Scholarly Paper

Mitigating Payment Problems in the Construction Industry

through Analysis of Construction Payment Disputes
Thanuja Ramachandra 1 and James Olabode Bamidele Rotimi 2

Abstract: Payment is the lifeblood of construction businesses because performance in any construction activity is dependent on an un-
interrupted funds flow. However, steady funds flow is rare, and businesses suffer with the worst cases resulting in litigations. The study of
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litigations, 40 construction payment dispute cases filed in the High Court in New Zealand, within the current study gives an indication of the
nature of the payment problem in the construction industry. Disputes over payment arise between contractors and principals in most (80%) of
the instances investigated, with progress and final payments being often disputed in construction projects. However, only in limited situations
do contractors and subcontractors achieve success with their claims and are able to recover their payments fully. Through the analysis of
payment disputes, the study suggests means by which payment problems could be mitigated. Placing charging orders, caveat registration over
built properties, and issuance of bankruptcy and liquidation notices have been the means of mitigating payment disputes. In spite of these
measures, payment problem is prevalent within the industry. This study therefore suggests that the rational starting point for real solutions to
the payment problem is a change in attitude of upstream construction parties, followed by adherence to provisions within payment-related
legislation and contract forms. DOI: 10.1061/(ASCE)LA.1943-4170.0000156. © 2014 American Society of Civil Engineers.
Author keywords: Payment problems; Construction disputes; Mitigation measures; Court cases.

Introduction financing and transaction costs, which increases their risk of

Payment is the core of any economic transaction, without which,
any entity can succeed in business. This is significant, particularly
in the construction industry where the construction process takes a
longer time, the products are expensive, and payment is made on
the completion of the product (Ameer-Ali 2006). As Kartam and
Kartam (2001) suggest, delayed payment is the second highest
operational risk, after financial failure, that causes project delays.
Payment delays also cause stoppages to material delivery, which
in turn, impact labor productivity in the construction industry.
Consequently, the success of construction projects, and ultimately,
the survival of the industry, is affected (Cheng et al. 2009). As such,
construction payment problems are prevalent and have been a
source of concern for decades, as recognized by studies in the
United Kingdom and other countries since the 1960s.
Researchers suggest that the common form of payment prob-
lems, delays, and nonpayments are caused by deliberate and/or
unintentional actions of upper-tier construction parties in many
countries. For example, delays in approving contractors’ invoices/
claims and settling payments and release of retention monies have
had major impacts on constructors’ cash flows (Odeyinka et al.
2008; Sin 2006). Odeyinka and Kaka (2005) and Euginie (2006)
both suggest that failure to make payments within stipulated
timeframes mean that contractors would have to incur additional
1
Senior Lecturer, Dept. of Building Economics, Univ. of Moratuwa,
Moratuwa 10400, Sri Lanka (corresponding author). E-mail: thanuja03@
hotmail.com
2
Senior Lecturer, Construction Management Program School of Engi-
neering, Auckland Univ. of Technology, Auckland 1010, New Zealand.
E-mail: jrotimi@aut.ac.nz
Note. This manuscript was submitted on January 27, 2014; approved on
June 13, 2014; published online on July 11, 2014. Discussion period open
until December 11, 2014; separate discussions must be submitted for in-
dividual papers. This paper is part of the Journal of Legal Affairs and
Dispute Resolution in Engineering and Construction, © ASCE, ISSN
1943-4162/A4514005(8)/$25.00.
insolvency.
Literature suggests that payment problems have been an increas-
ing source of disputes in the construction industry. For example,
Chan and Suen (2005), and Kennedy (2006) are of the opinion that
irregular payments are a major cause of disputes. These authors
explain that failure to comply with payment provisions and irregu-
larities around the processing of valuations for interim, final, and
variation claims cause disputes between project owners and con-
structors on construction projects. In New Zealand, there are instan-
ces where disputes arose between construction parties because of
nonpayment. For example, Gibson (2004) reported that a building
contractor was not paid interim payment (of about $265,000) on an
apartment development project because the project owner (devel-
oper) refused to pay the contractor for incomplete works and
delays. Similarly, a prominent developer opposed a bankruptcy
application brought by one contractor (Gibson 2010). In this situa-
tion, the developer owed the contractor nearly $1 million for a
$100 million Hotel complex. However, in both cases, the contrac-
tors got High Court judgments in their favor. In the latter case, the
contractor won the case to enforce an adjudicator’s determination
and security over titles.
An exploration of construction payment disputes within this
study is intended to contribute to the discourse on payment prob-
lems and further seek solution to the problems. The study hopes to
give an indication of the nature of payment problems in the
New Zealand construction industry, using information obtained
from construction disputes. It concludes by suggesting mechanisms
by which the payment problems could be mitigated.
Literature Review
Undoubtedly, payment problems have been a cause of disputes
within the industry (Kennedy 2005; Watts and Scrinvener 1993).
A summary of five different situations where different payments
were responsible for disputes in construction projects in some

