Chappell v Swindells

[2018] NZHC 2982

IN THE HIGH COURT OF NEW ZEALAND HAMILTON REGISTRY

I TE KŌTI MATUA O AOTEAROA KIRIKIRIROA ROHE

CIV-2017-419-357

[2018] NZHC 2982

IN THE MATTER

The Judicial Review Procedure Act 2016

IN THE MATTER

of the Construction Contracts Act 2002

BETWEEN

MATTHEW CHAPPELL & CHERIE CHAPPELL

Applicants

AND

AND

EDWARD SWINDELLS - ADJUDICATOR

First Respondent

ANNEX CONSTRUCTION LIMITED

Second Respondent

Hearing:

4 July 2018

Appearances:

Further submissions and evidence completed:

K Badcock for the Applicants

No appearance by or on behalf of either the First or Second Respondents

20 July 2018

Judgment:

19 November 2018

JUDGMENT OF POWELL J

This judgment was delivered by me on 19 November 2018 at 4 pm pursuant to r 11.5 of the High Court Rules

Registrar/Deputy Registrar Date:

Solicitor:

Kevin A Badcock, Rotorua

CHAPPELL v SWINDELLS & ANOR [2018] NZHC 2982 [19 November 2018]

[1]    The applicants, Matthew Chappell and Cherie Chappell, seek judicial review of an adjudicator’s determination made pursuant to the Construction Contracts Act 2002 (“the Act”) by the first respondent, Edward Swindells (“the adjudicator’s determination”). The second respondent, Annex Construction Ltd (“Annex”), was the other party to the adjudicator’s determination.

Background

[2]    The adjudicator’s determination occurred after a dispute arose between the applicants and Annex. In April 2016 Annex had been engaged by the applicants to renovate the applicants’ home in Northcote, Auckland, with the works intended to be completed by September 2016. Since that time works had been ongoing with Annex rendering invoices for work done with these being paid by the applicants. By November 2016 the relationship between the applicants and Annex had soured somewhat as by that time the amounts invoiced by Annex had exceeded the original estimate, while considerable work still appeared to be required to finish the renovations. The applicants had also raised a number of specific issues with regard to the works that had been carried out, and in particular the quality of reroofing undertaken. A compromise appears to have been agreed in mid-November 2016 which let the works continue but after the issue of further invoices by Annex in November and December 2016 which were not paid, Annex gave notice of suspension and removed all materials from the site. The applicants responded by refusing Annex any further access to the site without the applicants’ express permission.

[3]    Negotiations to settle the dispute were unsuccessful and on 6 September 2017 Annex gave notice of adjudication pursuant to s 36 of the Act, claiming a total of

$72,624.89 made up as follows:

(a)Invoice 92a on 14 November 2016 for $20,464.21 of which $6,704.49 was claimed to be owing;

(b)Invoice 101 on 1 December 2016 of which $28,445.22 was claimed to be owing;

(c)Invoice 111 on 14 December 2016 of which $24,867.70 was claimed to be owing;

(d)Invoice 153 on 27 February 2017 of which $8,970 was claimed to be owing; and

(e)Invoice 241 on 19 May 2017 of which $366.76 was claimed to be owing.

[4]    After the parties were unable to agree on an adjudicator Mr Swindells was appointed by an authorised nominating authority.

The adjudication

[5]    A formal Adjudication Claim was filed by Annex on 13 September 2017 supported by a statement provided by Annex’s director, David Poole. The following day Annex sought to add a claim for $36,349.20 being legal fees incurred by Annex up to that point, a course that was opposed by the applicants.

[6]    After obtaining an extension of time for filing an Adjudication Response and Counterclaim/Setoff was filed on behalf of the applicants on 27 September 2017. The applicants denied that any monies were owing to Annex and instead sought

$140,749.79 from Annex advising:

a)The total amount outstanding under the construction contract is no more than $23,325.64. This amount is established from the total value of invoices Annex has provided to the Chappells to date ($318,405.71) less the total amount paid by the Chappells to date ($282,665.28) less credits due to the Chappells from Annex ($12,414.79) that have not yet been issued; and

b)The total amount of the Chappells provable counterclaim/setoff is

$164,075.43. This amount is established from the cost to rectify the roofing work ($44,320.00) plus the cost to repair the pool ($19,882.40) plus the cost to rectify the wall bracing elements ($14,639.5) plus lost rent due to Annex's late completion ($2,000.00) and the cost to complete the renovation work ($83,233.53).

