Cases Construction Contract

A REVIEW OF THE CASES ON THE CONSTRUCTION CONTRACTS ACT 2002 As at 7 December 2012 by Tómas Kennedy-Grant, QC MA(Oxon), Gray's Inn, FCIArb, FICA, FSIArb, FAMINZ(Arb/Med) Chartered Arbitrator

Introduction 1

It is impossible to tell how many times the provisions of the Construction Contracts Act 2002 (“CCA”) have been invoked since the Act came into force on 1 April 20031. It is also impossible to tell what proportion of the cases in which the Act has been invoked has resulted in judicial decisions. A search of the Ministry of Justice’s website2 at http://jdo.justice.govt.nz/jdo/Search.jsp provides links to 177 superior court decisions referring to the Act including one Supreme Court decision and 12 Court of Appeal decisions. There have, in addition, been a number of District Court decisions; but these are not easily accessible.

2

I examine these decisions under the following heads: a. Definitions – paragraphs 3-8; b. The right to progress payments and the procedure for claiming and making them – paragraphs 9-57; c. The consequences of a payer’s failure to comply with the provisions regarding payment schedules and the making of progress payments – paragraphs 58-59; d. Adjudication – paragraphs 60-99;

1

The texts of the Act and of the Construction Contracts Regulations 2003 can be accessed on the New Zealand Government legislation website at www.legislation.govt.nz 2 Carried out up to 23 July 2012

e. Recovery of unpaid claims and enforcement of adjudicator’s determinations – paragraphs 100-128; f. Service – paragraphs 129-137; g. The prohibition of contracting out – paragraphs 138-139; h. The High Court’s powers of judicial review – paragraphs 140-145.

3

In addition to giving references to printed law reports I have given references to the case reports on the Judicial Decisions Online website 3 or, where available, to the case reports on the New Zealand Legal Information Institute website at http://www.nzlii.org .

Definitions

(a)

“Construction contract”

4

In O’Connor Holdings Ltd v Ace Builders Construction Ltd4 the Court held that, while a contract for the direct hire of labour is not within the Act5, a contract for the supply of workers is.

(b)

“Construction work”

5

The term “construction work” is defined in s 6 of the Act, as follows: (1)

In this Act, unless the context otherwise requires it, construction work means any of the following work: (a) the construction, erection, installation, carrying out, alteration, repair, restoration, renewal, maintenance, extension, demolition, removal, or dismantling of any building, erection, edifice, or structure forming, or to form, part of land (whether permanent or not and whether constructed wholly or partly on, above, or below ground level): (b) the construction, erection, installation, carrying out, alteration, repair, restoration, renewal, maintenance, extension, demolition,

3

See paragraph 1 above for the url. [2005] DCR 193 5 See s 11(a) of the Act 4

2

(2)

6

removal, or dismantling of any works forming, or to form, part of land; including— (i) any road, motorway, aircraft runway, wharf, docks, harbour works, railway, cableway, or tramway: (ii) any canal, inland waterway, pipeline, reservoir, aqueduct, water main, well, or sewer: (iii) any electricity, water, gas, or telephone reticulation: (iv) any telecommunication apparatus or industrial plant: (v) any installation for the purposes of land drainage or coast protection: (c) the installation in any building or structure of fittings forming, or to form, part of land; including heating, lighting, air conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection, security, and communications systems: (d) the alteration, repair, maintenance, extension, demolition, or dismantling of the systems mentioned in paragraph (c): (e) the external or internal cleaning of buildings and structures, so far as it is carried out in the course of their construction, erection, alteration, repair, restoration, or extension: (f) any operation that forms an integral part of, or is preparatory to or is for rendering complete, work of the kind referred to in paragraphs (a) to (d); including— (i) site clearance, earthmoving, excavation, tunnelling, and boring; and (ii) laying foundations; and (iii) erecting, maintaining, or dismantling scaffolding or cranes; and (iv) prefabricating customised components of any building or structure, whether carried out on the construction site or elsewhere; and (v) site restoration, landscaping, and the provision of roadways and other access works: (g) the painting or decorating of the internal or external surfaces of any building or structure. Despite subsection (1), construction work does not include any of the following work: (a) drilling for or extracting oil or natural gas: (b) extracting (whether by underground or surface working) minerals, including tunnelling or boring, or constructing underground works, for that purpose.

This definition has been considered in the following cases: a. In Gulf Harbour Investments Ltd v Y Gulf Harbour Ltd 6 the Court held that a yacht is not a “structure” within the meaning of that term in the definition of “construction work” in s 6(1)(g) of the Act.

The

argument that was advanced was that the absence from s 6(1)(e) and 6(1)(g) of the words “forming, or to form, part of land” meant that, 6

High Court, Auckland, CIV 2006 - 404-386, 16/3/06 Christiansen AJ

3

under those paragraphs of the subsection, construction work could include work in relation to chattels, including boats and aircraft. The Judge rejected this argument on the ground that it was clear from the definitions of “construction contract”, “commercial construction contract” and “residential construction contract” in s 5 of the Act that “construction work” is in every case on buildings or structures forming part of the land. b. In Central House Movers Ltd v Russell7 it was accepted by both parties that the relocation of a villa was “construction work”. c. In Westpark Marina Ltd v Automated Solutions Ltd8 it was argued that the installation of cameras and computer software in barrier arms for a car park comes within the definition of “construction work”. The Court did not need to decide the issue; d. In M.van der Wal Builders & Contractors Ltd v Walker9 the Court held that: The Act does not presently authorise claims for payment in connection with construction work preparation or consultancy in connection with proposed work.

(c)

“Dispute”

7

The term “dispute” is important because of its use in Part 3 of the Act, which provides for the adjudication of disputes. I consider it in paragraphs 60-70 below.

(d)

“Residential occupier”

8

The term “residential occupier” is defined in s 5 of the Act to mean: an individual who is occupying, or intends to occupy, the premises that are the subject of a construction contract wholly or mainly as a dwellinghouse.

7

High Court, Palmerston North, CIV 2010-454-103, 20/05/10, Christiansen AJ High Court, Auckland, CIV2011-404-7295, 30/11/11, Abbott, AJ 9 High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ 8

4

I consider it in paragraph 108 below.

The right to progress payments and the procedure for claiming and making them (a)

Introduction

9

Part 2, Subpart 2 (ss14-18) of the Act provides that the parties to a construction contract “are free” to agree on progress payment provisions but that, to the extent that they “fail” to do so, the default provisions stipulated in the Act apply.

10

Part 2, Subpart 3 (ss19-24) of the Act provides for the making of, and responding to, payment claims (sections 20-21) and prescribes the consequences of failure by the payer to make payment (sections 22-24). Section 19 contains some necessary definitions.

11

Among the definitions in s 19 is the definition of “payee” as: “the party to a construction contract who is entitled to a progress payment”10

In Suaniu v Hi-Qual Builders Ltd 11 the Court held that the fact that a code compliance certificate, the existence of which was a condition of a claim for payment, was rescinded after the claim had been made but before the time for serving a payment schedule had expired (no payment schedule was served) was irrelevant: the claim was valid when made.12

(b)

Procedure: the courts’ general approach

12

The general approach of the courts to cases arising under Part 2 subpart 3 of the Act may be summed up by the following quotations:

10

The term “progress payment” is defined in s 5 of the Act and includes “final payment under the contract”. 11 High Court, Auckland, CIV 2008-404-1576, 26/6/08, Wylie J. 12 See, to similar effect in relation to the effect of a later payment certificate and schedule on an earlier one the basis of a claim, Nash Properties Ltd v Harris Holdings Construction Ltd (High Court, Auckland, CIV 2009-404-1013, 11/6/09, Faire AJ).

5

a. from George Developments Ltd v Canam Construction Ltd 13 [41] We are satisfied that the necessary analysis must be undertaken with the purpose of the Act in mind. The purpose provision of the Act includes the fact that the Act was “to facilitate regular and timely payments between the parties to a construction contract”. The importance of such regular and timely payments is well recognised. Lord Denning (quoted in Gilbert-Ash (Northern) Ltd v Modern Engineering (Bristol) Ltd [1973] 3 All ER 195, 214 (HL) Lord Diplock) said: “There must be a “cashflow” in the building trade. It is the very life blood of the enterprise”. [42] As is noted in Smellie Progress Payments and Adjudication (2003) at 31, “Although [the s 20(2)] requirements are mandatory, technical quibbles that they have not been complied with will probably receive scant attention”. The learned author notes the New South Wales case of Hawkins Construction v Mac’s Industrial Pipework [2001] NSWSC 815 where Windeyer J considered the validity of a payment claim under legislation equivalent to the New Zealand Act and said at paragraph 8: [Counsel] contended that the payment claims served on the plaintiff … were ineffective because they did not comply with section 13(2)(a) and (c) of the Act. The arguments were that they contained the incorrect contract number and abbreviated the name of the Act under which the claim was made … As to the first, while the contract number may have been wrong in some cases, the claims did identify the work done. The second argument was that because the payment claims abbreviated the name of the Act, they did not fulfil a statutory requirement to name the Act. This argument might have had some weight in 1800. In 2001, an argument based on the absence of the word “and” and the letters “USTRY” has no merit. It should not have been put. [43] We acknowledge that the approach of this appellant was not as pedantic as those confronting Windeyer J, but the general observation that technical quibbles should not be allowed to vitiate a payment claim that substantively complies with the requirements of the Act is critical and needs to be weighed alongside the “technocratic” interpretation advanced by George. 14

b. from Marsden Villas Ltd v Wooding Construction Ltd 15 [16] The Act sets up a procedure whereby requests for payment are to be provided by contractors in a certain form. They must be responded to by the principal within a certain timeframe and in a certain form, failing which the amount claimed by the contractor will become due for payment and can be enforced in the Courts as a debt. At that point, if the principal has failed to provide the response within the necessary time frame, the payment claimed must be made. The substantive issues relating to the payment can still be argued at a later point and adjustments made later if it is shown that there was a set-off or other basis for reducing the contractor’s claim. When there is a failure to pay the Act gives the contractor the right to give notice of intention to suspend work, and then if no payment is made, to suspend work. There is also a procedure set up for the adjudication of disputes.

13

[2006] 1 NZLR 177 (CA), (2005) 18 PRNZ 84, CA 244/04, 12/4/05. See, for examples of the courts distinguishing between substantial objections and technical ones, Foggo v R J Merrifield Ltd (High Court, Christchurch, CIV 2009-409-605, 21/9/09, French J) and Coker v Phil Brown Building Ltd (High Court, Blenheim, CIV 2010-406-235, 17/2/11, Ronald Young J). 15 [2007] 1 NZLR 807, High Court, Auckland, CIV 2008-404-2136, 25/5/06, Asher J. 14

6

[17] The Act therefore has a focus on a payment procedure, the results that arise from the observance or non-observance of those procedures, and the quick resolution of disputes. The processes that it sets up are designed to side-step immediate engagement on the substantive issues such as set-off for poor workmanship which were in the past so often used as tools for unscrupulous principals and head contractors to delay payments. As far as the principal is concerned, the regime set up is “sudden death”. Should the principal not follow the correct procedure, it can be obliged to pay in the interim what is claimed, whatever the merits. In that way if a principal does not act in accordance with the quick procedures of the Act, that principal, rather than the contractor and sub-contractors, will have to bear the consequences of delay in terms of cashflow.

c. from Laywood v Holmes Construction Wellington Ltd16: [52]

(c)

Payment claims

(i)

13

… the CCA adopts a “pay now, argue later” philosophy … 17

Permissible and impermissible claims

Section 20(1) provides that: “A payee may serve a payment claim on the payer for each progress payment”

The term “progress payment” is defined in s 5 as follows: (a) means a payment for construction work carried out under a construction contract that is in the nature of an instalment (whether or not of equal value) of the contract price for the contract (other than an amount that is, or is in the nature of, a deposit under the contract); and (b) includes any final payment under the contract.

