Arrow International (NZ) Ltd v NZ Project 29 Ltd
[2019] NZHC 1326
•12 June 2019
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-485-279
[2019] NZHC 1326
UNDER Part 15A of the Companies Act 1993 BETWEEN
ARROW INTERNATIONAL (NZ) LIMITED
First Plaintiff
ANDREW JAMES BETHELL, ANDREW JOHN MCKAY AND COLIN ANTHONY GOWER
Second Plaintiffs
AND
NZ PROJECT 29 LIMITED
First Defendant
AAI LIMITED
Second Defendant
Hearing: 11 June 2019 Appearances:
S A Barker and O C Gascoigne for Plaintiffs
M J F Taylor and N H Browne for First Defendant C L Bryant for Second Defendant
Judgment:
12 June 2019
JUDGMENT OF COOKE J
(Interim injunction)
[1] Arrow International (NZ) Ltd (Arrow) is in liquidation. Arrow and its liquidators apply for orders extending the period of an interim injunction granted by the Court on 15 May 2019 which prevents AAI Ltd (Vero) from making payment to NZ Project 29 Ltd (Project 29) under a Construction Bond. The Construction Bond was provided by Arrow in association with the construction contract between Arrow and Project 29 in relation to a property at 89 Courtenay Place, Wellington. When
ARROW INTERNATIONAL (NZ) LTD v NZ PROJECT 29 LTD [2019] NZHC 1326 [12 June 2019]
Arrow went into voluntary administration construction works ceased, and Project 29 stepped in and took control of the works. Arrow then made a claim under the Construction Bond provided by Vero. Vero is in turn able to claim any amounts it pays under the Construction Bond under the terms of a general security agreement with Arrow. So Arrow will ultimately bear the cost of the claim under the Bond. Arrow and its liquidators dispute that the claims made by Project 29 under the Construction Bond are legitimate.
Interim injunction principles
[2] The principles relating to the grant of an interim injunction are well established. Such injunctions are made under r 7.53 of the High Court Rules 2016.
As the Court of Appeal stated in NZ Tax Refunds Ltd v Brookes Homes Ltd:1
[12] The approach to an application for an interim injunction is well established. The applicant must first establish that there is a serious question to be tried or, put another way, that the claim is not vexatious or frivolous. Next, the balance of convenience must be considered. This requires consideration of the impact on the parties of the granting of, and the refusal to grant, an order. Finally, an assessment of the overall justice of the position is required as a check.
[3]It is important not to engage in a rigid application of the formula, however.2
[4] The application for the interim injunction is dated 15 May, and initially proceeded on a without notice basis. It was supported by an affidavit of Iain Shephard of the same date, together with a memorandum of counsel. Mallon J was able to address the matter that day and granted orders on the following basis:
In the very compressed time I have had to consider this without notice application I am prepared to grant it on a strictly limited basis to hold the position until a telephone conference can be convened before a Judge at which all parties have the opportunity to be heard. Accordingly the orders are in place for, at this stage, three working days unless:
(a)Extended by further order of the Court; or
(b)Any party seeks to have the holding order rescinded in a shorter timeframe and a Judge is satisfied that the order should be so rescinded.
1 NZ Tax Refunds Ltd v Brooks Homes Ltd [2013] NZCA 90, (2013) 13 TCLR 531 (footnotes omitted).
2 Klissers Farmhouse Bakeries Ltd v Harvest Bakeries Ltd [1985] 2 NZLR 129 at 142 (CA).
[5] Joint memoranda of counsel were subsequently filed setting a timetable for an opposed hearing, which is the hearing that has proceeded before me. By agreement the interim orders were extended to continue until the hearing, and I then further extended them until delivery of judgment.
[6] Project 29 has filed a notice of opposition supported by an affidavit of Brent John Gilchrist dated 31 May 2019. A further affidavit of Simon Wilson, the Engineer under the Contract dated 7 June 2019 was also filed, albeit late. Vero also filed a memorandum dated 5 June 2019 explaining its position.
