Timothy Bates and Bodene Robertson-Wright of Auckland law firm Tim Bates & Co pose a debt collection fact scenario, and put forward the various debt collection options available to the unpaid subcontractor, while noting that the correct approach for a construction creditor will depend upon its own financial circumstances.
This month we set out the debt collection options available to a subcontractor in the situation below.
Facts:
• Subcontractor A carried out painting and decorating work for Developer X on 10 townhouses in the greater Auckland area.
• Developer X fails to pay Subcontractor A.
• Developer X tells Subcontractor A to re-address invoices to Head Contractor B.
• Subcontractor A does what he is told and invoices Head Contractor B.
• Subcontractor A is still not paid.
• Head Contractor B goes into liquidation.
• Subcontractor A seeks payment from Developer X.
• Developer X tells Subcontractor A your contract is with Head Contractor B.
• Developer X continues to refuse to pay Subcontractor A.
Step 1
Convert your invoices into payment claims under the Construction Contracts Act 2002. If you simply sent Developer X GST invoices, convert them into payment claims under the Act (you must use the standard form with notice provision) as then your claim will have the backing of the Act.
Where not paid or responded to, you can action the claim as if it is a debt that is due and owing under the Act.
Step 2
If Developer X does not make payment or respond with a payment schedule, then there are several options available to you:
• Issue a statutory demand under section 289 of the Companies Act 1993. Technically, this regime only works well where the existence of a contract is not disputed.
In this situation we would not advise pursuing this route as you could be exposed to a negative cost order in the High Court for misuse of the procedure.
• Issue summary judgment proceedings, which is a fast-track route to judgment. For the reasons set out above, again, this course would not be recommended.
• Pursue a fast-track adjudication under the Construction Contracts Act 2002. This course is recommended because if successful, it could mean that Subcontractor A has a determination (with charging order) in its favour within a moderately short period of time (three-month estimate).
The determination would then be capable of being entered as a judgement of the District or High Court. However, because this method of collection comes with a likely $15,000 deposit in respect of the adjudicator’s fees before factoring in legal fees, this option may often not be chosen.
• So, the legal proceeding that typically fits the cashflow constraints of an unpaid subcontractor in the position of Subcontractor A, is an ordinary proceeding in the District Court, which relies upon the contract and unpaid/unresponded to payment claims.
• In addition, these proceedings would include a claim to capture payment for works that Developer X had benefited from but had not paid for — the principle of law being known as “quantum meruit”.
This cause of action works well in this situation because even if Developer X manages to convince a court that it had not contracted with Subcontractor A, it still has to pay for works completed on its site by Subcontractor A.
• The downside to pursuing the course set out in the last two options is time. This process could take 12 to 24 months to get through. A further drawback is the potential for the financial position of a developer to worsen significantly during this period.
• Where Subcontractor A is concerned that there may not be any assets left in Developer X whereby the contract debt/judgment can be paid, it can seek an order freezing the assets of Developer X. In the case of a developer, this could potentially be exercised over land.
At TM Bates & Co, we have been advising clients in these types of construction contract matters for more than 20 years.
We know that each client requires a legal solution tailored towards its strengths and weaknesses.
Please make contact if you need advice upon the aforementioned issues discussed, or more general construction law advice.
Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co or Building Today to anyone who relies on the information in this article.
