23.07.2018

CONSTRUCTION LAW UPDATE – JUNE 2018

Recent Construction Law Decisions and Developments in New Zealand

This note summarises recent construction law decisions and developments in New Zealand.

LawIssuesDecision / Principle
Body Corporate 200012 v Keene [2017] NZHC 2953

Judicial review of CCA adjudication

Res judicata

CCA , ss 58(3) 61(2) 68

Application for judicial review of two adjudicators’ determinations dismissed.

Judicial review of CCA adjudications is rare given the availability of other relief.  Judicial review is only available if there has been a genuine excess of jurisdiction by the adjudicator, a serious breach of natural justice, or some apparent and significant error of law.

Section 68 of the CCA (the confidentiality provision) did not stop a party putting before an adjudicator an earlier determination by another adjudicator involving the same parties/issues.  Res judicata applies.

Body Corporate 20012 v Keene [2018] NZHC 814

Costs      

CCA, s 59

Costs decision following dismissal of an application for judicial review of two adjudicators’ determinations (see above).

The entitlement to actual and reasonable costs under s 59(2)(1)(ii) is confined to debt recovery proceedings initiated under s 59(2)(a).

Naylor Love was therefore unable to recover actual and reasonable costs for opposing the judicial review application as the proceeding was not one of debt recovery.  Scale costs were awarded instead.

Borlase v R [2017] NZCA 514 (CA)

Bribery and corruption

Crimes Act 1961, s105

Over a period of 7 years Mr Borlase (Projenz Ltd) bribed local body official Mr Noone (Rodney District Council and Auckland Transport).  As a result, Projenz successfully tendered for roading contracts with RDC and AT.  Both men were convicted of charges under s 105 of the Crime Act 1961 (bribery and corruption of a public official).

The Court of Appeal held the purpose of s 105 does not require proof of an intention to influence the official to act in a certain way. Corruption existed here because payments were made additional to and outside of the official’s salary via “bogus contractual arrangements designed to disguise their true nature”. Both men knew that receipt of the benefits was inconsistent with a public official’s duties. The Court upheld both sentences, holding that the cumulative pattern of offending over 7 years was “criminality on a serious scale”.

Custom Street Hotel Ltd v Plus Construction NZ Ltd [2017] NZCA 36

Termination provisions

NZS3910

Extra completion costs

Unsuccessful appeal by Custom from a HC decision (originally appealed from an arbitral award) which considered the meaning of the termination provisions in NZS 3910:2003 (clause 14). The appeal was limited to specific legal points.  Of note:

  • Something less than repudiation may disentitle a party from terminating, such as breach of an essential term or a serious breach under s 7 of the Contractual Remedies Act 1979 (now the Contract and Commercial Law Act 2017). However, that will be the effect of such a breach only where the terminating party would otherwise benefit from its own wrong.  Here, Plus had not repudiated or breached an essential term, so the application of this principle did not need to be considered.
  • Under clause 14.3.3 actual suspension is not required before the contractor could terminate. It is enough that a right to suspend arose before termination.  Accordingly, the fact that the Engineer had not acted on Plus’s request to suspend did not prevent Plus from terminating.
  • Under clause 14.2.4, a principal (here Custom) cannot recover the additional costs of another contractor completing the works until those works are complete (ie that clause does not allow recoverability of projected costs).  
David Browne Contractors Ltd v Petterson Ltd [2017] NZSC 116

Solvency test

Contingent liabilities

On the particular facts, a contingent liability (a damages claim for alleged welding failures on an infrastructure project) could be taken into account when determining whether or not a transaction was an insolvent transaction under s 292 of the Companies Act 1993.

An insolvent transaction is one made when a company must be able to pay its due debts and which enables the other party to receive a benefit in the company’s liquidation

The Supreme Court outlined a new test for assessing whether a damages claim is a “debt”: a damages claim may be debt due for the purpose of s 292 if a reasonable and prudent businessperson would be satisfied that there is sufficient certainty that a claim will crystallise into a judgment debt in the relevant period (to be determined on the facts of each case).