Background
[7] Unsurprisingly the parties to significant construction contracts turn their minds to what will happen in the event of the insolvency of the construction company. The parties here, Project 29 and Arrow, used the standard contract agreement NZS3910:2013 Conditions, as varied by special conditions that they negotiated (the Contract). The Contract here is dated May 2018, and includes terms which contemplate the failure of Arrow as the construction company. That is essentially what has happened in the present case as Arrow went into voluntary administration on 28 February 2019, with the second plaintiffs appointed as administrators. It went into liquidation on 6 June.
[8] Project 29 has certain rights under the Contract in the event of Arrow’s insolvency. When there is a failure of the principal contractor of a major construction project there are various practical problems: the sub-contractors may not have been paid for work they have already done; the site will have equipment and there will be site works in situ for the project which belong to the principal contractor; and there is the question of site security. Construction contracts seek to address the practical considerations for the party who contracted the principal to do the building work. One of the rights that such a person can attain under such a contract are referred to as “step- in” rights. In effect such clauses give the principal the ability to effectively step-in to the shoes of the construction company by assuming control of the works, securing what there is on-site, and taking over the contracts with sub-contractors to do the work.
[9] That is what happened in the present case. Clause 14.2.2 of the Contract is a special condition agreed to by the parties. It provides:
In the event of an Insolvency Event occurring in relation to the Contractor, the Principal may at its option after giving notice to the Contractor either terminate the Contract or resume possession of the Site.
[10] Step-in rights were given to Project 29 under cl 14.2.6 in the event of “resuming possession”.
[11] The parties also agreed to a further special condition in cl 14.2.7 in the following terms (emphasis added):
Where the Principal resumes possession of the Site or terminates the Contract under 14.2.1 or 14.2.2, the Principal may:
(a)withhold further payments to the Contractor until all amounts that may become owing to the Principal by the Contractor as a result of the Contractor being removed are known; and
(b)require the Engineer, once the Principal has made a provisional election of its remedies, to certify that there has been a breach by the Contractor and make a provisional assessment of all amounts that may become owing to the Principal by the Contractor as a result of the Contractor being removed based on the Principal’s provisionally elected remedies, and that amount will be a sum immediately due and payable from the Contractor to the Principal and the Principal may immediately recover such amount from the Contractor and/or by making a call on the bond provided under 3.1 and/or on any other security.
Any amount paid by the Contractor to the Principal under 14.2.7(b) will be taken into account by the Engineer when certifying under 14.2.4.
[12] In the present case the step-in rights suited Project 29. Project 29 is a company associated with John and Michael Chow who are well-known for property development, amongst other things. Project 29 was accordingly well placed to use construction expertise and facilities readily available to it in order to exercise such step-in rights, and minimise the cost of Arrow failing. There is no dispute that Project 29 was entitled to, and has exercised such step-in rights.
[13] Mr Simon Wilson became the Engineer under the Contract. On 13 May 2019 Project 29 made a claim on him as an Engineer in accordance with cl 14.2.7 by providing him with a spreadsheet of costs said to be caused by Arrow’s breach. On
the same day Mr Wilson certified that these amounts under cl 14.2.7. Arrow disputes that these amounts are indeed duly payable.
[14] The Construction Bond referred to in cl 14.2.7 then applies to these circumstances. Given the prospective losses that could be faced by a contractual principal whose construction company fails during the building project, many such contracts require there to be a financial institution of standing to act as a guarantor. A construction bond comes from an institution in favour of the contractual principal for a percentage of the overall value of the construction contract, usually between 5 and 10 per cent. Again that is what happened in the present case with Vero providing such a construction bond for an amount of $900,000, being five per cent of the fixed price contract sum (the Construction Bond). Vero then obtained rights back against Arrow in the event the Construction Bond was called. Vero’s rights against Arrow were protected by a general security agreement.
[15] The Construction Bond itself has its own relevant terms and conditions, but there are also terms and conditions in the Contract relevant to the Bond. Clause 3.1 of the Contract provides:
The Contractor’s Bond may be called up if:
(a)the Contractor owes any money to the Principal and such amounts are certified by the Engineer;
(b)the Principal resumes possession of the Site or terminates the Contract under 14.2;
(c)an Insolvency Event occurs in respect of the Contractor.
