ACM Removals Limited v Southern Demolition and Salvage Limited
[2019] NZHC 124
•12 February 2019
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
I TE KŌTI MATUA O AOTEAROA ŌTAUTAHI ROHE
CIV-2016-409-909
[2019] NZHC 124
BETWEEN ACM REMOVALS LIMITED
Plaintiff
AND
SOUTHERN DEMOLITION AND SALVAGE LIMITED
Defendant
Hearing: 16-19 April 2018
30 July–1 August 2018
Appearances:
CJR Baird and SRJ Hamilton for Plaintiff A N Riches and V A Nichols for Defendant
Judgment:
12 February 2019
JUDGMENT OF MANDER J
ACM REMOVALS LTD v SOUTHERN DEMOLITION AND SALVAGE LTD [2019] NZHC 124 [12 February 2019]
Contents
Background.......................................................................................................... [4]
The 1 October quotation [9]
The 9 November quotation [15]The 12 November quotation [19]
The parties’ competing contentions as to the composition of the asbestosremoval contract [22]
Work commences [24]
The contract breaks down [27]
ACM Removals’ claim....................................................................................... [30]
The issues to be determined.............................................................................. [33]
The principles of contractual interpretation................................................... [35]
What were the terms of the contract between ACM Removals and
Southern Demolition?........................................................................................ [41]
The October quotation and the interaction between Ms Manderson and
Mr McPherson [41]
Mr Blackie becomes involved and the revised price [49]The November meeting [54]
The relevance of the November meeting to Southern Demolition’s case [65]
The 9 and 12 November quotation documents [69]
Did the asbestos removal contract extend to the basement? [73]
Did the removal contact include the standard terms and conditions? [77]
The scope of the contract.................................................................................. [95]
The Optimum Report [95]
The effect of cl 3 in the context of the contract [112]
Did ACM Removals discharge its obligations under the contract?............ [121]
Testing and review of the work 45 The “I” beams [129] The basement and the lift shafts [136] The pillars [141] Were the contracted works completed? [143] Variations......................................................................................................... [150]
The quantum meruit claim............................................................................. [158]
Tax invoice 5186- Lift shaft clearing and removal of asbestos [163] Invoice 5187- Removal and disposal of asbestos from 17 pillars [176] Invoice 5189 – Mr Nicholson’s work [184]
Liquidated damages........................................................................................ [192]
The rule against penalties [195] The competing contentions [206] Decision [215] Results.......................................................................................................... [222](a)
Costs.................................................................................................................. [223]
[1] This case concerns a dispute arising from a contract to remove asbestos from a building that was damaged in the Canterbury earthquakes. The defendant, Southern Demolition and Salvage Ltd (Southern Demolition), was engaged to demolish the old BNZ Building situated in Christchurch’s Cathedral Square (the BNZ Building). To demolish the building, it was necessary to remove and dispose of asbestos. Southern Demolition entered into a contract with the plaintiff, ACM Removals Ltd (ACM Removals), to carry out that task (the asbestos removal contract).
[2] ACM Removals seeks payment of outstanding sums it claims it is owed by Southern Demolition under the asbestos removal contract, and for further work it completed that it maintains fell outside the scope of the contract. Additionally, ACM Removals claims liquidated damages under a term of that contract.
[3] Southern Demolition denies liability. It maintains that ACM Removals failed to remove all the asbestos it was obliged to extract from the building and abandoned the site without completing its contractual obligations.1 Southern Demolition alleges that all the work undertaken by ACM Removals fell within the scope of the fixed price agreement and that no variations were agreed prior to ACM Removals ceasing work. Southern Demolition denies liability to pay liquidated damages, and that, in any event, the clause of the contract relied upon by ACM Removals is an unenforceable penalty provision.
Background
[4] In 2013, demolition work was commenced by the original owner of the BNZ Building. This resulted in the discovery of asbestos. Work was not able to proceed until the asbestos was removed. In late 2014, a prospective purchaser of the partially deconstructed building commissioned Optimum Projects Ltd (Optimum) to carry out an asbestos survey and provide a report about the asbestos contamination.
1 Southern Demolition filed a counterclaim to recover the cost it incurred to complete the asbestos removal work. By a minute of 7 March 2017, Associate Judge Matthews directed that Southern Demolition’s counterclaim was to be tried separately from ACM Removals claim on the basis that if Southern Demolition is held to be liable to ACM Removals for breach of contract, its counterclaim will fall away. If Southern Demolition is not liable to ACM Removals, the counterclaim is to be determined at a future separate trial. ACM Removals Ltd v Southern Demolition and Salvage Ltd HC Christchurch CIV-2016-409-909, 7 March 2017.
[5] The report was prepared on the basis of the purchaser’s intention to remediate the building rather than demolish it. A range of samples were taken from the interior of the building, of which a number tested positive for the presence of asbestos. The prospective purchaser did not buy the building. However, the report in a modified form (the Optimum Report) would later be provided to the parties and forms part of the contract between them. It is a key document in this proceeding.
[6] Around mid-2015, the BNZ Building was sold. Its new owner decided to demolish both the BNZ Building and a neighbouring building, situated in Hereford Street (the Hereford Street building). The owners appointed Cequent Projects Ltd (Cequent) to manage the property and, in particular, to complete the demolition of the building.
[7] The Optimum Report was provided to contractors tendering for the demolition work. However, before it was issued a number of amendments were made to the original report. These amendments essentially reflected that the original report had been produced for the purpose of remediating the building, whereas the building was now to be demolished. The parties have conflicting views as to the significance of the changed purpose for which the Optimum Report was utilised. An asbestos report for the Hereford Street building was also provided to prospective demolition contractors at the same time as the amended Optimum Report.
[8] On 21 September 2015, the tender documentation was received by Southern Demolition. That same day, it contacted Bricon Asbestos Ltd (Bricon), as ACM Removals was then known, and invited it to quote for the task of removing asbestos from the BNZ Building and from the neighbouring Hereford Street property. The Optimum Report was provided to the asbestos removal company for that purpose. Southern Demolition had engaged Bricon on a number of projects in the past and had a good working relationship with that asbestos removal contractor. Bricon changed its name to ACM Removals Ltd on 8 October 2015. Nothing turns on that change and the plaintiff company throughout this judgment is referred to by that name.
The 1 October quotation
[9] After reviewing the Optimum Report and attending a site meeting on 23 September, the Operations Manager for ACM Removals, Ms Manderson, submitted a quote to Southern Demolition for $235,690 (plus GST) to remove asbestos from the BNZ Building (the 1 October quotation). The description of the work “allowed to be carried out” was:
Removal and disposal of asbestos and contamination of waste as per the report supplied by Optimum Projects dated 14-8-15.
[10] The quotation was made subject to ACM Removals’ standard terms and conditions, which were included in the quotation document, and relevantly provided as follows:
Work scope being:
1[ACM Removals] agree to carry out the “work” on this property/building. This work is, as we understand from you the main contractor/client, as written and/or stated in the contract documents supplied.
Comments, Qualifications and Exclusions:
...
3All practicable steps shall be taken to remove the visible asbestos. Due to the nature of sprayed on or some other forms of asbestos, this cannot be given a 100 per cent guarantee of removal.
...
12Should we become aware of any relevant circumstances or facts on this project that was not known to us prior to tendering, we will consult with you, the main contractor/client, and make our recommendations, plus discuss any cost implications? [sic] Once written agreement is received, should this apply, the work will be carried out.
...
19 If a debt recovery agency has to be employed all payments will incur costs “plus” a penalty charge of $30. Plus a daily charge of 0.125 per cent of the contract value.
A quotation for the Hereford Street building was provided at the same time.
[11] In addition to ACM Removals’ quote, Southern Demolition also received a price from another contractor. That contractor quoted $680,000 (plus GST) to remove the asbestos from the BNZ Building. Mr McPherson, who was the Operations Manager for Southern Demolition, was concerned about the large discrepancy between the two quotes. On 14 October, he inquired from Ms Manderson whether ACM Removals had properly understood the extent of the required work and, in particular, questioned her as to whether she had allowed for the removal of all asbestos from the BNZ Building.
[12] The content of Ms Manderson’s and Mr McPherson’s subsequent conversation was the subject of evidence and is discussed later in this judgment. However, Southern Demolition placed weight on an email sent by Ms Manderson after the conversation with Mr McPherson which stated:
As per our conversation, we have allowed to remove all asbestos from the basement to the top level. Unless there is asbestos discovered in the building foundations when it is coming down, we believe we have covered everything else in the way of asbestos.
[Emphasis added]
[13] It is Southern Demolition’s case that, based upon what it considered was the reassurance provided by Ms Manderson as to the scope of the work covered by the price, it accepted the 1 October quote for the removal of asbestos from the BNZ Building.
[14] The owner of ACM Removals, Mr Blackie, had been away on leave at the time Ms Manderson prepared the quotation for the BNZ Building. He had not attended the site meeting on 23 September. On his return, he reviewed the quotation and became concerned that the price was far too low to complete the required work. After Mr Blackie had attended the site himself, he informed Mr McPherson that the project could not be completed for the quoted price. He was particularly concerned about the asbestos removal work required to be undertaken in the lift shafts, which were piled full of debris. Mr Blackie advised that if ACM Removals was not able to resubmit its quote it would have to withdraw from the project.
The 9 November quotation
[15] On 9 November, ACM Removals submitted a new quote (the 9 November quotation). The scope of the works was described as follows:
Removal and disposal of asbestos as identified in the Optimum Report and after further clarification with Alan Albertson. NOTE: This only includes ground floor to level four.
[16] The price now quoted was $461,329.66 (plus GST). That total price was broken down into two parts. A price of $252,821.26 (plus GST) was provided for the “Main area”, and for the “Lift Shaft areas” a price of $208,508.40 (plus GST) was quoted. The 9 November offer included ACM Removals’ standard terms and conditions, including clauses 1, 3, 12 and 19, as previously set out at [10].
[17] In a preamble to the 9 November quote, the reason for the revised price is explained in the following way:
Upon our 2nd site visit for the asbestos removal from the BNZ Bank, which was attended by the director, for the first time, we have had discussions with Alan Albertson, from Optimum Projects, regarding the report that he issued, to get a full understanding of what is required. It was also noted by Alan that the basement was not included in his original scope, therefore it has not been included in our price. Due to this we have needed to resubmit our quote as the report was/is not a full representation of the extent of the removal.
[18] On 28 October, Southern Demolition received from Cequent a letter of intent to appoint it to complete the demolition of the BNZ and Hereford Street buildings based upon its tender for that work. However, that tender had been based on the original 1 October quote. Because of ACM Removals’ revised 9 November quote, a meeting was convened with Mr Blair of Cequent and representatives of Southern Demolition and ACM Removals to discuss the revised costings for the BNZ demolition. The meeting took place on either 11 or 12 November (the November meeting). While there is dispute as to what occurred at that meeting and its outcome, its indisputable purpose was to assess whether the increased price contained in the 9 November quote could be agreed.
The 12 November quotation
[19] The conflicting accounts of the parties as to what was said and agreed at the meeting are discussed later in this judgment. It is sufficient for the present narrative to note that the meeting resulted in ACM Removals creating a third quotation document (the 12 November quotation). This document was provided to Southern Demolition, together with a breakdown of the costings relating to the “main floor areas” and the “lift shafts bnz” to support the price increase. The 12 November quotation followed the same format as the earlier two quotations. However, its content was different. The preamble now read:
Upon our 2nd site visit for the asbestos removal from the BNZ Bank, which was attended by the director, for the first time, we have had discussions with Alan Abertson from Optimum Projects, regarding the report that he issued, to get a full understanding of what is required. Due to this we have needed to resubmit our quote as the report was/is not a full representation of the extent of the removal.
