DHC Assets Limited v Arnerich
[2022] NZHC 1381
•13 June 2022
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-307 [2022] NZHC 1381
BETWEEN DHC ASSSETS LIMITED
Plaintiff
AND
ANTONY IVO ARNERICH
Defendant
Hearing: 13, 14 December 2021 Appearances:
F J Thorp & L J Turner for Plaintiff
J D McBride & A J Steel for Defendant
Judgment:
13 June 2022
JUDGMENT OF PAUL DAVISON J
This judgment was delivered by me on 13 June 2022 at 3:30 pm pursuant to r 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Solicitors:
Duthie Whyte, Auckland Doug Cowan, Auckland
DHC ASSSETS LIMITED v ARNERICH [2022] NZHC 1381 [13 June 2022]
Introduction
[1] This judgment determines a matter remitted back to this Court by the Court of Appeal following a successful cross-appeal by the plaintiff, DHC Assets Limited (DHC), against my judgment delivered on 2 October 20191 and which relates to a part of its claim against the defendant, Mr Antony Arnerich, for compensation pursuant to ss 131 and 301 of the Companies Act 1993. The part of DHC’s claim to which this judgment relates, are claims which were rejected by an adjudicator appointed pursuant to the Construction Contracts Act 2002 and which the High Court declined jurisdiction to address, as being matters appropriately determined by means of the arbitration proceeding which DHC had already commenced in respect of those claims rejected by the Adjudicator.
Background
[2] The full background to this dispute is set out in the judgments of the High Court, Court of Appeal2 and Supreme Court.3 For present purposes only a brief summary is necessary.
[3] In October 2011 DHC entered into a construction contract with Vaco Investments (Lincoln Rd) Limited (Vaco) for the design and construction of a commercial building on a property in Lincoln Road, Henderson, which Vaco owned and had leased to ASB Bank Limited (ASB).4 Mr Arnerich was the sole director and effective owner of Vaco, which held the property as trustee for the Vaco Trust, of which Mr Arnerich and members of his family were the beneficiaries. During the course of construction, a dispute between DHC and Vaco arose over DHC’s entitlement to recover the costs it had incurred as a result of time delays caused by significant changes to the building which were required by ASB.
1 DHC Assets Ltd v Arnerich [2019] NZHC 1695 [October 2019 judgment].
2 Arnerich v DHC Assets Ltd [2021] NZCA 225 [Court of Appeal judgment].
3 Arnerich v DHC Assets Ltd [2021] NZSC 121.
4 In fact it was Clearwater Construction Ltd (CCL) that entered into the construction contract with Vaco on or about 18 October 2011, and CCL subsequently assigned the contract to DHC with Vaco’s consent on 1 April 2012. See the October 2019 judgment, above n 1, at [70].
[4] In my judgment of 2 October 2019 I held that Mr Arnerich was liable to pay DHC the sum of $367,7685 being the amount awarded to DHC in the adjudication proceedings together with interest entered as a judgment of the North Shore District Court in favour of DHC against Vaco on 11 May 2017.6
[5] The events leading to the Adjudicator’s determination are set out in my judgment at paragraphs [203]–[215]. As I noted in that section of the judgment, the Adjudicator upheld all four of DHC’s extension of time claims totalling 147 calendar days, and ruled that each extension of time had “arisen as a result of the net effect of a compensatable Variation in terms of clause 10.3.1(a) of the General Conditions”. He further found that Vaco was wrong to deduct the sum of $70,800 from the Final Payment Schedule as liquidated damages, and also that Vaco (In Liquidation) was required to pay DHC sums totalling $367,768.12 as at the date of his determination together with contractual interest on part of that amount, 75 per cent of his adjudicator’s fees, and 75 per cent of DHC’s legal costs and expenses.
[6] However, the Adjudicator rejected DHC’s claim for time-related costs in connection with its extension of time claims for completion of the building work pursuant to the construction contract.
[7] The events leading to the District Court entering judgment for DHC against Vaco for $367,768.12 set out in paras [212]–[215] of my judgment are set out here for convenience:
[212] However, although it had achieved a substantial degree of success, the adjudicator disallowed DHC’s claim for time related costs related to extensions of time to the due date for completion. These costs were for
$182,462, $5,182, and $23,581. The Adjudicator found that the insuperable difficulty for CCL was that the time related costs it had claimed for related to P&G costs, which were precluded by the terms of clause 4.4 of the Contract Performance Agreement.
[213] The Adjudicator also disallowed DHC’s claim for its High Court related legal fees, saying that those costs were not within the scope of an adjudication under the Construction Contracts Act.
[214] Following receipt of the Adjudicator’s Determination on 12 October 2016, DHC requested the Liquidator’s consent to refer the DHC claims which
5 This sum includes GST of $33,687.33.
6 October 2019 judgment, above n 1, at [353].
the adjudicator had disallowed to arbitration pursuant to clause 13.4.2 of the General Conditions of the Contract. The Liquidator declined to consent to the commencement of arbitration proceedings.
[215] On 15 March 2017 and following a formal proof hearing in the High Court, Lang J made orders granting DHC leave pursuant to s 248(1)(c) of the Companies Act 1993, to commence arbitration proceedings against Vaco (In Liquidation), and to apply to the District Court pursuant to s 73(2) of the Construction Contracts Act 2002 for the adjudicator’s determination to be enforced by entry as a judgment. On 26 April 2017 DHC applied to the District Court at North Shore for the Adjudicator’s Determination dated 5 October 2016 to be enforced by entry as a judgment. Vaco (In Liquidation) was served and took no steps. On 11 May 2017 the District Court entered the Determination as a judgment of the District Court in favour of DHC against Vaco [for] the sum of $367,768.12 (including GST).
(footnotes omitted)
The matter remitted back for determination by the High Court
[8] In its judgment allowing DHC’s cross-appeal the Court of Appeal granting relief relevantly said:
[118] However, as regards the parts of DHC’s contractual claim that had been disallowed by the Adjudicator, and subsequently referred to arbitration, the Judge found that the dispute provisions of the contract were engaged and underway, but were yet to be completed. The Judge could not determine whether Vaco was liable to meet the DHC claims that had been rejected by the Adjudicator. The process for determining those issues under the contract was by arbitration.
