CPB Contractors Pty Limited v FZ Group Ltd
[2024] NZHC 3421
•18 November 2024
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2024-404-1196
CIV-2024-404-1653 [2024] NZHC 3421
BETWEEN CPB CONTRACTORS PTY LIMITED
Applicant
AND
FZ GROUP NZ LIMITED RESPONDENT
Hearing: 24 September 2024
Post-hearing submissions completed 30 October 2024
Appearances:
L M Van and R H Turi for the Applicant T J P Bowler for the Respondent
Judgment:
18 November 2024
JUDGMENT OF ASSOCIATE JUDGE SKELTON
This judgment was delivered by me on 18 November 2024 at 4.00 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
[1] The applicant, CPB Contractors Pty Ltd (CPB) (as main contractor), and the respondent FZ Group Ltd (FZ Group) (as subcontractor) entered into a construction contract on 14 October 2020 for partitions, linings and other works at Waikeria Prison (contract).
CPB CONTRACTORS PTY LIMITED v FZ GROUP NZ LIMITED [2024] NZHC 3421 [18 November 2024]
[2] Issues arose between the parties in 2022. Ultimately, the parties issued a statutory demand against each other. Each party now applies to set aside the statutory demand issued by the other party under s 290 of the Companies Act as follows:
(a)FZ Group has issued a statutory demand against CPB for the sum of
$443,179.75 (including GST) relating to payment claim 20 under the contract. CPB has applied to set aside the statutory demand on the basis that FZ Group is a solvency risk and CPB will be irretrievably prejudiced if the statutory demand is upheld; payment claim 20 was invalid and in any event, superseded by payment claim 21; it has a counterclaim in the sum of $3,553,748.19 (including GST) relating to the contract; the statutory demand is therefore an abuse of process (first application).
(b)CPB has issued a statutory demand against FZ Group for the amount of
$3,553,748.19 (including GST). FZ Group has applied to set aside that statutory demand on the basis that the parties agreed that additional costs of completion would be claimed from the Department of Corrections and there would be no claim against FZ Group (second application).
What happened?
[3] On 14 April 2022, FZ Group submitted payment claim 20 for $443,179.75 under the Construction Contracts Act 2002 (CCA) (payment claim 20).1
[4] CPB contends that the parties were in ongoing discussions about payment claim 20 in the period following the issue of the claim.
[5] On 13 May 2022, FZ Group submitted payment claim 21, for what CPB says was an identical sum and scope of work (payment claim 21). CPB contends that payment claim 21 superseded payment claim 20. FZ Group disputes this.
1 Construction Contracts Act 2002, s 20.
[6] No payment schedule was issued in response to payment claim 20 as required by the Act.2
[7] FZ Group issued a statutory demand for payment claim 20 on 20 May 2022. Following discussions between the parties, this was withdrawn on 26 May 2022. FZ Group says that it withdrew its statutory demand on the basis of assurances from CPB that payment would be forthcoming and reserved its rights as to payment claim
20. CPB says that it understood the amount claimed by FZ Group in payment claim 20 and payment claim 21 had been resolved by withdrawal of the statutory demand and the issue of payment schedule 21.
[8] On 13 June 2022, CPB issued a payment schedule in response to payment claim 21 for a negative amount (that is, the schedule stated that FZ Group owed CPB a certain amount).
[9] CPB says that FZ Group failed to provide sufficient resources to complete the contract works and gave written notice to CPB on 13 July 2022 that it was unable to continue with the works, thereby repudiating the contract. CPB says that it did not accept the repudiation and engaged Wadsworth Contracting Ltd (Wadsworth) to complete the works including defective work. CPB says that the parties agreed to a “walk away” arrangement which involved FZ Group agreeing that it would not pursue any claims against CPB, while CPB would “do its best” to claim additional costs of completion “upstream” from the Department of Corrections, but may ultimately claim its costs from FZ Group. CPB says that, so far, it has incurred costs of $4,157,755.43 completing the works.
[10] FZ Group denies any repudiation. FZ Group contends that CPB drafted the 13 July 2022 letter for FZ Group to sign because CPB needed the letter in order to be able to claim costs upstream. FZ Group says that the parties agreed that FZ Group would withdraw from the project and that any additional costs of completion would be claimed from the Department of Corrections with no claims against FZ Group.
2 Construction Contracts Act, ss 21, 22 and 23.
[11] On 6 May 2024, FZ Group issued a statutory demand against CPB for the payment of $443,179.75 in respect of payment claim 20. As noted, CPB has applied to set aside the statutory demand. FZ Group opposes.
[12] On 15 May 2024, CPB issued its own statutory demand against FZ Group for the amount of $3,553,748.19. As noted, FZ Group has to applied set aside that statutory demand. CPB opposes.
Legal principles – setting aside statutory demands
[13] Under s 290 of the Companies Act 1993, the Court may set aside a statutory demand if upon an application made within time,3 it is satisfied that––
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
[14] A demand must not be set aside by reason only of a defect or irregularity, unless a substantial injustice would be caused if it were not set aside, under s 290(5). A defect is defined in s 290(6) to include a “material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand”.
[15] The general principles that apply to applications to set aside statutory demands are well-settled:4
3 Within 10 working days of the date of service of the demand; and served on the creditor within 10 working days of the date of service of the demand.
4 Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16].
