Administration CONS 6812 - Class exercise No.

3 + ANSWERS
This Topic is Payments incl. NZS 3910 & Construction Contracts Act 2002 Tuesday 1st August 2017

NZS 3910 2013 applies to building contracts in the following questions.

Q1.. Explain according to NZS 3910 2013 and include relevant clause references:

1a.. Under what circumstances can a Contractor include in its progress claim for the cost of materials
it has ordered for the Contract Works that have not yet been delivered to Site, and expect to be
paid for them?

1.2 Definitions - Materials: Any raw or manufactured material, goods, or things (other than Plant)
required for use in the Contract Works

5.6.2 The Contractor shall be responsible for the care of all Materials which are in its care or
possession awaiting incorporation in the Contract Works.

5.9.3 Where paymentmade byPrincipal inadvancefor Materials not yet incorporated in the
Contract Works,ownershipshall on paymentvest in the Principal [who] shall permit the
Contractor the use of theMaterialsNoMaterials vested in the Principal shall be
removed from the Site without theconsent of the Principal

Materials are personal property until they are incorporated in the Contract Works whereupon they
become real property [part of land]. vest as a verb: confer or bestow (power, authority, property,
etc.) on someone. Title in property, i.e. its ownership, is separate from its possession so you can
drive a car you have hired, and although it is your possession you do not own it as you do not have
title in it. A car is personal property in the same way that a concrete block is personal property, but
when a concrete block is attached to a concrete foundation which is attached to the land, in law it
becomes land, and is now real property.

Ownership depends on who has title, so an incorporated concrete block now belongs to whoever
owns the land typically the Principal. Before it is incorporated it is personal property and it is
clear who has possession in it but that doesnt identify its owner. You see someone driving a car, do
they own it? Perhaps the company they work for owns it or a financial entity they lease it from?
The same principle applies to the unincorporated concrete block. Suppliers often sell Materials
under an agreement with a retention of title [ROT] clause in it which states that until the goods are
paid for in full, title remains with the supplier.

This explains 5.9.3 above. By the nemo dat [quod non habet] principle: you cannot pass better title
than that which you possess yourself. Typically a Subcontractor [1.2 Any Person who contracts with
the Contractor to design, carry out, or supply part of the Contract Works on behalf of the Contractor] buys
Materials from a supplier under an agreement with a ROT clause. The Materials are typically: [1]
delivered direct to Site; or [2] delivered to the Subcontractors premises for fabrication into an
assembly, e.g. structural steel units. Q1. concerns option [2] but I will look at option [1] first.

Materials are delivered to Site, where they are temporarily stored before incorporation [the time
between delivery and incorporation varies]. The Subcontractor claims payment for them from the
Contractor who then incorporates that claim into its own claim for payment from the Principal.
But if the Principal pays for them it expects ownership to vest in itself, which cannot happen
because of the nemo dat principle under which title remains with the supplier whose agreement
wont transfer title to the Subcontractor until the supplier is paid in full.

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If a Contractor claims payment from a Principal for Materials it is supposed to have title to,
when it typically does not know whether it does or not, that is misrepresentation, whether it is
intentional or negligent by the Contractor is irrelevant.

None of this matters much as long as nobody becomes insolvent at which point lawyers and
insolvency experts become involved in the process. They look for assets, and ownership of
Materials on Site are a prime target, but who owns them? This is not a big issue for a few concrete
blocks but if for example there is an expensive piece of equipment on Site waiting to be bolted down
to a concrete base so as to be incorporated into the Contract Works, or major structural steel
assemblies waiting to be erected, it can be a very big issue.

Contractors may not recognise this situation, but to avoid problems arising from it, particularly
created by a Subcontractor who relies on provisions of the Construction Contracts Act 2002 to
enforce a payment claim regardless of whether it has title to the Materials it delivers to Site, a
Contractor can incorporate a subcontract term stating: no payment made for unincorporated
Materials you do not have full title to without prior agreement to the contrary. Whether such
terms are strictly enforced would depend on the nature and value of the Materials.

Option [2] above is more widely recognised being Materials worked on or temporarily stored off
Site [this involves the common law of bailment which concerns delivery goods to a bailee for a
particular purpose, without transfer of ownership. Hiring a car is related to bailment. It is not
necessary to know more about bailment for the purposes of this Course].

Requirements before paying for Materials not on Site are typically that they must be: [1] clearly
labelled to indicate whose property they are, i.e. who has title in them and owns them, usually the
Principal; [2] properly stored to protect them from the weather or possible damage; and [3]
insured against loss or damage by theft, fire, or water and other perils. All involved parties are
advised to visit the place where Materials will be kept, at the same time.

NZS 3910 contains the following information in regard to the Contractors payment claims:

12.1.3 The Contractors payment claims shall(b)Identify(iii) Where provided for in the Special
Conditionsadvances forvalue of Materials delivered toSitenot yet incorporated [and] (iv)
Advances forMaterials not yet on Site for which payment is provided in the Special Conditions
[which] mayincludeexecution of an agreement in the form [of] Schedule 14 [see 1b.. below] or
other appropriate form [i.e. the Principal or the Contractor can produce and agree on an
alternative form e.g. because the Material will be moved between storage areas].

Under 12.1.3 there is payment for Materials until they are incorporated unless the Special
Conditions say otherwise. A difficulty may arise be if Subcontractors have been employed without
having their attention drawn to 12.1.3. Larger Subcontractors may have no difficulty with the
provision but smaller ones, who submit very low prices, are also sensitive to cash flow, especially for
the purchase of Materials, and they may rely heavily on supplier credit being unable to pay their
suppliers until they have been paid by the Contractor.

