Construction Disputes Update – November 2018
In this update we round up key legal developments affecting construction and projects disputes in New Zealand. We cover:
- Circumstances in which a builder may owe a duty of care to building owners in tort.
- The interaction between construction contracts and performance bonds in several recent cases.
- The effect of notified claims for damages on the assessment of a company's solvency.
- Circumstances where an adjudication determination may be set aside through judicial review proceedings.
Duties of care
Minister of Education v H Construction North Island Ltd  NZHC 871
The plantiffs successfully sued the defendant contractor, formerly known as Hawkins Construction North Island Limited (Hawkins), for over $13m in respect of construction defects in a school constructed by Hawkins. The school was built between 2003 and 2009, and because the contractual claims were time barred the claim was pursued in negligence. The six-year limitation period for a negligence claim runs from the date at which the defect was, or could reasonably have been discovered, whereas the period for a contract claim runs from the date of breach.
Most notably, the test applied in determining whether the contract excluded a duty of care was whether its terms were inconsistent with such a duty. The Court concluded that it did not exclude such a duty, because Hawkins could have negotiated an express exclusion, but chose not to. This has obvious implications for building contractors.
In summary, the Court held that:
- A builder generally owes a duty of care in tort to both commercial and residential owners to ensure compliance with the Building Code.
- On the facts, the duty was not excluded by the terms of the contract.
- A number of defects were established, which the judge accepted were caused by Hawkins' breaches of duty.
On demand vs conditional bonds
Clark Road Developments Ltd v Rohits Civil & Infrastructure Ltd  NZHC 2844
Clark Road emphasises the importance of careful drafting when it comes to performance bonds, and the clear distinction between on-demand bonds and conditional bonds.
In this case the bond was procured by the principal (Clark) to guarantee payment to the contractor (Rohits) under the construction contract. A bond is an independent contract between the issuer and beneficiary: the obligation to pay is determined solely on its terms. The Court confirmed that a straightforward "on demand" bond (without any clauses excluding or limiting the extent of repayment) can be called upon for non-payments by the principal irrespective of any default by the contractor, termination of the construction contract, or dispute between the parties to the construction contract. Even if there was an "unsatisfactory tension" between the parties' position under the construction contract, and under the bond, without conditions on payment, it remained payable "on demand".
Practical completion and discharge of bond
Richina Pacific Ltd v Samson Corporation Ltd  NZCA 132
In an appeal regarding the discharge of a performance bond, the Court of Appeal has underlined the importance of what the parties to construction contracts or performance bonds actually agree to in determining whether a bond has been discharged.
A performance bond stated that it would be "null and void" if the contractor "carries out and fulfils the obligations imposed on [it] by the Contract Documents prior to the commencement of the period of Defects Liability". The appellants alleged that the bond was discharged in accordance with its terms when practical completion was certified by the engineer, despite the certificate stating that practical completion had been achieved "with the exception of the car stacker machine". The appellant argued that the practical completion certificate could not and did not have partial effect, and that the parties agreed to vary the contract and treat the problematic car stacker as a deferred work.
In a decision turning very much on the facts, the Court found that this could not be correct because the contractor had never completed its obligations under the contract, and so the bond could not have been discharged. In addition, the Court was not prepared to accept that an agreement to treat certain tasks as deferred work necessarily excludes that part of the works from practical completion (although the Court said this is a question of fact). Instead, and without expressly saying so, the parties had created a separable portion, which the practical completion certificate did not certify as being complete. The fact that the contractor had at no time resisted this exclusion or asserted that the certificate discharged the bond supported this finding.
The Court also found that the bond was not discharged by the building owner taking possession of the car stacker or by it paying out retentions, as both acts were done pursuant to the construction contract, not voluntarily.