[20] It is noteworthy that the words included in the 9 November quote, “it was also noted by Alan, that the basement was not included in his original scope, therefore it has not been included in our price”, was removed from the 12 November quotation. The description of the work to be carried out was also changed:
Description of the work allowed to be carried out:
Removal and disposal of asbestos as identified in the Optimum Report and after further clarification with Alan Albertson.
The words contained in the 9 November quotation, “NOTE: This only includes ground floor to level four” were excluded.
[21] The 23 clauses set out in the 9 November quotation were not reproduced in the 12 November quotation document. After the description of the work “allowed to be carried out” a series of bullet points were listed. These are distinguishable from the ordinary terms and conditions previously included in the 1 October and 9 November quotations, in that they were specific to the asbestos removal work to be carried out at that BNZ Building site and to that particular project. One of the bullet points related to a matter that had been discussed and agreed at the prior meeting between the parties
and Cequent. That term provided that any asbestos 20 m2 or less that was discovered during the process of removal would be removed without any extra cost.
The parties’ competing contentions as to the composition of the asbestos removal contract
[22] The status and effect of the 12 November quotation is an essential issue in this proceeding. ACM Removals’ case is that the 12 November quotation document was produced by it and provided to Southern Demolition to supplement the 9 November quotation, and that together the two documents form the contract between them. The 12 November quotation recorded or formalised the matters that had been discussed and agreed at the November meeting but did not replace the 9 November quotation which included ACM Removals’ standard terms and conditions. The contract comprised those two documents.
[23] Southern Demolition does not accept that interpretation. It maintains the 12 November quotation superseded the 9 November quotation. The removal of the terms and conditions of the earlier quotes, it submitted, was the product of the November meeting, which reflected its need to be assured that all the necessary asbestos required to be removed had been included in that quotation.
Work commences
[24] On the same day Southern Demolition received the 12 November quotation from ACM Removals, it submitted a revised demolition tender to Cequent for both the BNZ and Hereford Street buildings, and work commenced later that month. ACM Removals was directed to submit payment claims based on a percentage of the contract value at the end of each month for the work completed. Any variations for which additional payment was sought beyond the fixed price were also to form part of the monthly payment claim.
[25] The first payment claim for the BNZ Building was made at the end of January 2016 and further claims were made in February and March. Each of those claims were for 25 per cent of the contract price. By 30 April, 75 per cent of the contract price for
the BNZ Building had been claimed. Each of these claims were approved and the invoices generated as a result of those approvals paid.
[26] During this period ACM Removals underwent a change of ownership. Mr Blackie sold the business in December 2015. His scheduled last day of work was 31 December, although he continued with the company for a short period into 2016, carrying out a “handover role”. In January 2016, Mr Barton was appointed the General Manager of ACM Removals and he became responsible for managing the contract with Southern Demolition.
The contract breaks down
[27] Two further claims for the balance of the contract price were made. On 30 April, a 10 per cent payment claim in the sum of $46,133 (plus GST) was made and a final 15 per cent payment claim in the sum of $69,199.45 (plus GST) was sent on 31 May. By that time, ACM Removals considered it had completed all the work it was obliged to undertake. These claims were declined by Southern Demolition and it refused to pay invoices subsequently issued by ACM Removals. Southern Demolition advised ACM Removals that it did not consider it had completed the asbestos removal work required of it under the contract.
[28] On 3 June, Southern Demolition formally demanded ACM Removals to resume work and gave notice that the contract would be cancelled unless the work was completed. ACM Removals maintained it had completed the contract in accordance with its contractual obligations and, on that basis, it had concluded its work at the BNZ site. On 21 June, ACM Removals issued a number of additional invoices to Southern Demolition which it claimed were variations for work it had undertaken that was outside the scope of the contract.
[29] On 24 June, Southern Demolition issued payment schedules in response to the invoices and moved to cancel the contract on the basis of ACM Removals’ alleged repudiation by refusing to complete the removal of asbestos. It engaged a substitute
subcontractor to identify and remove the remaining asbestos. That work was completed at a cost of $495,040 (plus GST).2
ACM Removals’ claim
[30] ACM Removals claims that Southern Demolition breached the asbestos removal contract by failing to pay the April and May 2016 invoices for the remaining 25 per cent of the contract price and to pay the three invoices issued for variations representing work additional to the contracted scope of works. ACM Removals seeks special damages in the amount of $218,327.45 (plus GST) under this cause of action.
[31] ACM Removals also seeks liquidated damages pursuant to cl 19 of the standard terms and conditions which it maintains form part of the asbestos removal contract. That clause provided that if a debt recovery agency has to be employed all payments will incur costs “plus” a penalty charge of $30, plus a daily charge of 0.125 per cent of the contract value. Based on the contract price of $461,329.66 (plus GST), ACM Removals claimed the sum of $454,264.60 based upon a calculation up until the first day of the trial, (0.125 x $461,329.66 (plus GST) = $663.16 (the daily charge) x 685 days = $454,264.60).
[32] In the alternative to the contractual claim for payment of the variation sums, a second cause of action was brought under the doctrine of quantum meruit. ACM Removals claims that if the variations are held not to have been validly claimed under the terms of the contract, the work it completed which fell outside the scope of the contract was to the benefit of Southern Demolition for which it should be compensated. ACM Removals seeks damages under this alternative cause of action in the sum of $102,995 (plus GST). That figure represents the sum of the variation invoices submitted for work completed in the basement lift shafts and on internal pillars, and includes the cost of an assessment of the completed work by a third party.3
2 Southern Demolition has counterclaimed for this amount. By a minute of 7 March 2017, Associate Judge Matthews ordered the counterclaim to be heard separately, with the present proceeding being limited to the determination of liability only. ACM Removals Ltd v Southern Demolition and Salvage Ltd HC Christchurch CIV-2016-409-909, 7 March 2017.
3 ACM Removals opened on the basis that its quantum meruit claim related to the work completed in the basement and on the pillars. However, its pleading and Mr Baird’s closing submissions included the costs of the third party under this heading.
The issues to be determined
[33] The essential dispute between the parties concerns the definition and scope of the asbestos removal contract and whether ACM Removals completed the contractual works. ACM Removals’ claim for breach of contract turns on the following questions:
(a)What were the terms of the contract between ACM Removals and Southern Demolition? In particular, was the contract limited to the 12 November quotation, or did it comprise both that document and the 9 November quotation which included ACM Removals’ standard terms and conditions?
(b)What was the scope of the works ACM Removals was required to complete to discharge its obligations under the contract?
(c)Did ACM Removals discharge its obligations and complete the asbestos removal work required of it under the contract?
(d)Was ACM Removals entitled to claim for variations?
[34]The proceeding gives rise to two further issues:
(a)In the event of a finding that Southern Demolition was not liable under the asbestos removal contract to pay the claimed variations, is ACM Removals entitled to receive compensation for the work it completed pursuant to its quantum meruit claim?
(b)If the asbestos removal contract included the terms and conditions of the 9 November quotation, are liquidated damages payable under cl 19, or is it an unenforceable penalty provision?
The principles of contractual interpretation
[35] A key issue is whether the 12 November quotation exhaustively and exclusively recorded the contract between the parties. While each party sought to
emphasise particular aspects of the approach to be taken to the interpretation of the 12 November document, they were in broad agreement as to the principles to be applied.
[36] It is well established that the proper approach to contractual interpretation is an objective one, the aim being to ascertain the meaning which the document would convey to a reasonable person.4 However, a contextual approach is also required. A reasonable person is one who is informed by all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract.5
[37] In Vector Gas Ltd v Bay of Plenty Energy Ltd, Tipping J stated the approach in the following way:6
[19] ... The necessary inquiry therefore concerns what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean. The court embodies that person. To be properly informed, the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.
[38] In Firm PI 1 v Zurich Australian Insurance Ltd, Arnold J (with whom McGrath and Glazebrook JJ agreed) observed that this objective meaning of the document is taken to be that which the parties intended.7 The context provided by the contract as a whole and any relevant background will inform this meaning.
[39] Mr Riches, on behalf of Southern Demolition, stressed that the objective approach to contractual interpretation requires the focus to be on the agreement reached in its final form as representing the ultimate consensus of the parties.8 However, while it is correct that evidence is not relevant if it does no more than seek to establish what a party subjectively intended, the Court is required to be aware of the
4 Firm PI 1 v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 at [60], citing Lord Hoffman in Investors’ Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 at 912; Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19].
5 Firm PI 1 v Zurich Australian Insurance Ltd, above n 4, at [60], citing Lord Hoffman in Investors’ Compensation Scheme Ltd v West Bromwich Building Society, above n 4, at 912.
6 Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 4, at [19].
7 Firm PI 1 v Zurich Australian Insurance Ltd, above n 4, at [60], citing Attorney-General of Belize v Belize Telecom Ltd [2009] UKPC 10, [2009] 1 WLR 1998 at [16], per Lord Hoffman delivering the judgment of the Privy Council.
8 Citing Tipping J in Vector Gas Ltd v Bay of Plenty Energy Ltd, above n 4, at [20].
commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to operate on the parties’ minds.9 In that regard,
Arnold J in Firm PI 1 v Zurich Australian Insurance Ltd observed:10
[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on their being an ambiguity in the contractual language.
[40] I turn now to the identification of the terms of the asbestos removal contract and whether the 12 November quotation represented the final and exclusive iteration of the contract or supplemented, rather than replaced, the earlier 9 November quotation.
What were the terms of the contract between ACM Removals and Southern Demolition?
The October quotation and the interaction between Ms Manderson and Mr McPherson
[41] Over the course of October and November 2015, ACM Removals provided three quotations to Southern Demolition for the purpose of obtaining the contract to remove asbestos from the BNZ Building. The first 1 October quotation was submitted by Ms Manderson, in the absence of Mr Blackie. It significantly underestimated the work and associated cost required to satisfactorily complete the project. Ms Manderson and Mr McPherson gave evidence regarding their discussion about the work the 1 October price covered.
[42] Ms Manderson said that she informed Mr McPherson that the quote allowed for the removal of all asbestos that had been identified in the Optimum Report. She further stated that she would not have said that the 1 October quotation was to remove all asbestos from the BNZ Building because she did not know there was asbestos in the building beyond that identified in the Optimum Report. She referred to ACM
9 At [19].
10 Firm PI 1 v Zurich Australian Insurance Ltd, above n 4, at [61].
Removals’ standard conditions, and in particular to cl 3: that all practicable steps
would be taken to remove visible asbestos.
[43] Ms Manderson contended that telling Mr McPherson that the quotation was to remove all asbestos from the building, regardless of whether it was identified in the Optimum Report, would have been inconsistent with cl 3. However, at least on its face, Ms Manderson’s evidence appears to be contradicted by her subsequent email to Mr McPherson in response to his inquiry of the same day. In that email Ms Manderson stated that ACM Removals had “allowed to remove all asbestos from the basement to the top level. Unless there is asbestos discovered in the building foundations when it is coming down, we believe we have covered everything in the way of asbestos.”