16

[2009] NZCA 35, [2009] 2 NZLR 243 This principle has been recognised by the Court of Appeal in Rees v Firth [2011] NZCA andapplied in the following cases at first instance: Luxta Ltd v Capital Construction Ltd (High Court, Wellington, CIV 2009-485-1957, 10/02/10, Gendall AJ); Yun Corporation Ltd v YQT Ltd (formerly Canam Construction (1955) Ltd) (High Court, Auckland, CIV 2009-404-7656, 26/02/10, Abbott AJ); Canam Construction Ltd v Ormiston Hospital Investment Ltd (High Court, Auckland, CIV 2010-404-291, 10/8/10, Faire AJ); Kariiti Ltd v Donovan Drainage & Earthmoving Ltd (High Court, Whangarei, CIV 210-488-613, 19/11/10, Bell AJ); Luxta Ltd v Paragon Builders Ltd (High Court, Wellington, CIV 2010-485-1825, 17/12/10, Gendall AJ); Chow Group Ltd v Walton (High Court, Auckland, CIV 2011404-3148, 9/6/11, Rodney Hansen J); M van der Wal Builders and Contractors Ltd v Dunphy (High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ; and Absolute QS Ltd v Ascot Aluminium Ltd [2012] NZHC 648. The principle is not an absolute one.

17

7

14

In George Developments Ltd v Canam Construction Ltd18 the Court of Appeal made the following fundamental statement regarding the scope of the Act at paragraphs [55]-[56] of the Judgment: [55] … Although the definition of construction work in s 6 of the Act refers to physical work, the force and thrust of the Act cannot be limited to claims for physical work actually done as opposed to costs which inevitably arise from carrying out the work. This might include: insurance costs, interest, costs of preparing a programme or an extension of time entitlement. As long as the construction contract provides for the payee to be paid the claimed amount in consideration for its performance of construction work (whether or not the entitlement is contingent on a factor such as an extension of time being granted), the payee is entitled to make a claim for payment in a payment claim. If the payer’s stance is vindicated, the particular amount will not have to be paid, but that will not prejudice the entitlement of the payee to be paid the other amounts claimed in the payment claim or invalidate the payment claim as a whole. It is not necessary that every amount claimed in the payment claim can be directly linked to a physical task involved in the construction of the building or structure. The Act was specifically intended to be interpreted so as to achieve its object of speeding up payments. [56] This approach was echoed by Quasar, where the Court distinguished between an amount claimed under a provision in the construction contract and a claim for damages for breach which is not referable to a provision in the contract. We too adopt the same reasoning. We reject the suggestion that the Act and its protective processes are to be interpreted in a restrictive and confining manner.

In that case the Court of Appeal upheld the lower Court’s finding that a claim for extension of time costs could be included in a payment claim under the Act.

15

In Jian Hua Property Ltd v Freemont Design & Construction Ltd

19

the

contractor contended that the principal’s payment schedule was defective because it did not deal with payment claims for “down time and loss of profits”. The contract had been terminated prematurely, by mutual consent, because of difficulties being experienced in obtaining the necessary planning consents. The Court held that the claims did not arise under the contract but were “the respondent’s estimates of the loss it has suffered because it is no longer possible to carry out the work under the contract”. The claims were therefore not properly the subject of a payment claim under the Act.

18 19

[2006] 1 NZLR 177 (CA) (2005) 18 PRNZ 84, CA 244/04, 12/4/05 High Court, Auckland, CIV 2005-404-5526, 16/2/06, Doogue AJ.

8

16

In Marsden Villas Ltd v Wooding Construction Ltd

20

the progress claim

included claims that had been considered and, it was contended, rejected by the adjudicator at an earlier adjudication. The Court held that the adjudicator had not in fact determined those claims, so that it was unnecessary for it to determine the effect on the payment claim if it had included determined claims. However, obiter, the Court drew a distinction between determinations that a party is liable to make a payment and determinations about the parties’ rights and obligations under the construction contract and noted that it is only the former that are enforceable under s 58 of the Act.

17

In Invent Solutions Ltd v Chan Developments Trustee Ltd 21 the Court held that claims made under an exit agreement providing for the termination of a construction contract were claims arising under the contract.

18

In Redhill Development (NZ) Ltd v Green 22, a judicial review application, the Court said: [33] I deal first with the submission that the phrase “under the contract” should be interpreted narrowly. I agree that the use of this phrase suggests that Parliament intended to restrict the range of disputes that adjudicators could determine under the Act. Disputes may arise out of, or in relation to, a construction contract in numerous ways. It would not be appropriate, however, for many of them to be determined by an adjudicator. Claims for misrepresentation and under the Fair Trading Act 1986 are good examples of this. Parliament clearly intended that those types of claims should remain solely within the jurisdiction of the courts notwithstanding the fact that they might arise out of, or be in relation to, a construction contract. [34] I do not, however, accept that the words “under the contract” should necessarily be interpreted as narrowly as the plaintiffs suggest. They must be interpreted so as to give effect to the purposes and objects of the Act. If that requires them to be accorded a broad interpretation, then that is the approach that the Court must take.

The Court in that case was required to consider whether an adjudicator, having found that the parties to a construction contract had not agreed to an extension of time for the service of a payment schedule, had jurisdiction also to find that, in terms of s 23(2)(a), the amount of the claim was recoverable ‘as a debt due to the payee”. The applicant developer argued that that was a consequence of the statute and did not arise under the construction contract, so that the 20

[2007] 1 NZLR 807, High Court, Auckland, CIV 2008-404-2136, 25/5/06, Asher J. High Court, Wellington, CIV 2005-485-2834, 1/4/09, Gendall AJ. 22 High Court, Auckland, CIV 2009-404-3784, 5/8/09, Lang J. 21

9

adjudicator had no jurisdiction to make the order in question. The Court took as its starting point the identification of the dispute that the adjudicator was required to determine. It held that the dispute was whether the amount of the claim was payable to the payee under the contract and that the adjudicator had jurisdiction to make the order challenged. Alternatively, the Court held that the challenged order was of “a consequential or ancillary nature necessary to exercise or complete the exercise of the [admitted] jurisdiction”, under s 38(1)(b) of the Act.

19

In M van der Wal Builders & Contractors Ltd v Walker 23 the Court held, in the context of a summary judgment application to enforce an adjudicator’s determination upholding a claim for breach of contract, that a determination upholding a claim for damages for breach of contract was not a determination of “a liability to ‘make a payment under’ that contract” under s 48(1)(a) of the Act and was therefore not enforceable under s 58(1)(a) and s 59(2). An adjudicator’s determination in respect of such a claim would be subject to s 58(2) and (3) and s 61.

(ii)

20

Frequency

Section 20(1) provides that: A payee may serve a payment claim on the payer for each progress payment,— (a) if the contract provides for the matter, at the end of the relevant period that is specified in, or is determined in accordance with the terms of, the contract; or (b) if the contract does not provide for the matter, at the end of the relevant period referred to in section 17(2).

21

In Marsden Villas Ltd v Wooding Construction Ltd 24 the Court held that, notwithstanding the inclusion in the contract of a clause stating that payment claims “shall be submitted in respect of work carried out during periods of not less than one Month ” and the definition in the contract of “Month” as

23 24

High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ. [2007] 1 NZLR 807, High Court, Auckland, CIV 2008-404-2136, 25/5/06, Asher J.

10

“calendar month”, a claim for a shorter period was not invalid. The Judge took the same approach, obiter, to the equivalent provision in the default payment regime (s 17(2)).

(iii)

22

Service

Section 20(1) requires a payment claim to be served “on the payer”. In Winslow Properties Ltd v Wooding Construction Ltd25 the Court held that, where the contract provides for service on the engineer for the principal, such service is valid. The argument that such a contractual provision amounted to contracting out of the Act was rejected (see further paragraph 101(d) below).

23

In Herbert Construction Company Ltd v Alexander26 the Court rejected an argument that the payment claim was invalid because it was not “addressed to the payer”, on the basis that s 20 did not require a payment claim to be “addressed to any one particular person”.

24

For the effect of s 80 see paragraphs 92-99 below.

(iv)

25

Content: introduction

Section 20(2)-(4) provide: (2)

A payment claim must— (a) be in writing; and (b) contain sufficient details to identify the construction contract to which the progress payment relates; and (c) identify the construction work and the relevant period to which the progress payment relates; and (d) indicate a claimed amount and the due date for payment; and (e) indicate the manner in which the payee calculated the claimed amount; and (f) state that it is made under this Act.

25

High Court, Auckland, CIV 2006-404-4969, 14/12/06, Cooper J. The decision is reported at [2007] DCR 408. It was followed in Hawkins Construction Ltd v Ecosse Afrique Enterprises Ltd (High Court, Wellington, CIV 2008-485-2327, 25/2/09, Gendall AJ). 26 High Court, Napier, CIV 2011-441-500, 21/10/11, Gendall AJ.

11

(3)

(4)

If a payment claim is served on a residential occupier, it must be accompanied by— (a) an outline of the process for responding to that claim; and (b) an explanation of the consequences of— (i) not responding to a payment claim; and (ii) not paying the claimed amount, or the scheduled amount, in full (whichever is applicable). The matters referred to in subsection (3)(a) and (b) must— (a) be in writing; and (b) be in the prescribed form (if any).

Form 1 in Schedule 1 to the Construction Contracts Regulations 2003 prescribes the information that must accompany a payment claim served on a residential occupier.

26

The requirements of s 20(2)(a) and (f) must be complied with to the letter. The requirements of s 20(2)(b)-(e) are less strict and are satisfied if complied with substantially.27

(v)

Content: indication of construction work to which the progress claim

relates (s20(2)(c))

27

In Cube Building Solutions Ltd v King28 the construction contract provided for six progress payments as follows: 80 Bale shed 5% of the Contract Price paid as a non-refundable deposit upon signature of this Contract 10% of the Contract Price paid 1 month before the advised start date of construction. 20% of the Contract Price paid 30 days following the start of construction. 20% of the Contract Price paid 60 days following the start of construction 35% of the Contract Price paid 90 days following the start of construction. 10% of the Contract Price paid on notification of issue of code compliance certificate.

The contractual payment provisions were thus very different from the normal value-of- work done or milestone-reached formula. The contractor (“Cube”) served a payment claim on the employer (“King”) which did not ascribe particular work to the claim but, rather, claimed 35% of the contract price as the payment agreed to be made “90 days following the start of construction”. Counsel for the employer argued that the payment claim did not comply with s 27

Welsh v Gunac South Auckland Ltd (High Court, Auckland, CIV 2006-404-7877, 11/2/08, Allan J) and McAlpine Hussmann Ltd v Cooke Industries Ltd [2012] NZHC 464. 28 High Court, Christchurch, CIV 2009-409-34, 17/12/09, Osborne AJ.

12

20(2)(c) of the Act, in that “it did not identify the construction work ... to which the progress payment relates”. The Court rejected this argument at paragraphs 27-29 of the judgment : [27] The regime under the contract does not provide for payments proportionate to the work completed to a particular date. Rather it provides for payments to be made at given points as percentages of the contract price. In these circumstances it would be a misnomer to say in a payment claim that the progress payment relates to any particular construction work. The claim comes about not because particular work has been done but because a date has arrived when the contract requires a percentage of the contract price to be paid. [28] In these circumstances, it is sufficient that the construction work as a whole has been identified (the position is of course different in relation to claims for variations, to which I will return – there the payment claim, in the terminology of s20(1)(c) can be truly said to relate to particular construction work). [29] I do not find PC5 to be ineffective by reason of a breach of s20(2)(c) – for the reasons I have stated PC5 adequately identifies the construction work to which it relates.

28

In McAlpine Hussmann Ltd v Cooke Industries Ltd29 a contract for the supply and installation of HVAC Mechanical Services required the subcontractor to supply air conditioning diffusers and componentry made by a particular manufacturer. For reasons which it is unnecessary to explain, the contractor instructed the subcontractor to cancel the order which it had placed with the manufacturer. The subcontractor submitted a claim for “Charges associated with the cancellation of your order no …” The Court held that the reference to the order number was a sufficient compliance with s 20(2)(c).

(vi)

29

Content: indication of due date for payment (s20(2)(d))

In Jenkin v Hanna30 the Judge held that the deficiency was remedied by the fact that, by reference to the notice to residential occupier, “the defendant would have been readily able to ascertain a due date”.

I question the

correctness of the Judge’s decision.