Termination under NZS 3910:2003
Custom Street Hotel Ltd v Plus Construction NZ Ltd  NZCA 36
The Court of Appeal considered the meaning of default provisions in NZS 3910:2003 when both the principal and the contractor sought to cancel the contract alleging that the other was in breach. A contractor walked out nine months into a project, having validly terminated the contract. The principal sought to be paid the performance bond (the contractor had no assets in New Zealand). However, it was found that on its terms, the principal had no right to the performance bond. Payment of the bond was conditional on the issue of an engineer's certificate, which was not valid, because the contractor could not be in default after termination.
The Court of Appeal decided several points on the interpretation of NZS 3910:2003. These concerned:
- Preconditions to a contractor's right to terminate.
- The interplay of the Contractual Remedies Act 1979 (now Part 2, Subpart 3 of the Contract and Commercial Law Act 2017) and the contractual termination provisions.
- The operation of the principal's right to recover the costs of completing a project from an expelled or terminated contractor.
The Court of Appeal concluded that:
- Formal suspension of the contract works is not a pre-condition to the contractor's right to terminate under clause 14.3.3 of NZS 3910:2003, but it follows that the contractor must have the right to suspend before it cancels the contract.
- Clause 14 does not preclude rights to terminate under what is now the Contract and Commercial Law Act 2017. It does not matter whether the legal basis asserted at the time was correct, provided a right to cancel existed (in this case, cancellation could be justified under either the contract or the Act).
- A principal cannot recover the additional cost of completing the contract works before the works are actually completed.
David Browne Contractors Ltd v Petterson as liquidator of Polyethylene Pipe Systems Ltd (in liq)  NZSC 116,  1 NZLR 112
The decision in David Browne underlines that where assets are transferred away from a company facing potential claims, those assets can be clawed back. The Supreme Court's decision provides clarity for New Zealand businesses as to what is meant by a "due debt", drawing on Australian and United Kingdom authority. Known claims against a company for damages should be taken into account when determining the company's cash flow solvency – provided the claims are sufficiently certain to succeed.
The Supreme Court took a broad reading of "debt due" for the purpose of determining cash flow insolvency under section 292(2) of the Companies Act 1993 (allowing the transactions to be "voidable" as insolvent transactions). "Debt" includes notified claims for damages, but would not cover "specious" claims, or those to which there was a credible defence.
Here, claims against a subcontractor for defective piping and welding were held to be a "debt due" (which includes contingent debts). The subcontractor had been notified that the wronged party intended to make a claim, the subcontractor had no defence, and was not covered by insurance. It was "sufficiently certain" that the claim would crystallise and was a contingent debt. Accordingly, it should have been taken into account in the cash flow solvency assessment under section 292(2).
In the circumstances, the Court held that the transfer of funds could be unwound.
Construction Contracts Act adjudication and judicial review
Anderson v Swindells  NZHC 1803
The High Court recently quashed the determination of an adjudicator appointed under the Construction Contracts Act on a successful application for judicial review. This is notable given that the Court is generally wary of interfering with adjudication determinations because the objective of the Act is to provide a fast, effective method of determining construction disputes. To succeed in judicial review, an applicant must demonstrate that an adjudicator has made a significant and substantial error of law, or there has been a substantial breach of natural justice.
McDowall Renovations Limited (McDowall) purchased the business of another construction company in 2016, and took over the works at a house owned by the applicants. Following a number of disputes regarding the amount of money owed to McDowall (if any), McDowall submitted several issues to adjudication (including whether the relevant contract had been validly novated and whether the applicants owed McDowall the sum of $56,930.32, noting that the applicants had raised issues regarding delay, overcharging, and defective workmanship).
Crucially, the issues submitted did not include whether sums were owing on a "pay now, argue later" basis under the Act. Despite this, the adjudicator determined the matter on the basis that since payment claims had been issued, and no payment schedules had been issued in response, the applicants were liable in accordance with section 22 of the Act.
The Court quashed the decision on this basis. The case illustrates that where an adjudicator answers a question not put, and on which parties were not given the opportunity to make submissions, this can be the basis for a successful judicial review.
This article is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of the partners listed below.