…
[148] At the risk of stating the obvious, the High Court had jurisdiction to hear and determine DHC’s claim against Mr Arnerich. It necessarily had jurisdiction to determine any question of fact or law relevant to that claim, absent some limit on its jurisdiction established by statute or by common law. In this case, there was no relevant limit on the High Court’s jurisdiction. …
…
[151] We accept DHC’s submission that in these circumstances, the proceeding should be remitted back to the High Court to determine the question of what, if anything, Vaco owes to DHC over and above the amount determined by the Adjudication process, if that issue is relevant to the award of relief under s 301 of the Companies Act in this proceeding. We return to the question of relief below.
…
[191] DHC’s cross-appeal is allowed. The proceedings are remitted back to the High Court to determine the amount of any further claim DHC may have against Vaco under the construction contract and, in light of that
determination, to make such further orders against Mr Arnerich under s 301 of the Companies Act as may be appropriate.
DHC’s claim
[9] DHC’s claim for the amounts disallowed by the Adjudicator which it referred to arbitration and which it repeats in this proceeding is for:
(a)time-related costs arising out of its entitlement to extensions of time totalling 147 days (being claims 387051; 387079; and the fourth extension of time); and
(b)further claims for P&G (preliminary and general) costs associated with ASB generated or instructed variations (being variations 387036; 387037; 387038; 387039; 387045; 387046; 387059; 387062; 387065) together with GST and where appropriate, interest thereon at the contractual rate on a monthly compounding basis as from 4 May 2013 until date of payment.
[10] DHC claims that it incurred time-related costs as a result of the delays for which the time extensions totalling 147 days were granted totalling $299,471.23.
The contract
The design build construction contract documents
[11] The construction contract, between CCL as “Contractor” and Vaco as “Principal” is entitled “Design Build Lump Sum Contract” and dated 18 October 2011 (the contract).7 It was signed by Mr Fahey as a director of CCL and by Mr Arnerich as the director of Vaco. The terms of the contract are to be found within a collection of documents comprising eight parts.
[12] Part 1 is entitled “Contract Performance Agreement”, and it includes correspondence and a spreadsheet work programme showing a completion date of 29 June 2012. Part 2 is entitled “Second Schedule Agreement”; Part 3 is “The
7 October 2019 judgment, above n 1, at [14]–[32].
[Contractor’s] Tender and Scope Document”; Part 4 is “The Notification of Acceptance of Tender”; Part 5 is “The Special Conditions of Contract”; Part 6 comprises “Sundry Documents” including drawings, the ASB pre-launch checklist and lease agreements; Part 7 is “The General Conditions of Contract” and provides that the General Conditions of Contract shall be NZS 3910:2003,8 Conditions of Contract for Building & Civil Engineering Construction (the General Conditions); and Part 8 is entitled “Agreed Correspondence (if applicable)”.
The Contract Performance Agreement
[13] The terms set out in Part 1 of the Contract Performance Agreement (CPA) state that the Contractor is obliged to undertake the work described in the CPA to the extent that no work necessary to achieve the outcomes described as being the scope of work, would justify extra payment, “even if a Variation to the specification & drawings is necessary to achieve these outcomes, (non compensatable variations)”.
[14] In the section entitled “OVER RIDING BASIS OF AGREEMENT” it is provided that:
The emphasis on the project is on “end results” obligations and it must be clearly understood that it is the responsibility of the Contractor to include within the Contract Price all of its compensation entitlement for achieving those end results on time.
Having regard to the design build nature of this Contract, it is intended that compensatable variations shall be kept to an absolute minimum and that no compensatable variation shall be recognized unless it is instigated by the Principal and the Contractor has fully complied with the VPR [variation price request] procedures set out in the Contract.
…
[15] Under a heading entitled “GENERAL NOTES FOR PRICING” the CPA provides:
2.1 DESIGN BUILD LUMP SUM CONTRACT
Because of the wide experience of the Contractor in commercial projects, and its wide experience with design build contracts, the Contractor hereby guarantees that for the agreed lump sum fixed price, it will meet all of the
8 Standards New Zealand “NZS 3910:2003 — Conditions of contract for building and civil engineering construction” (10 August 2003) <standards.govt.nz> [NZS 3910:2003].
requirements of this Contract Performance Agreement, the scope of works, the specifications, the drawings, and all of the other Contract Documents including the obtaining of the Building Consents and the Code Compliance Certificate(s) and commission, handover and deliver a fully functioning completed building ready to occupy and fit for the intended purposes.
The Contractor shall absorb within the lump sum fixed price, the cost of all works (not necessarily addressed within the Contract Documents) which an experienced Contractor could reasonably be expected to have foreseen in a project of this nature. There shall be no extra payment and no compensatable Variations other than tenants’ Variations, or changes in scope requested by the Principal which are significant and would not be reasonably foreseen by an experienced Contractor.
(emphasis added)
[16]The CPA provided for variations to the contract as follows:
4.1VARIATIONS TO THE CONTRACT WORKS
The Principal or the [Principal’s] Representative shall be entitled to direct the Contractor to carry out Variations. No Variation shall vitiate the Contract and the Contractor shall carry out all Variations. Work executed by the Contractor without direction or authority from the Principal or the [Principal’s] Agent shall constitute a Variation only if subsequently sanctioned as such in writing by the Principal.
Where any compensatable Variation is directed by the Principal or the [Principal’s] Representative, its value shall be agreed in writing before work is commenced.
4.2CLAIM FOR VARIATION
Where a direction is given by the Principal which is not expressly stated to be a compensatable variation but which the Contractor considers to involve a variation at a cost above the lump sum, the Contractor shall within ten (10) working days of receiving the direction, and before proceeding with the work, notify the [Principal’s] Representative that the direction involves a variation not within the lump sum. Within ten (10) working days, the [Principal’s] Representative shall notify the Contractor whether or not the direction constitutes a compensatable Variation.
