘forceful’ methods to recover the money. One such method is forcing a sale of the land over which the contractor has a charging order.

Forcing a sale

If a contractor intends to use this method they should act quickly. There will only be so much equity in the land and if there is a mortgage (or two) most of the equity will already be gone.  Mortgagors take priority over creditors and therefore will be satisfied first from any proceeds of sale. 

If there is something left after the forced sale and satisfaction of the mortgagors then the creditor who initiated the procedure will get to keep that surplus and apply it towards the outstanding debt.

As there is a real risk that there will not be enough to satisfy any mortgages, let alone the contractor’s debt, a contractor should take legal advice and carefully analyse the cost/benefit before taking this step. 

Order for examination

This type of Order requires a debtor to attend the court to be examined orally to assess its debts and assets. 

Orders for Examination were infrequently used but are now becoming more common where the contractor does not know the debtors true financial position. They are also effective because failure to attend court is deemed contempt of court and can result in an arrest warrant being issued.

These are only some of the options that can be utilised to help a contractor get their hands on the money. The key to success in any payment dispute is to act quickly. The longer the delay, the less likely the recovery becomes.

Contractors should not be wary of suspending works, if done at the right time suspension can provide a strong incentive to pay. In the current climate contractors need to know their rights, how to best protect their rights and when to act.


Contractor Vol.33  No.10  November 2009
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