[44] For his part, Mr McPherson acknowledged that he had no specific recollection of his 14 October telephone discussion with Ms Manderson. He relied upon the email of the same date which Southern Demolition maintained gave the necessary reassurance that the work covered by ACM Removals’ 1 October quote met its requirements. Based on that understanding, Southern Demolition proceeded to provide its tender to Cequent for the demolition of the BNZ Building. On 28 October, Cequent advised of its intention to appoint Southern Demolition to complete the work “subject to agreement of final contract terms”.
[45] Because of the subsequent involvement of Mr Blackie and the provision of the 9 and 12 November quotations, the interaction between Mr McPherson and Ms Manderson relating to the 1 October quotation was largely overtaken by subsequent events. It is common ground between the parties that whatever the terms of the contract between them, the 1 October quote did not form part of their contract. However, it is worthwhile making two observations at this stage regarding this earlier interaction between the parties.
[46] Firstly, ACM Removals placed much emphasis on the Optimum Report having been prepared for a client that was only contemplating the remediation of the building, and that the utility of the report was limited because of its original purpose. Linked to that feature of the report was the claimed state of knowledge of ACM Removals’ representatives of the purpose of removing asbestos and whether the building was to
be demolished. A number of witnesses, including Ms Manderson, gave evidence regarding their understanding of the situation at the time, and their ignorance of the planned demolition of the BNZ Building until the following year.
[47] I did not find that evidence entirely convincing but ultimately it was of little relevance. It is apparent from Ms Manderson’s 14 October email, when she referred to the building “coming down”, that she was aware the building was to be demolished, although her evidence was that she viewed it as a partial demolition because of advice received from an employee of Southern Demolition that the basement was to remain as a carpark. This potentially had some relevance in terms of the extent of the work required to be undertaken in the basement. However, Ms Manderson’s understanding of the position and her knowledge of the extent of the demolition as at 14 October became irrelevant in light of the subsequent involvement of Mr Blackie and his renegotiation of the contract in the following month. This was premised on the BNZ Building being completely demolished.
[48] Secondly, both parties accepted that the contracted scope of works for the removal of asbestos was governed by the Optimum Report. To the extent Ms Manderson’s evidence was premised on an apparent conflict between herself and Mr McPherson as to whether the contract covered all the asbestos or all the asbestos identified in the Optimum Report, that is no longer an issue between the parties in this proceeding.
Mr Blackie becomes involved and the revised price
[49] When Mr Blackie arrived back in New Zealand from overseas, he sought to renegotiate the contract and visited the site accompanied by Southern Demolition representatives. Mr Blackie’s chief concern was that the removal work required in the lift shafts may not have been included in the price set out in the 1 October quote. He found the lift shafts, which extended to the basement, to have been piled full of debris. To progress the situation, it appears there was some agreement to provide Mr Blackie with the opportunity to submit a new price. By this time Southern Demolition had already submitted its demolition tender to Cequent, which in turn had notified it of its intention to appoint the company as its contractor. Mr Blackie’s advice that he could
not undertake the asbestos removal work at the current price presented a significant impediment to progressing the project.
[50] ACM Removals, under its previous name of Bricon, had a long and generally positive commercial relationship with Southern Demolition. They had in the past successfully tendered to extract asbestos from buildings to be demolished by Southern Demolition. It is apparent therefore that, at the time, there was a good working relationship between the companies and they had not previously been in serious dispute regarding asbestos removal work. It is unsurprising therefore that in the circumstances ACM Removals was permitted the opportunity to submit a new price in an effort to progress the project, the arrangements for which had already been agreed in principle between Southern Demolition and Cequent. Although, as with all quotes, whether it would be accepted remained an outstanding issue.
[51] Mr Blackie was concerned that the 1 October price of $235,690 (plus GST) was too low to complete the work described in the quotation as the “Removal and disposal of asbestos and contamination of waste as per the report supplied by Optimum Projects dated 14-8-2015”. When he reviewed the quotation with Ms Manderson, she informed him that she had priced the job on the basis that the asbestos in the basement was not to be removed. Her explanation for doing that was because Mr Albertson, one of the authors of the Optimum Report, had told her that he had not been able to access the basement to carry out testing in that area. She also referred in her explanation to Mr Blackie of having been advised that the building was not to be demolished in its entirety and would only be “coming down” to ground level, with the existing basement being retained for car parking.
[52] In his evidence, Mr Blackie acknowledged that it appeared Southern Demolition had always expected the asbestos in the basement to be removed. However, he maintained, at least until the November meeting, that he had proceeded on the basis that asbestos was not required to be removed from the basement and that, as matters had stood after the 1 October quotation, ACM Removals was only bound to remove all asbestos from the ground floor and above for the price quoted by Ms Manderson.
[53] Mr Blackie’s understanding of the position was reflected in the 9 November quotation, which expressly stated that because the basement had not been included in Mr Albertson’s work for the purpose of the Optimum Report, it had not been included in ACM Removals’ price. The 9 November quotation specifically stated under the description of the work that it only included “ground floor to level four”.
The November meeting
[54] After receipt of Mr Blackie’s 9 November quotation, a meeting was convened at the offices of Cequent. The price had nearly doubled and the revised quotation made it explicit that it did not include the basement. The meeting was attended by Mr Blackie and Ms Manderson, and Messrs Blair and McPherson, and the owner and director of Southern Demolition, Mr Edge. It is unclear whether the meeting occurred on 11 or 12 November. Most of the evidence was premised on the meeting having been held on 12 November, but email communications and Mr Blair’s recollection point to it having more likely occurred on 11 November.
[55] There is a significant divergence between the parties’ respective witnesses as to what occurred at this meeting. The meeting clearly took place for the purpose of deciding whether the proposed increase in price would be accepted. That increase, if agreed, would ultimately have to be met by Cequent’s client, the owner of the building, because Southern Demolition’s tender to demolish the BNZ Building had been based on ACM Removals’ initial 1 October quote. While Southern Demolition had received notice of Cequent’s intention to appoint it as the main contractor, that remained subject to confirmation of contractual terms.
[56] Mr Blair’s evidence was that at the meeting he informed Mr Blackie and Ms Manderson that he wanted to ensure that all asbestos was removed from the building in order for it to be demolished. Clause 3 of the standard terms and conditions which had been included with the 9 November quote provided that all practicable steps would be taken to remove the visible asbestos. It also provided that because of the nature of some forms of asbestos a 100 per cent guarantee of total removal could not be given. Mr Blair was concerned about the effect of cl 3, and his evidence was
that he told Mr Blackie and Ms Manderson that he wanted that clause removed to ensure that the contract covered all asbestos necessary to complete the demolition.
[57] Mr Edge’s evidence was that Mr Blair, as the agent for the owner of the building who would ultimately have to pay the cost of the asbestos extraction to complete the building’s demolition, was only prepared to allow an increase in the price on the condition that the additional clauses (the standard terms and conditions) were removed. Mr McPherson’s evidence was to similar effect; that cl 3 was not acceptable because it was inconsistent with the scope of the required works to remove all asbestos to allow the building to be demolished.
[58] However, Mr Blackie’s evidence was that he had no recollection of any discussion regarding cl 3 at that meeting. If there had been such a discussion he would not, as a prudent asbestos removal contractor, guaranteed 100 per cent removal of all asbestos from the BNZ Building. He explained that asbestos is often hidden within building elements and encased by sprayed on concrete. That was why ACM Removals always included such a disclaimer and made provision for variations in its contracts. Mr Blackie’s evidence was that he would not have agreed to the removal of cl 3 because, in his words, it would be “commercial suicide” for him to have done so. Under cross-examination Mr Blackie denied being told to remove clauses from the contract. Ms Manderson’s evidence was that she did not believe that ACM Removals was asked for the clauses to be removed.
[59] There is an irreconcilable difference in the evidence regarding the discussion that took place at the November meeting. It is Southern Demolition’s case that at this meeting Mr Blair agreed to increase the contract price but only on the condition that the contract was varied to ensure all asbestos was removed to permit the building to be demolished. The need for such an assurance was reflected in Mr Blair’s evidence when, in reference to the objective of the meeting in the wake of ACM Removals’ price having increased so significantly, he said it was “just to be very clear with everyone we’re not, we’re not going to entertain having another crack at further asbestos down the line having already incurred another couple of hundred thousand dollar cost already”. I accept that was Mr Blair’s objective at the meeting. If his client was to absorb the increased cost of the asbestos removal which had almost doubled as
a result of the revised quote, he wanted some assurance there would be no further increase in the cost to remove asbestos in order for the building to be demolished.
[60] While Mr Blair’s principal had no contractual relationship with ACM Removals, Mr Blair’s evidence was that he had concerns about the consistency of cl 3 with the requirement that ACM Removals remove all asbestos for the purpose of the demolition work. And, although he acknowledged that the effect of cl 3 would ultimately be Southern Demolition’s problem as the contract was between it and one of its subcontractors, the reality was that final acceptance of that Southern Demolition tender (which would reflect the actual cost of the asbestos removal work) was dependent on Mr Blair’s client accepting ACM Removals’ increased price.
[61] Southern Demolition and Mr Blair’s concern was reflected in the modification to ACM Removals’ entitlement to claim variations under the contract. One of the bullet points included in the 12 November quotation provided that any asbestos 20 m2 or less discovered during the process of removal was to be removed by ACM Removals without any extra cost. This additional term was agreed at the November meeting.
[62] While agreement was reached that ACM Removals would have to absorb certain costs should undiscovered asbestos be located during the process of removal, it is not clear that any agreement was reached regarding the exclusion of ACM Removals’ standard terms and conditions, and in particular cl 3. The following passage from Mr Blair’s evidence, in my view, most likely reflects the position:
Q Mr Blair, we were talking about the meeting at Cequent’s offices, 12 November, before. Nowhere in your evidence do you explicitly say that there was any agreement by Mr Blackie and Ms Manderson to remove clauses 1 to 20 from their 9 November quotation, do you?
A No.
QBecause they didn’t agree to that at the meeting, did they, otherwise you would have said so, wouldn’t you?
A I can’t recall exactly what was discussed at the meeting other than general topics so I can’t-
QDo you accept what I say, if there had been a firm agreement you would have said so in your evidence, wouldn’t you?
A If it was asked and discussed, yes it would have been.
QIt is not in your evidence because it wasn’t discussed and agreement wasn’t reached on it, was it?
AI believe it was discussed but I don’t know if I asked for an agreement or – it was just, I’m pretty sure.
Q So you couldn’t contradict Mr Blackie and Ms Manderson in your evidence robustly when they said, “we did not reach an agreement at the 12 November meeting to remove the standard conditions 1 to 20 from our quotation”?
A No, I couldn’t contradict that.
[63] Based on the evidence of the November meeting, I am satisfied there was discussion about cl 3 and its potential impact on ACM Removals’ obligations to remove asbestos identified in the Optimum Report. However, it is not clear that any actual agreement was reached between the parties to omit ACM Removals’ standard terms and conditions, and in particular cl 3, from the asbestos removal contract. I consider there was an obvious focus in the discussion on ensuring the significantly increased price contained in the 9 November quotation provided for the comprehensive removal of all the asbestos necessary to allow the building to be demolished. However, beyond the agreed allowance for the removal of an amount of undisclosed asbestos without additional cost and, as I will discuss shortly, work to be completed in the basement, it is not clear what else was actually agreed.