4.3VARIATION PROCEDURE
The procedure for valuing compensatable Variations in accordance with the General Conditions shall be as follows. In ordering a Variation the [Principal’s] Representative shall issue a sequentially numbered instruction. Where the instruction requests quotation (VPR) from the Contractor, it shall be in accordance with the requirements noted below:
Variation Price Request:
a) To be submitted by the date state,
…
d) Each quotation is to be fully amplified indicating all quantities, rates, costs, fees, etc,
…
f) VPR’s are to be fixed price.
g) Identify the final possible date the VPR approval can be provided by the [Principal’s] Representative to ensure there is no delay to the overall practical completion date.
h) VPR’s are to note any time consequences, should the VPR approval be provided by the [Principal’s] Representative and become a compensatable Variation, that may affect the overall practical completion date.
4.4VALUING VARIATIONS
Each compensatable Variation shall be valued by agreement if agreement can be reached. In the absence of agreement it shall be valued by the [Principal’s] Representative having regard to the following basic principles:
·The valuation is to be on a fair and reasonable basis;
·All processing costs shall be deemed to be included in the original Contract Price and therefore no further allowance will be made;
·All Preliminary and General costs and expenses relating to any changes shall be deemed included in the original Contract Price and therefore no further allowance will be made;
·No costs will be considered unless the original invoices relating to such costs are produced to the [Principal’s] Representative for inspection.
The “Contract Agreement”
[17] Part 2, the “Second Schedule Agreement”, is entitled “Contract Agreement” and it records that the contract was made on 18 October 2011. The Contract Agreement states the contract price of $2,129,838.00, and sets out a list of the other documents comprising the contract which includes: the CPA, the Contract Agreement, the CCL tender and scope documents dated 29 July 2011, which include the “Outline Specification”, the Vaco acceptance of tender letter dated 23 September 2011, the First Schedule - Special Conditions of Contract, Sundry Documents including the ASB pre-
launch checklist (PLC), lease agreement(s), and the General Conditions of Contract NZS 3910:2003.
Vaco’s acceptance of tender letter — 23 September 2011
[18] The Vaco acceptance of tender letter dated 23 September 2011 signed by Mr Arnerich as director of the company, states that Vaco accepts the CCL design build lump sum tender subject to the terms and conditions set out in the letter. The letter is counter-signed on behalf of CCL. The list of terms and conditions stipulates the “Conditions of Contract” as being “NZS 3910:2003. and Special Conditions”. The “Special Conditions” set out in the letter relevantly include:
1.$600.00 per calendar day excluding G.S.T. Liquidated Damages to commence from 27 July 2012 until practical completion.
2.Fixed Price no increased costs all piling and foundation works allowed for if any. (subject to provision of information and review of geotechnical investigation and confirmation of structural requirements to be carried out)
…
7.Programme to be updated and submitted with practical completion date as 29 June 2012. (excluding ASB fit out works which are to be completed on separate fit out consent)
8.No extensions of time for inclement weather.
…
16.The Engineer to the Contract shall be Scott Beagley of Davis Langdon Limited, ANZIQS.
17.All Contract Documents are of equal status. If an item is specified but not drawn, or drawn but not specified, it shall be deemed both drawn and specified. If a discrepancy exists then the Contractor shall cost the most expensive item, system or installation and the Principal or Principal’s Representative will determine the correct item. All such items will be clearly scheduled by the Contractor. All items specified are “or similar” on approval of the Principal or the Principal’s Representative.
[19] A further paragraph of the Vaco acceptance of tender letter is headed, “General”, and relevantly includes:
No claim for variations or extra time will be entered into.
The New Zealand Standard General Conditions of Contract — NZS 3910:2003
[20] The “Special Conditions of Contract” referred to in the list comprising the contract documents is in the form of the First Schedule of NZS 3910:2003.
[21] Section 9 of the General Conditions NZS 3910:2003 is entitled “Variations”. It sets out a series of detailed provisions for the claiming and determination of contractors’ claims for compensation as a result of variations to the contract which are within the scope of the contract, and which increase the quantity of any work.
[22]Clause 9.3.10 of the General Conditions provides:
(a)Where the Contractor is entitled to an extension of time by reason of the net effect of any Variation, the Contractor shall be entitled to compensation for the time related Cost incurred in relation to that extension together with an allowance for profit. To the extent that such Cost has not been compensated in arriving at the Base Value of the Variation, or under the following provisions of this clause 9.3.10, it shall be determined in accordance with 9.3.4, 9.3.5 and 9.3.6 and included in the Base Value.
…
(c) Where the Conditions of Tendering do not provide such a rate, the Contractor shall be entitled to reasonable compensation for time related On-Site Overheads, Off-Site Overheads and Profit.
[23] Section 10 of the General Conditions is entitled “Time for Completion”. Clause 10.1 deals with commencement of the contract works and states that following commencement of the work the contractor “shall then proceed with the execution of the Contract Works with due diligence except as may be sanctioned or instructed by the [contract] Engineer”. Clauses 10.2 and 10.3 provide:
10.2Due Date for Completion
10.2.1 The Due Date for Completion of the Contract Works or any Separable Portion shall be calculated by adding to the date of commencement of the contract period as defined in 10.1.1:
(a)The period provided in the Special Conditions; and
(b)All extensions of time, if any, awarded under 10.3.
10.3Extension of time
10.3.1 The Engineer shall grant an extension of the time for completion of the Contract Works or for any Separable Portion if the Contractor is fairly entitled to an extension by reason of:
(a)The net effect of any Variation; or
(b)Weather sufficiently inclement to interfere with the progress of the works; or
(c)Any strike, lockout or other industrial action; or
(d)Loss or damage to the Contract Works or Materials; or
(e)Flood, volcanic or seismic events; or
(f)Any circumstances not reasonably foreseeable by an experienced contractor at the time of tendering and not due to the fault of the Contractor.
10.3.2The Engineer shall not be bound to grant an extension unless:
(a)The Contractor notifies the Engineer that it claims an extension and states the grounds for the extension;
(b)The notice is given within 20 Working Days after the circumstances arise which are relied on as the grounds for extension, or as soon as practicable thereafter;
(c)The notice either gives details of the period of extension sought or is followed within a reasonable time by a further notice giving such details.
…
10.3.5 Upon receipt of details of the period of extension sought by the Contractor the Engineer shall, if he or she has determined that the Contractor is fairly entitled to an extension, then determine the period of the extension and notify the Contractor of his or her decision as soon as practicable.