(a)The onus is on the applicant seeking to set aside the statutory demand to show that there is arguably a genuine and substantial dispute as to the existence of the debt. The Court's task is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b)The mere assertion that a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(c)If such material is available, the dispute should normally be resolved first in ordinary civil proceedings before any statutory demand is issued.
(d)If a counterclaim, cross-demand or set-off is suggested an applicant must establish that this is reasonably arguable in all the circumstances.
(e)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise unless such evidence is contrary to the available documents or earlier statements made by the parties.
[16] In 144 Trustees Ltd v Mike Pero Real Estate Ltd, Osborne J set out a general approach to the exercise of the jurisdiction under s 290(4):5
As to s 290(4)(a):
·The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt. Put another way, the applicant must show that there is a real and not a fanciful or insubstantial dispute.
·The mere assertion that the dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
·If such material is available the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.
5 144 Trustees Ltd v Mike Pero Real Estate Ltd [2018] NZHC 3197 at [8].
As to s 290(4)(b):
·An applicant must establish that it appears to have a counterclaim, cross-demand or set-off which is reasonably arguable in all the circumstances.
·The “appearance” test involves a review of low threshold.
·The hearing relating on a s 290(4)(b) argument is to be short and to the point.
·It is to be distinguished from a summary judgment application where complex legal issues are not a bar to a remedy.
As to both ss 290(4)(a) and (b):
·It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.
As to s 290(4)(c):
·There exists a residual discretion under the “other grounds” jurisdiction of 290(4)(c) which enables the Court to do justice between the parties. As Tipping J indicated in Commissioner of Inland Revenue v Chester Trustee Services Ltd, the exercise of the discretion comes down to the Court’s judgment as to whether the creditor’s prima face entitlement to liquidate the company is outweighed by some factor making it plainly unjust for liquidation to occur.
The issues for determination
[17]The issues for determination are:
The first application
(a)Whether there is arguably a substantial dispute as to the existence of the debt on the basis that payment claim 20 was not validly issued in terms of the contract, or was superseded by payment claim 21, or otherwise.
(b)Whether the issuing of the statutory demand by FZ Group was an abuse of process on the basis of knowledge of a potential dispute and counterclaim, and delay.
(c)Whether CPB will suffer irretrievable prejudice if the statutory demand is not set aside and payment is required, because of FZ Group’s financial position.
The second application
(d)Whether there is arguably a substantial dispute as to the existence of the debt on the basis that there was a “walk away” agreement between CPB and FZ Group.
First application
Whether there is arguably a substantial dispute as to the existence of the debt – s 290(4)(a)
[18]The contract provides that:
35.1 Payment Claims
(1)Up until the whole of the Work under the Contract has achieved Substantial Completion and thereafter until CPB provides the Release to the Contractor under clause 38(1), the Contractor is entitled to submit a payment claim on the day of each month stated in Annexure B (each a “relevant time”), where that day is also a day upon which the Contractor:
(a)has already provided the Contract, duly executed by the Contractor, to CPB;
(b)is not in breach of clause 5 in any respect; and
(c)has complied with clause 35.3 in respect of the relevant month.
...
35.3 Requirements for Statutory Declaration
(1) Up until the whole of the Work under the Contract has achieved Substantial Completion and thereafter until CPB provides the Release to the Contractor under clause 38(1), the Contractor must provide CPB, on the day of each month stated in Annexure B, with a statutory declaration that is in the form set out in Annexure D and duly completed and executed.
To avoid doubt, with respect to the month in which the Contractor provides the duly executed Contract to CPB, if the day that is specified for that month pursuant to the preceding paragraph is earlier than the
date on which the Contractor provides the duly executed Contract then no statutory declaration is required for that month.
[19] The first argument raised by CPB is that, when payment claim 20 was submitted, FZ Group had not provided the relevant monthly certificate (statutory declaration) in accordance with cl 35.1(1)(c) and 35.3(1) of the contract, and therefore FZ Group was not entitled to submit a payment claim at that time.
[20] However, this is the type of enquiry which the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd found should not be undertaken by the Court in determining an application to set aside a statutory demand issued on the basis of a payment claim under the CCA.6 The Court of Appeal found that if a party wishes to contend that the other party was not entitled to serve a payment claim under s 20(1) when it did so, that is a point that should be taken by way of response in a payment schedule rather than in an application to set aside a statutory demand. In Demasol, the only enquiries required in relation to the application to set aside the statutory demand were:7
(a)whether the payment claim complied with s 20(2), 20(3) and 20(4) of the CCA; and
(b)whether a payment schedule had been provided by the due date contesting liability or whether the amount claimed had been paid by the due date.
[21] Accordingly, I do not consider further whether FZ Group was entitled to issue payment claim 20 when it did.8 This argument is not a valid basis for contending that the statutory demand should be set aside.
6 Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480 at [41]–[42]; Newhaven Hoskins Trustee Ltd v Active Contracting Ltd [2023] NZHC 213 at [39]; Dem Home Ltd v New Gate Ltd [2023] NZHC 2709 at [55] –[58].
7 Demasol Ltd v South Pacific Industrial Ltd, above n 6, at [47].
8 See also CMP Construction Ltd v Aluminium Technology Ltd [2013] NZHC 2481 at [56] where the Court found that “deferring the right to issue a payment claim until certain documentary formalities have been attended to is not a matter that the parties are free to agree upon under the terms of the Construction Contracts Act 2002”.