[16] The terms and conditions of such a bond are entirely for the parties to determine. But there are broadly two different types of bonds, an on-demand bond or a conditional bond. On-demand bonds are absolute obligations. They are not guarantees, but are treated substantively as promissory notes, or substitutes for cash.3 Conditional bonds create an obligation on the provider of the bond on certain
3 Such a bond was held to exist by the High Court in Clark Road Developments Ltd v Rohits Civil & Infrastructure Ltd [2017] NZHC 2844.
conditions — for example if a construction company fails to meet its obligations under the contract.4
[17] Counsel for Vero filed a memorandum in the present case indicating that its view is that the Bond here is a conditional bond, and I do not understand that to be disputed by Arrow. The relevant term of the Contract Bond provides as follows:
2. DEMAND by the Principal on the Surety under this bond must be accompanied by a certificate from the Engineer to the Contract certifying that:
(a)the Contractor is in default under the Contract; that it has failed to rectify such default following reasonable notice to do so, and
(b)the sum demanded is in the opinion of the Engineer reasonable having regards to the nature and consequence of the default.
[18] The parties also agreed to other terms of the Contract Bond which depart from the standard terms and conditions prescribed in NZS3910:2013 Conditions. In particular they agreed that Vero would not be released from any liability under the Bond because of any dispute between Arrow and Project 29 under the Contract (cl 5(f)). This reiterates that such matters would not affect the enforceability of the Bond.
[19] There are three related features that are particularly emphasised by Arrow in seeking a continuation of the interim injunction against this background. First Mr Barker for the plaintiffs argues that the Engineer’s certification has not properly followed the contractual processes which require a reasonably disciplined analysis of the position, and that this is characterised by his certification occurring on the same day as receipt of the claim from Project 29. Second, the plaintiffs point to particular matters included in the scheduled claim adopted by the Engineer which the plaintiffs say are not legitimate claims. Third, the plaintiffs emphasise that Project 29 does not own the site that is being developed, and that there is an issue about Arrow’s ability to repay any amounts that might ultimately be determined as being an overestimate of potential liability, and an excessive claim under the Bond. I will address the plaintiffs
4 Such a bond was held to exist by the High Court in Quay Park Arena Management Ltd v Great Lakes Reinsurance (UK) PLC [2014] NZHC 2204 and Richina Pacific Ltd v AII [2017] NZHC 1686 at [109]–[120].
more detailed submissions below. But in summary Mr Barker submits that these considerations mean that there is a serious question to be tried, and that the balance of convenience favours the plaintiffs.
Assessment
[20] I see this case as raising considerations that may not normally arise with applications for an interim injunction. That is because the parties have addressed the question of what should happen when there has been contractual default in their Contract. The clauses of the Contract in relation to the step-in rights, including the clauses that provide what rights Project 29 have, are intended to regulate that situation. Similarly, the provisions of the Bond provided by Vero are intended to apply in the event of Arrow defaulting, and should be applied in accordance with the agreed contractual machinery. In particular, the contract contemplates that the Bond could be called upon if Arrow failed to meet its contractual obligations and Project 29 has accordingly exercised its step-in rights.
[21] As I will explain in greater detail below, these agreed terms also cover what is to happen on an interim basis. For that reason I accept Mr Taylor’s submission that when assessing whether there should be an interim injunction, the Court ought not to make orders that are inconsistent with what the parties have already agreed will occur in the circumstances they now face. Put another way, an injunction imposed by the Court should not cut across what the parties have expressly agreed will occur in those circumstances.
[22] Similarly I accept Mr Taylor’s submission that it is not appropriate in this case to impose injunctive relief on the basis that the plaintiffs have an arguable case in accordance with the first of the three factors usually considered in an application for injunctive relief.5 The nature of the Bond protects Project 29 from the adverse effect of such disputes. This is reiterated by cl 5(f) of the Bond which emphasises that Vero is still liable irrespective of any dispute or disagreement between Arrow and Project
29. Accordingly, in my view, it is not sufficient for the plaintiffs to show they have an arguable case. To obtain the continued protection of an interim injunction they will
5 See [2] above.
need to demonstrate that the contractual provisions are not being given effect to — which will principally depend on whether the conditions of the Contract and the Bond are being performed.