30

In Suaniu v Hi-Qual Builders Ltd 31 the Court held:

29

[2012] NZHC 464. District Court, Blenheim, CIV 2008-006-101, 23/6/08, Zohrab DCJ. 31 High Court, Auckland, CIV 2008-404-1576, 26/6/08, Wylie J. 30

13

a.

that, where the contractual term as to the due date for payment is unworkable, the default provision of s 22(b)(ii) applies; and

b.

that the fact that the payment claim stated that payment was due five days after receipt of the claim (which was not correct, given (a)) did not invalidate the claim.32

31

In Cube Building Solutions Ltd v King33 the Court held that the statement in the payment claim that “the claim is payable on” complied with s 20(2)(d) because: Any reading of the payment claim would indicate the “payable” is intended to be synonymous with “due”.

32

Sections 14 and 15 of the Act provide: 14 The parties to a construction contract are free to agree between themselves on a mechanism for determining— (a) the number of progress payments under the contract: (b) the interval between those payments: (c) the amount of each of those payments: (d) the date when each of those payments becomes due. 15 If the parties to a construction contract fail to agree on a mechanism for determining any of the matters referred to in section 14, the relevant provisions of sections 16 to 18 apply to the extent that those provisions relate to any matter for which a mechanism has not been agreed on between the parties

Section 10(a) of the Act provides that ss15-18 do not apply to “residential construction contracts” (see s5 for the definition of a “residential construction contract”). In Coker v Phil Brown Building Ltd34 the parties had agreed that there would be progress payments under the contract but had not agreed on the details of those payments. In the District Court it was held that the reference to s 17(2) in s 20(1) (see paragraph 20 above) was effective to fix the date by which the progress payment was to be made. The High Court rejected this approach.

32

This case was followed, in relation to the issue of the effect of misstatement of the due date, in Invent Solutions Ltd v Chan Developments Ltd (High Court, Wellington, CIV 2008-485-2834, 1/4/09, Gendall AJ). 33 High Court, Christchurch, CIV 2009-409-34, 17/12/09, Osborne AJ. 34 High Court, Wellington, CIV 2010-406-235, 2/5/11, Ronald Young J.

14

33

In Chow Group Ltd v Walton35 the Court held that the provision in the general conditions of contract36 that: No payment otherwise due under the Contract Documents shall become payable until the Contractor and its surety have executed and delivered the bond to the Principal

did not have the effect of postponing the date on which the sum claimed became due. The Court held: The concept of a due date for payment under the contract is a different concept to whether or not a payment which otherwise may be due (because the due date has passed) is payable.

34

In Loveridge v Watts & Hughes Construction Ltd37 the claimant had inserted, in the line of the payment claim form entitled “Claim date and Period covered” the information “30/6/2010 feb-june”. It therefore failed to state a date on which payment was said to be due. The Court held that the payment claim was invalid because it did not specify a due date for payment.

35

In Herbert Construction Co Ltd v Alexander38 the Court held that the failure of the architect to assess the contractor’s payment claim and issue a provisional payment schedule, as part of the payment process, did not have the effect of postponing the due date for payment in terms of the contract conditions, ie, in that case, within 10 days of receipt of the payment claim. The Associate Judge distinguished his earlier decision in Construction Service Co (Wellington) Ltd (in receivership) v Wellington Waterfront Ltd 39 . Further reference is made to this decision in paragraph 115 below.

(vii)

Content: indication of manner in which claimed amount calculated

(s20(2)(e))

35

High Court, Auckland, CIV 2011-404-3148, 19/8/11, Venning J. NZS 3915:2005 cl 3.1.3. 37 High Court, Tauranga, CIV 2011-470-275, 29/9/11, Doogue AJ. 38 High Court, Napier, CIV 2011-441-500, 21/10/11, Gendall AJ. 39 High Court, Wellington, CIV 2006-485-1117, 13/9/09, Gendall AJ. 36

15

36

In George Developments Ltd v Canam Construction Ltd40 the Court of Appeal held that it was permissible to have regard to earlier claims in deciding whether a claim “indicated” the manner in which the claimed amount had been calculated.

(viii)

37

Content: identification as claim under the Act (s20(2)(f))

Section 20(2)(f) of the Act provides that a payment claim: must ... state that it is made under the Act.

38

The District Court, in Civil Construction Group Limited v Dhuez Ltd41, and the High Court, in Welsh v Gunac South Auckland Ltd 42 have held that failure to comply with this provision is fatal.

39

However: a. In the latter case Allan J stated, obiter, that: It may be that in a given case a Court might properly conclude that an omission to comply with s 20(2)(f) is not determinative. An example might be the case of a major construction project in which a single payment claim appearing in the middle of a series of similar documents happens to omit the necessary reference to the Act. In those circumstances, it could not properly be said that the principal had been misled, or is in doubt as to what is intended. A Court might well then hold that the document ought to be read along with all previous payment claims in the series. But I express no firm view as to that. It is a matter for another court at another time.

b. In Winslow Properties Ltd v Wooding Construction Ltd 43, Cooper J held that a claim that failed to state that it was a payment claim under the Act was nevertheless valid, because it was accompanied by a 40

[2006] 1 NZLR 177 (CA), (2005) 18 PRNZ 84, CA 244/04, 12/4/05. District Court, Auckland, CIV 2006-4-102, 19/5/06, Joyce DCJ. 42 High Court, Auckland, CIV 2006-404-7877, 11/2/08, Allan J. 43 High Court, Auckland, CIV 2006-404-4969, 14/12/06, Cooper J. The decision is reported at [2007] DCR 408. It was followed in Hawkins Construction Ltd v Ecosse Afrique Enterprises Ltd (High Court, Wellington, CIV 2008-485-2327, 25/2/09, Gendall AJ). 41

16

covering letter, the first paragraph of which referred to the claim as “Progress Claim No 18 which is a payment claim under the Construction Contracts Act 2002”. c. In Invent Solutions Ltd v Chan Developments Ltd 44 the Court held that the misdescription of the Act as the Construction Contracts Act “2003” did not invalidate the claim.

(ix)

Content: information required to be given to residential occupier in terms of s 20(3) and (4)

40

Section 20(3) and (4) of the Act provide: (3) If a payment claim is served on a residential occupier, it must be accompanied by— (a) an outline of the process for responding to that claim; and (b) an explanation of the consequences of— (i) not responding to a payment claim; and (ii) not paying the claimed amount, or the scheduled amount, in full (whichever is applicable). (4) The matters referred to in subsection (3)(a) and (b) must— (a) be in writing; and (b) be in the prescribed form (if any).

41

In Bills v Arnold Jensen (2005) Ltd 45 the contractor’s payment claims were initially served without the information required to be given to a residential occupier.

The claims were subsequently reissued with the necessary

information; and no issue was taken regarding this.

42

In Foggo v RJ Merrifield Ltd46 the prescribed form was used but contained errors capable of confusing the payer. The claims were held to be invalid.

(x)

Format

44

High Court, Wellington, CIV 2005-485-2834, 1/4/09, Gendall AJ. High Court, Christchurch, CIV 2008-409-1349, 10/10/08, Fogarty J. 46 High Court, Christchurch, CIV 2009-409-605, 21/9/09, French J. 45

17

43

In George Developments Ltd v Canam Construction Ltd47 the Court of Appeal also rejected the argument that the payment claim in that case was invalid because it was in the normal, cumulative, format. The Court took the view that: … technical quibbles should not be allowed to vitiate a payment claim that substantively complies with the requirements of the Act

and went on to note that the contractor in that case had not complained about the comprehensibility of previous payment claims made in the same way. (This reliance on the course of conduct between the parties is reflected in a number of other cases, eg Solidcrete Technology Ltd v First Pacific Investments Ltd48 and Marsden Villas Ltd v Wooding Construction Ltd 49).

(xi)

44

Inability to cure defect by amended or substituted payment claim

In Loveridge Ltd v Watts & Hughes Construction Ltd50 the Court held that it is not possible to cure a defect in a payment claim by serving a subsequent amended or substituted payment claim, on the basis that: By using the terminology that it did in enacting ss 20 and 21, the legislature has made it clear that there will be only one payment claim relating to each progress payment and one payment schedule responding to it.

The Court held that there is no bar to a claim being made in a later period for work done in an earlier period.

(xii)

45

The possible effect of bad faith

The question of whether the validity of a payment claim or payment schedule may be affected if there is bad faith has been considered in two cases: a. In Cube Building Solutions Ltd v King 51 the Court considered, but rejected on the facts, the contractor’s argument that the employer’s

47

[2006] 1 NZLR 177 (CA), (2005) 18 PRNZ 84, CA 244/04, 12/4/05. [2005] DCR 769. 49 [2007] 1 NZLR 807, High Court, Auckland, CIV 2008-404-2136, 25/5/06, Asher J. 50 High Court, Tauranga Registry, CIV 2011-470-275, 29/9/11, Doogue AJ. 48

18

payment schedules were invalid because they asserted there was no sum payable on the claim but accepted that there might be “extreme cases where an inference of bad faith is irresistible having regard to the content of a particular payment schedule” and “that it would not have been Parliament’s intention in the Act to allow a payer to have treated as valid a payment schedule presented in bad faith” (see paragraphs [68]-[71] of the judgment for the full extent of the Judge’s consideration of the point). b. In Chow Group Ltd v Walton 52 the Court referred to the earlier decision in Cube Buildings Solutions Ltd v King (see subparagraph (a) of this paragraph) but held that the later case fell well short of the extreme case posited by Osborne JA in the earlier case.

(d)

Payment schedules

(i)

46

Content: introduction

Section 21 of the Act provides: (1) A payer may respond to a payment claim by providing a payment schedule to the payee (2) (a) (b) (c)

A payment schedule must— be in writing; and identify the payment claim to which it relates; and indicate a scheduled amount.

(3) If the scheduled amount is less than the claimed amount, the payment schedule must indicate— (a) the manner in which the payer calculated the scheduled amount; and (b) the payer's reason or reasons for the difference between the scheduled amount and the claimed amount; and (c) in a case where the difference is because the payer is withholding payment on any basis, the payer's reason or reasons for withholding payment.

51 52

High Court, Christchurch, CIV 2009-409-34, 17/12/09, Osborne AJ. High Court, Auckland, CIV 2011-404-3148, 19/8/11, Venning J

19

(ii)

47

Content: nature of payment schedule

In Jian Hua Property Ltd v Freemont Design & Construction Ltd53 the Court held that the provisional progress payment schedule issued by the engineer to the contract (in terms of a contractual scheme which required the payer to respond to the provisional progress schedule and the engineer then to issue a progress payment schedule) was not a payment schedule. The Court said: The engineer’s letter of 25 August 2005 does not clearly amount to a statement of the amount that the payer proposes to pay to the payee. That letter is a preliminary communication between the engineer and the payer. An objective reading of the document would not convey to the payee that this was the statement by the payer of the amount that it proposed to pay.

(iii)

48

Content: meaning of the word “indicate”

The word “indicate” is used in both s 21(2)(c) and s 21(3). In Solidcrete Technology Ltd v First Pacific Investments Ltd54 Judge Roderick Joyce QC had this to say about the meaning of the word “indicate” in s 21(2)(c): [61]

Did it indicate the payer’s reason or reasons for withholding payment on any basis? In other, related to the statute, words did it explain (in indicative terms) the difference?

[62]

To “indicate” means “to point out, point to or make known – to show more or less distinctly”: see the Shorter Oxford Dictionary on Historical Principal [sic]. That dictionary offers as a variant “to express briefly, lightly or without development; to give an indication.

[63]

So the statute’s choice of verb must be taken to demonstrate that something rather less than, for example, the full and explicit particulars requisite for many pleadings will suffice.

… [65]

[66]

53 54

After what appears immediately above had been written, my attention was drawn to Multiplex Constructions Pty Ltd v Luikens [2003] NSWSC 1140. There, (under the equivalent New South Wales legislation) Palmer J had the following to say as to what a payment schedule should show: … s 14(3) of the Act, in requiring a respondent to “indicate” its reasons for withholding payment, does not require the payment schedule give full particulars of those reasons. The use of the word “indicate” rather than “state”, “specify” or “set out”, conveys an

High Court, Auckland, CIV 2005-404-5526, 16/2/06, Doogue AJ. [2005] DCR 769.

20

[67]

(iv)

49

impression that some want of precision and particularity is permissible as long as the essence of the “reason” for withholding the payment is made known sufficiently to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication I take respectful comfort from the fact that this approach is one coinciding with that to which I had already been attracted.