[22] CPD accept that payment claim 20 complied with the requirements in s 20(2), 20(3) and 20(4) of the CCA. Further, it is clear on the evidence that no payment schedule was issued in response to payment claim 20.
[23] However, CPB contends that payment claim 21 issued by FZ Group on 13 May 2022 was identical to payment claim 20 in terms of the scope of the work covered and the amount claimed, and therefore payment claim 21 superseded payment claim 20, and it was subsequently agreed between the parties that CPB would only be required to provide a single payment schedule in response to payment claim 21. CPB contend this agreement was confirmed and the matter was resolved when FZ Group withdrew the first statutory demand issued in respect of payment claim 20, and CPB subsequently issued a payment schedule for payment claim 21 for a negative amount. FZ Group refutes any such agreement and says that when the statutory demand was withdrawn it reserved all its rights in relation to payment claim 20, including the right to re-serve a statutory demand based on payment claim 20 at another date.
[24] Payment claim 20 was for the period 15 March 2022 to 15 April 2022 and the due date for payment was stated to be 3 May 2022. Payment claim 21 was for the period 15 April 2022 to 15 May 2022 and the due date for payment was stated to be 27 May 2022. The payment claims appear to be for the same work, and both claim
$443,179.75 (including GST).
[25] I do not understand CPB to be arguing that payment claim 20 was invalid because the claim in payment claim 20 was repeated in the subsequent monthly claim, payment claim 21. The law is clear that a party may resubmit prior claims under the CCA by repeating them in subsequent claims.9
[26] CPB’s argument is that payment claim 21 superseded or replaced payment claim 20. CPB contend that there is nothing in the CCA which prevents this. CPB relies on Lindsay Builders Ltd v Bird.10 In that case, the defendants, defending an
9 For example, see George Developments Ltd v Canam Construction Ltd [2006] 1 NZLR 177 (CA) at [44]; Canam Construction Ltd v George Developments Ltd HC Auckland, CIV-2004-4040- 3565, 10 November 2004 at [68]; Sol Trustees Ltd v Giles Civil Ltd [2014] NZHC 1813 at [6]; Auckland Electrical Solutions Ltd v Warrington Group Ltd [2016] NZHC 2245 at [22].
10 Lindsay Builders Ltd v Bird HC Christchurch CIV-2010-409-2724, 13 July 2011.
application for summary judgment, contended that the plaintiff had agreed to withdraw the relevant payment claim and issue a revised payment claim and therefore the defendants could not be required to comply with the first payment claim. The Court dismissed the application for summary judgment because the plaintiff did not appear to advance its application. However, the Court went on to make some obiter observations in relation to the defendants’ position.
[27] The Court considered that the defendants’ position was supported by the fact that the plaintiff had subsequently sent an amended payment claim under cover of a facsimile in which it was stated he was “resending PC 13”. The Court considered that the plaintiff must have intended the second payment claim to replace the first because otherwise “the defendants would be required to make payments in terms of both payment claims in the event that they did not respond to them in the appropriate way” and “[t]hat cannot be the case”.11
[28] There is a threshold issue as to whether a payment claim under the CCA can be withdrawn and replaced unilaterally or by agreement such that the payer is only required to respond to the replacement payment claim.12 However, putting that issue aside, I consider that Lindsay Builders Ltd can be distinguished on the facts, based on contemporaneous documentation in this case. In my view it is clear that payment claim 20 was not superseded or withdrawn and replaced by payment claim 21. Payment claim 21 was issued in the normal course of monthly payment claims one month after payment claim 20. Even though it is for the same amount as payment claim 20, it is for a different (subsequent) payment period and states a different (later) due date for payment. After CPB had failed to provide a payment schedule in response to payment claim 20 by 17 May 2024,13 and after payment claim 21 was issued on 13 May 2024, FZ Group sought to enforce payment claim 20 by issuing a statutory demand on 20 May 2024.
11 At [7]
12 See the discussion on s 12 of the CCA below at [31]–[35]. See also Argyle Building Services Pty Ltd v Dalanex Pty (No 2) [2022] VSC 452 –– this case found that a payment claim under the relevant provisions of security for payment legislation in Victoria cannot be unilaterally withdrawn but left open the issue of whether this can be done by agreement between the parties.
13 The parties agree that a payment schedule for payment claim 20 (if assumed to be valid) was required to be served by 17 May 2022 based on the default provisions under the CCA.
[29] Further, although the issue does not arise in this case, I do not consider there is any issue with statutory debts under the CCA arising in respect of the same amount or amounts claimed in two payment claims, in the event that both payment claims are not responded to in the appropriate way. The fact that a party may roll over claims by repeating them in subsequent claims means that there is always the possibility that this might occur. If there is an attempt to seek payment for the same work twice, this can be dealt with at the enforcement stage by exercising the discretion available to the Court in relation to applications to set aside statutory demands, applications for liquidation of companies and applications for summary judgment. This does not threaten the underlying policy of ‘pay now, argue later’ because the payee is paid for the work and any dispute can be determined subsequently.
[30] CPB also contend that, at some stage, possibly around the time of the withdrawal of the first statutory demand in respect of payment claim 20, it was agreed that CPB would respond to the claims by way of a single payment schedule responding to payment claim 21. Adam Ridgeway, who was the senior commercial manager for CPB states:
CPB made it clear that it would otherwise respond to works claim for the April 2022 period (whether under Payment Claim #20 or #21) through a single payment schedule (because the two claims were for the same thing). I believed based on my discussions with FZ Group that this had been agreed because the statutory demand was withdrawn by FZ Group.