[7]In addition the applicants disputed receiving invoices 153 and 241 totalling

$9,336.76.

[8]    Annex responded on 4 October 2017 and provided submissions and a statement from the architect responsible for the design of the renovations. Annex denied the counterclaims made by the applicants and contrary to the applicants’ Adjudication Response and Counterclaim/Setoff asserted that there has no dispute over the amount invoiced by Annex. More broadly Annex:

(a)disputed that any credits were owing;

(b)rejected any roofing issues;

(c)stated that Annex was not responsible for enclosing the walls requiring re-opening for inspection (the cost to rectify the wall bracing elements);

(d)rejected any responsibility for damage to the swimming pool;

(e)accepted no liability for rental “as it was not intended by the parties the [applicants’] tenant would remain in the property”; and

(f)denied that the original estimate was in anyway undertaken negligently.

[9]    Overall the position of Annex was that the applicants had suffered no loss as they had only been invoiced for work properly undertaken in the course of the contract and there was therefore no basis for the applicants to claim from Annex the costs of work not yet undertaken.

[10]   The applicants in turn sought and obtained leave to file an Adjudication Rejoinder and Reply. This was filed on 6 October 2017, and provided further supporting evidence for the applicants’ counterclaims. The applicants again disputed that $355,290.18 had been invoiced by the second respondent, and submitted instead that the correct figure was $318,405.71. In addition, the applicants provided a detailed response to Annex’s submissions on both the credits claimed by the applicants as well as the merits of the counterclaim.

[11]   Mr Swindells then proceeded to determine the dispute on the papers. In the course of his deliberations Mr Swindell sought further clarification from Annex about

the totals invoiced to the applicants and paid by them.   The applicants’ solicitor,   Mr Badcock, was not copied in to the correspondence and it was not until the day before the adjudication determination was issued by Mr Swindells, on 9 November 2017, that Mr Swindells’ sought comment from Mr Badcock on a spreadsheet provided by Annex. This gave insufficient time for Mr Badcock to obtain instructions given Mr Chappell was overseas with work at the time and Mrs Chappell was at work. After issuing the adjudication determination Mr Swindells acknowledged an error in his calculations and so on 11 November 2017 issued a replacement decision (still dated 9 November 2017).  This determination is the subject of the present proceedings.   Mr Swindells’ determined the following:

The Respondents have made counterclaims against the Claimant which if not covered in the reasons for the determination below they have been satisfactory covered in the Reply to Response and Response to Counterclaim dated the 4 October 2017 submitted by the Claimant.

For this Adjudication I hereby determine that the Respondents will pay to the Claimant within two working days;

4.1The sum of $43,472.30 being the total amount claimed of $355,290.18 minus the amount paid of $282,665.28 and minus the deposit already paid but not spent of $29,152.50.

4.2Interest on the $43,472.30 minus the deposit held by Annex of

$29152.50 total of $14,319.80 @ 16.4% since the 22nd of November 2016 until the 9th of November 2017 being the sum of $2,264.80.

4.3Adjudication fees of $10,000 being for the total fees because the Respondents defaulted the contract.

Totals to be paid by the Respondents to the Claimant are;

4.1	$43,472.30
4.2	$ 2,264.80
4.3	$ 5,000.00
$50,737.10 including GST

All other sums of money (if any) in escrow still held by third parties in relation to this dispute are to be returned once the above sum is paid in full by the Respondent to the Claimant.

[12]   The adjudicator’s determination went on to set out why the contract between the applicants and Annex was a cost and margin type contract rather than a fixed price contract. Reasons were also provided by Mr Swindells as to why the contract

specification for the roofing iron was 0.4mm rather than 0.6mm, and the notice of suspension given by the second respondent was then reviewed. The substantive adjudicator’s determination concluded with the following comments:

Payment Schedule sent from Chappell to Annex dated the 19/12/16 stating ‘Our reason for the difference between the scheduled amount and the claimed amount is that the claimed amount to date exceeds the estimate given by a significant and unreasonable margin with minimal extra work that has been requested …

The reasons given for non-payment in the Payment Schedule are not grounds for a total non-payment of the payment claim. This is a Cost and Margin Contract and the Chappell’s had benefitted from the work being undertaken for invoice 111. One might consider that a portion of the invoice may be disputed on reasonable grounds but not the whole invoice without substantial reasoning.