Ebert Construction Ltd v Sanson & Anor [2017] NZCA 239

Direct agreements with financiers and voidable preferences

Construction project financing

Direct payment / tripartite agreements

Contractors presented with a direct agreement need to bear in mind the risk that payments made by a financier could be clawed back by a liquidator in the event of a principal’s insolvency.  To prevent this, the financier must have an obligation or “direct liability” (not a discretion) under the direct agreement to pay the contractor which is independent of the direction and will of the principal.

A direct (or tripartite) agreement is one where the contractor may be paid directly by the financier, and the financier typically has “step in” rights if the employer defaults.

Floorman Waikato Ltd v MacRae [2017] NZHC 1063Meaning of “Construction Work” under the CCA

Floorman was engaged by MacRae to sand and cost his floors.  MacRae was dissatisfied with the works and refused to pay the claimed amount without issuing a payment schedule to Floorman.  MacRae argued that the CCA did not apply because it only applied to jobs of new work, or jobs of a certain worth, or to jobs involving professional tradespeople.

MacRae’s arguments were flatly rejected.  Floor sanding and coating work is “construction work” as defined in the CCA.

When a compliant payment claim is issued and no payment schedule is issued, the claimed amount is recoverable as a debt due and owing regardless of the size of the contract or the amount at stake.

Honey Bees Preschool Ltd v 127 Hobson Street Ltd [2018] NZHC 32Penalties

Following the UK and Australia, the Court departed from the longstanding ‘genuine pre-estimate of loss’ threshold test in Dunlop Pneumatic Tyre Co Ltd and adopted a wider ‘legitimate interests’ test.  Under this test, a clause is a penalty where the detriment to the contract-breaker is “out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.

In this case an indemnity clause if a lift was not installed by an agreed date was not a penalty as it was proportionate to Honey Bees’ legitimate interests in operating a childcare business at capacity.

Jefferson v Straw Homes Ltd [2017] NZHC 1766

Estimated vs fixed price contracts

Duty of care for estimates

A residential building agreement based on an estimate was not a fixed price contract.  A reasonably and properly informed third party would consider the words “contract price” to mean the builder’s estimated price.  The subsequent conduct of the builder (Straw Homes) continuing to invoice after the estimate was exceeded and the lack of protest by the principal (Jefferson) was seen as objective evidence that the parties had not agreed to a fixed price.

The builder owed a duty to provide accurate estimates, including for variations.  That duty arose in circumstances where the principal was a residential homeowner, and the builder knew the principal had a limited budget and was using their estimate to obtain finance.  The builder was negligent for failing to accurately advise the cost implications of variations.  Nevertheless, the principal had not suffered any loss as they had received commensurate additional value.

Lot 8 Investment Ltd v RPS Construction Ltd [2017] NZHC 1400Payment regime under the CCA

Section 21 of the CCA does not preclude a single payment schedule dealing with multiple payment claims, provided that delivery is made on time and the other requirements of the section are met.

Section 21 does not require that a payment schedule contain a line-by-line assessment of each aspect of a payment claim.

 Minister of Education v H Construction North Island Ltd (Formerly Hawkins Construction North Island Ltd) [2018] NZHC 871

Negligence

Leaky buildings

 

Hawkins was liable in negligence to pay nearly $13.5m to the plaintiffs for the cost of repairing leaky school buildings that it had constructed between 2003 and 2009.

Hawkins argued that the contract excluded it from liability stemming from design defects because it was a construction-only contract and also raised an affirmative defence in respect of the 10-year longstop provision in the Building Act.  As to quantum, Hawkins submitted an alternative scope and costing.

The Court held that Hawkins was negligent in respect of five of the seven defects claimed by the plaintiffs.  Liability stemmed from non-compliance of the Building Act / the building code.

Hawkins’ longstop defence was only partially accepted in respect of one of the listed defects.  And its alternative costing was dismissed as it was not workable in terms of the building code.

 Richina Pacific Ltd v AAI Ltd [2017] NZHC 1686

Performance bonds

Practical completion

This decision is ultimately guided by the Court of Appeal decision below, but it is useful for the discussion on whether the contractor’s bond was truly “on-demand” or conditional.