[31]However, s 12 of the CCA provides that:
No contracting out of Act
This Act has effect despite any provision to the contrary in any agreement or contract.
[32] A relevant case in this regard is Willis Trust Company Ltd v Green.14 In that case, the Court discussed s 12 of the CCA in the context of a judicial review of an adjudicator’s determination. The contractor, Holmes Construction Wellington Ltd (Holmes), issued a final claim under the construction contract on 23 August 2025, pursuant to the CCA. The final claim referred to an agreement between the parties on
14 Willlis Trust Company Ltd v Green HC Auckland CIV-2006-404-809, 25 May 2006 at [30]–[34]; See also Pedestal Ltd v City Build Construction Ltd [2014] NZHC 1783 at [67].
6 April 2005 whereby the parties agreed to meet to resolve outstanding disputes and that any matters not resolved would be referred to arbitration under the contract. The final claim repeated that any claims in the final claim not agreed and paid by the due date for payment would be regarded as being in dispute and would be referred to arbitration. Willis Trust Company Ltd (Willis) neither provided a payment schedule in accordance with the statutory provisions nor paid the claim by the due date for payment.
[33] Willis argued that the two documents amounted to an agreement to refer Holmes’ final claim to arbitration thereby estopping it from enforcing its statutory rights. The Court held that s 12 is unambiguous.15 And further:16
If Mr Carden is correct that the two documents amount to an agreement to refer Holmes final claim to arbitration, thereby estopping it from enforcing its statutory rights to claim payment, the agreement can only amount to a contractual provision to oust the statute’s application. It would neither have relieved Willis from its statutory obligation to provide a payment schedule within the prescribed time nor barred Holmes from submitting its claim to adjudication. Mr Carden’s argument, however expressed, relies upon an unanswered offer to refer a dispute for arbitral determination in accordance with an existing agreement. S12 subordinates the effect of an arbitration provision where a claim is made under the Act. As a result, the statute prevails notwithstanding an agreement to arbitrate.
[34] Therefore, in the present case, even if there was an agreement with regard to provision of a single payment schedule as contended by CPB, this could not oust the statute’s application, and s 22 provides that the payer becomes liable for the claimed amount if it does not provide a payment schedule in response to a payment claim by the relevant date. As noted above, no payment schedule was provided in response to payment claim 20 by 17 May 2022. Further, if the alleged agreement to provide a single payment schedule was reached after 17 May 2022, it seems to me that statutory liability to pay the amount claimed in payment claim 20 by the due date for payment had already accrued. FZ Group says that it reserved all its rights when it withdrew the statutory demand but CPB disputes this. However, even if rights were not reserved, I do not consider this was necessary to preserve FZ Group’s rights under the CCA. The withdrawal of the statutory demand, which is simply a means of enforcement, did not
15 At [31].
16 At [34].
extinguish the underlying statutory liability to pay the amount claimed, nor the right under s 23 of the CCA to recover the claimed amount as a debt due.17
[35] Further, as discussed below in the context of the second application, even if FZ Group subsequently agreed not to pursue its claim against CPB as part of a “walk away” arrangement in July 2022, the effect of s 12 is that FZ Group remains entitled to recover the statutory debt from CPB under s 23 of the CCA.18
Abuse of process – s 290(4)(c)
[36] CPB contend that in any event it was an abuse of process for FZ Group to issue the second statutory demand in respect of payment claim 20 because FZ Group was well aware that there was a potential dispute and that CPB had a significant counterclaim, and because FZ Group has delayed enforcing its rights.
[37] I do not consider that the fact that FZ Group may have been aware of a potential dispute, and that liability was not accepted by CPB, makes the issue of the second statutory demand an abuse of process. That is because the statutory demand has been issued in respect of a statutory debt under the CCA. It is not an abuse of process to issue a statutory demand to enforce a debt due under the CCA even though the party seeking to enforce the debt is aware that there is an underlying dispute that will have to be argued later.
[38] The same position applies in relation to any knowledge of a significant counterclaim. Even if FZ Group had knowledge of a significant counterclaim prior to the issue of the statutory demand in May 2024, it was not an abuse of process to issue a statutory demand for a debt due under the CCA. Section 79 of the CCA provides that the Court must not give effect to any counterclaim in respect of proceedings for the recovery of a debt under s 23 of the CCA.19 There is an exception for set-off of a liquidated amount if judgment has been entered for that amount, or there is not in fact any dispute between the parties in relation to the claim for that amount. I discuss
17 Construction Contracts Act, s 12, 22 and 23.
18 See the discussion at [69] below.
19 Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR243 at [61]– [64]; Newhaven Hoskins Trustee Ltd v Active Contracting Ltd, above n 6, at [41].
below why I consider there is a dispute between the parties with regard to CPB’s alleged counterclaim.
[39] Finally, there is the issue of delay. Mr Storey states that it was “with a sense of extreme frustration that FZ Group felt compelled to re-serve the statutory demand recently given that we still had not received payment from the applicant”. Although FZ Group has not explained why there has been a delay in seeking to enforce payment claim 20 by reissuing a statutory demand, I do not consider that this constitutes an abuse of process such that the statutory demand should be set aside.