The basis of the contract was to ensure that the Chappell’s could remain within budget. This included the mutual agreement where further work could be terminated due to budget restraints. The Respondents had this option but for reasons unknown did not stop work in time to avoid a dispute.

One of the Respondents reasoning for non-payment was that the Claimant had a duty of care to inform the Respondents of potential cost overrun but did not. The Respondents also have look into [sic] what they had to manage and should have foreseen any overrun coming.

The contract was also Cost and Margin with scope changes being for variations and unforeseen work. The reporting side and general project management by the Claimant was lacking which they have admitted but this is not significant enough for the Respondent to claim under duty of care.

Also the overrun appeared worse because of the deposit not being deducted from the total to date equation and the provisional sum not being allowed for by the Respondents in their budget but still included in the Claimants budget.

Nevertheless, at the time of the invoice 111 Payment Schedule work was already suspended and the Chappell’s were in default of contract for non- payment within the agreed timeframes.

By law the Claimant is entitled to claim all of their costs in relation to the Respondents default of payment firstly for the suspension of work under clause 19.2 and secondly under clause 19.10 of the Cost and Margin Contract. This claim by the Claimant was deemed outside the scope of the Claimants Adjudication Claim and disallowed in this determination.

For the above and other claims not fully covered by this determination this is because information, statements, amendment requests etc. were not submitted within the required timeframes and cannot be used as part of this Adjudication Determination Process.

The current proceeding

[13]   The applicants paid the amount directed in the adjudicator’s determination, but sought to challenge it. As the contract between the applicants and Annex provided that an adjudication determination would be final subject to judicial review or enforcement, the present proceedings were issued on 6 December 2017 as an application for judicial review. The proceedings filed by the applicants identify nine “defects” in both the process adopted in the adjudication and with the adjudication determination itself, translated through into 12 causes of action, one for each defect and three more general causes of action. In broad terms:

(a)Causes of Action 1-9 and Cause of Action 11 identify issues in procedure which the applicants claimed amounted to “procedural impropriety” and “apparent or actual bias” on behalf of Mr Swindells;

(b)Cause of Action 10 is an allegation that Mr Swindells failed to take into account relevant information in the adjudicator’s determination; and

(c)Cause of Action 12 alleges Mr Swindells “failed to give coherent and adequate reasons in his determination, and failed to make conclusions on the important issues that were raised, including significant issues of fact and law.”

[14]   Neither Mr Swindells nor Annex have taken any steps in the proceedings. It is in fact normal procedure for an adjudicator not to take any steps in this type of proceeding and Mr Swindells is taken to abide the decision of this Court. Annex, in contrast, entered into liquidation after the proceedings were commenced but leave has been given for the applicants to continue the proceedings against the company.1 The matter has accordingly proceeded by way of formal proof.2

[15]   At the hearing it became apparent that not all relevant documents were before the Court and I directed that Mr Chappell file a further affidavit to bring those

1      Chappell v Swindells [2018] NZHC 506.

2      High Court Rules 2016, r 15.9.

documents before me, as well as filing supplementary submissions on a number of issues.

Legal Principles

[16]   The applicable legal principles were recently reviewed by Paul Davison J in Anderson v Swindells, incidentally a case involving Mr Swindells.3 The appropriate approach to applications for judicial review of an adjudicator’s determination is well settled and was considered by the Court of Appeal in Rees v Firth.4 The Court said:

[22] … The key point, we think, is that the statutory context is such that a person who does not accept an adjudicator’s determination should litigate, arbitrate or mediate the underlying dispute, rather than seeking relief by way of judicial review of the determination. Such relief will be available only rarely.

…

[26]      Second, an adjudicator’s determination of rights and obligations under a construction contract is not binding in any event. A party with the benefit of such a determination must issue proceedings in order to enforce its rights and the court will be free to reach a different view from that of the adjudicator. In this type of case, it is difficult to see what point there would be in any judicial review proceedings.

