69 Greenlane East Limited v Orient Construction Limited
[2022] NZHC 2246
•5 September 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2022-404-770
[2022] NZHC 2246
IN THE MATTER OF an application to set aside a statutory
demand under section 290 of the Companies Act 1993
BETWEEN
69 GREENLANE EAST LIMITED
Applicant
AND
ORIENT CONSTRUCTION LIMITED
Respondent
Hearing: 10 August 2022 Appearances:
N Perera for Applicant
P Shanahan-Pinker for Respondent
Judgment:
5 September 2022
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
This judgment was delivered by me on 5 September 2022 at 4.00 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Introduction
[1] This is an application for an order setting aside a statutory demand. The statutory demand, dated 4 May 2022, was served on the applicant, 69 Greenlane East Ltd (Greenlane), by the respondent, Orient Construction Limited (Orient), on or about that date. Orient demanded $47,774.05 plus GST, said to be payable following service of a payment claim under the Construction Contracts Act 2002.
69 GREENLANE EAST LIMITED v ORIENT CONSTRUCTION LIMITED [2022] NZHC 2246
[5 September 2022]
[2] Greenlane’s application is made pursuant to s 290(4)(a) of the Companies Act 1993, which provides that the Court may set aside a statutory demand if satisfied that there is a substantial dispute as to whether or not the alleged debt is due.
[3] For Greenlane’s application to succeed, it must show that there is arguably a genuine and substantial dispute as to the existence of the debt.1
[4] In its originating application, Greenlane states that such a dispute exists on the following grounds:
a)The Respondent’s own records show there was no agreement for the fixed price.
b)The Applicant has never owed the Respondent the sum of [$47,774.05] plus GST; and
c)The Applicant has advised the Respondent in writing on numerous times before the Statutory Demand was issued that the debt was in dispute; and
d)The basis of the dispute is the Respondent had to submit to the Applicant a fixed price agreement as per the tender submitted and accepted on 9 September 2021;
e)The Respondent has not submitted any fixed price agreement to be executed between the Respondent and the Applicant for the construction project to commence operations despite many requests being made by the Applicant to the Respondent.
The factual background
[5] Greenlane is a property developer. Orient is a building contractor. In September 2021, Greenlane was considering a major development involving a five-storey apartment building at 69 Greenlane East, Remuera, Auckland. It approached Orient and invited it to tender for the project as the head contractor.
[6] As Mr Perera observed in the course of his submissions, matters may have progressed more smoothly had the parties elected to seek advice from their solicitors before entering into complex contractual arrangements.
1 AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559 at [19] and [22]; and
West Village Capital Partners Ltd v Acrow Ltd [2019] NZHC 1035.
[7] The sequence of events leading up to the parties’ contract was described differently by Greenlane’s Project Manager, Mr Sohan Mittal, and Orient’s Quantity Surveyor, Mr Wai Chee Fang, in their affidavit evidence, and by Mr Perera and Mr Shanahan-Pinker in their submissions.
[8]On my assessment of the affidavit evidence, events unfolded in this way:
(a)As already indicated, Greenlane elected not to go down the orthodox route of a public tender process. Instead, it carried out its own inquiries and lighted on Orient as a suitable head contractor. Greenlane approached Orient, and pre-contractual discussions or negotiations followed.
(b)In due course, Orient presented a tender for one aspect of the project. This was in the form of a letter dated 9 September 2021. Orient proposed that, subject to qualifications, it would procure the completion of the project for a “fixed management fee” of $969,300 plus GST; the contractual platform for the project would be the New Zealand Standards Conditions of Contract for Building and Engineering (NZS 3910:2013); based on drawings and specifications supplied, the budget for the project would be $9.53m (exclusive of the fixed management fee); and that Orient would present a lump sum fixed price proposal for the project within 48 days from 27 September 2021 (the proposed start date for the contract between the parties).
(c)On or around 9 September 2021, Greenlane accepted Orient’s tender, and the parties signed the contractual documentation which consisted of the tender letter, the NZS 3910:2013 contract and what appears to be a critical path diagram. The signed NZS 3910:2013 contract in evidence is dated 3 September 2021. Seemingly in reliance on this, Mr Mittal’s evidence and Mr Perera’s submissions proceeded on the basis that Greenlane and Orient signed that document prior to tender. I do not accept that. The explanation for the apparent inconsistency between the dates appears to me to be obvious enough. Orient prepared
the tender documentation ahead of time, and whilst it altered the date of the letter of tender, it did not alter the date on the NZS 39010:2013 contract, so that when the tender was accepted on or about 9 September 2021, and parties signed the contractual documentation, the NZS 3910:2013 contract still bore the earlier date.