Irretrievable prejudice – s 290(4)(c)
[40] The Courts have recognised that the “pay now, argue later" policy underlying the CCA is not inflexible and may yield in circumstances where, for example, any payment made now will not be recoverable later so that the payer is irretrievably prejudiced.20 This issue may arise in an application to set aside a statutory demand on other grounds under s 290(4)(c).21
[41]In Kariiti Ltd v Donovan Drainage & Earthmoving Ltd, the Court held that:
[10]While each application will turn on its own facts and circumstances, there are two important considerations:
a)How real is the risk that the payee will not repay once there has been a final determination on the merits under a dispute resolution procedure under s 26(1) [of the CCA]?
b)How strong is the payer's claim that the payee will have to repay under that later determination?
…
[17] For the payer to persuade the Court that it ought to be relieved from enforcement of its obligations under ss 23, 24 and 59 of the Construction Contracts Act, because of the risk that the payee will not repay, it needs to establish:
a)That there is a high degree of likelihood that the payee will not be able to repay if a determination after a dispute
20 Triple Connection Ltd v Concept Builders Queenstown Ltd [2024] NZHC 1049 at [17]–[28]; Kariiti Ltd v Donovan Drainage & Earthmoving Ltd HC Whangarei CIV 2010-488-613, 19 November 2010; C&R Property Development Ltd v MR Civil Ltd [2020] NZHC 1470.
21 Kariiti Ltd v Donovan Drainage & Earthmoving Ltd, above n 20, at [9].
resolution procedure under s 26(1) goes in the payer's favour; and
b)That it has a good arguable case that it will succeed under the dispute resolution procedure under s 26(1).
[42]In respect of the risk of non-payment, the Court stated:
[11] The risk must be more than nominal. It is not enough for the payer simply to express a concern about the payee's ability to repay. In England, the issue has arisen in applications for stay of execution under order 47 of the Civil Procedure Rules when adjudicators' orders under the Housing Grants Construction and Regeneration Act 1996 have been enforced. That Act operates in a broadly similar way to our Construction Contracts Act. There is, therefore, helpful guidance from English decisions, just as Australian decisions under state Building and Construction Industry Security of Payments legislation are helpful. In Total M and E Services Ltd v ABB Building Technologies Ltd [2002] EWHC 248 at [52], Wilcox J said at 52:
“ … The risk of an inability to repay on due time is one of a number of factors to be taken account of in the balancing exercise. Where the risk is high as where there is strong uncontradicted evidence of a present inability to pay or a company is in administration a stay may be appropriate on terms safeguarding the disputed monies. The burden is clearly upon the party seeking a stay to adduce evidence of a very real risk of future non-payment.”
...
[13] So, if the payee is in substantially the same financial position as it was when the payer chose to engage it under the construction contract, the payer can hardly complain about the risk of non-payment, because that is a risk the payer took when he entered into the contract with the payee. Similarly, when a payee's weakened position is attributable to a significant degree to the payer's failure to pay sums due under ss 23, 24 or 59, that is not a be good reason for relieving the payer from its obligation to pay.
[14] On the other hand, it is not the policy of the Construction Contracts Act to transfer between parties to construction contracts the risk of insolvency. So where the payee is in insolvent liquidation or receivership or administration, or there is no dispute that the payee is insolvent, then there will be evidence of an inability to repay.
[43] In relation to the strength of the payer’s case, the Court found that the standard was that the payer must establish a good arguable case that it will succeed under another dispute resolution procedure and:
[20] While I allow for the case where the payer's case is blindingly obvious, a word of caution is required. Disputes under construction contracts are typically not suitable for summary decision. Arguments about delays in performance, defective workmanship, over-charging and the like are not the materials to build an argument that the payer's case is blindingly obvious.
[21] When a payer does not adequately address both the risk of non-payment and the strength of its case, then it is hardly likely to get interim relief against non-payment under ss 23, 24 and 59.
[44] CPB says that I should find that there is a “high degree of likelihood” that FZ Group will not be able to repay for the following reasons.
[45] First, FZ Group was put into receivership in April 2024. However, Mr Storey states in his affidavit evidence that this was “purely due to an oversight” in that notice was served on the company by way of an email address not currently used. He states that immediately following the notice being received arrangements were put in place to satisfy the debt and discharge the receivers, and the receivership lasted “on a practical basis” for less than one day. The Receivers’ Report dated 12 April 2024 states that the receivers were appointed on 10 April 2024. The receivers state that the director of FZ Group entered into an arrangement to settle the outstanding debt of the appointer (in the sum of $66,428.78) and the receivers therefore retired from the appointment. This appears to have been a one-off issue which was quickly resolved.
[46] Second, CPB also refers to credit reports adduced in evidence which indicate that from April 2022 to May 2024, there was a high to moderate risk that FZ Group would fail, and that in the 12-month period preceding 16 May 2024, FZ Group had a new court action taken against it in an amount of $133,959. However, there is no evidence that FZ Group has ceased trading, and nor is it in receivership or liquidation.
[47] Third, CPB say that FZ Group is facing extant liquidation proceedings in which the applicant creditor relies on a statutory presumption that FZ Group is unable to pay its debts due to failure to comply with a statutory demand. It is alleged that there is at least one other creditor, independent of CPB, supporting the application for liquidation. The sums are approximately $42,000 claimed by Freedom Interiors Ltd (FIL) and approximately $10,000 claimed by Brace-It Ltd. FIL served a statutory demand on FZ Group on 18 December 2023 and filed an application for liquidation in February 2024. Brace-It Ltd filed an appearance in support of that application dated 1 July 2024.