© ASCE A4514005-1 J. Leg. Aff. Dispute Resolut. Eng. Constr.

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2015, 7(1): A4514005

 Table 1. Causes of Disputes: Types of Payment
Number Causes of disputes Country Source
1 Nonpayment for certified sums, delay in progress payments, misleading payment procedure Malaysia Abidin (2007)
according to privity/terms of contract, and argument about the amount to be paid
2 Client fails to pay for variations claims, argument on the valuation of contracted work, delays Hong Kong Cheung and Yin (2006) and
in interim payment from client, nonpayment to subcontractor by main contractor, argument Kumaraswamy (1997)
on the prolongation costs claimed by subcontractor, late release of retention monies to main
contractor, and argument on acceleration costs
3 Valuation of final account, valuation of variation, and failure to comply with payment U.K. Sheridan (2003)
provisions
4 Payment and variations are the top two out of 18 problem areas of disputes in international China Chan and Suen (2005)
construction projects
5 Payments and final certificate and final payments are two out of six main categories of disputes, Australia Watts and Scrivener (1993)
which consist 59 subcategories of disputes; 26% of total disputes are payment related
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countries is given in Table 1. According to the review presented on Further information on construction disputes/cases is freely acces-
the table, disputes over payments occur not only in developing sible from the website of the Building Disputes Tribunal (2010) in
countries but also in developed countries in over two decades. New Zealand. For the analysis, cases referred to adjudication within
Payment types that are responsible for disputes include progress, five years (2006–2010) were considered. The analyses of disputes
final, variations, and claims. In addition, the review indicates that were carried out in 2011 as an aspect of a larger study program that
although payment provisions are set out, payment problems persist sought solutions to payment problems in New Zealand. Altogether,
because of noncompliance with the provisions. Another notewor- 40 payment related cases were referred to Building Disputes Tri-
thy point is that payment problems are not limited to project owners bunal during the period in concern.
and head contractors but flow down the chain to include disputes The set of information extracted from High Court proceedings
between head contractors and subcontractors. Finally, the review include time periods when the cases were filed, parties in dispute,
indicates the nature of payments in dispute to include: monetary value of the disputes, types of payments in dispute, and
1. Delays in progress and final payment and the release of reten- the judgments awarded. High Court proceedings offered both
tion monies, qualitative and quantitative data that were analyzed using simple
2. Nonpayments to main contractor by the project owner and descriptive analysis. The results from the analyses are presented
subcontractors by main contractors, in the next section.
3. Valuation of final accounts and contracted works,
4. Variations claims by contractors,
5. Failure to comply with payment provisions, and
Findings of the Research
6. Arguments on prolongation and acceleration costs.
From this little review, it could be suggested that an analysis of
construction disputes could establish the status of payment prob- Profile of Payment Disputes
lems in the New Zealand construction industry and ways by which A total of 40 cases relating to construction payment disputes were
payment problems could be mitigated. Thus, this research analyzes filed in the High Court over the five-year period considered by the
payment-related disputes that were referred to adjudication and current study (2006–2010). Table 2 provides a distribution of these
subsequently filed in the High Court in New Zealand. The study 40 cases, according to the dates the cases were filed and the final
is undertaken with the view to mitigating payment problems. judgments. As observed from the table, most of the cases (80%)
Subsequent sections describe the study approach and methods were filed over the period between 2008 and 2009. Similarly,
adopted, the results and findings, and conclusions of the study.
the distribution of final judgment time reveals that more than 80%
of cases were resolved during the same period. This correlation
Research Methods indicates that some of these cases were resolved within the same
year they were filed, whereas other cases took longer time. This, in
The main approach used by this study is the analysis of documents return, confirms that the payment-related disputes referred to
on construction payment disputes filed at the High Courts in adjudication initially through Building Disputes Tribunal and sub-
New Zealand. Document analysis is a tool used in archival research sequently filed in High Court are resolved quicker than resolutions
approach where the research study focuses on contemporary or through traditional methods of litigation or arbitration.
historical events (Saunders et al. 2007; Yin 2003). The analysis
of documents is a nonreactive technique where the information
given in the document is free from possible distortion by the re-
searcher (Corbetta 2003). Similarly, the approach is a cost-effective Table 2. Profile of the Cases
data collection technique (Denscombe 1998), despite its limitation Final judgment date Filed date
in terms of access and data accuracy (Saunders et al. 2007). Given
the benefits and drawbacks of document analysis, this study chose Year Frequency Percentage (%) Frequency Percentage (%)
the method as a primary approach to investigating the status of 2010 6 15 1 3
payment problems and possible mitigation measures. 2009 18 45 14 35
As indicated previously, it is widely recognized within literature 2008 16 40 18 45
that one of the common causes of construction disputes is payment 2007 — 0 6 15
irregularities within the construction industry. Therefore, this study 2006 — 0 1 3
Total 40 100 40 100
analyzes disputes/cases filed in the High Court in New Zealand.