Content: permissibility of inclusion of claim for set-off

In Cube Building Solutions Ltd v King55 the Court held (applying s 79 of the Act by analogy) that counterclaims/set-offs/cross-demands contained in a payment schedule cannot be upheld unless they are the subject of a judgment or there is no factual dispute in relation to them but that the inclusion of claims for set-off in a payment schedule does not invalidate the payment schedule. The Court’s reasoning for the latter part of its decision was as follows (paragraph [62] of the judgment): The fact that s 79 permits a court to give effect [to] a counterclaim/set-off/cross-demand where there is not in fact any dispute between the parties in relation to that claim indicates that at least in some circumstances a counterclaim/set-off/cross-demand can be validly claimed within a payment schedule. In the context of developing discussions or disputes between parties, it may well be that a paye[e] does not know whether there is any dispute as to a set-off until the payer provides the payment schedule claiming the set-off. At that point it is open to the payee to accept or dispute the said set-off claim. At the point the payment schedule is provided, it cannot be argued that the claiming of a counterclaim/set-off/crossdemand of itself invalidates a payment schedule.

In coming to this conclusion, the Associate Judge declined to adopt what he appeared to consider to be the contrary view expressed by Harrison J in Metalcraft Industries Ltd v Christie56.

(v)

50

Content: whether requirements as to content satisfied

The following are some of the cases in which a payment schedule has been held to satisfy the requirements of the Act as to content: a. Solidcrete Technology Ltd v First Pacific Investments Ltd57 :

55

High Court, Christchurch, CIV 2009-409-34, 17/12/09, Osborne AJ. High Court, Whangarei, CIV 2006-488-645, 15/2/07. 57 [2005] DCR 769. 56

21

In this case the Court held that the plaintiff had sufficient information to enable it to decide whether to pursue the claim: the previous claims had been dealt with on the same basis of a valuation of completed work and the reason for the difference on this occasion (defective work) was already known to it. b. Westnorth Labour Hire Ltd v SB Properties Ltd 58: In this case the judge held that, although the respondent’s letter did not adopt the terminology of the Act, was not stated to be a payment schedule and did not “specify that the scheduled amount is nil”: … the essential message is clear and unequivocal. Mr Mullane explains why he now doubts the accuracy of Westnorth’s time sheets and hence the sums he has been charged. He identifies a charge for materials that have been returned and instances of faulty workmanship which would entitle SB Properties to counterclaim. He says he will not pay the two invoices [which were the last two in a series] until Westnorth provides him with full particulars of what the contracted labour has done.

c. NCB 2000 Ltd v Hurlstone Earthmoving Ltd59 : In this case the payment schedule took the form of a letter, which had the heading “88 Lady Ruby Drive – Construction Contracts Act 2002”. It did not specify the payment claim to which it was a response. However, because there was only one relevant claim that the letter could have been responding to, the Court held that the relevant claim had been sufficiently identified.

The Court also held that, in the

circumstances of the case, the question of whether NCB had sufficiently stated the reasons for the difference between the scheduled amount and the amount claimed should be judged against the background of previous correspondence between the parties.

51

The following are some of the cases in which the payer’s response has been held not to satisfy the requirements of the Act as to the content of a payment schedule: a. West City Construction Ltd v Edney60:

58

High Court, Auckland, CIV 2006-404-858, 19/12/06, Rodney Hansen J. High Court, Auckland, CIV 2010-404-8096, 23/6/11, Wylie J. 60 (2005) 17 PRNZ 947. 59

22

In this case the respondent did not specify a payment amount but, in the Judge’s words, “rather, at most, it specified a formula”. b. 10 Gilmer Ltd v Tracer Interiors and Construction Ltd 61: In this case there were four payment claims. Two of the responses were held to be defective because, although they included a scheduled amount, they did not indicate the manner in which that amount was calculated nor the payer’s reasons for the difference between the claimed amount and the scheduled amount nor the payer’s reasons for withholding payment. c. Mules Construction Ltd v Wedding Earthmovers Ltd62 : In this case (which is one of a number of cases in which the alleged payment schedule has taken the form of a letter rather than a formal document

(other such cases are Westnorth Labour Hire Ltd v SB

Properties Ltd63 and Metalcraft Industries Ltd v Christie 64)) the letter made it clear that the head contractor would “dispute liability for the claims and that the invoices [would] be subject to counterclaims or counter charges for the cost of remedial works” but did not specify “the extent to which any charges may be set off against the claim”. d. Metalcraft Industries Ltd v Christie 65: This is another letter case. The payer asserted that remedial work was required at a cost which would exceed the payment claim. The Court held that: An assertion that remedial work is required at a cost which would exceed the payment claim could never constitute a valid reason either for the difference between the scheduled amount and the amount claimed or for withholding payment. General and unspecified allegations of defective workmanship are insufficient unless quantified within a reduction for the claimed cost of remedial work.66

e. Greys Avenue Investments Ltd v Harbour Construction Ltd 67: 61

High Court, Wellington. CIV 2005-485-2009, 6/12/05, Gendall A.J. High Court, Auckland, CIV 2006-404-4570, 20/12/06, Sargisson A.J. 63 High Court, Auckland, CIV 2006-404-858, 19/12/06, Rodney Hansen J. 64 High Court, Whangarei, CIV 2006-488-645, 15/2/07, Harrison J. 65 High Court, Whangarei, CIV 2006-488-645, 15/2/07, Harrison J. 66 For a similar case see Invent Solutions Ltd v Chan Developments Trustee Ltd (High Court, Wellington, CIV 2005-485-2834, 1/4/09, Gendall AJ). 67 High Court, Auckland, CIV 2009-404-2026, 12/6/09, Wylie J. 62

23

The payer responded to two of the three claims by providing a document headed “Claims Certificate Breakdown Summary”.

The

Court held that this did not comply with the requirements of s 21(2)b) and (c) or (3)(a) and (b). f. Foggo v RJ Merrifield Ltd 68: In this case the Court declined to apply the approach adopted in George Developments Ltd v Canam Construction Ltd 69 to oral discussions between the parties. g. Concrete Structures (NZ) Ltd v Inframax Construction Ltd70 : In this case the respondent wrote a letter giving as its reasons for providing a “nil” scheduled amount the facts that the previous payment claim was subject to adjudication, the amount claimed in the current payment claim was less than that claimed in the previous payment claim, no work had been done since the previous payment claim, there were no new items, and there was nothing new in the current claim. The respondent was in error in saying that the current payment claim did not go beyond the previous one and contained no new items. The Court also held that it was not sufficient for the respondent to rely upon the fact that the claimant had not carried out further work on site since it had issued the previous payment claim: Contracts of this type give rise to an ongoing process in which both parties regularly re-assess their respective positions in light of information that comes to light as matters progress.

h. Chow Group Ltd v Walton71 : The payment schedule in this case did not indicate a scheduled amount nor set out the reason or reasons for withholding payment. i. Herbert Construction Co Ltd v Alexander72: In this case the payer issued a payment schedule in response to one payment claim but not in response to another. 68

High Court, Christchurch, CIV 2009-409-605, 21/9/09, French J. [2006] 1 NZLR 177 (CA), (2005) 18 PRNZ 84, CA 244/04, 12/4/05. 70 High Court, Hamilton Registry, CIV 2010-419-909, 9/11/10, Lang J. 71 High Court, Auckland, CIV 2011-404-3148, 19/8/11, Venning J. 72 High Court, Napier, CIV 2011-441-500, 21/10/11, Gendall AJ. 69

24

j. McAlpine Hussmann Ltd v Cooke Industries Ltd73: In this case the payment schedule letter read, as far as relevant: To avoid doubt our position is: 1

If that allowance is not acceptable as full and final payment, then

no amount is payable, and the amount is nil; …

The Court held that the payment schedule did not comply with s 21 because “a tag is placed on the scheduled amount”. k. Seating Systems Ltd v Kidson Construction Ltd74: In this case the document relied on as a payment schedule was an email raising a series of questions about the invoices in question. The Court held that, read as a whole, the document “is seeking answers” and “can[not] be fairly construed as a document which complies with the requirements of a scheduled amount in s21.”

(vi)

52

Timing

In terms of s 22 of the Act: Liability for paying claimed amount A payer becomes liable to pay the claimed amount on the due date for the progress payment to which the payment claim relates if— (a) a payee serves a payment claim on a payer; and (b) the payer does not provide a payment schedule to the payee within— (i) the time required by the relevant construction contract; or (ii) if the contract does not provide for the matter, 20 working days after the payment claim is served.

(emphasis added)

53

For a decision on when the default time frame established by s 22(b)(ii) applies see Suaniu v Hi-Qual Builders Ltd 75.

73

[2012] NZHC 464. [2012] NZHC 2217. 75 High Court, Auckland, CIV 2008-404-1576, 26/6/08, Wylie J. 74

25

54

In each of TGC Properties Ltd v Freemont Design and Construction Ltd 76, Marsden Villas Ltd v Wooding Construction Ltd 77 and Winslow Properties Ltd v Wooding Construction Ltd 78 there was a contractual payment regime which required the payment schedule to be served within a shorter period of time than the default statutory period of 20 working days. In all three cases the Court held that the shorter contractual period governed the position and ruled that the payment schedule in each case had been served late. This approach is consistent with s 22 of the Act79.

55

Westnorth Labour Hire Ltd v SB Properties Ltd 80 was a case in which the Court held that the relevant construction contract did not stipulate a time by which the payment schedule was to be provided. In that case the Court held that the provision of the construction contract relied on by the payee related only to the time of payment and did not relate to the time by which the payment schedule must be served81.

56

In Beeby Construction Ltd v Javah Corporation Ltd82, the Court held that a letter written by the contractor after failure to provide a payment schedule within the time prescribed by clause 12.2.4 of NZS 3910:2003 attracted the operation of clause 14.3.2 of NZS 3910 and extended the period within which the payment schedule had to be provided.

(vii)

The possible effect of bad faith

76

High Court, Auckland, CIV 2005-404-7165, 10/4/06, Doogue AJ. [2007] 1 NZLR 807, High Court, Auckland, CIV 2008-404-2136, 25/5/06, Asher J. 78 High Court, Auckland, CIV 2006-404-4969, 14/12/06, Cooper J. The decision is reported at [2007] DCR 408. It was followed in Hawkins Construction Ltd v Ecosse Afrique Enterprises Ltd (High Court, Wellington, CIV 2008-485-2327, 25/2/09, Gendall AJ). 79 In Suaniu v Hi-Qual Builders Ltd (High Court, Auckland, CIV 2008-404-1576, 26/6/08, Wylie J) an argument that there was a shorter contractual period was rejected on the facts. 80 High Court, Auckland, CIV 2006-404-858, 19/12/06, Rodney Hansen J. 81 See also Cube Buildings Solutions Ltd v King (High Court, Christchurch, CIV 2009-409-34, 17/12/09, Osborne AJ). 82 A District Court decision of which I am aware only as a result of criticism of it in one of Kensington Swan’s newsletters. I agree with Kensington Swan’s criticism of the decision. 77

26

57

See paragraph 45 above.

The consequences of a payer’s failure to comply with the provisions of the Act regarding payment schedules and the making of progress payments

58

Sections 22-23 of the Act set out the consequences of failure to serve a proper payment schedule on the payee. Section 24 prescribes the consequences of failing to pay the scheduled amount indicated in a payment schedule.

59

I will return to this topic later in the paper under the heading of recovery and enforcement (see paragraphs 100-125 below).

Adjudication (a)

Introduction

60

Section 25(1) of the Act provides : Any party to a construction contract – (a) has the right to refer a dispute to adjudication

Sections 25-71 govern the procedure to be followed in an adjudication.

61

The term “dispute” is defined, not very helpfully, in s5 of the Act to mean: A dispute or difference that arises under a construction contract

62

An example of a dispute is given in s 25(2): An example of a dispute is a disagreement between the parties to a construction contract about whether or not an amount is payable under the contract (for example, a progress payment) or the reasons given for non-payment of that amount.

Again, this is not very helpful.

63

There are therefore two requirements for an adjudication under the Act: 27

a. there must be “a dispute or difference”; b. “that arises under a construction contract”.