[48] Mr Storey states that FZ Group is solvent and able to pay its debts as they fall due. He acknowledges that FZ Group is currently facing some cashflow issues but states that the primary reason for this is the non-payment of payment claim 20 by CPB. FZ Group say that the $42,000 amount claimed by FIL relates to the project works that FZ Group was carrying out for CPB at Waikeria Prison, and that FIL has agreed to wait until the outcome of this application before taking any further steps. When a payee’s weakened position is attributable to a significant degree to the payer’s failure to pay sums due under the CCA, that is not a good reason for relieving the payer from its obligation to pay.22
[49] In this case, the FIL invoices were issued between August 2021 and 14 February 2023. FZ Group has made significant payments towards these invoices, but there is a balance owed of approximately $42,000. It is apparent that non-payment of payment claim 20 in 2022 and subsequently may have impacted FZ Group’s ability to pay the outstanding amount to FIL and the amount claimed by Brace-It Ltd. CPB contends that it is “disingenuous” for FZ Group to say that non-payment of payment claim 20 is the cause of its cashflow problems given that it could have sought to enforce payment claim 20 at any time since May 2022. However, while there has been delay in seeking to enforce payment claim 20, the primary issue here is the failure by CPD to pay the debt.
[50] Third, CPB also takes the position that its counterclaim against FZ Group in the sum of $3,553,748.19 (including GST) is also a debt due, and should be taken into account in considering whether to exercise the discretion to set aside the statutory demand under s 290(4)(c). CPB submits that even if there is a dispute regarding the counterclaim,23 it should still be taken into account as a contingent liability.24 CPB submits that even if FZ Group is entitled to payment of payment claim 20 (which is not accepted), and allowing for a set-off, there is no evidence that FZ Group could pay the balance of approximately $3m to CPB. However, there is a difficulty with this argument in the context of the CCA. To find that the statutory demand should be set
22 Kariiti Ltd v Donovan Drainage & Earthmoving Ltd, above n 20, at [13].
23 See the discussion below.
24 CPB refers to David Browne Contracts Ltd v Petterson [2018] 1 NZLR 112 at [90]–[96].
aside under s 290(4)(c) on the basis of CPB’s counterclaim would be to give effect to the counterclaim in contravention of s 79 of the CCA as discussed above.25
[51] Overall, for the reasons set out above, I do not consider that I can properly find that there is high degree of likelihood that FZ Group will not be able repay the debt claimed in the statutory demand if a subsequent determination of the underlying disputes between the parties goes against FZ Group. Further, to the extent that CPB is raising its counterclaim to satisfy the requirement of a good arguable case against FZ Group, I am unable to take the counterclaim into account as this would be contrary to s 79 CCA.
Conclusion
[52] For the reasons set out above, I am not satisfied that the statutory demand issued by FZ Group should be set aside under s 290(4)(a) because there is a substantial dispute as to whether the debt is owing or due, or because it is an abuse of process, or on any other grounds under s 290(4)(c).
Second application
[53] CPB submit that FZ Group is contractually barred from raising any dispute with regard to its claim, and there is no possible challenge under s 290(4)(a). CPB’s position is based on the following clauses of the contract:
34.1 Valuation Amount
(1)For the matters described in paragraphs (a) to (c) of this clause 34.1(1), the Contract Sum will be increased or decreased, as the case requires, by an amount agreed by the parties or, failing such agreement, by an amount determined by CPB. The agreed or determined amount will be:
(a)In respect of costs, expenses, losses and damages suffered or incurred by a party if the other party breaches the Contract, an amount valued as follows:
(i)the valuation will be determined on the basis of the costs, expenses, losses and damages suffered or incurred by the party in question;
25 C&R Property Development Ltd v Mr Civil Ltd [2020] NZHC 1470 at [30].
(ii)the valuation must include for off-site overheads, but must not include profit for the benefit of CPD or the Contractor (as applicable); and
(iii)any determination by CPB must be made on the basis of a bona fide view formed by CPB as to whether a breach of the Contract has occurred and the determination will be deemed not to constitute a breach or repudiation of the Contract by CPB.
36.2 Demand for Payment
If CPB gives a notice under clause 36.1(1)(b) or 36.1(6) that includes a demand of payment, the Contractor must pay the amount in question to CPB within 10 Business Days of receiving the notice, and if the Contractor fails to do so, then at the expiry of that period, and without prejudice to any other right that CPB may have, CPB is entitled to recover the amount in question from the Contractor as a debt that is immediately due and payable by the Contractor. Nothing in this clause 36.2 limits any obligation or liability of the Contractor under clause 38(5).
46DISPUTE RESOLUTION
46.1Intention
…
(2)Without limiting clause 38 or 45, if the Contractor disagrees with a determination or valuation of CPB in respect of:
(a)any Extension Claim under clause 28; or
(b)any valuation under clause 34;
then, to the extent permitted by law, it is agreed that:
(c)if the Contractor wishes to dispute CPB’s determination or valuation, it must give a Notice of Dispute to CPB within 20 Business Days of being notified of the determination or valuation; and
(d)if the Contractor does not give a Notice of Dispute within that time, then it will be deemed to have accepted the relevant determination or valuation and that determination or valuation will be final and binding on CPB and the Contractor and not subject to any further dispute under this clause 46 or otherwise.