[23] I consider the arguments advanced by Mr Barker for the plaintiffs in that context.
Contractual discretion
[24] I deal first with Mr Barker’s argument that the power of the Engineer under the Contract to certify amounts that were then payable under the Bond involved a contractual discretion, and that such a discretion was constrained, and had been inappropriately exercised in the present case.
[25] Contractual discretions, like all discretions created by legal instruments, are not unlimited.6 They must be exercised in accordance with the terms, and for the purposes for which they are given. There are parallels with statutory powers of decision, and accordingly the judicial analysis concerning the proper exercise of such powers is instructive.7
[26] But the extent to which such discretions are implicitly constrained depends on the particular circumstances of the contractual power in question.8 That can be seen by the different kinds of contractual power that have been at issue in the cases that have explored this concept. In the present case we are not dealing with an open-ended discretion. Rather there are a series of carefully drawn provisions in the Contract, which have involved utilisation of an industry standard contract, with specific alterations to suit the particular circumstances of these commercial parties. The power of the Engineer under the relevant clauses is carefully identified in both the Contract and the Bond. There may still be some room for implicit limits on the discretionary power, but when there is a contractual power and detailed provisions within the contract that regulate it, the room for further implied controls is more limited. In the
6 Equitable Life Assurance Society v Hyman [2002] 1 AC 408 at 460 (HL).
7 See, for example, Gan Insurance Co Ltd v Tai Ping Insurance Co Ltd [2001] EWCA Civ 1047, [2001] 2 All ER (Comm) 299. For a review of the authorities see Stephen Kós “Constraints on the Exercise of Contractual Powers” (2011) 42 VUWLR 17.
8 Paragon Finance plc v Staunton [2001] EWCA Civ 1466, [2002] 2 All ER 248 at [41].
present case it seems to me that any limitations of the Engineer must primarily turn on the terms and conditions of the particular terms of the Contract. I do not accept that there are any implied terms that are relevant to the current position.
Contractual completion
[27] Mr Barker also argued, at least in his written submissions, that it was inappropriate for the Engineer to certify that amounts were payable under the Contract before the completion of the contractual works. He argued that the process of certification, and then drawing down on the bond, occurred only at a later stage. In advancing this argument, he relied on the following clause which he argued contemplated the true role of the Engineer in the process.
14.2.4 On completion of the Contract Works, any Plant, Temporary Works, and surplus Materials of which the Principal has taken possession shall be handed back to the Contractor. The Engineer shall enquire into the Cost to the Principal of completing the Contract Works and certify accordingly. If the amount certified exceeds the Cost to the Principal, had the Contract Works been completed by the Contractor, the difference between the two amounts shall be certified by the Engineer and paid by the Contractor to the Principal. If the amount certified is less than the Cost to the Principal, had the Contract Works been completed by the Contractor, the difference between the two amounts shall be paid by the Principal to the Contractor.
[28] In his oral submissions he further refined the argument by contending that clause 14.2.4 at least informed the exercise contemplated by cl 14.2.7 at the preliminary stage.
[29] Clause 14.2.4 is within the standard terms of the contract adopted by the parties. It plainly applies only after the contract works have been completed. But here the parties agreed to additional terms which were adopted as part of the special terms and conditions specifically negotiated. The rights of Project 29 under cl 14.2.7 are in addition to the rights in cl 14.2.4. Moreover it is plain that the rights in cl 14.2.7 occur before completion, and involve only an estimate by the Engineer of what he believes to be the likely outcome when the contract is completed. That is apparent from the following features of cl 14.2.7:
(a)The clause refers to a “provisional assessment” of the amounts that “may become owing”. That is clearly predictive, and contemplates uncertainty.
(b)The uncertainty extends also to the fact that Project 29 may only have made a “provisional election of its remedies”. That is, Project 29 could later change its mind, which may change the basis of the assessment.
(c)The assessment made on this basis is then required to be taken into account when making a subsequent assessment under cl 14.2.4. So there will be a subsequent reconsideration of what has provisionally been assessed.