© ASCE A4514005-2 J. Leg. Aff. Dispute Resolut. Eng. Constr.

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2015, 7(1): A4514005

 The review of the backgrounds to the cases show that payment
disputes were over building and civil engineering contracts, which
included construction of residential and commercial buildings,
earthworks and access roads, development contracts, demolition
work, alterations, and renovations. Disputes also included trade
services, such as painting, structural steel and metal work contracts,
and electrical services and products. These indicate that disputes
exist not only between the owners and main contractors but also
between main contractors and subcontractors/specialist trade
contractors.
A further review of cases shows that approximately 50% (19 out
of 40) cases were referred to adjudication initially and then filed in
the District Court for enforcement and review of adjudicators’
determinations. The remaining cases include applications to the
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High Court, to set aside the statutory demands issued and to
enter a summary judgment or appeals to the High Court from
the District Court. With respect to cases referred to the construction
contracts act (CCA), more than 50% (22 out of 40) of cases were
related to payment claims and payment schedules prepared under
the CCA.
Construction Parties in Disputes
Analyses of the High Court cases indicate that construction pay-
ment disputes are mostly between principals, head contractors,
and subcontractors. As observed in column 4 of Table 3, in almost
50% of the cases, principals filed suits against contractors, whereas
in approcimately 40% of court cases, contractors filed against
principals. This would suggest that the common phenomenon in
payment disputes is to have the principals and contractors in con-
tention. In contrast, contractors’ and subcontractors’ disputes were
only in 8% of the cases examined. An equal percentage of the cases
were between principals and subcontractors. This suggests that the
disputes involving subcontractors do not seem to be referred to
adjudication or applied to the High Court. Subcontractors are
generally reluctant to file a case against upper-tier parties. Thus,
payment to subcontractors could be guaranteed by offering a sep-
arate form of security by the upper tiers.
Monetary Value of Disputes
The monetary value of payment claims in disputes is presented in
column 3 of Table 3. For clarity on the value of payment delays and
losses experienced by project parties, these claim values were
grouped into four value intervals. These value intervals are less than
NZ$100,000; NZ$100,000–500,000; NZ$500,000–1,000,000; and
above NZ$1,000,000. The analyses show that in most cases (46%),
the monetary value of claims were less than NZ$100,000. The sec-
ond highest number of claims (40%) was between NZ$100,000 and
NZ$500,000. The amount claimed in 11% of the cases was above
NZ$1,000,000, where in 3% of the cases, the claims were between
NZ$500,000 and NZ$1,000,000. As observed from Table 3, more
than 50% of disputes involved more than NZ$100,000 either
delayed or lost. This value is significant for small- or medium-scale
constructors who account for 98% of firms in the construction
industry in New Zealand.
Nature of Payment in Disputes
A summary of the nature of payments in dispute is prepared using
information extracted from cases filed in the High Court. The sum-
mary is presented in Table 3. The table gives the case number, final
judgment date, amount of claim disputed, cause of disputes, and
the final judgment. Case numbers given in the table for each case
indicates the year the cases were filed, not the actual case file num-
bers. However, in the case of judgment, the actual dates of the final
judgments are given. This, therefore, prevents a comparison of the
filed date and judgment date, to determine the actual time it took to
© ASCE A4514005-3
J. Leg. Aff. Dispute Resolut. Eng. Constr., 2015, 7(1): A4514005
resolve the disputes in court proceedings. However, the informa-
tion shows that 20 cases out of 40 (50%) were resolved within the
same year in which the cases were filed. Thus, the data would
suggest that the remaining 50% of cases took over 1 year to be
resolved.
Further, the root causes of payment disputes were extracted
from the background information provided for the cases filed in
the High Court of New Zealand. Column 4 of Table 3 shows the
types of payment that were responsible for payment disputes. It is
apparent from the table that disputes arose over issues where claim-
ants were refused progress, final, and other payments (retentions
and costs incurred in court proceedings) because of the validity
of progress claims, incomplete or defective work, and nonissuance
of payment schedules.
The results show that 28 out of 40 (70%) of the cases studied
were related to progress payments, whereas 25% related to final
payments. Only in one case out of 40 was the dispute over payment
of retention money, whereas in another, the costs associated with
court proceedings was the source of the dispute. However, this was
originally caused by a default in the settlement of a payment claim.
Hence, it would seem that progress and final payments were more
likely to be delayed or lost by construction participants in court
cases. It is to be noted that although some of the claims are referred
to as progress claims, they could mean final payments as well.
Disputes are, therefore, more over progress payment than other
payments, such as variations or claims.
The status of payment as to whether it is delayed or lost because
of disputes was determined using the comparison of final judg-
ments given with the amount in dispute, as shown in Table 3.
In order to get an understanding of the extent of payment delays
and losses in court cases, five different situations were assumed by
the study. Hence, where a disputing party is paid fully after court
proceedings, the party would still have incurred delay in the pro-
cess. The second situation assumed is loss and delay, when a party
is paid partially. Thirdly, is loss, when there is nonpayment, then
likely loss or delay and other for the fourth and fifth categories. If
the claimant is paid fully or partially, because it was referred to the
High Court, the payment would have been delayed. Payment loss is
assumed to have been experienced by a claimant when it loses the
claim or was not paid by the defendant. The status of payment was
classified as likely delay or loss if it was unresolved, pending fur-
ther decision or determination. The comparison of amounts claimed
and final judgments reveals that there were delays, losses, and
likely delay or loss of payment by construction parties (refer to
column 5 of Table 3).
Accordingly, in 40% of the cases, claimants were paid fully but
experienced delays in payment. In another 10% of claimants were
partially paid, thus experienced delay in the process while also
losing the amount that was not paid. For reasons traceable to their
actions or inaction, 25% of the claimants lost their cases. For
example, some of the claimants failed to comply with contractual
obligations, submitted invalid payment claims and statutory de-
mands, and/or provided inappropriate payment schedules. For
the 25% of claimants who lost their cases, the amount lost was gen-
erally less than NZ$100,000.
A further 20% identified in the analysis were those parties that
were likely to be delayed or to lose money because these few cases
were unresolved and referred back to adjudication. The remaining
5% shown in the table refer to cases in which both parties (claimant
and defendant) came to an agreement, and the disputes were
consequently resolved. The previous analysis provides an insight
into the nature of construction payment delays and losses in
New Zealand.
J. Leg. Aff. Dispute Resolut. Eng. Constr.
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Table 3. Summary of Payment Disputes