[54] CPB contends that it valued and determined the additional costs it has incurred as a result of FZ Group’s alleged repudiation under cl 34.1, and then issued demand for payment under cl 36.2. CPB contends that FZ Group failed to disagree with the determination or valuation by issuing a Notice of Dispute within 20 working days
under cl 46.1(2) and therefore FZ Group is deemed to have accepted the determination and valuation and they are final and binding and cannot be subject to any further dispute. CPB also contends that because FZ Group failed to comply with the demand for payment, CPB is entitled under the contract to recover the relevant amount from FZ Group as a debt immediately due and payable.
[55] The issue is whether there is arguably a substantial dispute as to the purported existence of the debt because, due to a “walk away” agreement between the parties, CPB has not validly undertaken the valuation and issued the demand for payment of its claim under the contract at this stage.
[56] Mr Storey, a director of CPB, states that around April/May 2022, “site walks” were done with CPB staff and final “measures/mark ups” had been signed and passed on to CPB so that CPB could finalise valuation of the works undertaken by CPB. He states that he was on site completing remedial works as it fell due. This is disputed by CPB witnesses who say that no work was undertaken by FZ Group from March 2022 onwards.
[57] Mr Storey states that from around 20 May 2022 he was liaising with Andrew Hall, the project director for CPB at that time. Mr Storey states that Mr Hall advised him by email dated 12 July 2022 that CPB required a letter from FZ Group “to claim the overspend from Corrections”. CPB prepared the 13 July 2022 letter Mr Storey to sign. The letter states in part:
As you can see our company has been impacted by COVID in many different ways. And we can’t see the situation improving any time soon - labour, materials and shipping costs are still on the rise. Material costs have gone up by 26% due to shipping delays and cost increases and then land freight due to lack of labour to make deliveries. We are under extreme financial pressure. It has become clear that we can’t carry on like this. Unfortunately, and despite our best efforts we are unable to continue with the project. We understand the difficulties this creates for CPB, but we are left with no other choice but to withdraw. We are hopeful that Wadsworth will be able to finish the balance of the contract scope, but no doubt they will have their own challenges.
[58] Mr Storey states that the reason that FZ Group signed and returned the letter was that FZ Group understood that an agreement had been reached that CPB would
then claim any additional costs of completion upstream from Corrections and there would be no claim against FZ Group.
[59] Mr Hall states that FZ Group had been struggling to meet their obligations under the contract since around early 2022. Mr Hall and other CPB witnesses refer to the contractual notices sent to FZ Group in late 2021 and early 2022 with regard to alleged failure to provide sufficient resources and delay. However, there is also contemporaneous documentary evidence dated 21 December 2021 that records FZ Group disputing the allegations made against it. FZ Group alleges that it was waiting for information from CPB and for services to be removed so that it could plan and execute the works. FZ Group contended that it had sufficient staff on site for the works it could access, and sought a “workable updated program” from CPB.
[60] Mr Hall acknowledges that CPB was in discussions with Corrections about Covid relief because all contractors were suffering the effects of border closures which affected resourcing on projects. He says that he made it clear to Mr Storey that CPB would incur significant additional costs in completing the works with Wadsworth if FZ Group withdrew. He says that CPB needed a letter from FZ Group setting out its issues with non-performance to use for an upstream claim to Corrections, and CPB prepared the wording of the 13 July 2022 letter because FZ Group was unable to do so. Mr Hall says further:
In terms of getting the letter signed and returned, the discussion we had was that we would do our best to claim costs upstream, but that was on the clear understanding that all parties were to walk away. In other words, FZ had no further claims against CPB, and CPB would do our best to claim upstream. I wholly reject any suggestion that CPB would have left any live claims on the table for FZ to pursue (i.e. payment claim #20) knowing that it had a significant cost to remedy the works undertaken by FZ Group, and, further costs to complete the balance of the project works.
It is my understanding that FZ Group accepted that it had no further claims against CPB and that was the basis on which it returned the letter. Whilst there is no guarantee that CPB will ultimately have its claims accepted by the Principal, it was always willing to stand by its part of the deal, i.e. do its best to try and get costs covered upstream. It is FZ Group that has suddenly backtracked and tried to re-instate a claim which CPB ultimately believed had been put to bed.
[61] Mr Hall’s evidence indicates that there was a “deal” between CPB and FZ Group involving a “walk away”. However, the terms of the “deal” are not clear
and there is a conflict of evidence in this regard. FZ Group’s position seems to be that there was no agreement not to pursue its claim(s), but CPB agreed it would not make any claims against FZ Group for additional costs of completion if FZ Group signed and returned the 13 July 2022 letter. CPB’s position seems to be that FZ Group agreed not to pursue its substantial claim of approximately $445,000, but CPB could ultimately claim against FZ Group for the additional costs of completion, provided that it would “do its best to try and get costs covered upstream”.
[62] CPB says that, consistent with its position, its commercial team has been keeping FZ Group informed of the work performed to complete FZ Group’s scope of work, including providing copies of daily site diaries. However, Mr Storey disagrees that CPB has been keeping FZ Group informed of the position.
[63] Ms Van, for CPB, submits that it is “entirely misconceived” for FZ Group to contend that the “walk away” arrangement could only operate in FZ Group’s favour. However, it also seems to me to be unlikely that FZ Group would have agreed not to pursue it claim for approximately $445,000 without certainty that it would not be subject to a claim by CPB for additional costs in the future.