…
10.3.7 The Contractor shall not be entitled to compensation for time related Costs where an extension of time is granted on grounds other than the net effect of a Variation.
[24] Included within the General Conditions is a section entitled “Guidelines”. The purpose and contractual status of the guidelines is explained as follows:9
These guidelines are part of NZS 3910 and have contractual status as between the Principal and the Contractor, but only to the extent that they may be referred to as an aid to the interpretation of the substantive clauses. Their
9 NZS 3910:2003, above n 8, at 104.
purpose is to provide assistance in understanding the principles behind the substantive clauses and in applying these clauses to situations which are not dealt with specifically.
[25] Section 10 of the Guidelines is entitled “Time for Completion”, and clause G10.3 is headed “Extension of Time” which correlates to clause 10.3.1 of the General Conditions and relevantly provides:
G10.3.1 Delays can result in additional Costs to both Principal and Contractor. Delay Costs suffered by the Principal cannot be insured by the Contractor, but may be insurable by the Principal. The Contractor will be liable if the delay is due to breach by the Contractor, and may be required to pay liquidated damages. …
Late supply by the Principal is to be treated as a Variation under 5.16, and is therefore covered by 10.3.1(a). Where the Contractor is entitled to an extension of time under paragraph (a) of this clause, there will also be an entitlement to claim under 9.3.10 or 9.3.13 for any time related Costs which result from the Variation. Time related Costs are not recoverable by the Contractor where an extension of time is granted on any other grounds.
…
G10.3.2 This clause deals with the situation where the Contractor fails to give adequate and timely notice of a claim for an extension of time. In such case the Engineer is not bound to grant an extension, although the Engineer may still do so. The purpose of requiring adequate and timely notice is to ensure that the circumstances can be adequately investigated and a reliable judgment made. The discretion vested in the Engineer to reject or allow a late claim recognizes that there may be valid reasons for delay and there may be cases where the lateness of the claims does not prevent a proper investigation. The Engineer should not refuse to grant an extension on the ground of late application unless the lateness is such as to cause real difficulty in the making of a proper assessment, and there are no special reasons such as might excuse the failure to give notice at the proper time.
(emphasis added)
The Adjudicator’s decision
[26] In his decision dated 5 October 2016 the Adjudicator allowed DHC’s four extension of time claims totalling 147 days. In allowing the claims, he rejected Vaco’s submission that DHC’s claims had been made late and out of time, noting that unless the lateness was such as to cause the Contract Engineer real difficulty in making a proper assessment the claims should have been investigated and determined by the engineer. The Adjudicator concluded:
65. There is no evidence in this case that the lateness of Clearwater’s applications for [extensions of time] caused the Engineer any difficulty investigating and assessing those claims. …
…
67.Taken overall, I reject any suggestion by Vaco that delay on the part of Clearwater making applications for [extensions of time] caused any difficulty for the Engineer in making a proper assessment of those claims, such that the Engineer had any basis for rejecting the applications on that ground alone.
[27] The Adjudicator found that in each case the claimed extensions of time were the result of changes to the contract works which were variations to the scope of work and could not reasonably have been foreseen by an experienced contractor in circumstances where the risk was both clearly identified and expressly allocated to Vaco. For example, as regards the second extension of time claim, the Adjudicator said:
80.Clearwater claims an extension of time of five weeks due to late Variations issued by Vaco as a result of ASB not finalising its interior design until the end of April 2012.
81.Clearwater says construction works had been underway for some time before ASB decided to make these changes. It says ASB had previously provided its comments on the design in November 2011 when it changed the GFA, provided interior layouts, moved the plant platform to the roof, changed the roof layout, introduced the skylight and advised on the safe positions. Clearwater says further, that the sign off process had no bearing as the changes made were a complete redesign to what had previously been advised.
82.Clearwater says that the changes made by ASB at this late stage were accepted and paid as Variations to Vaco and it contends that these changes were not reasonably foreseeable and no contractor would allow for coordinating these works twice.
…
87. I have formed the view that the design changes requested by ASB constitute a change in scope requested by the Principal that is both significant and which could not have been reasonably foreseen by an experienced contractor in [the] circumstances. That much appears to be clear from the fact that the Variations have been accepted and paid for to a large extent.
[28] In his reasons for allowing DHC’s fourth extension of time claim for which it had claimed 28 days, the Adjudicator said:
103.On the evidence, which is not challenged by Vaco, Clearwater was awarded a Variation in respect of the power upgrade, and the ‘net effect’ of the Variation was that Clearwater suffered delay for the reasons it has advanced in support of its [extension of time] application.
104.Vaco’s argument that the contractor was not entitled to compensation by reason of there being no power is nonsensical in the circumstances of this case. The supply of suitable power and payment of related fees and costs was a Principal responsibility and risk event under the Contract.
105.I have formed the view that the power supply upgrade constitutes a change in scope requested by the Principal that is both significant and which could not have been reasonably foreseen by an experienced contractor in circumstances where the risk was both clearly identified and expressly allocated to Vaco.
106.Accordingly, I uphold Clearwater’s claim for [fourth extension of time claim] for 28 calendar days.
[29] However he rejected DHC’s claims for P&G costs incurred in connection with the extensions of time claims. He said:
142.Clause 4.4 of the Contract Performance Agreement - item 3 provides that all P&G costs shall be deemed included in the original Contract Price and therefore no further allowance will be made.
143.While there are conflicting provisions in the Contract documents relating among other things, to P&G, I am satisfied that the provision in the Contract Performance Agreement should prevail.
144.In essence, Clearwater argues that the provision makes no commercial sense and it is commercially improbable that the Contractor would have agreed/intended to absorb P&G costs relating to Variations with no further allowances to be made. While I agree with the rational sentiment, I disagree that the provision should be read down to mean anything other than the meaning that the words used convey in their ordinary and natural context. While it might not appear to be a commercially sensible undertaking, it is nonetheless because of that very fact that I am satisfied that Clearwater did, or certainly ought to have carefully considered the implications of agreeing to such a provision which plainly put the risk of P&G costs associated with substantial changes in scope and delay firmly at the feet of the contractor. No other conclusion is tenable in my view.