Case Judgment Amount

© ASCE
number date claimed (NZ$) Cause of disputes Final judgment
CIV- 2010 Jan-10 33,000k and Validity of claims and sums (two monthly claims for payment of $33 million and $61 million) of subcontractor Decision referred back to
61,000k (SC) disputed by the principal (P) adjudication—Unresolved
CIV-2008 Feb-10 32,147k Payment to final invoice was declined by P, as the SC failed to install an important bond beam; P applied to set Improper statutory demand—Loss
aside the statutory demand issued by the SC to the subcontractor
CIV-2009 Feb-10 Undisclosed Payment claim issued by the contractor (C) was technically invalid; C applied for summary judgment Technically invalid payment claim–
procedures against P regarding payment claim Loss to the contractor
CIV 2009 Feb-10 1,184k Final claim was adjusted, claimed a sum of $1,183,942; C rejected the claim, and SC referred to adjudication; Court awarded subcontractor
C applied to challenge the adjudicator’s decision, then, SC referred to arbitration for the difference in sum $327k—Delay and loss to
awarded by arbitrator and court subcontractor
CIV-2009 Feb-10 442k Contractor issued a statutory demand for the final payment The claim was paid in full—Delay
to the contractor
CIV-2007 Feb-08 32,649k C applied to set aside the statutory demand issued by SC for the final amount on providing electrical services Statutory demand set aside—Loss
and products to the subcontractor
CA145/2008 Sep-08 190k Appeal against High Court judgment dismissing the application to set aside statutory demand for nonpayment Unresolved
of progress claim
CIV-2009 Feb-10 219k Developer (C) issued a payment claim because of variation of single story into two stories, and no schedule was Contractor had no caveatable
provided and amount disputed; C had lodged a caveat over the title of the land interest in the land—Likely loss to
contractor
CIV-2009 Sep-09 37k C issued four payment claims but no payment schedule from P; District Court judgment was that P had no Payment claim was not valid—Loss
arguable defense, and the C was to be paid; P appealed to High Court to contractor
CIV 2009 Oct-09 53k P defaulted on some payments to C, and C filed a summary judgment proceedings, and the judgment was to pay Contractor was paid in full—Delay
C the full amount; P appealed to High Court to contractor
CIV 2006 Jul-09 282k Adjudicator determined that P is liable to pay C, and payment was not made; C applied to District Court for Bankruptcy notice accepted; thus,
enforce adjudicator’s determination; P appealed to High Court for judicial review of adjudicator’s determination the contractor to be paid $322k as

A4514005-4
per adjudicator’s determination—
Delay to contractor
CIV-2008 Feb-09 511k Progress payment claim was sent to P, and time for sending payment schedule lapsed; C proceeded to apply for Contractor was successful partially
summary judgment and paid $178k and lost $332k—
Delay and loss to contractor
CIV 2009 Jul-09 22k Three progress payments claimed remained unpaid, and adjudication determination was enforced in District Both parties were successful—No
Court, and a charging order was placed on the property; C commenced bankruptcy proceedings, and was dispute
refused; P commenced her own claim and referred to adjudication and obtained a ruling, trying to enforce in

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2015, 7(1): A4514005

High Court
CIV-2009 Oct-09 72k Disputes arose over construction of roof and other matters; adjudicator determined P to pay the balance contract Principal’s statutory demand was
price (final payment) once defects were remedied; P sent payment schedule indicating C owes P set aside—Loss to principal
CIV-2009 Nov-09 33k Dispute over payment of retention was referred to adjudication and before the award, C went into liquidation; Contractor was paid in full—Delay
the liquidator applied to review the determination, and this proceeding was to cancel the adjudication to contractor
CIV-2008 Apr-09 205k Unpaid overdue invoice application by the C for summary judgment against the P seeking an amended sum of All five payment claims were valid;
$205,167.27, said to be owed under a construction contract; C sought payment for the two claims thus, contractor was awarded full
amount—Delay to contractor
CIV-2009 Oct-09 345,395k SC made the claim and was denied by the C; it was referred to adjudication, and C sought to have the Application to set aside the
determination set aside statutory demand was withdrawn;
contractor required to pay
subcontractor—Delay to
subcontractor
CIV 2008 Apr-09 110k Engineer-issued payment schedule indicating that the C has to repay client; C did not accept the final payment Application to stay liquidation
schedule; matter referred to arbitration proceedings was dismissed—Loss
to principal

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Table 3. (Continued.)
Case Judgment Amount