[27]      The courts must be vigilant to ensure that judicial review of adjudicators’ determinations does not cut across the scheme of the CCA and undermine its objectives. But this does not mean that judicial review should be limited to instances of “jurisdictional error”. In principle, any ground of judicial review may be raised, but an applicant must demonstrate that the court should intervene in the particular circumstances, and that will not be easy given the purpose and scheme of the CCA. Indeed, we consider that it will be very difficult to satisfy a court that intervention is necessary. As an example, given that an important purpose of the CCA is to provide a mechanism to enable money flows to be maintained on the basis of preliminary and non- binding assessments of the merits, it is unlikely that errors of fact by adjudicators will give rise to successful applications for judicial review. In the great majority of cases where an adjudicator’s determination is to be challenged, the appropriate course will be for the parties to submit the merits of the dispute to binding resolution through arbitration or litigation (or, of course, to go to mediation).

[17]   In Body Corporate 200012 v Keene QC, Brewer J in dismissing an application for judicial review of an adjudication determination said:5

3      Anderson v Swindells [2018] NZHC 1803 at [41]-[43].

4      Rees v Firth [2011] NZCA 668, [2012] 1 NZLR 408.

5      Body Corporate 200012 v Keene QC [2017] NZHC 2953, [2018] NZAR 120 at [17].

In this case, [counsel] for [Body Corporate 12] makes it clear that [Body Corporate 12’s] objective is to avoid the “pay now, argue later” policy of the CCA. It hopes to avoid payment until the arbitration is concluded, with the goal of succeeding at arbitration and thus eliminating or reducing the requirement to pay. This objective clearly cuts across the scheme of the CCA. It would require a genuine excess of jurisdiction by the adjudicator (which would mean [Body Corporate 12] should not be subject to the CCA scheme), a serious breach of natural justice, or some apparent and significant error of law to persuade me to intervene.

[18]As Paul Davison J added:6

Applying the approach described in Rees v Firth, it is clear that the applicants face a high legal hurdle and must demonstrate that the adjudicator has made a significant and substantial error of law or that there has been a fundamental and substantial breach of natural justice such as warrants the Court exercising its discretion to grant judicial review relief.

Discussion and Analysis

[19]   I begin my analysis by considering the applicants’ allegations that the adjudicator’s determination should be set aside for “procedural impropriety” and/or “unfair and biased” conduct of Mr Swindells throughout the adjudication process. In summary, the applicants allege the following defects under this head:

(a)Defect 1 – Mr Swindells’ phoned Mr Badcock on behalf of the applicants to advise of an extension of time for the filing of the document without the second respondent being present;

(b)Defect 2 – Mr Swindells’ refused to withdraw after Annex’s solicitors included two without prejudice communications in the adjudication claim;

(c)Defect 3 – Mr Swindells’ communicated directly with Annex’s solicitors over the amounts invoiced by Annex and paid by the applicants without reference to Mr Badcock or the applicants until a copy  of  the  final  spreadsheet  prepared  by  Annex  was  sent  to  Mr Badcock the day before the Adjudication Determination was issued;

6      Anderson v Swindells, above n 3, at [43].

(d)Defect 4 – Mr Swindells accepted a further claim by Annex for the addition of legal fees in the sum of $36,349.20 after the adjudication claim had been made.

(e)Defect 5 – Mr Swindells allowed the applicants to file information late.

(f)Defect 6 – Mr Swindells initiated a call to Mr Badcock without Annex being present.

(g)Defect 7 – Mr Swindells referred to the whole of Mr Poole’s statement on behalf of Annex even though a number of pages had not apparently been received within the time specified.

(h)Defect 8 – Mr Swindells had not responded to a request by the applicants to exclude an additional document which had been filed by Annex without leave.

(i)Defect 9 – Mr Swindells’ granted the applicants’ application to file the rejoinder without reference to Annex’s solicitors.

[20]   In addition to these matters, Cause of Action 11 more generally asserts that Mr Swindells acted in a way “that was substantively unfair and biased”.