145.The legal adviser to Clearwater in this matter, [redacted], expressly acknowledges that the concept of a variation that carries with it no right to compensation or limited rights to compensation is not entirely meaningless. In relation to the suggestion that an adjudicator may view such a provision with distaste and resolve the conflict in favour of Clearwater, I do not find it necessary to engage in such a subjective analysis. Parties to commercial contracts make all manner of
agreements that might appear odd to an outsider and far be it for me to speculate as to the underlying intention or interest that caused Clearwater to agree to take the P&G risk in this Contract.
146.Taken overall, I have concluded that the cost of P&G associated with any Variations was a Contractor risk under the Contract.
(emphasis in original, footnotes omitted)
[30] The Adjudicator nevertheless accepted that each of the extension of time claims had arisen as a result of the net effect of compensatable variations in terms of clause 10.3.1(a) of the General Conditions and pursuant to which DHC would be entitled to compensation for time-related costs. However despite that provision of the General Conditions the Adjudicator found that DHC could not recover its time-related costs because:
179.… the insuperable difficulty for Clearwater in this case is that the time related costs it has claimed are in fact P&G costs which it is not entitled to claim for the reasons I have set out earlier in this determination.
180.Accordingly, it can properly be concluded that Clearwater is not entitled to time related costs in respect of the extensions of time and I reject its claim accordingly.
Submissions
DHC’s submissions
[31] DHC submits that the issue remitted back to this Court for determination by the Court of Appeal is what if anything Vaco owes to DHC over and above the amount determined by the adjudication process, and should there be a further and additional sum owing, whether the Court should make an order pursuant to s 301 of the Companies Act against Mr Arnerich, ordering him to pay the sum to DHC as compensation.
[32] DHC’s claim for its time-related costs incurred as a result of the delays for which the time extensions totalling 147 calendar days were allowed but which were rejected by the Adjudicator total $200,297.63.10 DHC relies on the evidence of its
10 The sum claimed by DHC in its Third Amended Statement of Claim dated 2 August 2018 at paragraph 83(a) of $299,471.23 was amended and initially reduced to $200,279.63 pursuant to the plaintiff’s memorandum dated 5 November 2018 seeking leave to amend the Third Amended
witnesses: Stuart McClatchy, DHC’s Operations Manager; Gordan Brkic, a structural engineer who undertook the structural design of the ASB Centre; Andrew Moore, the Commercial Manager at DHC responsible for costing the proposed project; and two expert witnesses, Raymond Bryant an engineer and Daniel Johnson, a quantity surveyor.
[33] DHC disputes Mr Arnerich’s contention that at this hearing the Court should inquire into all quantum issues, and that the Adjudicator’s determination is not binding or relevant to the Court’s approach to the construction contract generally, and as to whether or not the extension of time claims, the time-related costs, or P&G claims should have been ordered by the Contract Engineer. DHC submits that in accordance with the terms of the judgments of the Court of Appeal and Supreme Court, the only matters which remain in dispute between DHC and Vaco are the rulings made by the Adjudicator with which DHC was dissatisfied and which it subsequently referred to arbitration.
[34] DHC submits that consequent upon the release of the Adjudicator’s determination on 5 October 2016, if either party disputed any ruling made by the Adjudicator that had not been the subject of a formal decision made by the Contract Engineer it had one month to refer the decision to the Contract Engineer, and if either party disputed the Adjudicator’s determination or any ruling made it had one month to refer that matter to arbitration pursuant to clause 13.4.2(c) of the General Conditions, NZS 3910:2003. DHC says that in the absence of a party referring the Adjudicator’s determination for review by the Contract Engineer or to arbitration, the determination became final and binding on the parties.
[35] DHC notes that in accordance with clause 10.3.1 of the General Conditions the Contract Engineer was required to grant DHC an extension of time if it was fairly entitled to an extension by reason of any of the five grounds listed in 10.3.1, which includes where the extension is justified by reason of the net effect of any variation. DHC says that pursuant to clause 9.3.10, where the contractor is entitled to an
Statement of Claim. The amount was subsequently further reduced to either $191,386.98 or alternatively $159,423.25 as determined by the plaintiff’s expert witness Mr Daniel Johnson — depending on whether DHC is entitled to claim time-related costs incurred outside the period of delay to the contract works as a whole.
extension of time by reason of the net effect of a variation, it is also entitled to compensation for the time-related costs incurred in relation to that time extension together with an allowance for profit.
[36] DHC notes that although it referred the extension of time claims rejected by the Adjudicator to arbitration, Vaco did not challenge any part of the Adjudicator’s determination by referring any of his decisions to arbitration. DHC notes that Mr Arnerich acknowledged in his evidence that he knew that if Vaco wanted to challenge the Adjudicator’s determination that it had to refer the matter to arbitration within a certain period and that it had not done so. DHC notes that it was only when Mr Arnerich was facing the prospect of personal liability to DHC that he first sought to challenge the Adjudicator’s determination by commencing a further proceeding, which he subsequently withdrew (the 1926 proceeding). DHC submits that as a consequence most of the key rulings made by the Adjudicator in the course of his determination are now final and binding on the parties and cannot be challenged by Mr Arnerich. DHC says the fact that the Adjudicator’s determination was binding is reflected in the position taken by Vaco’s liquidator and Mr Arnerich in electing to abandon his 1926 proceeding in which he had sought an order that the liquidator be directed to file a counter-claim in the arbitration commenced by DHC, or alternatively that he be allowed to bring a counterclaim on Vaco’s behalf as a derivative action.
[37] DHC further submits that by reason of the prescribed time limits contained in clause 13 of the General Conditions, Vaco is now time barred from challenging the Adjudicator’s determination, and an issue estoppel operates to preclude him from doing so. DHC submits that the effect of this Court’s and the Court of Appeal’s judgments is that the nature of Mr Arnerich’s breaches of his duties under s 131 of the Companies Act are such that he should be liable to pay DHC the full amount of the debt that Vaco owes DHC, whatever that debt may be. DHC says that it is untenable for Mr Arnerich to advance arguments in relation to Vaco’s liability under the construction contract, which are no longer available to Vaco itself.