© ASCE
number date claimed (NZ$) Cause of disputes Final judgment
CIV 2009 Apr-09 13k Summary judgment was entered in District Court for the payment claim of $26,649.39 plus costs of $5,000 with Court awarded contractor $13k plus
disbursements of interest; C appealed to set aside the costs of $5,000 and required to be awarded actual and the costs of preparing for and
reasonable costs in the District Court proceedings appearing at the summary judgment
hearing related to payment claim of
$27k—Delay to contractor
CIV 2008 May-09 97k Outstanding progress claim amount was not made because P became insolvent when the finance company went Appeal was dismissed—Loss to
into receivership; adjudicator approved a charging order contractor
CA83/2008 Feb-09 1,324k Payment for the final claim was not paid, and the C referred to adjudication; C applied to District Court to Bankruptcy application
enforce adjudicator’s determination as judgment adjourned—Likely to be
a loss to contractor
CIV 2009 Jun-09 76k Payments to C were overdue; this was to be compensated with another agreement parties entered into, but the Court awarded contractor $57k—
relationship between parties broke down, and the C issued a statutory demand Delay and loss to contractor
CIV 2009 Jun-09 466k Three progress claims were not met, and statutory demand issued Statutory demand not set aside;
contractor to be paid—Delay to
contractor
CA463/07/2008 May-08 123k Dispute caused by failure to provide payment schedule was referred to adjudication and then to District Court Costs awarded to contractor in
for enforcement; applicant appealing against the award of costs dispute caused by nonissuance of
payment schedule for $123k
defended—Delay to subcontractor
CIV-2008 Oct-08 139k Statutory demand made for payment in building contract by the contractor was set aside by consents and costs Paid in full—Delay to contractor
awarded in 2B basis; C sought to challenge the award (High Court)
CIV 2008 Jul-09 112k P sought to set aside the demand issued by the SC with a counter claim for liquidated damages Statutory demand for the payment
was set aside by consent—Neither
loss or delay to the contractor

A4514005-5
CIV 2008 Aug-09 766k Contract was cancelled verbally because the work was not up to standard and defects were not rectified as Statutory demand was set aside—
agreed; C served the payment claim ($99,984) and referred to adjudication; P chose to defend adjudication Loss to subcontractor
proceedings by counter claiming ($138,602)
CIV-2008 Oct-08 28k C issued an invoice for its final contract payment, and as a response to that, P issued the payment schedule Caveat for nonpayment removed
having regard to various credits and a claim for liquidated damages; the contract made provision for C to and the amount held in trust
register a caveat against the land for nonpayment; P filed to remove the caveat account pending resolution—Delay
to contractor
CIV-2009 Aug-09 78k C served a payment claim. but no payment schedule was provided; District Court denied the C’s application for Contractor’s appeal against

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2015, 7(1): A4514005

summary judgment with regards to payment claim served; C appealed to High Court decision on summary judgment
proceedings dismissed;
adjudication is seen as a solution—
Likely outcome was delay to
contractor
CIV 2008 Nov-08 2,000k C sued the P for payment due under the payment claim made; P opposed the application for summary judgment; Time to serve payment schedule
P now seeks costs had not elapsed—Status of
payment was not available
CIV 2007 Jun-08 35k Payment for the work was refused by the P because the defects were not rectified; dispute referred to Paid in full—Delay to contractor
adjudication by C seeking relief including payment of outstanding invoices; a charging order was issued over
the property, and the C filed in District Court for enforcement; P applied to High Court and obtained an interim
order
CIV 2008 Jun-08 109k C served a final payment claim, and the P didn’t pay either in whole or part; Court ordered the P to pay the final Paid in full—Delay to contractor
invoice, but this was a cross appeal by P against the original court decision

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Table 3. (Continued.)
Case Judgment Amount