[64] I consider it likely that the parties may have misapprehended each other’s understanding of the consensus they thought had been achieved regarding cl 3. Perhaps unsurprisingly, in the absence of any formal record, minutes or written note of the meeting and the lapse of time, none of the witnesses were able to give detailed evidence of what was actually said or how matters were concluded. Because of the unsatisfactory state of the evidence, I am therefore unable to conclude on the oral evidence that agreement was reached at the meeting to exclude ACM Removals’ standard terms and conditions, and in particular cl 3. While it may have been Mr Edge and Mr McPherson’s understanding from the discussion that this had been achieved, I consider Mr Blair’s equivocalness as to whether any such agreement was reached is telling.
The relevance of the November meeting to Southern Demolition’s case
[65] Mr Baird, on behalf of ACM Removals, was critical of the failure by Southern Demolition to formally plead its contention that an agreement had been achieved at the November meeting to remove the standard clauses. Mr Baird submitted that, in light of its failure to do so, it was not open to Southern Demolition to run its case on the basis of such an agreement in the absence of that reliance having been specifically pleaded in its statement of defence.
[66] As is apparent from my factual finding, I have not found it proved that such an agreement was reached at the meeting. However, I accept Mr Riches’ submission that it was legitimate for Southern Demolition, in support of its argument that the 9 November quotation alone constituted the totality of the asbestos removal contract, to adduce evidence regarding what took place at the November meeting and, in particular, to support its case that as a result the subsequent 12 November quotation deliberately excluded the terms and conditions contained in the previous 9 November quotation. Mr Riches made it clear in his closing submissions that Southern Demolition was not relying upon a combination of a written contract in the form of the 12 November quotation supplemented by an oral contract to exclude the standard conditions. Southern Demolition’s case was that the 12 November quotation constituted the asbestos removal contract in full and should be treated as the whole contract.
[67] Southern Demolition does not therefore rely upon proof of an oral agreement having been reached at the November meeting to exclude ACM Removals’ usual terms and conditions. It points to and relies upon the 12 November quotation document itself which does not include those conditions. Not only is the absence of the terms and conditions in it, in particular cl 3, consistent with its understanding of the outcome of the meeting, but more importantly, in Mr Riches’ submission, the 12 November document must be viewed as representing the contract between the parties, and it does not include those terms and conditions. Mr Riches submitted that it was not necessary, nor should the contracting parties’ intentions be sourced from any other evidence, other than the content of that document.
[68] The situation is to be distinguished from where the written document was never intended to be the whole contract, but was intended to be supplemented by oral agreement.11 To the contrary, as previously observed, Southern Demolition’s case is that the 12 November quotation is a comprehensive record of the agreement between the parties which was intended to be exhaustive of their contractual obligations. The 12 November document no longer excludes the basement, it does not list the terms and conditions which had been included in the two earlier quotations, and it provided a new term governing the cost of variations.
The 9 and 12 November quotation documents
[69] Following the November meeting, ACM Removals emailed to Southern Demolition the 12 November quotation. The format of the document was almost identical to that used for the 9 November quotation. It was set out on ACM Removals’ letterhead (as were the earlier quotations) and reads as follows:
CONTRACT BETWEEN ACM Removals Ltd (The Contractor) AND Southern Demolition (The Client)
This Quotation is submitted under the Construction Contracts Act 2002
Upon our 2nd site visit for the asbestos removal from the BNZ Bank, which was attended by the director, for the first time, we have had discussion’s [sic] with Alan Albertson, from Optimum Projects, regarding the report that he issued, to get a full understanding of what’s required. Due to this we have needed to resubmit our quote as the report was/is not a full representation of the extent of the removal.
Re:_BNZ Building
We have pleasure in submitting our price for this project, based on the information available and from our site visit and/or documents supplied. We make our offer to carry out the following work:
Description of the Work Allowed to be Carried Out;
Removal and disposal of asbestos as identified in the Optimum report and after further clarification with Alan Albertson.
·Any asbestos 20m2 or less that is discovered during the process of removal, shall be removed, without any extra costs.
11 See for example, Walker Property Investments (Brighton) Ltd v Walker (1947) 177 LT 204; Couchman v Hill [1947] KB 554, [1947] 1 All ER 103 (CA); and other examples cited in Burrows, Finn and Todd on the Law of Contract of New Zealand (6th ed, Lexis Nexis, Wellington, 2018); A M Bisley and Co Ltd v Thompson [1982] 2 NZLR 696 (CA).
·Samples shall be taken from the lift shaft, upon removal and a composite sample shall be sent away for analysation. This is an allowance of four samples per lift shaft. This will be for qualitative and quantitative purposes.
·There shall be 2 teams working on the site, one for the lift shaft areas and one for the remaining areas.
·Samples have been taken for analysation and due to this we believe there is no more asbestos in the building.
·ACM Removals have rung ECan and spoken to Paul Dahl 0277038736 (senior compliance officer) and he has stated “there is no set % of contamination in regards to building rubble, this only applies to soil. There is a long lengthy process to screen hard fill or crushed concrete only, but it is a process that has to be approved by both ECan and Worksafe and is closely monitored by both”
·Have spoken to Rob Abraas from Worksafe he has stated there is no other way that [sic] to dispose of the waste in the lift shaft, other than as asbestos waste.
·Having spoken to Alan Albertson, this only applies to hail sites and is only in regards to soil, not building rubble
·Clarification on the compliance signs confirmed with Worksafe, and it is as per the guidelines and regulations.
Based on the above, our price for this project will be:
$461,329.33 +gst
(Four hundred and sixty one thousand, three hundred and twenty nine dollars, sixty six cents.) Plus GST
The difference from the previous price being $227,426.92
[70] The statement, which appeared in the 9 November quotation (as reproduced at [17]) that the basement was not included in the price was removed from the 12 November document. The quotation then proceeds in the same terms as the 9 November quotation. The work to be carried out is described as the “[r]emoval and disposal of asbestos identified in the Optimum Report after further clarification with Alan Albertson”. However, deleted from the 12 November description is the
stipulation that appeared in the previous quote, set out at [15], that the work only included ground floor to level four.
[71] Thereafter the two documents are significantly different. The 9 November quotation listed eight clauses, all of which referred to generic arrangements regarding the practical undertaking of the work. Under the heading “Comments, qualifications and exclusions” there followed 23 standard terms and conditions, of which cl 3 is one.12 In contradistinction, the 12 November document did not include these clauses. It only listed a series of bullet points specific to the task of removing asbestos from the BNZ Building. Those bullet points included the taking of samples from the lift shafts, inquiries with ECan regarding contaminated building rubble, and the disposal of waste from the lift shafts.
[72] Each quotation concludes that “based on the above, our price for the project will be $461,329.66 + gst”. The 12 November quote provides a figure which is 33 cents less, but nothing turns on that minor discrepancy. The parties accept the price was the same. Potentially of greater relevance is that under the stipulated price, the 12 November quotation specifically noted “the difference from the previous price being $227,426.92”. The 9 November quotation does not include that remark. It ends by expressing thanks for the opportunity to submit the quotation and states, “we look forward to hearing from you ...”. The 12 November quotation does not include those words.
Did the asbestos removal contract extend to the basement?
[73] The difference between the parties’ cases as to whether the asbestos removal contract comprised the amalgam of the 9 November quotation and the 12 November quotation, or was limited to the 12 November quotation alone, distils to what the reasonable person equipped with all the background knowledge reasonably available to the parties in the situation at the time of the contract would consider the parties intended the 12 November quotation to mean. Whether the document stood alone as the asbestos removal contract or whether, taking into account the commercial context
12 There were 20 terms and conditions contained in the 1 October quote. In the intervening period between the provision of that quote and the 9 November quotation ACM Removals updated its terms and conditions.
in which the contract was made and all the facts and circumstances known to and likely to be operating on the parties’ minds, the document only supplemented the previous 9 November quotation.
[74] On the face of the two documents, it is apparent that the limitation contained in the 9 November quotation regarding the scope of works being confined to levels ground to four no longer applied. The basement was no longer expressly excluded. Nor could there be any doubt that the lift shafts, which Mr Blackie was so concerned had not been taken into account by Ms Manderson in the original 1 October quotation, were now part of the contract, down to and including the basement. That conclusion is not only consistent with the removal of the previous limitation on the quotation’s application to the basement but with other contextual evidence.
[75] The rubble in the lift shafts, which Mr Blackie discovered when carrying out his site inspection, was provided by him as the predominant reason for the need to increase the 1 October price. It is axiomatic that Southern Demolition and Cequent would only be prepared to entertain such an increase if this work was included. Furthermore, the bullet points listed in the 12 November quotation itself expressly referenced the contaminated building rubble, and the disposal of waste from the lift shafts. These considerations leave me in no doubt that the asbestos removal contract included that work.
[76] Mr Blackie under cross-examination denied he was told at the November meeting that the limitation in the contract to work on the ground to fourth floors had to be removed. Insofar as Mr Blackie’s answer is to be interpreted as contesting that the asbestos removal contract no longer excluded the work in basement, I do not accept his evidence on that point. It is clear from the changes made by ACM Removals to its quotation that work in the basement was no longer excluded. That change logically must have resulted from what had been negotiated at the November meeting.
Did the removal contact include the standard terms and conditions?
[77] As I have earlier concluded, I consider the representatives of the parties who attended the November meeting discussed issues regarding the scope of the asbestos removal work and the potential difficulties raised by cl 3, which were viewed by
Messrs Blair, Edge and McPherson as a possible obstacle to achieving the necessary level of asbestos clearance for demolition. However, while some understanding was likely reached regarding the need for the asbestos removal works to be sufficiently comprehensive and efficacious, it appears no clear consensus was achieved to remove the disputed term. Mr Blair was not prepared to contest ACM Removals’ evidence that it did not agree to the removal of its standard terms and conditions. However, as Southern Demolition emphasised, these standard conditions upon which ACM Removals relies were absent from the 12 November document.
[78] Notwithstanding my acceptance of Southern Demolition’s evidence that it did not want those terms and conditions included in the asbestos removal contract, and their non-appearance in the 12 November quotation, I consider the balance of the evidence objectively leads to the conclusion that the terms and conditions set out in the 9 November quotation remained part of the contract. In reviewing that evidence, I have been careful to ensure that such evidence assists my objective assessment as to whether the contract included the earlier terms and conditions. Evidence as to what ACM Removals subjectively intended is not relevant.
[79] Ms Manderson was the author of the 12 November quotation. Her evidence was that she did not use ACM Removals’ “standard quotation template” when she created this document. She did this deliberately because she had already sent Southern Demolition the terms and conditions in the earlier 9 November quotation. Ms Manderson noted in support of this that the 12 November quotation was not paginated whereas the 1 October and 9 November quotations were. Her evidence was that the 9 November quotation had been created in a separate document. It was not therefore a case of ACM Removals editing a document for the purposes of it being substituted for the earlier quotation.
[80] I doubt whether Ms Manderson’s evidence about how she created the document assists ACM Removals because this was information only known to her at the time. The 12 November document, as I have already observed, takes the same form as the earlier quotations. The initial wording of the document is identical to the 9 November quotation, and other than the changes to reflect that the contract no longer excluded the basement, on its face, it appears to be a further iteration of the earlier
quotation. Of greater significance is a small but important piece of evidence Ms Manderson gave that she did not include the standard terms and conditions again in the 12 November quotation because, at the time she was preparing that document, Mr McPherson told her that he didn’t need to see those again. There was no challenge to Ms Manderson’s evidence on this point, nor did Mr McPherson contest Ms Manderson’s evidence that he made this representation to her at that time.