(b)

64

Subject matter of an adjudication : “a dispute or difference”

In Willis Trust Co Ltd v Green 83 the Court held that “whether or not a dispute exists is of an intensely factual nature”. In that case the contractor had issued a final payment claim to the principal and the principal had failed to provide a payment schedule within the statutory period and to pay the whole or any part of the claimed amount before the due date. The contractor elected to follow the path of adjudication rather than applying directly to the Court for summary judgment. Counsel for the principal argued that there was no dispute because the engineer to the contract had issued a statement of reasons for his inability to issue or otherwise deal with a final payment schedule. It was clear from the evidence as a whole, however, that the principal had (or believed it had) a counterclaim and did not intend to pay the contractor’s claim. The Judge ruled that there was clearly a dispute.

65

In Horizon Investments Ltd v Parker Construction Management (NZ) Ltd 84 the Court “respect[ed] the capacity of the parties to identify what points of dispute they would like an answer on”.

66

In Spark It Up Ltd v Dimac Contractors Ltd

85

the Judge followed the

approach adopted in Horizon86.

83

High Court, Auckland, CIV 2006-404-809, 25/5/06, Harrison J. High Court, Wellington, CIV 2007-485-332, 4/4/07, Simon France J. 85 High Court, Wellington, CIV 2008-485-1706, 12/6/09, Dobson J. 86 See paragraph 80(c) for the facts of Spark It Up. 84

28

67

In Redhill Development (NZ) Ltd v Green 87 the Court held that the challenged order of the adjudicator was within his jurisdiction having regard to the nature of the dispute referred to him.

68

In Plimmerton Courtyard Ltd v Huntingdon 88, Plimmerton, as contractor, had obtained a determination for the amount of unpaid progress claims 13, 14 and 15 against a Ms Franklin, as principal. She in turn had sought and obtained a determination in respect of unexecuted or defective work included in earlier progress claims which she had paid. Plimmerton effectively accepted the correctness of all of Ms Franklin’s criticisms of its earlier work but refused to remedy them until the amount of progress claims 13-15 had been paid by Ms Franklin. It argued in the adjudication initiated by her, and in subsequent judicial review proceedings, that “there was no dispute because it agreed with all her complaints”. The Court rejected the argument, saying: “One cannot avoid the process by simply agreeing fault but refusing to fix it until other conditions are met. The adding of another condition – in this case payment of … claims [13-15] – of itself creates a dispute. So does the refusal to work on site, and to fix the errors.”

(c)

Subject matter of an adjudication : “arises under a construction contract”

69

The decisions in Jian Hua Property Ltd v Freemont Design & Construction Ltd 89 and Invent Solutions Ltd v Chan Developments Trustee Ltd 90 noted in paragraphs 15 and 17 above, under the heading ‘Payment claims: (i) Permissible and impermissible claims’ are also relevant to the question of whether a claim, the subject of adjudication “arises under a construction contract”.

87

High Court, Auckland, CIV 2009-404-3784, 5/8/09, Lang J. High Court, Wellington, CIV 2009-485-772, 14/7/09, Simon France J. 89 High Court, Auckland, CIV 2005-404-5526, 16/2/06, Doogue AJ. 90 High Court, Wellington, CIV 2005-485-2834, 1/4/09, Gendall AJ. 88

29

70

In addition, reference should be made to the decision in M van der Wal Builders & Contractors Ltd v Walker 91 There were two issues in this case: a. Whether there was a concluded contract (the adjudicator had found that there was); b. Whether the adjudicator’s determination that the defendants should pay damages for breach of contract was valid, alternatively, if valid, enforceable. In the course of considering the plaintiff’s application for summary judgment based on the adjudicator’s determination, the Court held: i. that it was arguable that there had not been a concluded contract; ii. that a liability to pay damages for a “breach of contract” is not liability to “make a payment under” that contract: [98]

[99]

… The differentiation between liability to pay a debt and liability for damages is a well established one. I agree with Mr Price’s submission that for a damages for breach of contract determination to come within s 48(1)(a) one would either need to treat an award of damages as being an obligation to pay money under the contract (which could not be the case) or to treat “under the contract” as meaning “arising out of”, which would be contrary to the distinction between matters “under” and “arising out of” an agreement. Therefore a claim for damages falls within the scope of a “rights and obligations determination” and is not a claim for payment under a construction contract and as such is not a s 48(1)(a) determination nor is enforceable pursuant to s 59.

The effect of this judgment, if correct, is that a claim for damages for breach of contract may be made the subject of an adjudication claim but, if upheld, will be treated as a s 48(1)(b) determination, ie a “rights and obligations” determination and as such not enforceable under s 58(2) but only a matter to which any court “must have regard” under s 61(2)92.

(d)

91 92

The selection and appointment of the adjudicator

High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ. See also paragraph 24 of the Court of Appeal’s judgment in Rees v Firth [2011] NZCA 668.

30

71

The procedure for the selection and appointment of an adjudicator is prescribed in ss 33 and 35 of the Act.

72

In terms of s 35(1) the appointee must have been requested to act (“requested” or “selected” in accordance with s 33). Subsection (1) of section 33 provides: The claimant must, within the time required under subsection (2),— (a) request the person (if any) chosen by agreement between the relevant parties to act as adjudicator; or (b) if the person referred to in paragraph (a) has already indicated that he or she is unwilling or unable to act, request any other person chosen by agreement between the relevant parties to act as adjudicator; or (c) if no person is agreed on, request a nominating body chosen by agreement between the relevant parties to select a person to act as adjudicator; or (d) if the persons referred to in paragraphs (a) and (b) are unwilling or unable to act, and paragraph (c) does not apply, request an authorised nominating authority chosen by the claimant to select a person to act as adjudicator.

73

In Stellar Projects Ltd v Nick Gjaja Plumbing Ltd 93 the contractor appealed against a decision of the District Court entering judgment against it under s 74 of the Act. The procedure for the appointment of an adjudicator prescribed by s 33 of the Act had not been followed. There was no agreement between the parties as to the adjudicator nor was there any agreement as to a nominating body. The respondent subcontractor had not sought an appointment by an authorised nominating authority but had appointed an adjudicator who proceeded, notwithstanding objection by the appellant contractor, to determine the matter. His determination was then entered as a judgment by the District Court, notwithstanding the appellant contractor’s reiteration of its objection to the appointment of the adjudicator. The High Court held that: Given the defect in the appointment of the adjudicator and the fact that there was no adjudicator appointed for the purposes of the Act there was no basis for entry of judgment in the District Court. The Judge held that the entry of judgment in the District Court had “proceeded on the mistaken premise that the adjudicator had standing to make the award which led to the entry of judgment”.

93

High Court, Auckland, CIV 2005-404-6984, 10/4/06, Venning J.

31

(e)

The adjudicator’s jurisdiction to determine his or her own jurisdiction

74

The question of whether an adjudicator can determine his or her jurisdiction has been considered in three High Court cases: Patel v Pearson Ltd 94, Origin Energy Resources (Kupe) Ltd v Tenix Alliance New Zealand Ltd 95 and M van der Wal Builders & Contractors Ltd v Walker96.

75

In the first of these cases (which is also referred to in paragraph 110 below), the Court held that the validity of an adjudicator’s determination depends upon there being a contract between the parties to the adjudication. If, on the facts, the only contract is between individuals, a claim by a company subsequently incorporated by the contractor cannot be brought under the Act and a determination in favour of the company is invalid and cannot be enforced. In that particular case, the employer had accepted that the company was the contracting party, so conferring extended jurisdiction under s 38(2) of the Act. In the course of coming to this conclusion, the Court considered the question of whether an adjudicator has jurisdiction to determine his or her own jurisdiction. At paragraph [39] of the judgment, Miller J said: However, the Construction Contracts Act contemplates that the adjudicator will interpret the construction contract under which jurisdiction was ultimately conferred, and deal with ancillary matters. The terms and scope of the contract are matters of jurisdiction. Adjudicators require the power to determine such questions if the legislative purpose of swift and inexpensive dispute resolution is to be achieved.

76

In the Origin Energy case Tenix initiated adjudication in relation to a claim for moneys alleged by it to be owing to it. Origin contended that: a. the contract between the parties was one which contained an arbitration agreement and that in terms of that agreement that arbitration would be an international arbitration and therefore adjudication under the Act was not permissible: s 25(3) of the Act; and b. there was no construction contract between the parties.

94

High Court, Wellington, CIV2008-485-2571, 24/4/09, Miller J. High Court, Auckland, CIV2010-404-106, 19/1/10, Potter J. 96 High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ. 95

32

Origin instituted judicial review proceedings alleging illegality and error of law in Tenix initiating, and the adjudicator entering into, an adjudication under the Construction Contracts Act 2002 and sought an interim order under s 8 of the Judicature Amendment Act 1972. The Court held, as it had in the previous case, that, notwithstanding the absence of an express provision conferring power on an adjudicator to determine his or her own jurisdiction, an adjudicator had that jurisdiction. The Court also declined to intervene in advance of the adjudicator exercising that jurisdiction, stating (at paragraphs [25]-[28] of the judgment): [25] While I accept Mr O’Brien’s submission that there is no reason why the High Court should not intervene at any stage of the process on an application to determine an issue of jurisdiction under a contract which is subject to the Act, the Act provides a process for adjudication and does, inferentially, accept that the adjudication will determine issues of jurisdiction in the first instance. [26] In this case the matter has been progressed to the point where an adjudicator has been appointed, the parties being unable to agree upon one, and Mr Green has indicated that he will determine the issue of jurisdiction. He has made timetable orders to place the matter before him for adjudication within the tight timeframe contemplated by the Act. [27] I consider the appropriate procedure is for the matter to proceed to adjudication before the appointed adjudicator, for the parties to make their submissions to the adjudicator and for him to determine the issue of jurisdiction as he thinks fit. Depending on the outcome of that determination the matter may well come back to the High Court on an application for judicial review by Origin or possibly by Tenix. The High Court will then be asked to review the determination of the adjudicator and will have the benefit of his adjudication and the reasons for it. [28] I accept that in the long run this process may prove more time consuming than the one Origin seeks to implement by means of the order it has sought from the Court in its interlocutory application, but I consider it is the appropriate process given the purpose and intent of the Act.

77

In M van der Wal Builders & Contractors Ltd v Walker97 the Court’s focus was on the issue of whether the defence that there was no concluded contract could only properly be raised in judicial review proceedings or could be relied on in a summary judgment application, as had been done in that case. However, in summarising the salient features of the adjudicator’s determination, the Court referred to the fact that the adjudicator had relied on

97

High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ.

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the Patel and Origin Energy decisions without criticising him for having done so.

(f)

The adjudicator’s duty to comply with the principles of natural justice

78

Section 41 of the Act states that an adjudicator must: (a) (b) (c) (d) (e)

79

act independently, impartially, and in a timely manner; and avoid incurring unnecessary expense; and comply with the principles of natural justice; and disclose any conflict of interest to the parties to an adjudication; and if paragraph (d) applies, resign from office unless those parties agree otherwise.

The term “natural justice” normally includes both the duty to act independently and impartially and the duty of procedural fairness98. In the context of the Act, the requirement in s 41(c) that the adjudicator “comply with the principles of natural justice” is clearly directed to the procedural fairness limb of natural justice.

80

A breach or breaches of natural justice have been held to have occurred in the following cases: a. Horizon Investments Ltd v Parker Construction Management (NZ) Ltd99: In this case, the Court held that an adjudicator who had considered and determined the question of whether the payment schedules in the case complied with the statutory requirements as to content when neither party had questioned their validity and without giving the parties the opportunity to make submissions on the point had acted in breach of the rules of natural justice. b. Taylor v LaHatte 100:

98

There is a detailed discussion of the two limbs of the concept of natural justice in my paper “The New Zealand Experience of the UNCITRAL Model Law : a review of the position as at 31 December 2007” which can be down-loaded from my website at www.kennedygrant.com. The paper has also been published, in a slightly different format, in (2008) 4 Asian International Arbitration Journal 1-63 99 High Court, Wellington, CIV 2007-485-332, 4/4/07, Simon France,

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In this case, in which the Court reviewed the law relating to judicial review in some detail101, the Court held that the adjudicator had been in breach of the rules of natural justice in assessing the cost of remedial work in reliance on his own judgment, notwithstanding his acknowledged lack of expertise and the view of both parties that expert evidence was required, and in conducting a site visit in a manner which differed from his prior indication of how he would conduct the site visit. c. Spark It Up Ltd v Dimac Contractors Ltd 102: In this case the dispute referred was whether invoices 1161 and 1162 had been paid, the dispute decided was whether invoices 1201 and 1206 had been paid. This happened because the claimant contractor realised at a late stage of the adjudication (30 June 2008) that the invoices on which it had claimed had been paid and sought to claim instead for later invoices which had not been paid. On 4 July 2008 the adjudicator requested the contractor to file “a final corrected statement of claim and copies of all payment claims indicating those which had not been paid”. The contractor did so the same day (which was a Friday). At 7.25am on the following Tuesday the adjudicator informed the parties that he had made his decision. The Court held that the opportunity given to the employer to respond to the amended pleading had not been “a reasonably adequate one”. d. Construct Interiors NZ Ltd v Jones 103 and Chow Group Ltd v Walton104: These cases involved the then applicable procedure under the Building Disputes Tribunal. The Tribunal’s procedure has since been changed to remove the offending provision.