© ASCE
number date claimed (NZ$) Cause of disputes Final judgment
CIV 2007 Feb-08 13k C claimed unpaid portion ($18,771) of the invoice, and P had a counter-claim ($12,887) for recovery of Court ordered contractor to pay
payment; P applied to liquidate the C; C refused to pay after being served with a statutory demand principal—Contractor lost the
claim of $19k and paid $12k; delay
to principal
CIV 2007 Feb-08 157k P was ordered to pay the C by an adjudicator that was not paid; she applied to set aside the bankruptcy notice Contractor was paid in full but
with a counter-claim experienced a delay
CIV 2008 Jun-08 280k Adjudicator made a determination in favor of C and gave permission to issue a charging order, which was Contractor’s application to enter the
entered in the High Court; claimant notified the court that only the District Court could enter a charging order charging order dismissed because
only District Court could enter a
charging order—Likely loss and
delay to contractor
CIV 2007 Apr-08 1,000k C claimed $1.6 million, and the adjudicator determined $1 million; P commenced judicial review proceedings Principal’s interim relief application
and an ex parte application for interim relief declined; given 7 days to serve the
claim, and contractor to respond
within 7 days—Likely delayto
contractor
CIV-2008 Sep-08 Undisclosed C issued summary judgment proceedings because of nonpayment; P seeks an adjournment; the application for Application for adjournment was
adjournment was declined declined, and contractor to be
paid—Delay to contractor
CIV 2008 Dec-08 11k Outstanding balance of payment claim remained unpaid; client submitted her claim to the Disputes Tribunal; Judicial review of Tribunal decision
contractor filed a civil claim in the District Court seeking payment of the balance due was dismissed; difficult to
determine the party at fault; dispute
remains unresolved—Likely delay
or loss to contractor

A4514005-6
CIV 2007 Oct-08 246k Builder left the job because no payment was done for later invoices Contractor awarded partial $79k,
and this was also pending further
order—Delay and loss to contractor
CIV 2008 Oct-08 28k C in this appeal was sued in their capacity as trustees for failure to pay a payment claim issued to them under the Application to set aside summary
provisions of the Construction Contracts Act 2002 judgment was successful; principal
as trustee not the legal entity
entitled to payment—Loss to
contractor