[38] In relation to the construction contract, DHC submits that in light of the Adjudicator’s binding determination allowing DHC’s four extension of time claims; and because pursuant to clause 10.3.7 of the General Conditions DHC is entitled to
compensation for its time-related costs where an extension of time is granted on the grounds of the net effect of a variation; the issues for the Court are:
(a)Whether the Adjudicator was correct to find that DHC’s time-related costs claims were defeated by the provisions of paragraph 4.4 of the CPA; and
(b)Whether DHC is entitled to recover the balance of its P&G costs in respect of the particular ASB generated contract variations which were disallowed by the Adjudicator and subsequently referred by DHC to arbitration.
[39] DHC acknowledges that the construction contract was “cobbled together” from various sources without the benefit of legal advice, at least so far as DHC was concerned, and that it contains seemingly conflicting and inconsistent provisions. DHC submits that having regard to the inconsistent provisions of the contract, the Court should determine which inconsistent provision or provisions it should uphold in order to give effect to the real intention of the parties.
[40] DHC submits that it is plain from the provisions of clauses 10.3.1 and guideline G10.3.1 that DHC was entitled to time-related costs in respect of each of the four extension of time claims, each being the net effect of variations. DHC notes that the phrase “preliminary and general” or the term “P&G”, does not appear anywhere in the NZS 3910:2003 General Conditions, and where that term is used in paragraph 4.4 of the CPA it is contained within a section of the agreement dealing with and directed at the valuation of variations.
[41] DHC submits that consistency cannot be achieved other than by a result that preserves DHC’s entitlement to claim time-related costs caused by extensions of time which are the net effect of variations, because the NZS 3910:2003 provisions expressly confirm that entitlement. DHC says that the reference to preliminary and general costs in paragraph 4.4 of the CPA being contained in a provision directed at the valuation of variations and making no reference to either extensions of time or time-related costs, could be read down so as not to apply to or derogate from the distinct and separate
entitlement that DHC has under the contract to time-related costs arising from extensions of time caused by the net effect of variations. On that approach the provisions could be read together with the result that DHC’s entitlement to time- related costs due to the net effect of variations is upheld. Alternatively says DHC, the Court could uphold DHC’s contractual entitlement to time-related costs pursuant to clauses 10.3.1 and G10.3.1, and find that part of paragraph 4.4 of the CPA ineffective.
[42]DHC notes that while the Adjudicator found that the provision in paragraph
4.4 of the CPA presented an insuperable barrier to DHC recovering time-related costs, he did not explain why he found that provision overrode the provisions of the General Conditions pursuant to which DHC was entitled to time-related costs caused by the net effect of a variation.
[43] DHC submits that the parties’ conduct, including their conduct while performing the contract, is relevant to aid and inform the proper interpretation of the contract and the parties’ true intention as regards its provisions and their application. DHC notes that although Mr Arnerich has claimed that no variations were to be allowed under the construction contract; that no time extensions were to be allowed; and that no time-related costs were allowed, his conduct and that of Vaco during the course of the contract and construction of the building was inconsistent with that position. For example, DHC notes that contract variations were claimed by DHC, approved by the Contract Engineer, and paid for by Vaco on nearly 80 occasions during the course of the contract and construction. DHC notes that during the course of construction there were numerous discussions between the parties and the Contract Engineer regarding causes of delay which were clearly not attributable to DHC, and of the Contract Engineer having regularly noted in his drawdown reports that DHC’s claims for costs caused by the delays represented a significant risk to Vaco.
[44] DHC also notes the inclusion of the Agreement to Lease entered into between Vaco and the ASB as one of the documents comprising the contract documents and pursuant to which the ASB was to be liable for the differential cost of any variations which it instructed is also relevant to and informs the real intention of the parties as regards both variations and DHC’s entitlement to claim any differential costs arising from the ASB generated variations including associated time-related costs. Also
relevant is Mr Arnerich’s action in late 2013 of seeking payment from the ASB of the costs being claimed by DHC arising from the delays, on the basis that the amounts claimed were payable, while also disputing the validity of the claims.
[45] DHC says that an interpretation of the contract which would have allowed Vaco and its prospective tenants to require any variation to the building under construction, at no extra cost, and with no compensation being payable to DHC for the additional time and cost added to the project, would make no commercial sense, and would be in direct conflict with the extensive contractual provisions dealing with and allowing for extensions of time to be claimed as well as time-related costs.
[46] DHC submits that such an interpretation could not have been what the parties really intended.
[47] In the alternative DHC submits that Mr Arnerich is estopped from denying DHC’s entitlement to claim time-related costs on the basis of paragraph 4.4 of the CPA. DHC says that the estoppel arises because of the circumstances in which despite a term of the contract providing that compensatable variations “shall be kept to an absolute minimum”, Vaco through the actions of Mr Arnerich breached that term by requesting and instructing DHC to undertake approximately 80 separate variations to the building with the net effect being that DHC incurred considerable time-related costs. DHC submits that in these circumstances, Vaco and Mr Arnerich are estopped from taking advantage of a deliberate breach of the terms of the construction contract to benefit themselves at DHC’s expense, when the terms of the CPA provided that compensatable variations were to be valued on a “fair and reasonable basis”, and where Vaco had agreed with DHC that DHC would be entitled to be paid for the P&G costs it incurred in relation to variations generated by the ASB, and in respect of which DHC’s claims for such variations which included a charge for its P&G costs were received, approved, and paid by Vaco throughout the course of the contract.
[48] Finally as regards the contract, DHC says in the event the Court finds that the Adjudicator’s determinations (that DHC is entitled to extensions of time totalling 147 calendar days or that it was entitled to costs relating to those extensions of time by reason of the net effect of variations) are not binding, DHC submits that it has
nevertheless proved its entitlement to the extensions of time and the time-related costs based on the evidence of its witnesses, including Mr Moore, Mr McClatchy and Mr Bryant. DHC notes that in his evidence Mr Bryant said that as a result of the analysis he had undertaken he had concluded that “the Critical Path of the original Tender and Contract programmes was extended, as a result of variations to the original contract, by a period of 21 calendar weeks”. DHC notes that Mr Arnerich did not call any expert evidence to rebut Mr Bryant’s evidence, and the expert he did call, Mr Ewen, accepted under cross-examination that he did not have any relevant experience of contract programming.