(d)As per the conditions of the tender, Orient set about the process of developing a proposed fixed price lump sum contract to present to Greenlane. It is common ground that this involved a not insubstantial amount of work. Ultimately, Orient presented two proposals on 8 and 15 November 2021. Neither were within the budget figure of $9.53m plus GST. The first was for a total cost of $9,880,000 plus GST and the second was for a total cost of $10,113,000 plus GST. Both proposals were rejected by Greenlane, apparently because they exceeded the budget. As a result, the 48-day period expired without a fixed price lump sum contract. However, the correspondence between the parties indicates that they continued to envisage that the project would go ahead.
(e)On 6 December 2021 Orient served the payment claim that is at the centre of the case. It is common ground that this complied with the formal requirements of the Construction Contracts Act for such claims.2 The claim was said to cover the period from 9 September to 30 November 2021. The due date for payment was 10 January 2022.
(f)Greenlane, through Mr Mittal, responded by email on 7 December 2021. Greenlane does not contend that his email was a valid payment schedule pursuant to s 21 of the Construction Contracts Act. Mr Mittal’s letter stated:
Hi Waichee
Thanks for your email and your attached claim. We refute the claim.
Please note the following
2 Construction Contracts Act 2002, s 20.
1.We do not have any agreement at all at this stage.
2.We are still waiting for a fixed price contract as we have been requesting since our first meeting.
3.We stopped obtaining prices from other contractors when we were told that you could do it for $9.1m.
4.When we asked for in writing you could not do it for that sum and have also failed to give us fixed price contract till date.
5.In the process you took too long to action and have put our project in jeopardy. Our reputation with the funder has been tainted. I told you that this was urgent, and you still have not acted on following request by our QS and the funders.
a.Fixed price contract.
b.Fluctuation clause (on page 88) as to be removed.
c.As per the NZS 3910 contract there was requirement for 5% Performance Bond which you still have not met.
You left us no choice, but we had to postpone the project. We also had 3 presales which is now being cancelled. We are now going to lose a lot of money. Since we had no contract we cannot pursue damages.
We could have been as harsh, but we decided not to. We disagree with your attached claim except for the cost of the survey. We still need to build this building and plan is to get the pricing done again by few contractors. As far as we are concern, there is no agreement between us. If you think there is an agreement that we urge you to reply within 24 hours.
Please tell us how you would like to proceed and please reply in next 48 hours before we hand it over to the lawyer. Also available for a meeting.
Kind regards Vinod
(g)At this point the relationship between the parties appears to have deteriorated. There was ongoing correspondence between them and then later their solicitors. Much of this was self-serving and tended to generate more heat than light. There is no need to refer to it.
The parties’ arguments
[9] On Greenlane’s behalf, Mr Perera’s first argument was that at the time that Orient served its payment claim there was no extant contract between the parties, and therefore no basis for any claim.
[10] As I understood the argument it was that the contract between Greenlane and Orient had come to an end when the 48-day period referred to in the tender expired and the parties had not agreed the terms for a fixed lump sum contract within the budget. This meant that Orient was not entitled to make a progress or final claim.
[11]I do not accept that submission.
[12] While the parties certainly agreed that Orient was to present a proposal within that time frame, the contract does not provide that it would terminate in the event that the fixed price contract for the completion of works was not agreed between the parties at that point. Nor is there any indication in the parties’ correspondence that they were treating the contract as being at an end. On the contrary, both parties appear to have proceeded on the basis that there was an ongoing contract. Furthermore, there is no evidence that either party sought to cancel.
[13] I am satisfied that as at 6 December 2021 the contract between Greenlane and Orient was extant.
[14] Even if the contract had come to an end, that, in and of itself, would not have precluded Orient from charging for work undertaken prior to its conclusion, if it was otherwise entitled to do so.
[15] Mr Perera’s second argument was that even if the contract was extant, it was not a construction contract, but rather preliminary to, and anticipatory of, a construction contract in the future, presumably the contemplated fixed lump sum contract.
[16] On that basis, Mr Perera contended that Orient was not entitled to rely on the payment claim/payment schedule processes provided for in the Construction Contracts Act.
[17]I do not accept that submission.
[18] In my view, it is clear that the 9 September 2021 contract between the parties was a construction contract as that term is defined in the Construction Contracts Act.
[19] Section 5 of the Act provides that a construction contract is “a contract for carrying out construction work”.
[20]The term “construction work” is defined in s 6 so as to include:3
(a)design or engineering work carried out in New Zealand in respect of work of the kind referred to in subsection (1)(a) to (d) and (f); and
(b)quantity surveying work carried out in New Zealand in respect of work of the kind referred to in subsection (1)(a) to (g).