J. Leg. Aff. Dispute Resolut. Eng. Constr., 2015, 7(1): A4514005

J. Leg. Aff. Dispute Resolut. Eng. Constr.
 Strategies Used to Remedy Payment Problems
As part of the objective of the investigation, the study sought
solutions that could mitigate construction payment problems.
Information provided in column 5 of Table 3 reveals that in a
few cases, parties employed strategies, such as the placing of charg-
ing orders or caveat registration, bankruptcy and liquidation pro-
ceedings, issue of statutory demands, and summary judgment to
remedy nonpayment of their claims. These are different
provisions/strategies available within different documents in
New Zealand.
The CCA in New Zealand provides construction parties the
right to seek approval for the issuance of charging orders with re-
spect to a construction site owned by the respondent (CCA 2003,
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s.29). A claimant can seek approval for a charging order in adju-
dication. Upon the judgment or order for the payment, the claimant
can apply to the District Court or High Court for a charging order
[District Court Act (1947)]. Following the court order, the charging
order is registered under the Land Transfer Act [(LTA) 1952]. This
charging order prevents construction owners from registering any
conveyance, transfer, assignment, or disposition of the property.
Under the District Court rule, a charging order is removed by
the operation of s.105 of the LTA, if the empowering mortgage
has priority. The analyses of disputes show that in 4 out of 40 cases,
claimants sought a charging order to mitigate nonpayment by
respondents. Claimants’ charging orders were approved by the
adjudicator. Subsequently, a charging order was placed over the
owners’ properties.
Caveat registration is another mitigating strategy for payment
problems that parties to a contract could use to recover payments.
For example, the Land Transfer Act 1952 in New Zealand allows a
person claiming an interest in a piece of land to lodge a caveat
against its legal title. A caveat freezes the register until the caveat
lapses, is withdrawn, or is removed by court order [District Court
Act (1947)]. The registering of a caveat notice against a title alerts
any party that a claim is made and sought. This protects the interest
in the land by preventing the registered proprietor from disposing of
it or dealing with it in a way that would affect the caveator’s rights
and interests.
As per the analyses of the High Court cases, in one out of 40
cases, the claimant (developer) lodged a caveat against the title of
the land to recover payment due from the owner. In another situa-
tion, a project owner applied to the court for a removal of the caveat
lodged by the contractor over his land. With the first situation, the
caveat for nonpayment was removed, and the amount held in a trust
account is pending resolution. This caused a delay for the contrac-
tor. It was decided by the court that the contractor had no caveatable
interest in the land in the second situation. Therefore, it resulted in a
likely loss by the contractor.
Analyses of the cases indicate that filing a bankruptcy notice
and liquidation proceedings have also been used to recover pay-
ment from construction principals and contractors. According to
the New Zealand’s Companies Act 1993, both bankruptcy and
liquidation proceedings can be made by the debtor voluntarily
or by the creditors involuntarily on a court order granted. Thus,
both voluntary and involuntary bankruptcies and liquidations are
experienced in the construction industry. The dispute records
show that in 2 out of 40 cases the principal (project owner)
submitted an application to set aside the bankruptcy notices is-
sued to them. This was made after an order to pay their contrac-
tors was made. In some other cases (3 out of 40), some claimants
lodged liquidation proceedings to recover the amount claimed,
which was subsequently appealed by the respondents to stay
the liquidation proceedings. In all cases, the applications were
dismissed. Further, in 30% (12 out of 40) of cases, contractors