[49]As noted above,11 DHC claims time-related costs of either $191,386.98 or
$159,423.25 depending on whether or not it is entitled under the contract to time- related costs incurred outside the period of delay to the contract works as a whole. In this regard DHC relies on clauses 9.3.13 and G9.3.13 of the General Conditions.
[50]Clauses 9.3.13 and G9.3.13 respectively provide:
9.3.13 Where a part of the Contract Works is delayed by reason of a Variation for a greater period than the delay if any to the Contract Works as a whole, and the Contractor thereby incurs time related cost, the Contractor shall be entitled to reasonable compensation for such time related Cost and profit after taking into account any allowance for time related Costs included in the prices and rates where the Base Value has been determined under 9.3.4 or 9.3.5 or in the evaluation of overheads and profit in 9.3.8 and 9.3.9.
…
G9.3.13 Where the Variation results in time related Costs over a greater period than the delay to the Contract Works as a whole, the period of extension of the contract as a whole will not provide a full measure of the additional time related Cost. The Contractor is entitled under 9.3.13 to reasonable compensation in such a case.
[51] DHC submits that as the contract expressly provides for the contractor to be entitled to claim time-related costs incurred over a greater period than the delay to the contract works as a whole, and that the contractor is entitled to reasonable compensation in such a case, the appropriate amount here is the sum calculated by Mr Johnson of $191,386.98.
11 At [32], n 26.
[52] DHC submits that its claims for time-related costs were unreasonably deducted from its Payment Claim 17 and pursuant to clause 12.7.3 of the General Conditions, in the event of an unreasonable deduction of an amount being made from a contractor’s payment claim or Final Payment Claim which is later found by an adjudicator to be payable, the contractor shall be entitled to interest compounding monthly on that amount, from the date on which it would have been payable if the unreasonable deduction had not been made, down to the date of payment.
[53] DHC accordingly claims interest at the contractual rate determined by the Adjudicator of 12.4 per cent compounding monthly, commencing on the date that Payment Claim 17 ought to have been paid, being 4 May 2013 to the date of payment. Pursuant to clause 12.7.4 of the General Conditions the rate of interest shall be equal to one and a quarter times the average monthly interest rate as certified by a chartered accountant or trading bank manager, which is currently payable or which would be payable by the Contractor for overdraft facilities.12 DHC has produced a schedule setting out a calculation of the compound interest on the sum of $191,386.98 commencing 4 May 2013 to 4 February 2022 as being $378,414.74.
DHC’s submissions regarding interest calculation remitted back to the High Court
[54] Concluding its findings as regards interest and Mr Arnerich’s appeal, the Court of Appeal said:
[185] Mr Arnerich is on surer ground in relation to his challenge to the award of contractual penalty interest at a rate of 12.4 per cent per annum, compounding monthly, in respect of the whole of the sum awarded by the adjudicator. Contractual interest should be confined to the items in respect of which it is properly payable under the construction contract, and should not include the amounts which the adjudicator held should not attract penalty interest, or the amounts awarded in respect of GST and the costs of the adjudication. Interest in respect of those components of the determination — which was entered as a judgment — is recoverable in the same manner as interest on any other judgment.
…
[190] Mr Arnerich’s appeal is allowed in so far as it relates to the award of interest on the sum of $367,768.12. The award of interest in the High Court is
12 DHC has produced a written statement prepared by a Senior Manager of ANZ Bank New Zealand Limited setting out the average monthly interest rate payable by DHC for overdraft facilities for each month commencing 1 October 2018 to 31 October 2021.
set aside, and remitted back to that Court to be determined in accordance with this judgment. Mr Arnerich’s appeal is otherwise dismissed.
[55] As noted the Court of Appeal remitted the matter of the award of interest in favour of DHC back to this Court for correction. The order in my judgment directing Mr Arnerich to pay interest to DHC13 required interest to be paid on the sum of
$367,768.12 rather than the sum of $151,928.80 as determined by the Adjudicator as being the amount properly payable by Vaco in relation to Payment Claim 17, and which was due for payment on 4 May 2013. The sum of $367,768.12 included compound interest of $79,723.60 payable on the $151,928.80 sum from 4 May 2013 to the date of the Adjudicator’s determination on 5 October 2016.
[56] DHC therefore submits that the principal sums payable in accordance with the High Court judgment together with interest as adjusted in accordance with the Court of Appeal’s directions is as follows:
(a)$367,768.12 being the sum awarded as judgment, and being the amount awarded to DHC in the adjudication proceedings together with interest entered as a judgment of the North Shore District Court in favour of DHC against Vaco on 11 May 2017.14
(b)Further contractual interest payable by Vaco to DHC on the sum of
$151,928.80 for the period 5 October 2016 (being the date of the Adjudicator’s determination) until 4 November 2021.15
(c)Interest on the sum of $136,115.7216 at the rate of five per cent per annum from 11 May 2017 until the date on which payment is made. DHC calculates that sum as at 10 November 2021 to be $30,626.03.
13 October 2019 judgment, above n 1, at [353].
14 At [353].
15 DHC calculates this further contractual interest on the $151,928.80 to amount to $202,333.20 as at 4 November 2021, and the schedule annexed to DHC’s submissions calculates the compound interest on $151,928.80 from 4 May 2013 to 4 February 2022 as $300,096.06, which includes the
$79,723.60 sum found by the Adjudicator.
16 The sum of $136,115.72, being the balance of the amount awarded by the Adjudicator to DHC in his determination on 5 October 2016, as being the amounts the Adjudicator found should not attract contractual interest, the amounts awarded in respect of GST, and the costs and expenses of the adjudication. The arithmetic being $367,768.12 less $151,928.80 and $79,723.60 =
$136,115.72. The $136,115.72 being the sum of: retentions $40,279.48; GST $28,831.24; DHC
Mr Arnerich’s submissions
[57] Mr Arnerich submits that the construction contract contains an unambiguous provision that prohibits DHC from making claims for time-related costs for what are P&G costs incurred as a consequence of variations extending the contract programme. Mr Arnerich notes that the claims were rejected by the Adjudicator.