[30] I also reject Mr Barker’s written submission that the process contemplated by cl 14.2.7 has not been followed because it necessitated Project 29 proving that the losses had accrued, and it was only upon that proof that the clause could be exercised. The clause contemplates an estimate being made on a provisional basis before such losses are ultimately proved.
Process contemplated
[31] I see greater force in Mr Barker’s main argument that the clause contemplates the Engineer making an assessment of what was to be paid by Project 29 to Arrow for completion of the building works covered by the Contract, and then making a further assessment of what it would now cost Project 29 to do so under the new arrangements it has put in place utilising the step-in rights. In other words it focusses on the increased costs to complete the construction works.
[32] The spreadsheet provided on 13 May does not purport to calculate the cost of completing the contract compared with what it would have cost Project 29 if Arrow had done so. Rather it seeks to quantify damages said to arise from Arrow’s abandonment of the contract. It assessed that amount as $903,918 (plus GST) which is remarkably close to the value of the Bond. Some of the items are notable, including
$161,280 for flights and accommodation to bring the Stonewood Group to Wellington, calculated on the basis of $150 per night plus $210 per flight each way. An amount of
$168,300 is included for “directors” involving an hourly rate for two directors for 11 days managing the situation. Other items in the schedule involve what appears to be remedy for deficient works already undertaken by Arrow. So many of the items appear to be a calculation of consequential losses, and some appear to be amounts which would normally be assessed under retentions that Project 29 held in its contractual arrangements with Arrow. There is no calculation at all of the costs to complete the construction works, and any increase (or decrease) in that amount.
[33] Mr Wilson’s affidavit also attaches a report from a Quantity Surveyor, Mr Graham Henderson. But again that assessment appears to be of the consequential losses that Project 29 was claiming, and is limited to checking Project 29’s arithmetic and logic. Once again, there is no direct assessment of the cost to complete the Contract compared with what it would have cost if Arrow had done so. For example there is no assessment of what work there is to be done, which sub-contractors will now be contracted to do it, and at what cost. That seems to me to be the primary calculation contemplated by cl 14.2.7. The need to calculate the cost to complete may be particularly significant in the present case, as the Contract appears reasonably close to completion. The plaintiffs point out that $13,474,906 has already been paid under the Contract with an estimated final cost of $19,242,763. The plaintiffs’ assessment further suggests that the costs to completion may be lower than what was payable to Arrow under the Contract.
[34] A revised claim was then made by Project 29. On 28 May Mr Wilson emailed Mr Gilchrist from Project 29 in relation to the new costings that had been submitted. He indicated that “the existing Engineer’s certificate is formally withdrawn on the basis that new costings have been submitted”. He suggested that a Quantity Surveyor should be involved. He also noted that not all supporting information had been provided so there were a number of costs he couldn’t review. As Mr Barker submitted, there are some very significant changes to the original claims. Mr Wilson nevertheless says in his affidavit that he thought a higher cost could be certified, that he has no doubt that the costs that will ultimately be assessed would exceed the Bond, and that he stood by the certification he provided on 13 May 2019.
[35] The terms of the Bond contemplate the Engineer assessing that the sum demanded by the principal as “reasonable” under cl 2(b). The meaning of the terms of the Bond is, to my mind, influenced by the terms of the Contract as the two instruments are intended to work together. In that context it seems to me that it is at least arguable that the certificate contemplated by cl 2 of the Bond is contemplating a certificate provided in accordance with the terms and conditions of the Contract. If the certificate is not provided in accordance with those terms and conditions, it may not meet the terms of cl 2 of the Bond.
[36] For that reason it seems to me the plaintiffs have an arguable case that the exercise contemplated by cl 14.2.7 has not been undertaken as contemplated, which may mean that the obligation under the Bond has not been triggered.
Conditions of the Bond
[37] Notwithstanding the above points, I nevertheless accept the points made by Mr Taylor in response, which in my view are decisive.