[81] Ms Manderson’s evidence was that in supplying the 12 November quotation she was responding to a request by Mr McPherson for information to explain the price increase of over $220,000 and to confirm what she referred to as the “extras” that had been discussed at the November meeting. These were said to include the removal of any unidentified asbestos less than 20 m2 at no further cost and sampling of the lift shaft. Ms Manderson explained that the 12 November quotation was, as she described it, “a consolidation” of the earlier November quotation and that the two documents were to be read together.13
[82] Mr Baird made a number of submissions in support of ACM Removals’ case that the 12 November quotation supplemented the earlier 9 November quote and did not replace it. He submitted that even if it was accepted, as I have, that Messrs McPherson, Blair and Edge had raised with Ms Manderson or Mr Blackie that the conditions in issue be removed, there was no agreement to their removal. I have accepted that there was no consensus ad idem. However, that finding will not assist ACM Removals in its argument that the asbestos removal contract comprised both the 9 and 12 November quotations if the 12 November document, when measured against the facts and circumstances known to have been, or likely to have been, operating on the parties’ minds, would objectively lead to the conclusion that it constituted the contract in its own right, standing alone.
[83] In support of ACM Removals’ position, Mr Blackie observed in his evidence that even if there had been discussion at the 12 November meeting about the removal
13 The email in respect of which the 12 November quotation and the other documents, including the breakdown of the two sub-costings for the “main floor areas” and the “lift shafts bnz” were included as attachments, was sent to Mr McPherson in the very early hours of 12 November. It is likely therefore that Mr Blair’s understanding that the “12 November meeting” in fact occurred on 11 November is correct as all parties are agreed that the 12 November quote and the accompanying documents were sent after the meeting had been completed.
of cl 3, he could not have agreed to such a course. He stated that no prudent and competent asbestos removal contractor could possibly guarantee 100 per cent removal of all asbestos from a building, and in particular not at the time of quoting for a job, because asbestos is often hidden within building elements and encased within “sprayed-on concrete”. Mr Blackie noted that persons engaged to inspect buildings for asbestos and prepare reports regarding its presence could similarly never guarantee that they had identified all of the asbestos in the building. Neither ACM Removals nor any other asbestos removal contractor would guarantee that it could remove 100 per cent of the asbestos.
[84] Mr Blackie explained that this was why ACM Removals always included a standard term like cl 3 and made allowance to claim for variations for unidentified asbestos in its standard conditions. Furthermore, asbestos removal work is an uninsurable risk, and it was submitted that ACM Removals would always seek to protect itself from exposure to liability, like any other prudent asbestos removal contractor, by including in its standard terms and conditions that no guarantee could be given of 100 per cent removal. I accept these are persuasive reasons why, as a matter of standard practice, an asbestos removal contractor would always include such a disclaimer.
[85] ACM Removals further submitted that the scope of the works described in the 12 November quotation was not inconsistent with cl 3. The quotation did not require the removal of all asbestos from the BNZ Building. The description of the work covered by the quotation was for the removal and disposal of asbestos as identified in the Optimum Report, and both parties are agreed that this document set the parameters of the work required to be carried out by the contract. Similarly, it was argued that the additional 20 m2 clause documented in the 12 November quotation was consistent with the retention of cl 3, as it acknowledged the possibility of the presence of undiscovered asbestos at the time the contract was entered into.
[86] Mr Baird submitted that there was no evidence that Southern Demolition had ever complained about ACM Removals’ standard terms and conditions previously, nor did it complain about the presence of those contractual terms, including cl 3, in relation to the Hereford Street contract that was entered into at the same time. Furthermore, at
the time of the initial 1 October quotation, no attempt was made to remove those standard conditions, nor objection raised to their inclusion, by Southern Demolition. However, that submission tends to overlook the fact that ACM Removals was seeking to renegotiate a price for the removal of asbestos which had already been accepted by Southern Demolition and submitted by it to Cequent as part of its demolition tender.
[87] As canvassed earlier in this judgment, the objective of Mr Blair and the representatives of Southern Demolition was to obtain some assurance that if they were to allow ACM Removals to effectively double its price, the revised scope of works would adequately cover the removal of the asbestos necessary to permit demolition. The standard terms and conditions, and in particular cl 3, were viewed as an impediment to obtaining that objective. However, having made that observation, I accept the commercial sense of including such terms in an asbestos removal contract is a persuasive factor when objectively assessing whether such a clause remained part of the contract notwithstanding its absence from the 12 November quotation.
[88] Mr Baird made a number of submissions based upon the evidence of Mr McPherson who referred to there having been agreement to remove cls 1-20 of the standard terms and conditions when there were in fact 23 such terms included in the 9 November quote. Changes to ACM Removals’ standard terms and conditions between the time of the first quotation on 1 October and the 9 November quotation meant that they had increased to 23 clauses. Cross-examination of Mr McPherson included questioning as to why only cls 1 to 20 had been referred to in his brief of evidence as being the subject of the alleged agreement at the November meeting. This led Mr McPherson to speculate that the additional three clauses may not have been requested to be removed, and submissions were made that had there been agreement, one would have expected the remaining three clauses to have appeared in the 12 November quote.
[89] I do not consider this evidence has probative value. Mr McPherson was obviously mistaken as to the number of standard terms and conditions. I consider any concessions or explanations put forward based upon Mr McPherson’s mistaken premise as to the number of the terms and conditions does not assist. In any event, those considerations relate to the question of whether an agreement had been reached
at the 12 November meeting, about which I have already concluded no consensus was achieved.
[90] As earlier indicated, it is my objective assessment that on balance it is more likely the asbestos removal contract did include the standard terms and conditions set out in the earlier quotation of 9 November 2015. My essential reasoning in coming to that conclusion is that I do not consider that Mr Blackie would have allowed his company to enter into an asbestos removal contract simply on the basis of the terms of the 12 November quotation. Furthermore, it cannot objectively have been the parties’ intention to have their contractual relationship governed by such a limited document. To illustrate this point, it is necessary to set out the terms and conditions listed in the 9 November quotation but not repeated in the 12 November quotation. They read as follows:
1. ACM Removals Removals Ltd agree to carry out the “work” on this property/buiding. This works is as we understand from you the main contractor/client as written and/or as stated in the contract document supplied.
2. We may have a requirement for access to town pressure water supply plus electricity for the duration of our time on site. This is to be supplied by you at no cost to ourselves, as this has not been allowed for in our quoted price.
3. This work area (unless contaminated) is to be cleared of all debris that may impede our progress. This prior to ACM Removals crews commencing on site, allowing us to carry out our work in a productive and expedient manner. This also will ensure cross contamination will be less likely to occur.
4. Once we commence our work, access to this site or building will be denied without prior notification. Any person allowed entry on to site, is to be fully kitted out with the required safety equipment.
5. There will be a requirement for discussion on “some project” sites, regarding the understood work scope. This is to discuss the specific requirements and to have full agreement prior to commencing the work.
6. To remove all material from site for safe disposal as per the relevant regulations.
7. All restricted removal work will be carried out by out trained crew members/leading hand/foreman, under the supervision of a C.O.C holder.
8. Once an air clearance has been received, the polythene masking, will be removed and disposed of as asbestos waste.
Comments, Qualifications and Exclusions:
1. We understand our quoted price is directly to you, being the main contractor/client. This quote cannot be transferred to or be subject to payment by another contractor/client.
2. All work will be carried out under the asbestos regulations and the current code of practise.
3. All practicable steps shall be taken to remove the visible asbestos. Due to the nature of sprayed on or some other forms of asbestos, this cannot be given a 100% guarantee of total removal.
4. There is no “defect” period with asbestos removal. Therefore, we do not accept “Retentions” being withheld when invoice payments are made.
5. You the main contractor/client shall be responsible for any costs and arrangements, in regard to all permits, approval or authorisations required for this work to proceed. This is not allowed for in our price.
6. We will comply with all statues [sic], regulations and by-laws for which we would “normally” be responsible for.
7. Once we have received the contract acceptance in writing we will commence work without undue delay.
8. The principal is responsible for any air monitoring and clearance procedures, after the removal process has been completed. ACM Removals will not take any responsibility for this nor will they be liable for costs incurred.
9. Liquidated damages and/or extra charges will not be accepted unless prior discussions has [sic] been held and agreement reached.
10. Due to the nature of all removal work, damages will occur. This is especially relevant for “Re-occupation” properties. Internal stipple- texture ceiling linings, for removal work in particular, “will” result in repairs having to be carried out to painted-plastered-wall papered surfaces and/or floor coverings. This cannot be avoided and no allowance has been allowed in regard to these costs in our price below. All costs for replacement or repairs are at your, the main contractor/client or property owners expense.
11. At no time will ACM Removals Ltd, accept any claims for costs, without prior agreement and/or approval in writing from an approved ACM Removals representative.
12. Should we become aware of any relevant circumstances or facts on this project that was not known prior to tendering, we will consult with you, the main contractor/client and make our recommendations, plus discuss any cost implications? Once written agreement is received, should this apply, the work will be carried out.
13. Any other variation requests and/or site instructions generally will require pricing and agreement in writing before any such work is to be
carried out. This includes for un-foreseeable lack of access, obstructions stand down costs, due to circumstances beyond our control, or where the company’s materials – masking, are damaged on site by other parties or any other un-controllable event.
14. We have based our price on our crew members, working a standard week, this is nine (x9) hours ordinary time Monday to Fridays. Should you require longer hours or weekend work to be carried out, this will be a variation to our quoted price below and therefore we would require discussion as to recover [sic] of any extra costs incurred.
15. Our prices are based on today’s labour rates, GST and material costs. Any escalation in costs during our contract period shall be reasonably claimable; with the required confirmation of these varied costs.
16. This letter and any subsequent correspondence, shall form part of any contract between ACM Removals and you the main contractor/client.
17. Our price is submitted, based on the payment terms and conditions as laid out in the Construction Contracts Act 2002. This clause can only be varied by written agreement between you the main contractor/client and ourselves ACM Removals Asbestos Ltd:
18. We at ACM Removals Asbestos Ltd, expect payment to be made on or before the 20th of the month following the date of our invoice.
19. If a debt recovery agency has to be employed all payments will incur costs “plus” a penalty charge of $30.00. Plus a daily charge of 0.125% of the contract value.
20. All lead paint will need to have a TCLP test carried out by Hills Laboratories prior to being disposed of.
21. The disposal of the lead paint is based on Kate Valley acceptance limit of 5g/m3 and not exceeding this limit. Anything exceeding this shall have to be treated and another TCLP test carried out as well as a new price submitted.
22. Any skim coat that may contain asbestos, shall be skimmed back to concrete only. This is based on the original concrete being a smoot pour. This does not allow for any scabbling nor does it allow for rough concrete.
23. PLEASE NOTE: If our quote is to remove stipple/texture, it is stipple/texture only and does not include the jointing compound or bedding coat. This will be at an extra cost.
[91] These terms are to be compared with the bullet points listed in the 12 November quotation, set out earlier at [69], which are entirely specific to the BNZ project. It is reasonable to presume the topics with which the clauses are concerned would ordinarily be the subject of stipulated terms and form part of a contract between a demolition contractor and an asbestos removal subcontractor. There is no evidence
of concerns being raised by the parties when considering the increased quotation price about these terms and conditions, other than cl 3. That concern was specific, relating as it did to the potential qualification it may place upon ACM Removals’ contractual obligations to remove asbestos and the need to ensure that all asbestos was removed for the purpose of the demolition for the revised price.
