30.05.2024

Complexities of contract termination – High Court calls halt on the Contractor’s process in Rau Paenga v CPB

The High Court in Rau Paenga Ltd v CPB Contractors Pty Ltd [2023] NZHC 2947 granted an interim injunction preventing the Contractor from suspending and terminating its contract for the construction of the new Parakiore Sports and Recreation Centre in Christchurch (Sports Centre).  In doing so the Court identified limits on the use of NZS3910’s contractual process for suspending / terminating.  

The Principal, Rau Paenga Ltd, a crown-owned enterprise, engaged CPB as the Contractor in March 2019 to construct the Sports Centre for a lump sum contract price of $220m, under NZS3910:2013 with special conditions.  The due date for completion was October 2021.  Although extensions of time had pushed this into 2022, the works remained (and remain) in significant delay. 

Contractor’s Default Notices

Publicity has surrounded the difficulties with this project, and it is no secret that it has been challenging and contentious between the parties.

In September 2023, the Contractor issued three default notices (Default Notices) under clause 14.3 (Default by the Principal), each claiming the Principal was in default for “persistently, flagrantly, or wilfully neglecting to carry out its obligations under the Contract”.  Broadly, the allegations in each were:

  • First Notice: Failure to provide IFC revisions of the tender drawings in time, and to ensure the Engineer acted independently, fairly and impartially;
  • Second Notice: Failure to disclose relevant reports about ground conditions; and
  • Third Notice: The Contractor’s burden had increased from the above defaults such that it amounted to repudiation by the Principal (entitling the Contractor to cancel).

Default notices have potentially serious consequences; clause 14.3 gives the Principal 10 working days to remedy a notified default, otherwise the Contractor is entitled to suspend or terminate.

Here, the “remedy” sought in the Default Notices was: (a) payment of ~$453m for cost overruns, unpaid liabilities to subcontractors, and other damages (effectively taking the contract price to over $696m) and (b) an extension of time of 868 working days, which would have set a new due date for completion in May 2025.  

Principal’s reaction 

The Principal objected to the Default Notices and responded to them in two ways.  

First, it requested an Engineer’s “formal decision” (clause 13.2.4) declaring that: (a) the Default Notices were invalid (and therefore the Contractor’s ability to require the Engineer to suspend had not been triggered), (b) it had not “persistently, flagrantly, or wilfully neglected to carry out its obligations”, and (c) the Contractor was not entitled to cancel the contract.  

Second, it applied to the High Court for an interim injunction to stop the Contractor from suspending / terminating pending determination of the underlying dispute.  The payments and extensions sought by the Contractor were then mostly working their way through arbitration.  In making this application, the Principal was presumably concerned the Contractor might purport to suspend / terminate before the Engineer issued its formal decision (given the period for a formal decision is 20 working days – twice as long as the default notice remediation period).  The Contractor agreed to not suspend or terminate before the injunction application had been heard. 

Injunction granted preventing suspension / termination

The Court ultimately granted an injunction restraining the Contractor from suspending / terminating in reliance on the Default Notices.  The key findings leading to this decision were:

Underlying merits:  The underlying merits of the Default Notices were questionable.

  • A contractor does not have an absolute right to issue a default notice and then suspend/terminate, whether lawfully or not. A dispute about the validity of a default notice needs to be dealt with under clause 13 like any other dispute. 
  • The Default Notices were arguably deficient; clause 14.3 is for defaults capable of being remedied, whereas the Default Notices stated they could not be remedied by performance and instead demanded money and time that had not been certified and which was in dispute.
  • The alleged defaults were contestable and at least some of the issues raised in the Default Notices were subject to arbitration proceedings or had been ruled on already.

Damages inadequate remedy:  If the injunction was not granted, and the Contractor unlawfully terminated, the Principal would suffer harm that could not be fully compensated by damages.  

  • It may not be possible to secure an alternative contractor. 
  • Lost project knowledge from personnel, consultants and contractors exiting (or liquidating).
  • Risk of reputational harm for this and other projects.
  • Warranties and consenting records may be voided, unavailable, or impossible to replace.
  • Third parties (the community) waiting to use the new facilities would be affected.

Balance of convenience:  The likely harm to the Principal outweighed that to the Contractor.

  • An injunction would not effectively be a final remedy. Arbitration should be resolved in a matter of months – likely before the project is completed.   
  • If the works were completed before an arbitral award, the Contractor could be compensated by payment of damages as necessary.
  • There is no unconditional right to terminate, and the parties must have accepted that arbitration would take time when they agreed to that process in the contract.

Our Comment

This case highlights the importance of contractual dispute resolution processes.  While the decision may appear on its face to fetter termination rights, in practice such rights are unlikely to be affected.  Rather, the decision clarifies that the default termination process under NZS3910 should be used for operational defaults that are genuinely capable of remedy, and not for disputed claims for contractual entitlements (where the dispute process must be followed). 

Termination is a serious step.  Navigating any termination provisions requires care to ensure it is correctly and effectively carried out, and to avoid inadvertently repudiating the contract.  If you wish to instigate or are facing a potential termination, please get in touch with our Construction Team or your usual Hesketh Henry contact.    

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

 

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