[38] The key problem for the plaintiffs’ argument is that cl 14.2.7, and the Construction Bond, operate irrespective of whether the amounts in question might be disputed. Much like the procedure envisaged in the Construction Contracts Act 2002 they operate as a cashflow determination prior to the final assessment of what it has actually cost at the end of the Contract under the “wash up” contemplated by cl 14.2.4. The commercial purpose of cl 14.2.7 is to avoid Project 29 being disadvantaged by not being able to have access to the Bond simply because Arrow, or a liquidator of Arrow, says the amounts are disputed. The plaintiffs may well have concerns that it may not be able to recover any amounts paid to Project 29 that overstate what is ultimately owed. They say that that risk may prejudice Arrow’s creditors. But these are clauses that Arrow agreed to in negotiating the Contract which secured them the work in the first place. It is not the role of the Court to alter the balance of risks that the parties expressly negotiated, including in the clauses that regulated what would happen in the event of precisely the circumstances the parties now face.
[39] I accordingly accept that the Court should not go behind the Engineer’s certificate unless it cannot be treated as a valid certificate under the Contract. Whilst
it is true that Mr Wilson does not appear to have engaged in any direct assessment of the cost of completion, and that this is also not the task undertaken by Mr Henderson as the Quantity Surveyor, this does not mean the certificate is not valid under the contractual machinery. The quantification exercise engaged in by Project 29 appears limited to additional costs that it contends that it now faces. It appears that when assessing trial claims Mr Wilson has assumed that the cost to completion will not be less for Project 29 than it would be if it had been performed by Arrow. That is implicit in him giving the certificate based solely on the additional costs identified by Project 29, and from the view expressed in his affidavit that the costs that will ultimately be assessed under cl 14.2.4 will exceed the Bond.
[40] Mr Barker emphasised that Mr Wilson had stated that he withdrew his certificate in the face of being provided with further information in the email of 28 May 2019. But I accept Mr Taylor’s submission that it is not clear that this has contractual significance given that the certificate had been issued. Moreover, the amounts that had been provided to Mr Wilson suggested an increase rather than a decrease in the amounts in question. Given that Mr Wilson has said in his affidavit that he stands by his certificate, and that the costs will be greater than the Bond in his opinion, the apparent “withdrawal” of the certificate does not have the significance that Mr Barker contended for.
[41] Mr Barker also place reliance on an assessment that the plaintiffs had undertaken, and communicated to Mr Gilchrist by letter dated 10 April 2019, that the cost to completion would be less for Project 29 than what would have been charged by Arrow. But as Mr Taylor pointed out, that was only so on the assumption that the amounts payable to sub-contractors for January and February would not be paid by Project 29. That is an assumption at best.
[42] Otherwise it is not for the Court to make an assessment on the disputes concerning these costs. The very purpose of the certification by the Engineer, leading to the claim under the Bond, is to relieve Project 29 from the adverse impacts of such disputes. As Mr Taylor submitted, the very purpose of the clauses in the instruments is to transfer such risks away from Project 29.
[43] As indicated above, the test for assessing an interim injunction should not be applied rigidly.9 In my view the decisive consideration is that the grant of an interim injunction cuts across the express contractual terms and conditions agreed between the parties. That consideration is relevant to all three steps normally considered in the application of the test for the grant of an interim injunction.
[44] For these reasons I also conclude that it would not be appropriate to discharge the injunction on condition that the amount drawn down on the Construction Bond be paid to a company of greater substance than Project 29. This was a suggestion that emerged during the hearing as a possible way of addressing a concern given the fact that Project 29 is a special purpose vehicle. It was suggested that the company that owned the property that was being developed could be a recipient of the Construction Bond funds. But Arrow made the decision to enter the Contract with Project 29 notwithstanding that it was a special purpose vehicle which did not own the property in question. I do not think it appropriate for the Court to engage in a re-balancing of the risks and benefits that the parties decided upon for themselves.
Conclusion
[45] For these reasons I conclude that there is no basis to continue the interim injunction presently in place, and it is discharged.
[46] The first defendant is entitled to costs. I will receive memoranda if costs cannot be agreed. The defendants’ memoranda should be filed within 10 working days, and the plaintiffs’ memoranda five working days thereafter.
Cooke J
Solicitors:
Buddle Findlay, Wellington for Plaintiffs
Russell McVeagh, Wellington for First Defendant
9 Above at [3].
4
4
0