[92] Related to that issue was the question of cost implications arising from unforeseen developments and, in particular, the removal of unknown asbestos which may need to be the subject of a variation as provided for in cl 12. However, I did not understand it to be Southern Demolition’s case that the absence of the standard terms and conditions reflected any prior agreement to exclude variations, only to modify the threshold for when they could be claimed by the introduction of the 20 m2 term. Apart from cl 3, and arguably cl 12, there is no evidence of Southern Demolition or Mr Blair having objected to the other standard terms and conditions. Their focus was on the need to ensure the asbestos removal contract they entered into would be adequate to ensure removal of asbestos from the BNZ Building for the greatly increased price.
[93] That need is reflected in the first bullet point of the 12 November quotation, that if asbestos 20 m2 or less was discovered during the process of removal, it would be removed without additional cost. That stipulation qualified clause 12 of the standard terms and is illustrative of how the 12 November quote sought to reflect the issues that had been discussed at the 12 November meeting and to record the positions reached in respect of those matters. Similarly, the contract no longer excluded the basement, and recorded specific matters relating to the particular works that had also been discussed at that meeting.
[94] When the content of the 12 November quotation is viewed in the context of the way events unfolded, and which culminated in the November meeting, I consider that document was intended to reflect and record the modifications to the 9 November quotation and the matters of clarification and confirmation which Mr Blair and Southern Demolition had sought and been agreed. The 12 November document together with the breakdown of the revised costings of the asbestos removal work was to be used to obtain agreement to the increased cost of Southern Demolition’s tender. Against that background, I do not consider it can be inferred that the standard terms
and conditions as set out in the 9 November quotation were to be excluded because they were not reproduced in the 12 November document.
The scope of the contract
The Optimum Report
[95] The description of the work that ACM Removals was contracted to perform is set out in the final quotation of 12 November as being the “Removal and disposal of asbestos as identified in the Optimum report and after further clarification with Alan Albertson”. In late 2014, Messrs Godden and Albertson of Optimum were engaged by a prospective purchaser contemplating the possible remediation of the BNZ Building to prepare a report on asbestos contamination in the building.
[96] ACM Removals placed significant weight on the fact that the Optimum Report was prepared for the purpose of the possible remediation of the building rather than its demolition. This was the position taken by ACM Removals when the dispute between the parties initally arose. In a letter of 14 June 2016 sent by ACM Removals counsel, it was stated that it was important to recognise that the Optimum Report had been prepared for the purposes of building remediation and was not a demolition report. The suggested significance of that observation was that the report was aimed at only identifying unencapsulated asbestos. I do not consider such a stance by ACM Removals is tenable.
[97] It was clear to Mr Blackie, at least by November 2015, that the BNZ Building was to be demolished, and he knew that the Optimum Report was being utilised for the purpose of identifying to a prospective asbestos removal contractor the asbestos that would need to be removed to carry out the demolition of the building. It is common ground between the parties that the asbestos to be removed was that identified in the Optimum Report. The fact that the original purpose for which the Optimum Report was initially prepared, to consider remediation, is irrelevant.
[98] Mr Godden’s evidence was that the report was prepared to identify where asbestos was in the building, and that he would not omit asbestos from the report simply because it was being prepared for a client that was considering remediation.
Relying on cl 3, ACM Removals’ argument was that the asbestos covered by the contract was limited only to visible asbestos identified in the Optimum Report. However, the asbestos survey undertaken for the purposes of preparing the Optimum Report did not limit itself to visible asbestos, nor did it restrict itself to the identification of asbestos that was considered to be practicable to access.
[99] The Optimum Report that Mr Godden authored was based upon samples taken by Mr Albertson and tested by a laboratory, Dowdell and Associates Ltd (Dowdell). Mr Albertson and Dowdell were also to be involved in testing carried out towards the end of ACM Removals’ work in 2016. In December 2014 and January 2015, Mr Albertson took 16 static air samples from the BNZ Building and 68 “hard” samples from the physical elements of the building. Based upon the results of the testing of these samples, Optimum summarised its findings in its report as follows:
The results would indicate that, given the extent of sampling carried out, the following areas were clear of contamination:
[178] Mr Baird submitted that the 17 pillars that were the subject of this work were not ones that were identified in the Optimum Report because they did not penetrate the floors through to level four. I accept if that was the situation then the pillars would fall outside the scope of the Optimum Report. However, it is necessary for ACM Removals to prove that the pillars were not ones that penetrated the floors through to level four. I was not directed to any evidence that supported that submission. The evidence is to the contrary.
[179] In the course of his evidence, Mr Barton referenced some photographs of the interior of the building and identified concrete pillars that did not penetrate the floors, and “I” pillars (not to be confused with “I” beams) which did penetrate the floors. However, in cross-examination and by reference to floor plans of the building, Mr Barton conceded that the 17 pillars that were the subject of his claim for additional work were ones that penetrated the floors. That concession by Mr Barton appears to accord with the evidence of Mr Albertson, who referred to the variation claimed by ACM Removals in the 15 June invoice for work on 17 pillars.
[180] Mr Albertson opined that there would have been approximately 17 pillars that actually penetrated the floors and confirmed, by reference to the Optimum Report, that
the pillars that did not penetrate the floor were not those which were considered to be an “area of concern” for asbestos. Mr Albertson expressed the view that ACM Removals completed the removal of what he referred to as the “visible, practically accessible asbestos from the 17 pillars that penetrated the floors”. Mr Albertson’s evidence on the point is somewhat confusing. From the floor plans that were provided as an exhibit, it is apparent that there were more than 17 pillars that penetrated the floors, and I am unsure what direct knowledge Mr Albertson had of ACM Removals’ work on the 17 pillars, although he was involved in subsequent testing for asbestos after the work was completed.
[181] It is also not entirely clear from the evidence which pillars penetrated the floors, in the words of the Optimum Report, “through to level four”. The evidence adduced on behalf of ACM Removals sought to distinguish between concrete pillars that did not penetrate the floors and the steel “I” pillars that did penetrate through the floors. Mr Barton was shown the plan of the floors which marked the pillars that were the subject of a variation claim submitted by Ms Manderson. That document was part of the paperwork that was submitted at that time, in April, in support of the claim for a variation. However, as noted, Mr Barton accepted that all the indicated pillars on the plan marked up by Ms Manderson and submitted with the claim were in fact pillars that penetrated the floors.
[182] In bringing its quantum meruit claim there is an onus on ACM Removals to prove on the balance of probabilities that the asbestos removal work on the 17 pillars, the subject of the June 2016 invoice, was work that was additional to what it was obligated to complete under the asbestos removal contract. I do not consider on the state of the evidence that ACM Removals has discharged the onus on it to show that the work was other than that which it was obligated to complete under the contract. The quantum meruit claim, the subject of invoice 5187, therefore fails.
[183] Again, as noted at [175], that conclusion is subject to whether any of the withheld portion of the fixed price remains available after being applied by Southern Demolition to pay for that part of the contractual works which ACM Removals refused to complete. While that appears unlikely, because the trial was limited to issues of
liability and excluded quantum, I cannot come to any final determination regarding that possibility.
Invoice 5189 – Mr Nicholson’s work
[184] The third quantum meruit claim relates to the disbursement incurred by ACM Removals as a result of Mr Nicholson of Dowdell visiting the site and carrying out an inspection of the removal work. The claim is for the relatively small amount of $2,607 (exclusive of GST). The sum claimed is not strictly pleaded as part of ACM Removals’ quantum meruit claim, but I understand Mr Baird in his submissions contended for its inclusion in this part of ACM Removals’ claim and it is convenient to deal with its merits under that heading. The narrative accompanying the claim as set out in the invoice is as follows:
Variation – Rob Nicholson site visit as per Southern Demolition’s request. This amount includes, Travel, Consulting charges, Flights/Rentals, Sample procurement, sample testing x 5.
[185] ACM Removals relies upon cl 8 of the standard terms and conditions which provides:
8. The principal is responsible for any air monitoring and clearance procedures, after the removal process has been completed. ACM Removals will not take any responsibility for this nor will they be liable for costs incurred.
[186] ACM Removals organised and coordinated the testing undertaken by Mr Albertson and the review conducted by Mr Nicholson. Mr Barton gave evidence that Southern Demolition had raised issues with the 13 May report provided on ACM Removals’ letterhead and signed by both Mr Barton and Mr Albertson, informing that testing had confirmed the removal “of all known asbestos”. Mr Barton advised that Southern Demolition did not “like the wording” of the report and wanted a “peer” review of the testing. Mr Barton claimed that he agreed to that. However, there is a difficulty in accepting Mr Barton’s recollection of the circumstances of the engagement of Mr Nicholson.
[187] Under the heading “Conclusion” in the 13 May report and the statement that the “BNZ Building is clear and deemed so by the testing done by Alan and Dowell
(sic)”, Southern Demolition is advised “we are also having a ‘peer’ review from the president of Dowdell’s next week (Wednesday May 18th)”. It is therefore clear from the 13 May report that Mr Nicholson had already been instructed by ACM Removals to undertake the review before Southern Demolition had even seen the 13 May report. Mr Nicholson could not have been instructed at the request of Southern Demolition after receipt of the 13 May report. It is apparent from the content of the report itself that Dowdell’s had already been instructed to carry out the review at ACM Removals’ request.
[188] It appears ACM Removals assumed responsibility for air monitoring and clearance procedures in an effort to demonstrate to Southern Demolition that it had satisfactorily completed all the work it considered it was required to complete under the asbestos removal contract, and that it had done so successfully. It is likely Mr Barton considered these were prudent steps, given he considered the contract was near completion and the difficulties that were emerging between the parties at that time. Be that as it may, I am satisfied that Mr Nicholson was instructed at the initiative of ACM Removals and its motivation for doing so without reference to Southern Demolition was for its benefit. Having taken that initiative without reference to its client at that stage of the contract, it appears to have assumed responsibility for the costs. In the circumstances, it would seem fair that it accepted liability for Mr Nicholson’s expenses.
[189] However, the position is governed by the contract, and in particular by a further term included in the 9 November quotation to which neither party referred in the course of their submissions. After the statement of the price of the project at the end of the document, the quotation includes the following codicil:
Note: Clause 8 does NOT apply and any air clearance monitoring is included in the price.
[190] ACM Removals’ reliance on cl 8 in support of the recovery of Mr Nicholson’s expenses was misplaced. Clause 8 was explicitly cancelled as an applicable term of the contract.
[191] I do not consider the costs of Mr Nicholson’s “peer review” is recoverable by ACM Removals from Southern Demolition. Because of the emerging issues between the contracting parties at that time, I do not consider the initiative of instructing Mr Nicholson to carry out such a review could be categorised as work requested by Southern Demolition, nor as being services that were of a type freely accepted by Southern Demolition or, in the circumstances, considered a benefit to it. I do not consider any injustice arises from ACM Removals bearing the cost of its instruction of Mr Nicholson. Insofar as reliance was placed on cl 8, it did not apply. The claim for the work undertaken by Mr Nicholson in the sum of $2,607 (exclusive of GST) is therefore dismissed.
