18.06.2018

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

This was an unsuccessful appeal by Custom Street Hotel Ltd (Custom) from a High Court decision (originally appealed from an arbitral award) which considered the meaning of the termination provisions in NZS 3910:2003 (the predecessor to NZS 3910:2013).

Background

The parties entered into a $14.45m contract to convert an existing building into a hotel.  The project was inundated with issues.  The contractor, Plus Construction NZ Ltd (Plus), blamed Custom’s failure to obtain consents, while Custom asserted that Plus could still progress the works and had under-resourced the project and ultimately walked off the job.

Plus issued a default notice under clause 14.3.1(b) for two unpaid payment claims totalling c$258,000.   Under the contract, Custom had 10 working days to pay otherwise suspension/termination rights would arise.  During the 10 working days, the Engineer suspended the works at Custom’s behest alleging Plus was in breach of site safety requirements.  Custom did not pay the outstanding amount within the required time and Plus then purported to require the Engineer to suspend the contract works under clause 14.3.3 (although this was already suspended).  The next day Plus wrote giving notice of termination and Custom also paid the claimed amount.

Custom challenged the validity of Plus’ termination and issued its own notice of default, which included a contention that Plus had abandoned the contract.  Plus, operating on the basis that it had already validly terminated, did not act on Custom’s notice.  Custom therefore, purported to terminate the contract itself on the basis that Plus’s termination was invalid, and claimed damages from Plus for the increased cost of the having the works completed by another contractor.  Custom also sought to call up a performance bond which required certification by the Engineer.

The parties referred these issues to arbitration. In the meantime, they agreed the bond monies would be placed in escrow pending the outcome.  By this time the Engineer had also certified that $24.9m was due to Custom for the additional costs of another contractor completing the works.

The arbitrator found Plus had validly terminated the contract and could not have been in default when the Engineer issued his default certificate.  The arbitrator also found the Engineer had wrongly certified payment of $24.9m, and that a claim for additional costs to complete the work was governed by clause 14.2.4 and could only be determined on completion of the works.

Unsuccessful on appeal in the High Court, Custom further appealed to the Court of Appeal (CA) on specific points of law.

Repudiation disentitling termination

Custom argued that Plus was not entitled to terminate because it had repudiated the contract by ceasing work, removing scaffolding and breaching health and safety requirements.  However, the arbitrator held that there was nothing to indicate Plus was not committed to the contract.

The CA, agreeing with the arbitrator and High Court, that a breach by Plus did not need to be repudiatory before they would be disentitled from terminating the contract.  Something less, such as breaching an essential term or a serious breach under s 7 of the Contractual Remedies Act 1979 (CRA) (now, the Contract and Commercial Law Act 2017 (CCLA)), may suffice.  However, for such a breach to disentitle the party from terminating, it would have to mean that it would otherwise benefit from its own wrong.  Here, Plus had not repudiated or breached an essential term, meaning the question of whether it was disentitled from terminating did not arise.

Termination by contractor under clause 14.3.3

Under clause 14.3.3, if the principal is in default the contractor can give 10 working days notice to remedy the default.  If the default is not remedied, the contractor can require the Engineer to suspend the work and, following that suspension, the contractor can terminate.  In this case, the Engineer had not acted on Plus’ request to suspend as the works were already suspended at the behest of Custom. Custom contended that both the notice to suspend and the suspension were required before termination under clause 14.3.3 could occur based on the words “following such suspension”. Adopting a purposive interpretation, the CA rejected this – holding that actual suspension was not required under clause 14.3.3 before the contractor could terminate.  It was enough that a right to suspend arose before termination.

Additional costs to complete under clause 14.2.4

Custom claimed from Plus the projected additional costs of having another contractor complete the works under clause 14.2.4.  The CA agreed with the High Court that the quantum of any such claim under clause 14.2.4 could only be assessed once the works were completed, and could not be based on projected costs. Its reasoning was five-fold.  Clause 14.2.4 says specifically “on completion of the Contract Works”.  Second, an interpretation that required splitting the works within clause 14.2.4 would be an awkward and unnatural interpretation that would not have been intended in this type of contract.  Third, clause 14.2.4 follows in sequence with clause 14.2.3 (principal resuming possession).  Fourth, the language of clause 14.2.4 presumes the works are completed.  Finally, given the certification process under clause 14.2.4 may lead to a payment being made to the contractor, this indicated the wash-up task in 14.2.4 would only occur after completion since any further payments to the contractor are suspended until then.

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