By looking at the express language and overall purpose of the bond, the Court concluded that it was conditional and the principal was required to prove certain conditions had been met in order to call up the bond.  The contractor had failed to perform its obligations under the contract, meaning the principal was entitled to under the bond monies.

 Richina Pacific Ltd v Samson Corporation Ltd [2018] NZCA 132

Performance bonds

Partial practical completion

 The Court of Appeal upheld the High Court’s decision (above) that a practical completion  (PC) certificate was only issued for a separable portion of the works rather than for the whole works with an agreement for deferred work (in respect of an automatic car stacker).  The contractor’s argument that the bond had expired following the (partial) PC certificate was rejected.  As the contractor had failed to install the car stacker, PC of the overall works had not been achieved, meaning the bond had not expired.
Southland Indoor Leisure Centre Charitable Trust v Invercargill City Council [2017] NZSC 190

Duty of Care of Local Authority

Building Act 1991

Contributory negligence

 The Supreme Court partially allowed an appeal of the Court of Appeal’s decision in finding that a local authority owed a duty of care to a commissioning owner in issuing a CCC for a non-compliant building.

Councils’ duty of care arises from their regulatory role under the Building Act 1991.  Spencer on Byron cannot be distinguished on the basis that the Trust was a commissioning owner, or that issuing a CCC differed from the councils’ other functions (such as inspections) as all of these functions are directed at ensuring compliance with the Building Code.

The majority also upheld the Court of Appeal’s finding that the Trust was contributorily negligent, reducing the damages award by 50 per cent.

 Construction Contracts Act amendmentsConsultants It is nearly two years since the CCA was extended to consultants.  The fears many consultants had about PI claims being adjudicated does not appear to have materialised.  This is in line with overseas experience and our own assessment prior to this amendment coming into force (here).
 Construction Contracts Act amendmentsRetentions

The new retentions regime under the CCA has been in effect for over a year now.  To date there have been no known proceedings or prosecutions for breach of the trust obligations.  However, anecdotal evidence suggests there is still a wide range of approaches and knowledge about the regime.

We note that the UK is currently considering a similar legislative change, albeit one that would require parties to pay retentions into an approved independent deposit scheme.

 Updated standard forms

SFA

CCCS

Two of the most commonly used standard agreements to engage consultants (SFA and CCCS) have been subject to review and new iterations have been released.

The thrust of the main changes concern adding a requirements to give an ‘early warning’, updating suspension rights, providing for a quasi payment schedule procedure where the CCA does not apply and updating health and safety provisions.

A more detailed discussion of the key changes is available (here).

 ACP cladding

Regulation

Liability

In New Zealand, MBIE has commissioned a peer review on Tony Enright’s audit recommending suspensions of ACP cladding certification by CodeMark.  MBIE is also in the early stages of a regulatory investigation of imported construction products, including ACP cladding as well as imported steel.

In the UK, the Hackitt review was issued in May 2018 following the Grenfell Tower fire to make recommendations on the future regulatory system.

Australia is currently reviewing its testing methods for fire performance of external walls and cladding under the BCA following the Lacrosse fire in Melbourne.

Engineer to the Contract

Duty of fairness and impartiality

Liability in tort

Scope for reform

The role of the Engineer to the Contract is a common source of contention between contracting parties.

We recently examined the Engineer’s obligations under New Zealand law, including whether they owe the contractor a duty of care in tort.  Click here.

For more information, or to discuss any aspect of construction law, please contact:

Nick Gillies                       nick.gillies@heskethhenry.co.nz or +64 9 375 8767

Christina Bryant           christina.bryant@heskethhenry.co.nz or +64 9 375 8789

Helen Macfarlane          helen.macfarlane@heskethhenry.co.nz or +64 9 375 8711

Disclaimer:  The information contained here is of a general nature and should be used as a guide only.  It is not a substitute for obtaining legal advice.  Any reference to law and legislation is to New Zealand law and legislation.

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