The short answer to 1a.. is when 12.1.3(b)(ii) and (iv) Schedule 1 Special Conditions of Contract
Specific Conditions of Contract allow for payment prior to delivery.

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1b.. What relevance has Schedule 14 got to the storage off site by a subcontractor for materials
intended to eventually be incorporated into the Contract Works? Schedule 14 Agreement for
off-site Materials is a form intended to be signed by the Principal, the Contractor, and a
Subcontractor primarily to safeguard the Principal who pays for Materials before they
arrive on Site. See 1a.. above regarding the main steps to take when off-site Materials are to
be paid for. See also Guidelines G Schedule 14 [fifth paragraph from the end].

If the Materials are valuable enough to introduce Schedule 14 into the contract, they are
possibly valuable enough to register under the Personal Property Securities Act 1999 which
gives priority to those who are better entitled to the property when insolvency arises.

If the Materials are valuable enough to register under the Personal Property Securities Act
1999 they are valuable enough to consult a lawyer before registering the property. See OneSteel
Manufacturing Pty Limited (administrators appointed) [2017] NSWSC 21 for an Australian case
under similar legislation where equipment worth $23,000,000 was lost by mis-registration.

1c.. What is the purpose of Schedule A, Schedule B , and Schedule C. with regard to Schedule 14?

They form part of the Agreement and are self-explanatory: SCHEDULE A Description of Materials
inclusive of work performed on them?; SCHEDULE B The location in New Zealand at which the
Materials will be stored is:? [the agreement is not intended to operate internationally e.g.
equipment sourced from Australia is involved]; and SCHEDULE C The Bailee shall be: The
Contractor OR The Subcontractor [delete which one does not apply, both their details are set
out under the Agreement which they must sign.

1d.. What is a Payment Schedule in the Construction Contracts Act 2002? It is a payers response
to a payment claim received from a payee: s21 Payment schedules (1) A payer may respond
to a payment claim by providing a payment schedule to the payee. (2) A payment schedule
must be in writing; and (b) identify the payment claim to which it relates; and (c) state a
scheduled amount.

1e.. What is a Progress Payment Schedule in NZS 3910? It is an Engineers response to a payment
claim received from a Contractor: 12.2 Progress Payment Schedules 12.2.1 The Engineer shall
assess each of the Contractors payment claims andprovide a Progress Payment Schedule in
response to each payment claim12.2.2the Engineer shall, on behalf of the Principal, provide
a [provisional] Progress Payment Scheduleand shall: (a) Identify the Contractors payment
claim to which it relates; (b) Identifywhen the payment claim was servedand the due date for
payment; (c) Identifywhen the Progress Payment Schedule is provided; (d) Show the sum
certified by the Engineer; (e) Show [how] the sumhas been calculated; (f) Set outreasons
for any difference between the sum [certified] and the claimed amount; (g) State that the sum
[certified] shall be the provisional scheduled amount; and (h) State that the Progress Payment
Schedule is provisional only until the expiry of 12 Working Days after the date of service in
12.2.2(b), after which time the sum under 12.2.2(d) shall become the scheduled amount unless
within that time a replacement Progress Payment Schedule is provided

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1f.. What two factors are taken into account by the person named in 1e.. above when considering
whether to make alterations to the amount to be paid in response to the amount claimed in a
progress payment claim submitted by the Contractor? The person named in 1e.. is the
Principal. 12.2.4the Principal may notify the Engineerof any amendments or deductions
the Principal intends to make from the sum certified by the Engineer [which] shall show the
reasons for the amendments or deductions and the manner in which they have been calculated.

1g.. Does the Principal have the power to make amendments to or deductions from the amount
calculated as being due to the Contractor by the process in 1f.. above? Yes 12.2.5 [if] the
Principal has notified the Engineerof any amendments or deductions under 12.2.4the
Engineer shall, on behalf of the Principal, provide a replacement Progress Payment Schedule
which shall contain:(b) The amendments or deductionsthe Principal has notified under
12.2.4 and(c) The reasons for and...manner in which [they] have been calculated;and (e) A
statement that the Progress Payment Schedule supersedes the Progress Payment Schedule
provided under 12.2.2 in respect of the relevant payment claim.

1h.. What are retention monies? A percentage automatically deducted from the money due to a
person being paid e.g. 12.3.1 and 12.3.2 Schedule 1 Special Conditions of Contract Specific
Conditions of Contract which sets out default limits under NZS 3910.

1i.. What are the twin objectives of retention monies? The primary purpose of keeping back money
is to cover the potential cost of finishing the work off due to minor defects. This is particularly so
in wet trades which dry out and cause shrinkage cracks when a building adjusts to occupation.
Another reason given is that not releasing all the money encourages a Contractor to complete
the work earlier so as to have the retention money released. Whether this is true is debateable
because on larger contracts a Contractor may hold back more money from Subcontractors
than the Principal holds back from the Contractor.

1j.. Explain the alternative [apart from removing their requirement from the contract] to retention
monies? A retention bond is an option in place of retaining an amount of money. It is a type of
performance bond guaranteeing that the Contractor will carry out all necessary structural and
other correction work after the Principal takes occupation even if the Contractor has been
paid in full for the work. The Contractor is responsible for its Subcontractors work and will
still retain retention money from them. Re NZS 3910 see Schedule 5 Form of Contractors
bond in lieu of retentions.

1k.. When are retention monies released for payment to the Contractor? Typically half the retention
money is released when the Principal occupies the Contract Works and the other half is
released when all work is completed at the end of the maintenance period [referred to as the
Defects Notification Period in NZS 3910] see 12.3.1, 12.3.2 Retention monies (a) in Schedule 1
Special Conditions of Contract Specific Conditions of Contract