100

High Court, Auckland, CIV 2007-404-6843, 24/6/08, Stevens J. See also the decision in Spark It Up Ltd v Dimac Contractors Ltd (High Court, Wellington, CIV 2008-485-1706, 12/6/09, Dobson J.) 102 High Court, Wellington, CIV 2008-485-1706, 12/6/09, Dobson J. 103 High Court, Auckland, CIV 2010-404-897, 23/8/10, Cooper J. 104 High Court, Auckland, CIV 2011-404-3148, 19/8/11, Venning J. 101

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(g)

Power to make orders under s 50 of the Act in respect of non-respondent

owners

81

Section 30 of the Act provides that a claimant: Claimant may seek determination of liability of owner who is not respondent A claimant may, in the notice of adjudication, seek— (a) a determination under section 50 that an owner who is not a respondent is jointly and severally liable with the respondent to make a payment to the claimant; and (b) approval for the issue of a charging order in respect of the construction site.

82

Section 50 of the Act provides: Determination of liability of owner who is not respondent and approval of charging order over construction site owned by that owner (1) This section applies if— (a) a claimant has referred to adjudication a dispute about whether an amount is payable by a respondent under a construction contract; and (b) the claimant has sought, in the notice of adjudication,— (i) a determination of the owner's liability under section 30(a); and (ii) approval for the issue of a charging order in respect of the construction site under section 30(b); and (c) the adjudicator has determined that the respondent— (i) is liable to pay (whether in whole or in part) the amount claimed in the adjudication; and (ii) is an associate of the owner. (2) If this section applies, the adjudicator must— (a) determine that the owner is jointly and severally liable, with the respondent, to pay (whether in whole or in part) the amount claimed in the adjudication; and (b) record in his or her determination that the owner is so liable and the amount of the owner's liability; and (c) approve the issue of a charging order in respect of the construction site, and record that approval in his or her determination accordingly; and (d) include in his or her determination sufficient particulars to identify the construction site to which the approval for the issue of a charging order relates. (3) The liability of an owner under subsection (2)(a) must not exceed the reasonable value of all of the construction work carried out on the construction site by, or on behalf of, the respondent (including construction work carried out by another party for, or on behalf of, the respondent), less all amounts actually paid by the owner in respect of that work. (4) To avoid doubt, the owner's liability— (a) is satisfied to the extent that the respondent has paid the amount determined by the adjudicator under subsection (1)(c); or

36

(b) is discharged if the respondent's liability is set aside or otherwise discharged.

83

The term “associate” is defined in s 7 of the Act.

84

In Redhill Development (NZ) Ltd v Green 105, the non-respondent owners against whom orders had been made by the adjudicator contended, in judicial review proceedings, that there was no jurisdiction to make orders against them because of the definition of the term “owner” in s 5 of the Act; owner means an owner of a construction site

They argued that the property on which the work had been carried out was no longer a construction site (as that term is defined in the Act), i.e.: the land on which the claimant has been carrying out construction work under the relevant construction contract

when they became owners. The Court rejected their argument that s 50 of the Act only applied if work is still continuing when someone becomes an owner.

(h)

Costs

85

Two categories of costs are dealt with in the Act: a. The parties’ costs and expenses (s 56); and b. The adjudicator’s fees and expenses (s 57).

86

The Act provides a default position (ie the position which will apply if no order to the contrary is made by the adjudicator) in respect of each of these categories of costs. Under s 56(2) the default position is that the parties to the adjudication must meet their own costs and expenses. Under s 57(3) the default position is that the parties are each liable to contribute to the adjudicator’s fees and expenses in equal proportions.

105

High Court, Auckland, CIV 2009-404-3784, 5/8/09, Lang J.

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87

Under each of these sections, the adjudicator is given power to depart from the default position.

88

In relation to the parties, s 56(1) provides: An adjudicator may determine that costs and expenses must be met by any of the parties to the adjudication (whether those parties are or are not, on the whole, successful in the adjudication) if the adjudicator considers that the party has caused those costs and expenses to be incurred unnecessarily by— (a) bad faith on the part of that party; or (b) allegations or objections by that party that are without substantial merit.

89

In terms of s 57(3)(b) and (4) an adjudicator may make a determination that the parties are liable to contribute to his or her fees and expenses otherwise than in equal proportions in the circumstances specified in sub-section (4), which reads as follows: An adjudicator may make a determination under subsection (3)(b) if, in the adjudicator's view,— (a) the claimant's adjudication claim, or the respondent's response, was without substantial merit; or (b) a party to the adjudication acted in a contemptuous or improper manner during the adjudication.

90

There is a degree of overlap between the two provisions but they are not precisely the same.

91

In Willis Trust Co Ltd v Green (see paragraph 47 above) the adjudicator’s order that the appellant principal should meet a substantial proportion of the respondent contractor’s costs and expenses under s 56, on the ground that the principal had caused the contractor to incur costs and expenses unnecessarily by allegations or objections that were without substantial merit, was upheld by the High Court.

92

As far as I am aware, there has not been a decision on the provisions of s 57(3)(b) and (4).

(h)

Effect of adjudicator’s determination

38

93

A determination by an adjudicator does not create an issue estoppel nor bring into effect the doctrine of res judicata: Marsden Villas Ltd v Wooding Construction Ltd 106 , Donovan Drainage and Earthmoving Ltd v Halls Earthworks Ltd,107 and Concrete Structures (NZ) Ltd v Inframax Construction Ltd 108.

94

Sections 58 and 61 of the Act provide as follows: 58 Enforceability of adjudicator's determination (1) An adjudicator's determination under section 48(1)(a) is enforceable in accordance with section 59. (2) An adjudicator's determination under section 48(1)(b) or (2) about the parties' rights and obligations under the construction contract is not enforceable. (3) However, section 61 applies if the determination referred to in subsection (2) is not complied with. 61 Consequence of not complying with adjudicator's determination under section 48(1)(b) or (2) (1) If a party to an adjudication fails to comply fully with the adjudicator's determination under section 48(1)(b) or (2) about the parties' rights and obligations under the relevant construction contract, any other party to the adjudication may bring proceedings in any court to enforce that other party's rights under that contract. (2) In any proceedings under subsection (1), the court must have regard to, but is not bound by, the adjudicator's determination.

95

These sections were applied in M van der Wal Builders & Contractors Ltd v Walker109.

96

Section 27 of the Act provides: 27

Effect of Part on civil proceedings (1) Except as provided in this section and section 61(2), nothing done under, or for the purposes of, this Part affects any civil proceedings arising under a construction contract. (2) In any proceedings before a court or tribunal, or before a member under the Weathertight Homes Resolution Services Act 2006, in relation to any matter arising under a construction contract, the court or tribunal

106

[2007] 1NZLR 807. [2008] NZCA 135. 108 High Court, Hamilton Registry, CIV 2010-419-909, 9/11/10, Lang J. 109 High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ. See also the discussion of this case in paragraph 70 above. 107

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or member— (a) must allow for any amount paid to a party to the contract under, or for the purposes of, this Part in any order or award the court, tribunal, or member makes in those proceedings; and (b) may make any orders that the court, tribunal, or member considers appropriate, having regard to any steps taken by a party to the contract in good faith and in reliance on an adjudicator's determination under this Part (including an order requiring a party to the contract to pay for goods and services supplied by another party to that contract in good faith and in reliance on an adjudicator's determination).

97

This section was applied in Concrete Structures (NZ) Ltd v Inframax Construction Ltd 110.

(i)

The admissibility of the adjudicator’s determination in court proceedings

98

Section 68 of the Act provides: (1)

(2)

99

This section applies to the following information: (a) any statement, admission, or document created or made for the purposes of an adjudication; and (b) any information (whether written or oral) that, for the purposes of the adjudication, is disclosed in the course of the adjudication. The adjudicator and any party to a dispute must not disclose to another person any of the information to which this section applies except— (a) with the consent of the relevant party; or (b) to the extent that the information is already in the public domain; or (c) to the extent that disclosure is necessary for the purposes of, or in connection with, the adjudication or the enforcement of the adjudicator's determination; or (d) in statistical or summary form arranged in a manner that prevents any information disclosed from being identified by any person as relating to any particular person; or (e) if the information is to be used for statistical or research purposes and will not be published in a form that could reasonably be expected to identify any particular person.

In Concrete Structures NZ Ltd v Inframax Construction Ltd 111 the Court considered, obiter, the admissibility of the adjudicator’s determination in subsequent court proceedings.

110 111

High Court, Hamilton Registry, CIV 2010-419-909, 9/11/10, Lang J. High Court, Hamilton Registry, CIV 2010-419-909, 9/11/10, Lang J.

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Recovery of unpaid claims and enforcement of adjudicators’ determinations

(a)

Introduction

100

The consequences of failure to pay the claimed amount where no payment schedule has been provided are set out in ss 22-23 of the Act and the consequences of failure to pay the scheduled amount where a payment schedule has been provided are set out in s 24.

101

There is a parallel provision (s 59) in relation to the consequences of not complying with an adjudicator’s determination that a party to the adjudication is liable, or will be liable if certain conditions are met, to make a payment under the contract.

102

In the case of ss 22-24 of the Act, the consequences (so far as relevant for this paper) are as follows (quoting from s 23(2)(a)): The consequences are that the payee— (a) may recover from the payer, as a debt due to the payee, in any court,— (i) the unpaid portion of the claimed amount; and (ii) the actual and reasonable costs of recovery awarded against the payer by that court;

103

In the case of s 59, the equivalent provision (s 59(2)(a)) permits the party in whose favour a money order has been made in an adjudication to: recover from the party who is liable to make the payment (party B), as a debt due to party A, in any court,--(i) the unpaid portion of the amount; and (ii) the actual and reasonable costs of recovery awarded against party B by that court:

104

In addition to these parallel provisions, there is a special regime for the fasttrack enforcement of an adjudicator’s determination in ss 73-75 of the Act.

(b)

Enforceability generally

41

105

See paragraph 70.

(c)

Fast-track procedure for the enforcement of the adjudicator’s determination

106

The fast-track procedure for the enforcement of an adjudicator’s determination provided by ss 73-75 of the Act involves the following steps: a. An application to the District Court, by a party to an adjudication in whose favour an adjudicator has made an order for the payment of money and/or costs and expenses, for the adjudicator’s determination to be enforced by entry as a judgment of the District Court (s 73); b. An application, by a defendant, for an order that entry of the adjudicator’s determination as a judgment be refused (s 74); c. Entry of the adjudicator’s determination as a judgment if the defendant takes no steps (s 75) or its application for an order that entry of the adjudicator’s determination as a judgment be refused is unsuccessful (s 74(4)).

107

In Laywood v Holmes Construction (Wellington) Ltd112 the Court held: a. That the procedure under ss 73-75 of the Act was available to a successful party in an adjudication notwithstanding that the amount of the adjudicator’s determination exceeded the normal jurisdiction of the District Court; b. That, even if the defendant opposed the entry of the adjudicator’s determination as a judgment, an oral hearing was not necessary; c. That the defence under s 74 that the amount payable under the adjudicator’s determination has been paid to the plaintiff by the defendant is limited to proof of the payment of the amount of the determination after the determination has been made, and the question of whether or not payment had previously been made cannot be raised. On appeal113 the Court of Appeal:

112

[2008] 2 NZLR 493, High Court, Auckland, CIV 2006-404-4152, 13/12/07, Asher J.

