11.05.2020

Contract uncertainty leaves room to resist statutory demand: Mega Projects v Orewa Developments

Last week, the Court of Appeal issued its decision in Mega Project Holding Ltd v Orewa Developments Ltd [2020] NZCA 111

The Court of Appeal set aside a statutory demand issued by Orewa Developments Ltd’s (ODL) confirming that there was a substantial dispute over the debt.  In determining there was a substantial dispute, the Court of Appeal emphasised the importance of clear contractual drafting, adequate recording of meetings between parties, and the possibility of debts outside of contracts being enforceable under the statutory demand scheme.  The ambiguity and lack of clarity in the contractual terms left room for a genuine dispute.

The facts

Mega Project Holding Limited (MPHL) and ODL were developing sections in Orewa, with a section of land (Western Hoe Heights) adjoining both developments.  Western Hoe Heights required roading upgrades in order for both developments to progress.  MPHL and ODL entered into a contract in December 2016 for ODL to undertake the roading works, with MPHL to pay ODL half the costs.  

As the works progressed, ODL made demand for payment from MPHL, which MPHL did not respond to.  In December 2018, ODL issued a statutory demand under the Companies Act 1993 (the Act) requiring payment of construction costs said to be due and owing under the contract. 

MPHL applied to the High Court to set aside the statutory demand, arguing that there was a substantial dispute as to the debt, pursuant to s 290 of the Act, because certain contractual steps had not been followed.  Under the contract, ODL was required to provide MPHL with certain information and obtain certain approvals before the roading works could commence.  MPHL argued that ODL had not followed these steps, so there was a dispute as to whether the construction cost payments were due.  The High Court found that although there was a substantial dispute, MPHL was nonetheless liable to pay the debt to ODL on a restitutionary basis.

MPHL appealed the High Court’s decision, while ODL also cross-appealed the High Court finding that there was a substantial dispute. 

The Court of Appeal’s reasoning

In determining whether a substantial dispute existed, the Court of Appeal’s analysis centred on a meeting between contractors and representatives of ODL and MPHL in October 2017.  This meeting occurred after the roading works had commenced and both Courts noted evidence of what occurred in the meeting was limited.  Discussions at the meeting centred on various payment and cost schedules.  An email from one of ODL’s consultants following the meeting detailed the steps to be undertaken to finalise the costs schedule.  ODL contended that the discussions at the meeting constituted either a variation of the contract allowing ODL to proceed with the works without the contractual steps, or the discussions and subsequent silence from MPHL established that MPHL was estopped from arguing there was a dispute.  MPHL argued that the nature of the meeting focussed on determining the process of the costs and no matters were finalised.

The Court of Appeal found that the details of the meeting were insufficient to conclude that a variation to the contract had occurred and in any event the meeting and emails following the meeting were not final, and reflected a “gradually developing proposal”.  The Court found there was a substantial dispute as to whether there was a variation, and it followed that there was a substantial dispute as to whether the debt was owing.

ODL also argued that MPHL’s conduct at the October 2017 meeting and subsequent silence estopped MPHL from relying on the strict terms of the contract, and therefore prohibited MPHL from claiming the debt was in dispute.  Estoppel acts to protect parties who have detrimentally relied on a promise of another party.  Both parties agreed that for ODL to succeed in an estoppel argument ODL would need to establish that:

  • ODL held a belief that the terms of the contract no longer needed to be adhered to because of MPHL’s conduct;
  • that ODL detrimentally relied on MPHL’s conduct; and
  • that it would be unconscionable for MPHL to depart from this expectation.[1]

The Court of Appeal found that the estoppel argument could not succeed due to limited evidence available from the October 2017 meeting.  Clear facts are required to determine the extent of the belief that ODL may have developed from the October 2017 meeting and the Court determined that the events of October 2017 were not clear.  Accordingly, there was substantial dispute as to what representations may have been made in the meeting. 

Having determined that there was a substantial dispute and that the statutory demand should be set side, the Court considered what conditions should be attached to setting aside the demand under s 290(7) of the Act.  Under the contract, either arbitration or an assessment of construction costs by an impartial quantity surveyor remained as potential methods to determine disagreements between both parties.  The parties agreed to refer the issue of quantification of the construction costs to an impartial quantity surveyor.  The Court ordered this as a condition to be attached to setting aside the statutory demand order.  The Court also rejected ODL’s request that MPHL deposit a substantial sum of the debt into an independent trust account due to limited evidence being presented on MPHL’s financial position.

Lessons from the judgment

The statutory demand procedure is intended to be used in circumstances where there is no genuine dispute that the debt (and the amount of the debt) is owed.  This is an important requirement, as non-compliance with a statutory demand will lead to a presumption that a party cannot pay its debts when they fall due, and will be a sound basis for an application to place a company into liquidation.

Where contracts are loosely drafted, or agreements at meetings are not clearly recorded, it will be difficult for parties to use the statutory demand procedure as the other party will have an avenue to dispute the terms of the contract, and therefore the entitlement to any amounts owing.

Substantial costs can be incurred once an application to set aside a statutory demand has been filed.  Parties need to carefully consider whether there is a clear basis for the debt being due, and whether a lack of clarity in contractual terms could give rise to a genuine dispute whether the debt is owing.

If you have any questions about your contractual obligations or the statutory demand procedure, please get in touch with our team or your usual contact at Hesketh Henry.

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.

 

 

[1] Mega v Orewa at [62].

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