Liquidated damages
[192] As part of its claim ACM Removals sought to recover liquidated damages pursuant to cl 19 of the standard terms and conditions of the asbestos removal contract. That clause provided as follows:
If a debt recovery agency has to be employed all payments will incur costs “plus” a penalty charge of $30. Plus a daily charge of 0.125 per cent of the contract value.
[193] Because of my earlier findings that ACM Removals was not entitled to payment of the last two invoices in the face of its material failure to complete the asbestos removal contract, its claim under cl 19 must fail. ACM Removals claim for liquidated damages is reliant upon it establishing that there were payments owed to it by Southern Demolition which remained outstanding. In light of my findings regarding Southern Demolition’s liability, it is not strictly necessary for me to address this part of ACM Removals’ claim. However, this part of the case gave rise to the discrete issue of whether the contractual term relied upon was an unenforceable penalty as alleged by Southern Demolition. If I am mistaken in my findings regarding Southern Demolition’s liability, there is some value in expressing my views regarding this issue.
[194] The part of the liquidated damages clause which is the focus is that which imposes a daily charge of 0.125 per cent of the contract value should a “debt recovery agency” have to be employed to obtain payment of invoices. The contract value was
for $461,329.66 (exclusive of GST) or a total amount of $530,529.11 (inclusive of GST). The 0.125 per cent daily charge based on the contract price amounts to some
$663.16 (inclusive of GST). Based upon the date the first of the claimed invoices (invoice 5179) went into arrears, 1 June 2016, until the commencement of the hearing of ACM Removals’ claim on 16 April 2018 (685 days), the total amount of liquidated damages claimed under cl 19 is $454,264.60. Apart from denying its liability to pay the outstanding invoices, Southern Demolition maintained that cl 19 represented an unenforceable penalty.
The rule against penalties
[195] The rule against penalties has traditionally been that a secondary obligation in the event of a breach of contract will be considered a penalty unless the clause amounts to “a genuine pre-estimate of damages”.21 ACM Removals accepts that the penalties doctrine is engaged because cl 19 does represent a secondary obligation, the performance of which is only triggered upon a defaulting party’s failure to perform the primary obligation, namely payment under the contract. However, it denies the clause infringes the penalty rule.
[196] The modern application of the penalty rule or doctrine has been the subject of relatively recent review in a number of common law jurisdictions.22 Originally, the scope and application of the penalty rule was marked by the need to distinguish between the contractual term which provided for a genuine pre-estimate of damages in the event of breach with “payment of money stipulated as in terrorem of the offending party”, and being in essence a penalty.23 The common law considered that punitive provisions in contracts should be constrained and their remedial function confined to the achievement of performance expectations in respect of which the enforcement of punishment formed no part.24
21 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd [1915] AC 79 (HL).
22 Cavendish Square Holding BC v Makdessi [2015] UKSC 67, [2016] AC 1172; Andrews v Australia and New Zealand Banking Group Ltd [2012] HCA 30, (2012) 247 CLR 2015; Paciocco v Australia and New Zealand Banking Group Ltd [2016] HCA 28, (2016) 258 CLR 525; Wilaci Pty Ltd v Torchlight Fund No 1 LP (in rec) [2017] NZCA 152, [2017] 3 NZLR 293.
23 Dunlop Pneumatic Tyre Co Ltd v New Garage and Motor Co Ltd, above n 21, at 86, per Lord Dunedin.
24 Wilaci Pty Ltd v Torchlight Fund No 1 LP (in rec), above n 22, at [70].
[197] More recently, the dichotomy of penalty and compensation has given way to an assessment of proportionality. In Cavendish Square Holding BC v Makdessi (Cavendish), the United Kingdom Supreme Court recast the threshold test as being whether the secondary obligation “imposes a detriment on the contract-breaker out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.25 Lord Hodge identified the question as being, “whether the sum or remedy stipulated as a consequence of a breach of contract is exorbitant or unconscionable when regard is had to the innocent party’s interest in the performance of the contract”.26
[198] Similarly, the High Court of Australia in Paciocco v Australia New Zealand Banking Group Ltd (Paciocco) focussed on the proportionality of the sanction for non- performance.27 Kiefel J, with whom French CJ agreed, considered the test was whether the obligation was “out of all proportion to any legitimate interest of the innocent party in the enforcement of the primary obligation”.28 Gageler J focussed on whether the purpose of the clause was to punish, noting that “the relevant indicator of punishment lies in the negative incentive to perform being so far out of proportion with the positive interest in performance that the negative incentive amounts to deterrence by threat of punishment”.29
[199] The proportionality approach was adopted by the New Zealand Court of Appeal in Wilaci Pty Ltd v Torchlight Fund No 1 LP (in rec) (Torchlight).30 While the Court of Appeal in that case was applying the law of New South Wales, its reasoning was adopted by this Court in Honeybees Preschool Ltd v 127 Hobson Street Ltd (Honeybees).31 In that case, Whata J undertook a detailed review of the rationale and application of the penalty doctrine and noted that the most authoritative statement on the law of penalties in New Zealand is the Court of Appeal’s earlier decision in Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd.32 In that case, Blanchard J
25 Cavendish Square Holding BC v Makdessi, above n 22, at [32], per Lords Neuberger and Sumption.
26 At [255].
27 Paciocco v Australia and New Zealand Banking Group Ltd, above n 22.
28 At [54] and [57].
29 At [164]-[165].
30 Wilaci Pty Ltd v Torchlight Fund No 1 LP (in rec), above n 22.
31 Honeybees Preschool Ltd v 127 Hobson Street Ltd [2018] NZHC 32, [2018] 3 NZLR 330.
32 Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd [2004] 2 NZLR 614 (CA).
cited with approval the joint judgment of Mason and Wilson JJ in the earlier High Court of Australia decision of AMEV-UDC Finance Ltd v Austin:33
... equity and the common law have long maintained a supervisory jurisdiction, not to rewrite contracts imprudently made, but to relieve against provisions which are so unconscionable or oppressive that their nature is penal rather than compensatory. The test to be applied in drawing the distinction is one of degree and will depend on a number of circumstances, including (1) the degree of disproportion between the stipulated sum and the loss likely to be suffered by the plaintiff, a factor relevant to the oppressiveness of the term to the defendant, and (2) the nature of the relationship between the contracting parties, a factor relevant to the unconscionability of the plaintiff’s conduct seeking to enforce the term. The Courts should not, however, be too ready to find the requisite degree of disproportion lest they impinge on the parties’ freedom to settle for themselves the rights and liabilities following a breach of contract.
[200] Whata J considered that the rationale for the rule identified in Amaltal Corporation Ltd, namely the need to provide relief against oppression or unconscionable behaviour by a contracting party, broadly aligned with the explanation provided in Torchlight, that remedial clauses not be oppressive or unconscionable.34 However, it was observed that in Amaltal the difference between the stipulated sum and the likely loss to be suffered by the plaintiff was determinative of whether the clause was a penalty.35 Such an approach has now been qualified by that taken in the United Kingdom and Australia, which focusses on whether the clause is not out of all proportion with the legitimate performance interest sought to be protected.
[201] Similarly, in Torchlight, the Court of Appeal considered the test was not simply a comparison between contractually stipulated and Court-imposed damages, but fundamentally turned on whether the impugned obligation is out of all proportion between the legitimate interest in the enforcement of the primary obligation, or was exorbitant or unconscionable, having regard to the performance interests. In seeking to reconcile the early approach of the Court of Appeal in Amaltal when applying New Zealand law, and the same Court’s more recent analysis of the penalty doctrine in the context of New South Wales law, Whata J distinguished between cases where the pre-estimate of loss/stipulated sum comparison approved in Amaltal will be central
33 At [57], citing AMEV-UDC Finance Ltd v Austin [1986] HCA 63, (1986) 162 CLR 170 (HCA) at 193-194.
34 Amaltal Corporation Ltd v Maruha (NZ) Corporation Ltd, above n 32, at [59]; Honeybees Preschool Ltd v 127 Hobson Street Ltd, above n 31, at [40].
35 At [41].
and other cases where a defaulting party is seeking to depart from the clear words of the contract. The latter category of case will require the focus to be on the full context of the transaction to assess whether the remedial clause is a penalty.
[202]In relation to the former situation, Whata J noted:
[43] ..., I would not jettison altogether the pre-estimate of loss/stipulated sum comparison in appropriate cases, not least because it was endorsed by the Court of Appeal in Amaltal. Compensatory damages for loss remain the primary remedy for breach of contract. The stipulated sum that is out of all proportion to likely compensatory damages for breach is prima facie extravagant and exorbitant. Furthermore, the pre-estimate of loss/stipulated sum comparison may be usefully applied in a great many cases if a broad conception of likely loss is adopted including, for example, indirect losses or cost of a cure, or where the performance interest is a contract sum (a point made by Lords Neuberger and Sumption in Cavendish).
[203] In Honeybees, a landlord had covenanted with a prospective tenant to install a second lift in the building the subject of the tenancy by a certain date. If the lift was not installed by that date, the landlord agreed to indemnify the tenant for all obligations under the lease. At trial, the lift was 14 months overdue. Whata J held that the indemnity provided by the landlord was not an unlawful penalty, holding that its purpose was not to punish non-performance, and that the amount under the penalty, some $556,500, was not out of all proportion to the tenant’s legitimate performance interest in securing the second lift.
[204] Whata J described his decision as “not clear cut”. However, like the Court of Appeal in Torchlight, the Judge based his findings on the commercial context of the clause. The second lift was important to the tenant who was seeking to run a childcare centre at the property. It had a probationary licence for only 24 children, but after 14 months the rental liability would be fixed by reference to a fully licensed facility of 50 children. The tenant would be liable to pay the full rent and outgoings irrespective of the actual level of occupancy. The lack of a second lift precluded its eligibility for a full licence for 50 children, and thus the viability of the entire business rested on the installation of the second lift. In those circumstances, Whata J found there was justification for a strong deterrent against non-performance. The lack of a second lift at the property had initially been viewed as an unavoidable obstacle to a contract being successfully concluded, and its importance to the tenant was known by the landlord.
No steps had been taken by the landlord to fulfil the contractual obligation. Both parties were commercially astute.
[205] Whata J concluded that the essential issue will be “whether a stipulated remedy for breach is out of all proportion to the legitimate performance interests of the innocent party or otherwise unconscionable, having regard to those interests”. Relevant to that assessment would be whether the parties were commercially astute, had similar bargaining power, were independently advised, and whether the predominant purpose of the impugned clause was to punish as opposed to simply deter non-performance.36 Drawing heavily on Whata J’s analysis in Honeybees, I consider the following principles guide the application of the penalty rule:
(a)The threshold question of whether a clause is an unenforceable penalty is one of construction and context to be decided upon the terms and the circumstances of each contract. The issue is to be judged at the time of the making of the contract, not at the time of breach.
(b)The fundamental issue is whether the impugned secondary obligation is out of all proportion to any legitimate interest in the enforcement of the primary obligation, or is exorbitant or unconscionable, having regard to the interests of the innocent party. The degree of disproportion between the contractually stipulated consequence and the loss likely to be suffered by the innocent party will inform the assessment of disproportionality. The degree to which that factor will be influential or potentially decisive will depend on the circumstances of the case and will remain an important yardstick where the performance interest is a contract sum.
(c)The commercial context of the clause, including the relative bargaining power of the parties and whether they were commercially astute, is a relevant consideration.
36 At [45].
(d)Whether the predominant purpose of the impugned clause is to punish rather than deter non-performance will also be a relevant factor.