[21] Subsection (1)(a) to (g) describes core construction work. Further, s 6(1)(f) provides that construction work also includes “any operation that forms an integral part of, or is preparatory to or is for rendering complete, work of the kind referred to in sub-s (1)(a) to (d).
[22] The evidence establishes that the work Orient was engaged in pursuant to the 9 September 2021 contract was primarily quantity surveying work, as might be expected.
[23] Mr Perera was on firmer ground in advancing his third argument. This was that, even if the contract was extant, and even if the contract was a construction contract, Orient was not entitled to issue its 6 December 2021 payment claim having regard to the terms of the Act and the contract.
3 Section 6(1A).
[24] The parties’ contract, more particularly the signed tender letter, included the following clause, referring to the fixed management fee:
The fix [sic] amount will be paid in equal amounts over the Milestone dates, a detailed milestone and estimated cash flow table will be provided by Orient.
[25] Part 2 sub-pt 2 of the Construction Contracts Act deals with payment provisions, that is to say the payment claim/payment schedule process. As the first section in sub-pt 2, s 14 is an important provision, and is intended to preserve contractual freedom by providing that the parties to a construction contract may agree on their own mechanisms for or relating to payment:
14Parties free to agree on payment provisions in construction contract
(1)The parties to a construction contract are free to agree between themselves on a mechanism for determining—
(a)the number of payments under the contract:
(b)the interval between those payments:
(c)the amount of each of those payments:
(d)the date when each of those payments becomes due.
(2)To avoid doubt, the parties to a construction contract may expressly agree to a single payment under subsection (1)(a).
[26] In my view, this is exactly what Greenlane and Orient were doing when they agreed that the fixed management fees would be payable on what they referred to as milestone dates which they signalled would need to be agreed.
[27] It seems clear that the parties agreed that Orient would only be entitled to charge any proportion of the fixed management fee when the milestone dates had been agreed and the first of these had been reached. It follows that on the face of things Orient had no contractual entitlement to render a progress claim as at 6 December 2021 and rely on the payment claim/payment schedule process in relation to the same, because, at that point, no milestone dates had been agreed let alone reached.
[28] Mr Shanahan-Pinker referred me to the well-known cases in which the courts have made it clear that they will uphold the strict nature of the payment claim/payment
schedule process in the Act.4 Provided a payment claim is compliant, if there is no compliant payment schedule by way of response within the statutory timeframe, the courts have been very clear in saying that under s 23 of the Act the payee may proceed on the basis that the amount claimed is a due debt and take enforcement steps accordingly (including, amongst other things, serving a statutory demand).5
[29] However, those cases are predicated on the payment claim being lawful and compliant with the legislation. If, contractually, the payee was not entitled to issue the payment claim in the first instance, then it was void ab initio. An unlawful claim is not saved by the payment claim otherwise being compliant with the terms of the Construction Contracts Act, and the cases referred to cannot apply.
[30] That, in my view, is the position in this case. The parties had agreed on a process for progress payments. That clearly provided that the client had to agree on milestone dates before any payment claim could be made. They did not. Therefore, Orient was not entitled to issue a progress claim on 6 September 2021. Its 6 December 2021 payment claim was a nullity.
[31] On those bases, Greenlane has established that there is a substantial dispute as to whether or not the amount of Orient’s payment claim is due. Additionally, whilst its email of 7 December 2021 may not have constituted a payment schedule, in that letter, Greenlane clearly signalled to Orient that there was a fundamental dispute about its entitlement to make any claim. That, it seems to me, raises an issue as to the appropriateness of Greenlane’s use of the statutory demand process.
[32] None of the above is to say that Orient may not have a claim for payment for the work done, just that it is not a claim that it is entitled to pursue in this proceeding.
4 See for example Marsden Villas Ltd v Wooding Construction Ltd [2007] 1 NZLR 807.
5 Luxta Ltd v Paragon Builders Ltd HC Wellington CIV-2010-485-001825, 17 December 2010 at [12]. See also Greys Avenue Investments Ltd v Harbour Construction Ltd HC Auckland CIV-2009-404-2026, 12 June 2009 at [37]; and Gill Construction Co Limited v Butler [2010] 2 NZLR229.
Conclusion
[33] For those reasons, Orient’s statutory demand of $47,774.05 plus GST is set aside.
[34] As to costs, my preliminary view is that Greenlane as the applicant and the successful party is entitled to its costs on a 2B basis. However as I have not heard from counsel in relation to this I reserve costs. If counsel are unable to resolve these in regard to my indication as to my preliminary view then they may file memoranda in the usual way.
Associate Judge Johnston
Solicitors:
Legal Associates, Papatoetoe for applicants K4 Legal Limited, Auckland for respondents
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