[64] In my view, there is arguably a substantial dispute as to the nature, terms and effect of the “deal” between the parties. Did FZ Group agree not to pursue it claim(s) as part of the deal? Did both parties give up their respective claims as might be expected where there was, as stated by Mr Hall, a “clear understanding that all parties were to walk away”? If so, did that bring the contract to an end given that there would be no further performance or claims by either party under the contract? If CPB reserved the right ultimately to claim additional costs of completion from FZ Group subject to it doing its best to claim upstream, what was it required to do to satisfy this requirement, and when would it be entitled to make a claim against FZ Group? What does “do its best” mean? Was CPB required to pursue adjudication or arbitration proceedings against Corrections if its claims were disputed? The evidence indicates that CPB has extant claims against Corrections which have not yet been resolved, but there is no evidence put forward by CPB as to the progress of those claims and whether CPB has or may recover some or all of its costs from Corrections.
[65] In the circumstances, there is also arguably a substantial dispute as to the validity of the debt claim currently made by CPB under the contract. If the parties agreed to a “walk away” in the sense that FZ Group would withdraw from the contract and neither party would pursue claims against the other, then CPB’s purported claim would be in breach of that agreement. Arguably, CPB could not validly value the claim and issue a demand for payment under the contract if it did so in breach of the “walk away” agreement. Further, if the “walk away” was intended to resolve the issues between the parties, there is an issue as to whether CPB could have determined the valuation of its claim under cl 34.1(1)(a)(iii) on the basis of a current “bona fide view formed by CPB as to whether a breach of the Contract has occurred”. Further, there is an issue as to whether the contract even remains on foot, including the contract mechanisms for valuation of the claim and demand for payment.
[66] Even if the “deal” was that CPB would “do its best” to recover its additional costs upstream, and the contract remains on foot, there are issues which go to the validity of CPB’s purported debt claim because CPB may have acted in breach of the “walk away” agreement. These issues include: whether CPB has in fact “done its best”, including whether it may be required to pursue adjudication or arbitration proceedings against Corrections if its claims are disputed; and whether CPB is entitled to invoke the valuation and demand for payment provisions of the contract at this stage prior to its claims against Corrections being finally determined.
[67] Even if there was no concluded “deal”, there is arguably a substantial dispute as to whether an estoppel arises out of the discussions between the parties.26 For example, FZ Group may have relied to its detriment on a representation by CPB, or on a belief or expectation created or encouraged by CPB, that it would seek to recover its costs upstream and would not make any claims for additional costs against FZ Group. It is conceivable that, absent this representation, FZ Group may have acted differently regarding its claims under payment claims 20 and 21 and/or its withdrawal from the contract and sought to mitigate its exposure to a claim for additional costs by CPB. Therefore, it may now be unconscionable for CPB to depart from the representation, belief or expectation. This may impact on the debt claim as CPB may
26 Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (7th ed, Lexis Nexis, Wellington, 2022) at [4.6.2].
be estopped from validly invoking the valuation and demand for payment provisions of the contract.
[68] Therefore, I find that the statutory demand issued by CPB should be set aside under s 290(4)(a) on the basis that there is a substantial dispute as to the existence of the debt.
[69] CPB submits that FZ Group has reneged on the “walk away” agreement by issuing a statutory demand in respect of payment claim 20 in May 2024. That may be so, depending on the nature, terms and effect of the agreement. However, I do not consider this gives rise to a substantial dispute as to whether the debt claimed by FZ Group in its statutory demand is owing or due. Ms Van submits that there is no prohibition on parties agreeing to resolve debt claims as between themselves, even when they arise out of the operation of the CCA. However, even if there is no prohibition, and such an agreement has contractual force, s 12 of the CCA clearly states that the statute “has effect despite any provision to the contrary in any agreement or contract”.27 In Willis Trust Company Ltd v Green,28 the Court found that an agreement to refer Holmes’ final claim to arbitration did not mean that Willis was relieved of its obligation to provide a payment schedule, or that Holmes was estopped from enforcing its statutory rights, including the right to refer the claim to adjudication. In this case, I consider that any agreement by FZ Group not to pursue its claim(s) as part of a “walk away” arrangement does not prevent FZ Group from exercising its statutory right to recover the accrued debt in respect of payment claim 20 under the CCA. Section 23 of the CCA provides that FZ Group may recover the claimed amount from CPB as a debt due.
Result
[70] The application by CPB Contractors Pty Ltd to set aside the statutory demand issued by FZ Group NZ Ltd dated 6 May 2024 is dismissed. The time for compliance by CPB Contractors Pty Ltd with this statutory demand is extended by a further ten working days from the date of this judgment.
27 See above at [31]–[35].
28 Willis Trust Company Ltd v Green, above n 14.
[71] The application by FZ Group NZ Ltd to set aside the statutory demand issued by CPB Contractors Pty Ltd dated 15 May 2024 is granted. The statutory demand is set aside under s 290(4)(a) of the Companies Act 1993.
[72] My preliminary view is that FZ Group NZ Ltd is entitled to costs on both applications on a 2B basis and reasonable disbursements. The parties are encouraged to agree costs. However, if agreement cannot be reached, then memoranda may be filed (not exceeding three pages, excluding costs schedules) and costs will be determined on the papers.
Associate Judge Skelton
Solicitors:
Anthony Harper, Auckland for Applicant Neilsons Lawyers, Auckland for Respondent
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