NZS 3910 Court Judgment, With Implications

First, it opens the door for enforcement of a debt due under the Construction Contracts Act 2002 (CCA) to be blocked in certain circumstances.  Second, it confirms when the arbitration clause in NZS 3910 (NZS Arbitration Clause) ceases to apply.

Background

Body Corporate 197281 (Body Corporate) engaged TBS Remcon Ltd (TBS) to undertake weathertightness remediation works (Project).

As work progressed, new defects were discovered substantially enlarging the scope of works.  Construction costs escalated accordingly from $8.4m to $35m (Guaranteed Maximum Price), making it one of the most expensive leaky building remediation projects in New Zealand.

Following Practical Completion, the Body Corporate refused to pay the final c$2.8m, alleging a number of incomplete or defective works.  However, it seems the final payment schedule was issued for that amount and the Body Corporate failed to instruct deductions.

TBS applied for:

• Summary judgment for the outstanding amount as a debt due under the CCA. The Body Corporate opposed this on grounds it had a substantial counterclaim and had already commenced litigation against TBS (and its consultants); and
• A stay of the Body Corporate’s counterclaim proceeding on the basis clause 13.4 of NZS 3910 (ie the NZS Arbitration Clause) mandated that this be arbitrated. The Body Corporate opposed this on the grounds the arbitration clause was unenforceable.

Payment issue

Summary judgment

The Court had no difficulty accepting the scheduled amount was a ‘debt due’ under the CCA and granted summary judgment to TBS on this basis.  That the Body Corporate had a counterclaim was irrelevant given s79 of the CCA, which prohibits the court from taking into account counter-claims “in any proceedings for the recovery of a [debt due under the CCA]”.  This outcome was unsurprising and is consistent with the wording and intent of the CCA. 

Stay of enforcement

However, summary judgment proved to be a pyrrhic victory for TBS.  Unusually, the Court went on to stay (suspend) enforcement until the Body Corporate’s counterclaim had been heard. 

Replying on High Court Rule 17.29 and the Court’s inherent jurisdiction, Gardiner AJ granted the stay on the basis that enforcement (ie forcing the Body Corporate to pay) was likely to result in “a substantial miscarriage of justice”.  The following factors were relied on to exercise that discretion:

• The Court’s “impression” the counterclaims were credible.
• The “dramatic cost escalation” for the Project.
• The Body Corporate’s financial pressure. Despite the evidence not being “as comprehensive or specific as it could be”, the Court accepted the Body Corporate/apartment owners were “cash strapped”, and that having to pay TBS carried a real risk of them being unable to afford to pursue their own claims.
• The risk that the Body Corporate would not recover from TBS if its counterclaims were later successful. This was on the basis that TBS had been sold to an Australian company and was expected to immediately transfer the summary judgment sum to its former parent company, Hellaby, which would potentially leave TBS a shell company. 

The Court did not accept the stay of enforcement was contrary to s79 of the CCA.  It interpreted s79 as only applying when entering judgment (and not when enforcing judgment).  Further, the Court considered that cashflow was not as critical after the works were complete, putting this outside the typical situation contemplated by the CCA payment regime.   

Arbitration clause issue

The Body Corporate opposed being forced to arbitrate its counterclaim on two grounds:

• First, with the works complete, the NZS Arbitration Clause no longer applied; and
• Second, it was a “consumer” under s11 of the Arbitration Act 1996, rendering any arbitration clause agreed before the dispute arose unenforceable.

NZS Arbitration Clause

The Court concluded the NZS Arbitration Clause expires one month after the final payment schedule is issued (unless the dispute is referred to adjudication).  As that time had passed, the clause was unenforceable and the Body Corporate was free to litigate its counterclaim.

This interpretation was based on clause 13.2.1 of NZS 3910, which says that every dispute “shall be referred to the Engineer not more than 1 month after the provision of the Final Payment Schedule … or more than 1 Month after the date on which any relevant Adjudicator’s Determination is given to the parties, whichever is later”.  After that one month period, the window for referring disputes to the Engineer (as a prerequisite to arbitration) closes.

The Court accepted that, theoretically at least, the NZS Arbitration Clause could be re-enlivened by first adjudicating the dispute.  However, unless and until that happened “the door to arbitration is closed” after the one month period expires, and practically speaking there was no intention or likelihood of the Body Corporate adjudicating here when it had already commenced litigation.

“Consumer”

Section 11 of the Arbitration Act 1996 says, in summary, that an arbitration agreement with a “consumer” is unenforceable unless it is agreed after the dispute has arisen. 

Although it made no difference to the result, the Court confirmed that a “consumer” must be a natural person(s) for this purpose.  Accordingly, a body corporate could not rely on s11 to avoid the NZS Arbitration Clause (or any arbitration clause).

Our Comments

Payment issue

To our knowledge, this is the first time a stay of enforcement of a debt due under the CCA has been granted due to the likelihood of a substantial miscarriage of justice.  We have some reservations about whether this is inconsistent with s79, and the Court’s view that cashflow is less critical once the works are complete.  That said, there are likely to be few cases where there is a genuine financial difficulty and a credible prima facie counterclaim.

Arbitration clause issue

Hellaby provides some clarity regarding expiry of the NZS Arbitration Clause.  However, the result may catch some by surprise since parties using NZS 3910 arguably had a reasonable expectation any disputes would be resolved by the mandatory dispute resolution provisions.  This may yet lead to the inclusion of special conditions to confirm that intention and avoid Hellaby. 

Hellaby was based on an un-amended NZS Arbitration Clause.  Parties should be mindful that the dispute resolution process will depend on the specific terms of each contract, including any amendments to standard forms like NZS 3910.

Update:  Leave to appeal granted 

Since writing this article, SRG Global Remediation Services (NZ) Ltd (SRG) (previously TBS Remcon Ltd), has been granted leave to appeal the above decision.

In a judgment dated 29 July 2021, Gardiner J gave the following reasons for granting leave:

• There is at least an arguable case to be made that in staying enforcement of a judgment delivered under s 79 of the CCA, an error of law has been made. It could be perceived that in exercising its discretion the Court has, in the practical sense, given effect to the Body Corporate’s counterclaim (which s 79 precludes).  

• On the arbitration clause issue the law is far from settled, in fact, there is a “dearth of authority on the subject”, and so SRG’s view that that the dispute resolution process could be re-enlivened is “capable of serious argument”.

• Both points appealed by SRG are of some degree of general and commercial significance, and therefore a public interest exists in allowing the appeal to be heard.

The decision leaves open for now the question as to whether the arbitration agreement in a NZS3910:2013 construction contract is inoperative one month after the final payment schedule is issued as the trial judge found in Hellaby.

If you have any questions about this judgment, or construction disputes generally, please get in touch with our Construction 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.