[21]   Having reviewed the record of the adjudication presented on behalf of the applicants I am satisfied that apart from Defect 3 no issues of significance have been identified, and certainly nothing that would warrant setting aside the adjudicator’s determination. An adjudicator may conduct an adjudication in any manner that he or she thinks fit,7 subject to acting “independently, impartially and in a timely manner”8 and complying with the principles of natural justice.9 More specifically:

(a)Defects 1, 5, 7, 8 and 9 do not raise anything untoward in the circumstances of the case and certainly do not give rise to any evidence

7      Construction Contracts Act 2002, s 42(1)(a).

8      Section 41(a).

9      Section 41(c).

of unfairness or bias, noting in particular that the applicants were the beneficiaries of a number of the specific allegations that have been made.

(b)While there is no doubt Annex’s solicitors should not have provided the without prejudice documents as part of the adjudication  claim  (Defect 2), as soon as this had been realised the appropriate procedure was to remove the documents as soon as possible. This was in fact done, and Mr Swindells did not refer to the documents in the adjudicator’s determination. In the circumstances I am satisfied that no issue arises.

(c)While on the face of it the correspondence from Mr Swindells appears to indicate that he was prepared to accept a late claim for legal fees (Defect 4) the adjudicator’s determination itself makes it clear that this claim was not ultimately included in the claim before him, and as a result no determination was made. In the circumstances, it is again difficult to see how such provides any evidence of unfairness or bias on the part of Mr Swindells.

(d)While it is clearly not good practice to call counsel  separately  (Defect 6) there is no evidence before the Court that any prejudice arose to either party as a result of these particular discussions, and therefore provides no basis for setting aside the adjudicator’s determination.

[22]   Similarly in the absence of any particulars other than the defects noted above the general assertion contained in Cause of Action 11 that Mr Swindells was unfair and biased simply cannot be sustained. Indeed, as noted, four of the specific allegations of bias in fact favoured the applicants. It is difficult to see how a general finding of bias against the applicants can be made in these circumstances.

[23] The only defect with any substance is Defect 3, and in particular the conversation between Mr Swindells and Annex over the amount invoiced and paid. As noted at [3] above, which invoices had been provided by Annex to the applicants

was clearly at issue, and any attempts to clarify the position needed to involve all parties. Not only was Mr Badcock not copied in to the discussion between Mr Swindells and Annex’s solicitors, there was a complete failure to provide the applicants with any reasonable chance to comment on the spreadsheet provided by Annex. It was not in fact sent to Mr Badcock on behalf of the applicants until the day before the adjudicator’s determination was issued. Furthermore the spreadsheet apparently accepted by Mr Swindells shows the $355,290.18 amount as including the deposit and also shows the deposit as a payment by the applicants. It is not clear therefore on what basis the deposit was then deducted from the amounts Mr Swindells found owing to Annex. On this basis I am satisfied Defect 3 did amount to a significant flaw in the process adopted by Mr Swindells and more specifically a substantial breach of natural justice.

[24]   The remaining issues identified on behalf of the applicant (contained in Causes of Action 10 and 12) can be considered together, as they essentially reflect opposite sides of the same issue. In particular Cause of Action 10 alleges that Mr Swindells’ failed to take into account relevant material relating to the roofing issue and the absence of evidence the applicants had received all invoices issued by Annex. Cause of Action 12 alleges that Mr Swindells’ failed to give “coherent and adequate reasons in his determination and failed to make conclusions on important issues that were raised”.

[25]   Section 47 of the Act prescribes the form and contents of the adjudicator’s determination. It must be in writing and dated, and must contain reasons for the determination, unless the parties have dispensed with that requirement in writing. The determination must also include a statement setting out the consequences if the defendant takes no steps in relation to an application to enforce the adjudicator’s determination. Section 47(2) provides that a failure to comply with s 47(1) does not affect the validity of the adjudicator’s determination.

[26]Section 48(1) in turn concerns the substance of an adjudicator’s determination:

48       Adjudicator’s determination: substance

(1)If an amount of money under the relevant construction contract is claimed in an adjudication, the adjudicator must determine —

(a)whether or not any of the parties to the adjudication are liable, or will be liable if certain conditions are met, to make a payment under that contract; and

(b)any questions in dispute about the rights and obligations of the parties under that contract.