The competing contentions
[206] ACM Removals argued that the secondary obligation imposed by cl 19 was to compensate the innocent party for the non-payment of completed work and to incentivise the performance of that primary obligation. Mr Baird submitted that the parties were in a comparable commercial position with equal bargaining power. While neither party took legal advice, both were familiar with, or ought to have been familiar with, the standard terms of ACM Removals’ contract, having previously traded with each other on the same standard terms.
[207] ACM Removals argued that the clause provided appropriate insurance against the risk of late or no payment, in which situation it would be left to bear its own costs from the defaulting party’s non-performance and which it would have to continue to bear regardless of payment by the defaulter. Mr Baird submitted that the figure of
0.125 per cent was unambiguous, and pointed to evidence provided by Mr Blackie that it was based on a “bank formula” provided by his accountant and was not an arbitrary figure. Mr Barton, who had effectively inherited the standard clause when he took charge of the company, gave evidence that it was very difficult to pre-estimate with precise accuracy the losses that might arise from late or non-payment. However, from his experience in the construction industry, he maintained, when balanced against the costs associated with the running of ACM Removals’ business, it was an appropriate rate to pursue liquidated damages for non-performance.
[208] Mr Baird submitted that the liquidated damages figure had only grown because of Southern Demolition’s failure to resolve the claim more quickly, or by paying the disputed amount into Court or to a stakeholder and thereby limiting its liability. In the absence of having done so, he submitted ACM Removals should not be disadvantaged because Southern Demolition’s failure had resulted in an inflated figure comparable to the actual value of the contract itself.
[209] Southern Demolition argued that compared with ACM Removals’ legitimate commercial interests and transactional risks, the effect of cl 19 was unconscionable.
Mr Riches submitted it was only necessary to compare the losses arising from the alleged breach with the actual liability incurred by Southern Demolition under the penalty clause to show that the clause represented an unenforceable penalty. The term imposed a blanket daily penalty regardless of the amount of the default. Even if $1 was owing, the penalty would be the same, fixed as it was against the total contract price. Mr Riches argued that this demonstrated the disproportionality of the clause and that it lacked any compensatory element, but rather was for the sole purpose of punishing the other party.
[210] Mr Riches referred to Mr Barton’s admission that it was impossible to predict what the costs for any particular contract may ultimately be, and that it must therefore follow that the percentage figure stipulated cannot be other than arbitrary. In relation to Mr Blackie’s evidence, it was noted that the witness could not identify the rationale for the figure included in the clause, other than that it was one supplied by his accountant and he had no real understanding of how it related to his business. Mr Riches stressed there was no identified link between the claimed penalty of 0.125 per cent of the contract price and the potential commercial effect of any non-payment, which may range from an insignificant residual amount to the whole contract price.
[211] Both parties sought to gain support for their respective positions from the Torchlight decision. In that case, Torchlight was purchasing debt from the Bank of Scotland. It had paid all but AU$37 million of the AU$185 million purchase price and borrowed the remainder from Wilaci. That agreement was for a 60 day loan, with interest of AU$320,000 and a AU$5 million facility fee. The contract also provided a clause that stated that a late payment fee of AU$500,000 per week was payable after the 60 days had elapsed. Torchlight was late in its payments, and by the time Wilaci demanded payment, the late fee amounted to AU$28 million.
[212] This Court’s decision that the late payment fee breached the rule against penalties was overturned by the Court of Appeal. In reaching its decision that the late payment fee was not a penalty, the Court highlighted a number of features of the commercial context of the parties’ contractual relationship. The loan was a commercial transaction between economically astute commercial entities; each party stood to make substantial returns from the agreement, and expert evidence suggested
that the risk was such that it was only attractive to lenders of last resort who could earn a substantial rate of return. It was further observed that the cost of credit post-default was in fact lower than the cost of credit for the initial 60 day period.
[213] Because of those features of the contract and the parties’ commercial relationship, the late payment fee was not found to be out of all proportion to Wilaci’s legitimate interest in having Torchlight perform its obligations under the contract within the agreed timeframe. It was therefore not found to be a penalty. In reaching that conclusion, the Court of Appeal observed that Torchlight’s late payment fee indebtedness ended up nearly being as much again as the principal it borrowed and eventually repaid. However, that was the direct result of it not fully repaying the principal for some 19 months in clear appreciation of the risk, and litigating those fees rather than paying them.
[214] Mr Baird submitted that, as in Torchlight, the scale of debt faced by Southern Demolition is in large measure a consequence of the choices it made for itself by choosing to contest the outstanding payments. Mr Riches, on the other hand, emphasised that the Court of Appeal’s assessment was greatly influenced by the nature of the contractual transaction which was of a high risk, high return nature, entered into by a company that did not normally involve itself in the business of making commercial loans. In reaching its decision that the late payment fee was not out of all proportion to the legitimate interest Wilaci had in achieving repayment, the Court of Appeal relied on the particular commercial context and values the parties themselves placed on the provision of the loan facility. It was those features which led the Court of Appeal to conclude that the fee was not an unlawful penalty, because its purpose was not to punish Torchlight.
Decision
[215] I accept there are aspects of the commercial context in which the asbestos removal contract was entered into which suggest cl 19 should not be viewed as an illegitimate penalty provision. Both parties accepted they were commercially astute and had similar bargaining power at the time the contract was entered into. The clause was part of a standard form contract that had been employed on a number of earlier
occasions when the parties had entered into a contractual relationship. Both parties were aware of the nature of the obligations they were entering into and the imposition of a late payment fee in order to deter default will not by itself have the effect of rendering such a clause a penalty. As the Court of Appeal observed in Torchlight, a late payment fee is bound to have that purpose, as would other ordinary terms included in contracts to encourage due performance. Where the predominant purpose of the clause is to punish default it will be an unlawful penalty, but that is not to the exclusion of permitting a degree of deterrence.37
[216] I also consider that the size of the claim for unliquidated damages which has swelled over time must not be permitted to cloud the assessment of whether the clause itself is out of all proportion to the loss suffered. The question is not whether after the event the amount of liquidated damages is out of all proportion but whether, at the time of entering into the contract, the clause itself would be viewed as being a disproportionate response. At a daily rate of $667, the late fee, at least in comparison to the $530,000 (GST inclusive) contract, does not appear unduly disproportionate, particularly when viewed against potential outstanding costs in respect of which the innocent party may remain liable. Mr Barton and Ms Manderson gave evidence of the cost of hiring plant and equipment, employing staff and paying subcontractors. While the cost of such expenses will likely vary depending upon the size of the contract, ACM Removals would remain independently liable for such costs regardless of when and whether it is paid by the principal contractor. The fluctuating cost of credit, particularly over extended contracts and insurance, was also stressed as a factor.
[217] However, the difficulty that arises in the present case is the apparent lack of relativity between the late payment fee provided by the contractual term and the potential loss or risk arising from non-payment, to which I have referred. Clause 19 fixed the late fee against the whole of the contract price at a daily rate. It does not allow for any differentiation based on the amount of the balance owing, despite the contract being one for the payment of services rendered. The amount owing on the contract is an essential part of ascertaining the potential loss the plaintiff will suffer in the event of non-payment.
37 At [97].
[218] While efforts were made by ACM Removals to identify the risks and costs associated with non-payment, the way the clause is formulated does not permit any correlation to be made between the amount owed and the costs and potential loss the innocent party will be required to carry as a result of the default. No evidence was offered in the present case, nor attempt made, to quantify those costs. However, even if such evidence was adduced, focussing on the clause itself, I am unable to envisage how that potential loss could possibly be the same whether $1 is owed or $100,000. A legitimate clause seeking to pre-estimate loss would ensure its application and effect could, at least in some moderate or broad way, be calibrated to take into account the amount owing on the contract which it is seeking to recover.
[219] The key factor which influenced the Torchlight and Honeybees decisions, that the terms of those contracts did not amount to unlawful penalties, is absent. In both cases there was evidence about the risk that the plaintiffs faced in the case of breach other than non-performance of the contract. In Honeybees, the risk was the complete failure of the business. Its liability under the lease would only be able to be met if the landlord fulfilled its obligation to provide the second lift. In Torchlight, each party stood to make substantial returns in consequence of the agreement. The stakes were high. While Wilaci stood to obtain a very substantial facility fee as its consideration under the agreement, it also carried an exceptionally high risk as the lender. It was not in the business of lending and did not have a loan book across which it could spread the risk. In terms of proportionality, the weekly fee payable upon default was actually less than the cost of credit under the loan agreement itself. The late payment provision could not therefore be considered as out of all proportion to the legitimate interests of the lender. Wilaci was not viewed as predominantly intending to punish Torchlight by the default clause.
[220] In contrast, in the present case it is not clear what ACM Removals were at risk of losing, other than the non-performance of the contract, losses in respect of which they could be compensated by an award of ordinary damages. Furthermore, the clause is clearly focussed on mitigating the ordinary “course of business” problem of recovering debt. The risk of non-performance to the innocent party arises from the degree of the breach which can be measured against the balance owed. In Torchlight and Honeybees, the breaches were central to the efficacy of the contracts as a whole.
That feature was reflected in the prominence of the secondary obligation, as either an auxiliary agreement to the main contract or as a component of the contract itself, and is to be contrasted with the nature of cl 19 as a debt recovery provision listed in the standard terms and conditions which, as Ms Manderson acknowledged, was often not sought to be enforced when accounts were overdue.
[221] Mr Baird submitted that the present situation was not dissimilar to that in Honeybees. He observed that, in the event that the landlord was even one day late in installing the second lift, it would incur a substantial liability. Nevertheless, Whata J held that Honeybees had a legitimate interest in the landlord performing the contract and that the amounts payable to it under the indemnity were not out of all proportion to the interest it protected. However, I do not consider the comparison is accurate. The contract sought to impose a deadline for the fulfilment of a contractual obligation that was essential to the tenant. In the absence of its fulfilment the contract was of no commercial worth to that party. It was not a question of the degree to which the contract was fulfilled. As was observed in Cavendish and endorsed by the Court of Appeal in Torchlight, it is the character of the provision, rather than the circumstances in which it falls to be enforced, that matters.38
[222] Had cl 19 sought to impose a daily charge on the balance of the outstanding unpaid portion of the contract, or sought to impose an ascending percentage attaching to the amount owed as a daily charge, the formulation could not be categorised as other than a legitimate mechanism to deter default and incentivise the payment of money owed to it. The issue is not without difficulty but had I been required to make a determination, I would have, on balance, characterised the late payment fee provided in cl 19 as being illegitimately penal.
Results
(a)ACM Removals’ claim for damages for breach of contract in the sum of $218,327.45 (exclusive of GST) is dismissed.
38 Cavendish Square Holding BC v Makdessi, above n 22, at [9]; Wilaci Pty Ltd v Torchlight Fund No 1 LP (in rec), above n 22, at [101].
(b)Subject to the quantification of the cost incurred by Southern Demolition to complete the outstanding contractual works, ACM Removals’ quantum meruit claim in the sum of $102,995 (exclusive of GST) is dismissed.
(c)ACM Removals’ claim for liquidated damages is dismissed.
Costs
[223] As the successful party, Southern Demolition is entitled to costs. However, because Southern Demolition’s counterclaim and associated questions of quantum remain outstanding the proceedings are only partially completed. Accordingly, the issue of costs, at this stage, is formally reserved.
Solicitors:
McLeod & Associates, Auckland Saunders & Co, Christchurch
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