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i. upheld the Judge on the first and third points (see sub-paragraphs (a) and (c) above); ii. agreed with the Judge that no oral hearing was required in the particular case but held (paragraph 34 of the judgment) “that there may be cases where an oral hearing will be required”, eg (paragraph 45) “where there is a dispute as to whether payment has been made since the determination which cannot be resolved on the affidavits”.114

108

Section 10(d) of the Act provides that the fast-track procedure established in ss 73-75 does not apply to a “residential construction contract”, ie: a contract for carrying out construction work in which one of the parties is the residential occupier of the premises that are the subject of the contract115

The issue has been raised in two District Court cases as to whether the fact that the construction contract is entered into by the intending occupiers as trustees rather than as individuals makes the contract a commercial construction contract. In Grant Hamilton Construction Ltd v Trustees of the Japek Trust116 the Court held it did. In the later decision of IQ Homes Ltd v Trustees of the Fisher Family Home Trust117 the Court held it did not.

109

Section 74(2) limits the grounds on which a defendant may apply for an order refusing entry of an adjudicator’s determination as a judgment of the District Court. It provides: The application for an order referred to in subsection (1) may be made only on the following grounds: (a) that the amount payable under the adjudicator's determination has been paid to the plaintiff by the defendant: (b) that the contract to which the adjudicator's determination relates is not a construction contract to which this Act applies: (c) that a condition imposed by the adjudicator in his or her determination has not

113

[2009] NZCA 35. Leave to appeal from this decision was refused by the Supreme Court, which stated that it found “the judgment below compelling” [2009] NZSC 44, SC 23/2009, 15/5/09. 115 s 5 of the Act. The term “residential occupier” is defined in the same section as meaning: “an individual who is occupying or intends to occupy, the premises … wholly or mainly as a dwellinghouse”. 116 District Court, Hamilton, CIV 2008-019-1630, 25/3/09, Everitt DCJ. 117 District Court, Christchurch, CIV 2009-009-1314, 31/7/09, Macaskill DCJ. 114

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been met.

110

On the authority of Stellar Projects Ltd v Nick Gjaja Plumbing Ltd118 and Patel v Pearson Group Ltd119, I suggest that, notwithstanding the wording of s 74(2) of the Act, entry of an adjudicator’s determination as a judgment will be refused if the determination is a nullity. In Stellar Projects Ltd v Nick Gjaja Plumbing Ltd the Court held that the purported award of the adjudicator could have “no effect in law or in equity” and that the appeal against the entry of judgment in the District Court must succeed. It is, I think, implicit in this decision that, if the point were to arise again in a court, it would have to be considered by the court and, if upheld, entry of the adjudicator’s determination as a judgment refused, notwithstanding the terms of s 74(2) (for which see paragraph 107 above). In Patel v Pearson Group Ltd the Court held that the validity of an adjudicator’s determination depends upon there being a contract between the parties to the adjudication. If, on the facts, the only contract is between individuals, a claim by a company subsequently incorporated by the contractor cannot be brought under the Act and a determination in favour of the company is invalid and cannot be enforced. In that particular case, the employer had accepted that the company was the contracting party, so conferring extended jurisdiction under s 38(2) of the Act.

111

See also M van Der Wal Builders & Contractors Ltd v Walker.120

(d)

Recovery as a debt: generally

112

Recovery of an unpaid claimed amount under ss 22-23 or an unpaid scheduled amount under s 24 or an unpaid adjudicator’s determination under s 59 is dependent in each case on satisfaction of the relevant pre-conditions for recovery. See, for example, the cases discussed in paragraphs 69-70 above.

118

High Court, Auckland, CIV 2005-404-6984, 10/4/06, Venning J. High Court, Wellington, CIV 2008-485-2571, 24/4/09, Miller J. 120 High Court, Auckland, CIV 2011-404-83, 26/8/11, Christiansen AJ. 119

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113

It is also necessary to remember the provisions of s 27(2) of the Act (as to which see paragraphs 96-97 above).

(e)

Recovery as a debt: operation of s 79 of the Act

114

Section 79 of the Act provides: In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if--(a) judgment has been entered for that amount; or (b) there is not in fact any dispute between the parties in relation to the claim for that amount.

115

There has never been any question as to whether the section applies where a party seeks to recover by ordinary court proceedings (usually an application for summary judgment) an amount owing on a payment claim or ordered to be paid by an adjudicator’s determination. Examples are Metalcraft Industries Ltd v Christie 121 and Halls Earthworks Ltd (In Liquidation) v Donovan Drainage and Earthmoving Ltd122.

116

In Construction Service Co (Wellington) Ltd (in receivership) v Wellington Waterfront Ltd 123 the Court held that s 79 did not apply because it was not a case of a counterclaim, set-off or cross-demand but, rather, of there being no debt.

117

For some years after the Act came into force there was an issue as to whether the section applies where a bankruptcy notice under the Insolvency Act 2006 or a statutory demand under the Companies Act 1993 has been served on a debtor or debtor company.

121

High Court, Whangarei, CIV 2006-488-645, 15/2/07, Harrison J. High Court, Whangarei, CIV 2007-488-144, 18/7/07, Faire AJ. 123 High Court, Wellington, CIV 2006-485-1117, 13/9/06, Gendall AJ. 122

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118

In the case of a bankruptcy notice, the debtor may avoid committing an act of bankruptcy by satisfying the Court that he or she has a cross-claim against the creditor124. In the case of a statutory demand, the debtor company may apply to have the statutory demand set aside on the ground (so far as material in the context of this paper) that: (a) (b)

(c)

There is a substantial dispute whether or not the debt is owing or is due; or The company appears to have a counterclaim, set-off or cross-demand and the amount specified in the demand less the amount of the counterclaim, setoff or cross-demand is less than the prescribed amount; or The demand ought to be set aside on other grounds.

(s 290(4) of the Companies Act 1993) 119

That issue has now been resolved by the decision of the Court of Appeal in Laywood v Holmes Construction (Wellington) Ltd (see paragraph 107 above), which held that it does apply in those circumstances, while leaving open the question of whether it applies at the later stage of “adjudication of bankruptcy or order to wind up a company”125.

120

In Gill Construction Co Ltd v Butler 126 the Court held that s 79 also applies at the stage of an application for an order staying the subsequent liquidation proceeding.

121

In Grey’s Avenue Investments Ltd v Harbour Construction Ltd 127 the Court rightly rejected the argument that the decision in Laywood (see paragraph 120 above) only applies to the enforcement of an adjudicator’s determination under s73 of the Act and does not apply where a payee issues a statutory demand in reliance on s23 of the Act.

124

Insolvency Act 2006, s 17(1)(d)(ii). The term “cross-claim” is defined in s 17(7) of the Act. The equivalent provision in the Insolvency Act 1967 was s 19(1)(d). 125 Leave to appeal from the decision was refused by the Supreme Court [2009] NZSC 44 (SC 23/2009, 15/5/09). Reference was made to this aspect of the Court of Appeal decision in Plimmerton Courtyard Ltd v Franklin (High Court, Wellington, CIV 2008-485-2613, 2/7/09, Gendall AJ); but it was unnecessary to decide the point. The decision has been followed in, for example, Inconstruction Ltd v Glauser (High Court, Wellington, CIV 2011-485-443, 14/6/11, Gendall AJ) and BRC Ltd v Patel (High Court, Wellington, CIV 2011-485-1322, 11/11/11, Gendall AJ). 126 High Court, Wellington, CIV 2009-485-203, 2/11/09, Mallon J. 127 High Court, Auckland, CIV 2009-404-2026, 12/6/09. Wylie J.

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122

In Macennovy Trust Ltd v Sefton Construction Ltd (in liquidation)128, the Trust applied for an order setting aside a statutory demand served on it by Sefton. Sefton opposed the application.

The application was listed in the

miscellaneous list at 11:45am on 12 February 2010. Earlier in the morning two applications for orders for Sefton to be put into liquidation were called. The Associate Judge directed that the liquidation applications be stood down until Macennovy’s setting aside application had been called. When the setting aside application was called again there was no appearance for Sefton, so the Associate Judge made an order setting aside the statutory demand and awarded Macennovy costs. He then put Sefton into liquidation. Sefton’s liquidator applied to recall the order setting aside the statutory demand. The judgment is important because it contains a discussion of the question whether, once a company is ordered to be put into liquidation, the mutual credit and set-off provisions of s 310 of the Companies Act 1993 take over and s 79 of the Construction Contracts Act 2002 no longer applies. The Judge reviewed Australian, English and New Zealand authority and came to the conclusion, in reliance on the decision of the Court of Appeal in Laywood v Holmes Construction Wellington Ltd129 that, at the statutory demand stage, s 79 of the Construction Contracts Act 2002 prevented the application of the mutual credit and set-off arrangements under s 310 of the Companies Act 1993, notwithstanding that the company issuing the statutory demand had been placed in liquidation.

123

In 239 Queen Street Developments Ltd v Watts & Hughes Construction Ltd130 239 Queen Street withdrew its application to set Watts & Hughes’ statutory demand aside. Watts & Hughes sought an order for immediate liquidation under s 291(1)(b) of the Companies Act. The Court rejected Watts & Hughes’ argument that the principle of “pay now, argue later” should apply, holding that 239 Queen Street’s withdrawal of its application was not necessarily an admission that its counterclaim could not succeed and that it might be

128

[2010] NZHC 53. [2009] NZCA 35, [2009] 2 NZLR 243. 130 [2012] NZHC 1791. 129

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necessary “to see whether there is a net liability after taking into account all claims between the Claimant and the company”.

(f)

Costs

124

As noted in paragraphs 102-103 above ss 23(2)(a), 24(2)((a) and 59(2)(a) of the Act all provide for a party who has not been paid in terms of the progress payment provisions of the Act or in terms of an adjudicator’s determination to recover “the actual and reasonable costs of recovery” awarded by the Court against the debtor.

125

In Auckland Waterproofing Ltd v TPS Consulting Ltd131 the Court held that the words “actual and reasonable costs of recovery” should be given their ordinary meaning and decisions on costs thus be based on the plaintiff’s actual costs, so long as they are reasonable, rather than be determined in accordance with the ordinary rules relating to costs. In coming to this decision, the Court was influenced by the consideration that, if the Act were not interpreted in this way, its purpose of providing a speedy method of recovery by contractors and subcontractors would be defeated (see paragraphs [52]-[54] of the judgment).132

126

In Clearwater Construction Ltd v Chow Group Ltd133 the plaintiff sought to support its costs claim by reference to the High Court scale of costs. The Court noted that the scale: is relevant only by way of a cross-check comparison. The calculation of actual and reasonable costs for the purpose of s 59(2)(a) is not constrained by the application of the schedule

The actual costs claimed, being within 15% of the scale calculation as adjusted by the court, were held to be reasonable.

131

(2007) 18 PRNZ 797, High Court, Auckland, CIV 2007-404-5890, 11/12/07, Duffy J. This decision was followed in Suaniu v Hi-Qual Builders Ltd (see paragraph 10 of this paper), and in Solution Textures Ltd v Coleman (High Court, Auckland, CIV 2009-404-1052, 23/4/09 and 1/7/09, Potter J. 133 High Court, Wellington Registry, CIV 2011-485-1320, 2/12/11, Kós J. 132

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127

In Herbert Construction Co Ltd v Alexander134 the Court reduced the sum awarded for costs from that claimed on the ground that there was a lack of proportionality between the costs sought to be recovered and the amount claimed in the proceeding. The amount awarded was considerably in excess of the amount recoverable under the High Court scale of costs.

128

In Concrete Structures (NZ) Ltd v Inframax Construction Ltd135 the court held, not surprisingly, having regard to the terms of ss 23(2) and 57 of the Act, that the costs awarded by the Court could not include the costs of a prior adjudication.

Service (a)

The statutory provisions

129

Section 80 reads as follows: Any notice or any other document required to be served on, or given to, any person under this Act, or any regulation made under this Act, is sufficiently served if— (a) the notice or document is delivered to that person; or (b) the notice or document is left at that person's usual or last known place of residence or business in New Zealand; or (c) the notice or document is posted in a letter addressed to the person at that person's place of residence or business in New Zealand; or (d) the notice or document is sent in the prescribed manner (if any).