[27]   As noted above, Mr Swindells assessed the nature of the contract before turning to the issue of suspension and default. In determining that the contract was a cost and margin contract, Mr Swindells did give adequate reasons. He made reference to correspondence between the parties, noting that while a quote was apparently given subsequent to the 4 April 2016 contract being entered, this was apparently never agreed to and as a result the 4 April 2016 contract remained on foot.

[28]   As a result of characterising the contract in this way the logical consequence was that the applicants’ claims for the work still to be completed could not succeed. Similarly, Mr Swindells provided reasons as to why Annex was only required to use 0.4mm coloursteel when reroofing the applicants’ house. He also appeared to suggest that because of the nature of the contract while the reporting side and general project management was lacking, this was not significant enough to give rise to a breach of any duty of care owed.

[29]   However it is clear a number of other specific issues, fairly raised in the adjudication, were simply not addressed by Mr Swindells. These include the following:

(a)No reasons were given by Mr Swindells for concluding the total amount invoiced was $355,290.18, the amount asserted by Annex, rather than the figure asserted by the applicants, $318,405.71. This was clearly at issue.

(b)No determination was made on the credits claimed by the applicants for apprentices and scaffolding.

(c)No determination was made on the roof quality issues (which were acknowledged by Annex in correspondence in November 2016).

(d)No determination was made on the issues around damage to the swimming pool, including who was responsible for any damage and how much any rectification would cost.

(e)No determination was made on the issues around the rectification of the wall cavity – whether it was Annex responsible for sealing up the wall cavity prior to inspection and if so how much it would cost to rectify that issue.

(f)No determination was made on whether Annex was liable for any loss of rental to the applicants.

[30]   These were all clearly issues before Mr Swindells and in terms of ss 47 and 48 of the Act he was required to address them. It was not sufficient for him to assert that:

If not covered in the reasons for the determination below they have been satisfactory covered in the reply to response and response to counterclaim dated the 4^th October 2017 submitted by the claimant.

[31]   Not only was the document referred to by Mr Swindells simply a submission made by Annex and not evidence, given there had been further evidence and submissions presented on behalf of the applicants since that document had been filed on behalf of Annex, the applicants were clearly entitled to receive reasons for the non- acceptance of their various counterclaim/setoff issues.

[32]   Likewise Mr Swindells’ assertion that “the reasons given for non-payment in the payment schedule are not grounds for a total non-payment” are not only inadequate but also illogical. First, a considerable amount of further evidence had been presented by both parties since the “payment schedule” had been completed by the applicants in December 2016, which should have been analysed by Mr Swindells rather than making the bare assertion contained in a document prepared at a much earlier stage of the dispute. Secondly, even if not a total defence to Annex’s claims, as Mr Swindells acknowledged some of the issues raised by the applicants could have provided a basis for disputing “a portion of the invoices but not the whole invoice without substantial reasoning”. It is clear that in fact “substantial reasoning” had been provided and it was Mr Swindells’ role to assess that reasoning as to whether any of the issues

identified on behalf of the applicants did provide either a whole or partial defence to the amounts claimed by Annex. Mr Swindells manifestly failed to undertake such an analysis and as a result fundamentally failed in his role as adjudicator.

[33]   Taking these matters together I have no hesitation in concluding that the adjudicator’s determination carried out by Mr Swindells was manifestly flawed, constituted a substantial error of law, and that in the circumstances must be set aside.

Decision

[34]   The applicants’ application for judicial review of the adjudicator’s determination by way of formal proof is granted.

[35]The adjudicator’s determination dated 9 November 2017 is quashed.

Costs

[36]   The applicants sought costs on an indemnity basis. However I have determined that the appropriate order is that costs should lie where they fall.

[37]   Pursuant to s 70 of the Act, Mr Swindells is excluded from civil liability for anything done in the course of the exercise or intended exercise of his functions, duties and powers as adjudicator. Given the absence of evidence he did not act in bad faith, he is not liable for costs.

[38]   As for costs against Annex, the applicants have not succeeded in this proceeding by showing a fault on the part of Annex.10 Their success is a function of proving errors on the part of the adjudicator in the course of his determination. In those circumstances, I am persuaded that I should exercise my discretion to order that costs lie where they fall, despite the applicants’ success.

Powell J

10     Compare New Zealand Fire Sprinkler Protection Ltd v AFS Total Fire Protection Ltd [2016] NZHC 690 at [24].