© ASCE A4514005-7
J. Leg. Aff. Dispute Resolut. Eng. Constr., 2015, 7(1): A4514005
and subcontractors issued statutory demands, whereas in three
other cases (out of 40) contractors applied to the court for
summary judgment to recover payments from principals and
contractors.
Concluding Remarks
Anything that impacts the industry negatively affects the economy
in the same way. This could provide a pathway to consider improv-
ing the performance of the industry. In this sense, mitigation of pay-
ment problems could play a significant role because payment is the
core of any economic activity and could ensure the survival of the
construction industry.
This paper analyzed construction payment disputes with the
view of exploring mitigating measures for payment problems pre-
vailing within the industry. Consistent with literature, cases filed in
the High Court on construction disputes show that payment delays
and losses are significant causes of disputes in the industry. Thus,
the New Zealand construction industry is not an exception when
payment problems are considered. In over 80% of the situation,
disputes were between principals and contractors. A relatively
smaller number of disputes, between subcontractors and contrac-
tors, indicate that subcontractors’ disputes are not referred to formal
dispute resolution methods (such as adjudication or litigation). This
research, therefore, recommends that there needs to be an effective
way of dealing with payment issues that could adversely these
lower-tier parties.
Within the analysis, disputes relating to progress and final
payments account for 80% of cases. Thus, mitigation measures
need to provide a feasible form of security that caters for both
interim and final payments. The analysis within the current study
indicates that delayed and nonpayments to constructors were mi-
tigated by registering caveat notices and placing charging orders
over the projects built. In addition, construction parties filed
bankruptcy notices and liquidation proceedings to recover pay-
ments. Although these measures are effective ways of mitigating
payment problems, in the case of bankruptcy or liquidation, con-
struction contractors, subcontractors, and suppliers are unsecured
creditors. This means that these unsecured creditors are only
settled with leftovers after proceeds have been distributed among
secured and preferential creditors on completion of liquidation
proceedings.
The study further found that in court decisions, only 40% of
cases are successful so that claimants recovered all the money
in dispute. However, the remaining cases are either partially suc-
cessful or unsuccessful. Disputes mainly emanated from provisions
in legal and contractual instruments, such as those outlined in the
CCA and other standard conditions of contracts in New Zealand.
The study, therefore, recommends that in addition to the use of the
mitigation measures previously highlighted, adherence to pro-
cedural requirements in these documents, as well as providing pro-
tection from delays and losses, needs to be ensured. Attitudinal
changes are also required to help mitigate payment problems in
the construction industry. Anecdotal evidence suggests that up-
stream construction parties could be high handed in the settlement
of payment claims. A general change in attitude, together with
adherence to payment-related legislation in countries, could be a
rational starting point.
There are limitations to the study; for example, the actual
time taken to resolve disputes could not be determined. Informa-
tion on the actual dates of High Court judgments were given, but
in the case of filed dates, the cases gave only an indication of the
year in which the cases were filed. Further, the contract sums
J. Leg. Aff. Dispute Resolut. Eng. Constr.
 were unavailable and could have provided a better understand-
ing of the significance of payment delays and losses by represent-
ing the value of disputed claims in the contract sum. The findings
should, therefore, be treated with caution in terms of their
generalizability.
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