Why contract negotiations are important

Auckland demolition company Demasol was subcontracted to demolish a large concrete tank containing asbestos and submitted a quote of $100,000 plus GST to the head contractor to complete the work. In subsequent emails to the head contractor clarifying its quote, Demasol confirmed “everything included at $100k” but said it did not include costs to remove any asbestos that Demasol could not see. In further email correspondence with the head contractor, Demasol said its quote of $100,000 plus GST covered “ALL removal” of asbestos. The head contractor then issued a purchase order with Demasol’s latest email attached and work commenced.

Over the course of the work, Demasol issued payment claims under the Construction Contracts Act 2003 (CCA) claiming just over $390,000 for the works, around $230,000 of which was claimed as variations for asbestos removal and other items. The head contractor paid the $100,000 plus GST but refused to pay any more. The head contractor however did not serve Demasol with payment schedules in the timeframes required by the CCA and so Demasol served the head contractor with a statutory demand for payment on the basis that the ‘pay now, argue later’ regime of the CCA applied.

The head contractor applied to the High Court to have Demasol’s statutory demand set aside and was successful. The Court had several issues with Demasol’s claims, considering it arguable that:

• Demasol had agreed to do all work including all asbestos removal for $100,000 plus GST given the emphasis on “ALL removal” in Demasol’s email;
• The head contractor had only authorised or approved around 10% of the variations claimed by Demasol; and
• The parties agreed Demasol would only submit a single payment claim when it had finished all the work

All these things meant that Demasol’s payment claims did not satisfy the requirements of the CCA, in particular how the value of payment claims are calculated, which meant the ‘pay now, argue later’ regime of the CCA did not apply.

There are some lessons which can be learnt to avoid being in a situation like Demasol. First, take the time to properly record the terms of your agreement, including any exclusions, in writing. Second, ensure your payment claims are calculated in accordance with the relevant contract and the CCA. Third, unless you are happy to run the risk of doing work for free, ensure any variations to the contract works are agreed to in writing before you do the work. Fourth, if you are served with a payment claim under the CCA which you do not agree with, make sure you serve a payment schedule within the timeframe in the contract or the CCA, whichever applies. A good habit to get into is to serve payment schedules to all payment claims even when you don’t have an issue with them.