130

Regulations 9 and 10 read as follows: 9 (1)

(2)

134 135

Additional modes of service In addition to the modes of service specified in section 80 of the Act, any notice or any other document required to be served on, or given to, any person under the Act or these regulations is sufficiently served if— (a) it is sent by fax; or (b) it is sent by email or other means of electronic communication and the requirements of regulation 10 are met. A notice or document sent by fax under subclause (1)(a) is, in the absence of proof to the contrary, served or given if the fax machine generated a record of the transmission of the notice or document to the fax machine of the

[2012] NZHC 758. High Court, Hamilton, CIV 2010-419-385, 30/3/11, Faire J.

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(3)

(4)

recipient, and the date of the record is taken to be the date of receipt of that notice or document. A notice or document sent by email or other means of electronic communication under subclause (1)(b) is, in the absence of proof to the contrary, regarded as having been served or given,— (a) in the case of an addressee who has designated an information system for the purpose of receiving emails or other electronic communications, at the time the email or communication enters that information system; or (b) in any other case, at the time the email or communication comes to the attention of the addressee. For the purposes of subclause (3), information system means a system for producing, sending, receiving, storing, displaying, or otherwise processing emails or other electronic communications.

10 Requirements for service by email or other means of electronic communication (1) A notice or document may be sent by email or other means of electronic communication under regulation 9(1)(b) only if— (a) the information in the notice or document is readily accessible so as to be usable for subsequent reference; and (b) the person to whom the information is required to be served or given consents to the information being given in electronic form and by means of an electronic communication, if applicable. (2) For the purposes of subclause (1),(a) a person may consent to use, provide, or accept information in an electronic form subject to conditions regarding the form of the information or the means by which the information is produced, sent, received, processed, stored, or displayed: (b) consent may be inferred from a person's conduct.

(b)

The cases

(i)

131

Introduction

A number of questions have arisen in relation to these provisions: a.

Are they mandatory, so that service may not be effected in any other way?

b.

Is service by posting to a person’s post office box service “at that person’s usual or last known place of residence or business in New Zealand”, in terms of s 80(b) (see paragraph 128 above)?

c.

When is service by posting effected for the purpose of s 80(c)?

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d.

Is s 80(d) (see paragraph 128 above) limited to methods of service prescribed by statute or does it extend to methods prescribed by agreement or even unilaterally?

e.

If the answer to (d) is, No, can a contractually agreed method of service displace the methods set out in s 80?

(ii)

132

Are the methods set out in s 80 mandatory?

In West City Construction Ltd v Edney136 the Court held: ... the provisions of s 80 are not mandatory. As Mr Wilson accepted during the course of submission, s 80 provides a means by which a party may satisfy the Court on an evidentiary basis that proceedings have been served. If a party complies with s 80 then there can be no dispute that the notice has been properly served. However, the provisions are not mandatory nor exclusionary. If a document is served on a party by another means and the evidence satisfies the Court that the document hascome to the attention of that party then that is sufficient proof of service.

See, to the same effect, cases such as Willis Trust Co Ltd v Green 137, Herbert Construction Co Ltd v Toogood138, Luxta Ltd v Paragon Builders Ltd139, and NCB 2000 Ltd v Hurlstone Earth Moving Ltd140.

(iii)

Is service by posting to a post office box good service in terms of s 80(b)?

133

In Bills v Arnold Jensen (2005) Ltd 141 the Court held, following Hieber & Ors v Commissioner of Inland Revenue142, that the post office box address used in the previous dealings of the parties in relation to the contract qualified as a place of service under s 80(b).

136

(2005) 17 PRNZ 947. High Court, Auckland, CIV 2006-404-809, 25/5/06, Harrison J. 138 High Court, Napier, CIV 2010-441-283, 20/8/10, Gendall AJ. 139 High Court, Wellington, CIV 2010-485-1825, 17/12/10. Gendall AJ. 140 High Court, Auckland, CIV 2010-404-8096, 23/6/11, Wylie J. 141 High Court, Christchurch, CIV 2008-409-1349,10/10/08, Fogarty J. 142 (2002) 20 NZTC 17, 774. 137

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(iv)

134

When is service by posting effected for the purposes of s80(c)?

In Donovan Drainage & Earthmoving Ltd v Kaipara District Council 143 the Court held that service by posting under s 80(c) is effected at the time of posting.

(v)

Does s 80(d) only apply to statutory prescription or does it extend to contractual prescription?

135

In the following cases - Bills v Arnold Jensen (2005) Ltd 144 , Hawkins Construction Ltd v Ecosse Afrique Enterprises Ltd 145 , and Luxta Ltd v Paragon Builders Ltd 146 – the Court held that s 80(d) is not limited to prescription by statute but includes contractually agreed methods of service. Bills goes so far as to include unilaterally imposed methods of service, which (whatever the merits of the arguments for the inclusion of contractually agreed methods) must, I suggest, be seriously questionable.

(vi)

Can s 80(a)-(d) be displaced by prescription (otherwise than by statute) of a method of service?

136

The three cases referred to in paragraph 135 above hold that s 80(a)-(d) can be displaced. Whether they are displaced is a matter for decision in the individual case.

137

In contrast, in Marsden Villas Ltd v Wooding Construction Ltd147 the Court held that s 80 of the Act would apply even if there were specific provisions in the contract regarding service, because s 12 of the Act prohibits contracting

143

High Court, Whangarei, CIV 2010-488-319,18/10/10, Bell AJ. High Court, Christchurch, CIV 2008-409-1349,10/10/08, Fogarty J. 145 High Court, Wellington, CIV 2008-485-2327, 25/2/09, Gendall AJ. 146 High Court, Wellington, CIV 2010-485-1825, 17/12/10, Gendall AJ. 147 [2007] 1NZLR 807, High Court, Auckland, CIV 2006-404-2136, 25/5/06, Asher J. 144

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out of the Act, “so s 80 would have effect despite any provision to the contrary in any agreement or Contract”.

The prohibition of contracting out

138

Section 12 of the Act provides: This Act has effect despite any provision to the contrary in any agreement or contract.

139

The effect of s 12 of the Act has been considered in five High Court cases: a. Willis Trust Co Ltd v Green 148: This was a judicial review case.

The Court proceeded on the

assumption (without deciding the point) that it had the right to review the adjudicator’s determination for error of law. One of the arguments advanced for the plaintiff principal was that the contractor had waived its statutory right to require a payment schedule or elected not to rely upon it or had agreed that its statutory rights would be superseded by the arbitration process.

The Court rejected the argument, on the

ground that any such waiver, election or agreement would contravene the prohibition in s 12 of the Act against contracting out of the Act. b. Marsden Villas Ltd v Wooding Construction Ltd149: In this case the Court held that s 80 of the Act would apply even if there were specific provisions in the contract regarding service, because s 12 of the Act prohibits contracting out of the Act, “so s 80 would have effect despite any provision to the contrary in any agreement or Contract”. c. Construction Service Co (Wellington) Ltd (in receivership) v Wellington Waterfront Ltd150: In this case the Court held that a contractual provision deferring the contractor’s right of payment on resumption of possession by the 148

High Court, Auckland, CIV 2006-404-809, 25/5/06, Harrison J. [2007] 1NZLR 807, High Court, Auckland, CIV 2006-404-2136, 25/5/06, Asher J. 150 High Court, Wellington, CIV 2006-485-1117, 13/9/06, Gendall AJ. 149

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principal was part of the payment mechanism and not a contracting out of the Act. d. Winslow Properties Ltd v Wooding Construction Ltd151: In this case the Court held that a contractual provision for service on the engineer for the principal did not amount to a contracting out of the Act. e. Foggo v RJ Merrifield Ltd152: In this case, in which it was alleged that the payee was estopped from insisting on the provision of the payment schedule within the statutory time limit, the Court declined to follow the decision in Willis Trust Ltd v Green (see subparagraph (a) above).

The High Court’s powers of judicial review

140

Judicial review in New Zealand is conducted in terms of the Judicature Amendment Act 1972, which creates a single procedure for the judicial review of the exercise of, or failure to exercise, a statutory power. The power of adjudication under the Construction Contracts Act 2002 is, obviously, a statutory power and, therefore, subject to judicial review under this Act.

141

Examples of such cases are Willis Trust Co Ltd v Green 153 , Horizon Investments Ltd v Parker Construction Management (NZ) Ltd154, Taylor v LaHatte155, Spark It Up Ltd v Dimac Contractors Ltd 156, Redhill Development (NZ) Ltd v Green 157 , Canam Construction (1955) Ltd v LaHatte 158 , and Petterson v Gatley159.

151

High Court, Auckland, CIV 2006-404-4969, 14/12/06, Cooper J. High Court, Christchurch, CIV 2009-409-605, 21/9/09, French J. 153 High Court, Auckland, CIV 2006-404-809, 25/5/06, Harrison J. 154 High Court, Wellington, CIV 2007-485-332, 4/4/07, Simon France J. 155 High Court, Auckland, CIV 2007-404-6843, 24/6/08, Stevens J. 156 (2009) 19 PRNZ 631, High Court, Wellington, CIV 2008-485-1706, 12/6/09, Dobson J. 157 High Court, Auckland, CIV 2009-404-3784, 5/8/09, Lang J. 158 High Court, Auckland, CIV 2009-404-461, 30/10/09, Keane J. 159 High Court, Auckland, CIV 2009-404-3117, 9/11/09, Harrison J. 152

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142

In Rees v Firth160 the Court of Appeal was required to consider the scope of judicial review, it being argued for the appellant that it was only those errors of law that go to the adjudicator’s jurisdiction that can be the subject of judicial review in respect of an adjudicator’s determination.

The Court

rejected that argument, holding (at paragraph [22]): We are satisfied that the CCA as a whole does not require judicial review be limited to instances of what might be classified as jurisdictional error. In our view, to hold that the availability of judicial review is limited in that way invites unproductive and diversionary debate about whether a particular error is or is not “jurisdictional”. The key point, we think, is that the statutory context is such that a person who does not accept the adjudicator’s determination should litigate, arbitrate or mediate the underlying dispute rather than seeking relief by way of judicial review of the determination. Such relief will be available only rarely.

At paragraph [27] the Court went on to say: The courts must be vigilant to ensure that judicial review of adjudicators’ determinations does not cut across the scheme of the CCA and undermine its objectives. But this does not mean the judicial review must be limited to instances of “jurisdictional error”. In principle, any ground of judicial review may be raised, but an applicant must demonstrate that the court should intervene in the particular circumstances, and that will not be easy in the purpose and scheme of the CCA. Indeed, we consider that it will be very difficult to satisfy the court that it is necessary. As an example, given that an important purpose of the CCA is to provide a mechanism to enable money flows to be maintained on the basis of preliminary and non-binding assessments of the merits, it is unlikely that errors of fact by adjudicators will give rise to successful applications for judicial reviews. In the great majority of cases where an adjudicator’s determination is to be challenged, the appropriate course will be for the parties to submit the merits of the dispute to binding resolution through arbitration or litigation (or, of course, to go to mediation).

143

In a case involving breach of natural justice, the High Court, in considering applications for judicial review, has held that the decision as to whether relief should follow, and if so, what form it should take, is discretionary: Spark It Up Ltd v Dimac Contractors Ltd161 and Chow Group Ltd v Walton 162.

144

Under s 8 of the Judicature Amendment Act 1972, the High Court has power: … at any time before the final determination of an application for review, and on the application of any party, … [to,] if in its opinion it is necessary to do so for the

160

[2011] NZCA 668. (2009) 19 PRNZ 631, High Court, Wellington, CIV 2008-485-1706m 12/6/09, Dobson J. 162 High Court, Auckland, CIV 2011-404-3148, 19/8/11, Venning J. 161

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purpose of preserving the position of the applicant, make an interim order for all or any of the … purposes [prescribed in the section].

145

Examples of the exercise of that power are Willis Trust Co Ltd v Green163 and Taylor v LaHatte164.

© Tómas Kennedy-Grant, Auckland, New Zealand, 2013. The author has asserted his moral rights pursuant to the Copyright Act 1994 (N.Z.)

For further information, including my CV, see my website at www.kennedygrant.com

163 164

High Court, Auckland, CIV 2006-404-809, 25/5/06, Harrison J. High Court, Auckland, CIV 2007-404-6843, 24/6/08, Stevens J.

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