[58] Mr Arnerich says that in 2011 at the time of the initial discussions and negotiations leading to the parties entering into the construction contract, the New Zealand economy was still suffering the effect of the global financial crisis and DHC (then CCL) was eager to secure Mr Arnerich’s business.
[59] Mr McBride for Mr Arnerich says that the provisions of the contract reflect that context and he refers to the provisions of the CPA where the parties agreed that compensatable variations would be kept to an “absolute minimum”, and that no compensatable variation would be recognised unless instigated by the principal (Vaco) and the contractor complied with the relevant procedures set out in the contract. Mr Arnerich also notes the variation procedure set out in paragraph 4 of the CPA, and highlights the provisions in paragraphs 4.3 and 4.4, which stipulate that all processing costs relating to contract variations shall be deemed to be included in the original contract price and that “[a]ll Preliminary and General costs and expenses relating to any changes shall be deemed included in the original Contract Price and therefore no further allowance will be made.”
[60] Mr Arnerich notes that during negotiations of the terms of the construction contract, DHC’s Mr Moore sent Mr Arnerich a copy of NZS 3910:2003 attached to an email in which he said:
Please find attached NZS3910 Contract Documents that we propose to use for the upcoming ASB Bank Project in Lincoln Road, please note this is generic documentation and has to be adapted to suit the particular requirements of all parties concerned in the project. As discussed I will commence preparing the First and Second Schedules for your review next week.
costs of the adjudication $29,775.00; reimbursement to DHC for payment to the adjudicator as security for adjudicator’s fee $7,590.00; and a further payment made by DHC to meet the balance of the adjudicator’s fees and expenses $29,640.
[61] Mr Arnerich submits that the inconsistency between the general provisions of NZS 3910:2003 and the more specific provisions of the CPA confirms that the more exacting machinery and provisions of the CPA should prevail. Mr McBride submits that the CPA and not NZS 3910:2003 sets out the core understandings and contractual commitments of the parties to the design build contract, and DHC’s agreement that it would not charge a P&G margin on contract variations. Mr Arnerich notes that in the letter he sent to CCL on 5 September 2011 accepting CCL’s tender on behalf of Vaco, he said that acceptance of the tender was subject to the conditions listed in his letter, which include that the Conditions of Contract were NZS 3910:2003 and the Special Conditions including:
(a)No extensions of time for inclement weather.
(b)No cost fluctuations at all.
(c)No claim for variations or extra time will be entered into.
[62] Mr Arnerich notes that a subsequent version of his acceptance letter (dated 23 September 2011) was included in the suite of contract documents and counter- signed on behalf of CCL. Mr Arnerich submits that the terms and wording of his letter are plain enough and that it is clear from his letter that he would not entertain claims for variations or for more time, however if any such claims were put forward, while he would have a discretion as to whether to admit them or not, he had no obligation to do so. Mr Arnerich acknowledges that any variations that were required by the ASB and which had been agreed with Vaco in advance of being undertaken, would be an exception to this. If there were variations instigated by the ASB, then the ASB would ultimately pay the additional cost of the variations as Vaco would pass the cost on to the ASB for payment, provided that DHC had followed the process in the CPA, and the variations were valued under the provisions of NZS 3910:2003. However, any variation claims put forward by DHC that had not been pre-approved and valued in accordance with the CPA, would not be admitted.
[63] Mr Arnerich submits that the words of the contract should be given their plain and ordinary meaning and read objectively and in light of the context in which the
parties concluded their bargain. Mr McBride submits that if the Court is unable to give a workable effect to what are seemingly conflicting clauses of the contract, it should give effect to the bespoke clauses that have been tailored for the transaction rather than the standard form clauses and generic provisions that are contained within an annexure. Mr Arnerich submits that the tailored provisions of the CPA should be given their clear and unambiguous meaning, and the Court should find that DHC agreed that it would not claim for any P&G costs. Mr Arnerich says that should the Court find there to be ambiguity between the provisions of the contract, any such genuine ambiguities should be read against the party responsible for drafting the provision — in this case CCL/DHC.
[64] Mr Arnerich says that the prohibition on any extensions of time are “less ambiguous”, and the wording makes clear that DHC would not be able to make any such claims.
[65] Mr Arnerich submits that the only basis upon which DHC could have avoided the plain meaning of the wording and effect of the CPA and Mr Arnerich’s acceptance letter would be where there had been a waiver of the provisions by Vaco. Mr Arnerich submits that neither Vaco nor himself ever waived compliance with the provisions of the CPA and says that the Adjudicator’s finding that Vaco had waived compliance with the CPA and CCL/DHC’s failure to strictly comply with the variation price request procedures (VPR) contained in the contract, was wrong, and Mr Arnerich takes issue with the Adjudicator’s findings.
[66] Mr Arnerich also disputes DHC’s submission that the Adjudicator’s determination is final and binding and gives rise to an issue estoppel in respect of the key findings contained in the determination. Mr Arnerich submits that DHC’s submission is misconceived and that it is well-established that there is no res judicata resulting from a Construction Contracts Act adjudication determination, and says that the Court of Appeal misapprehended the correct position when it observed that the parties had proceeded from 17 August 2018 onwards on the basis that the amount (if any) owed by Vaco to DHC, over and above the amount awarded in the adjudication would be determined in this proceeding. Mr Arnerich says that was not his position and that he expected that he had discontinued his 1926 High Court proceeding in
which he sought an order enabling him to intervene in the arbitration on the basis that this proceeding had subsumed many of the issues arising in the 1926 proceeding.
Mr Arnerich’s submissions on interest
[67] Mr Arnerich submits that the contractual interest must be confined to items in respect of which it is properly payable under the construction contract, as explained by the Court of Appeal.17 Furthermore, interest on a damages award against Mr Arnerich in this proceeding can only be awarded in accordance with s 87 of the Judicature Act 1908.
[68] Mr Arnerich notes that pursuant to clause 12.7.3 of the General Conditions, contractual interest will only be payable where an unreasonable deduction was made from the contractor’s payment claim or Final Payment Claim, and where such amount is paid or found by an adjudicator to be payable. Mr Arnerich submits that the deductions made from DHC’s Payment Claim 17 were reasonable, and says that therefore, before contractual interest can be awarded the Court would need to determine whether the making of deductions from the DHC Final Payment Claim was unreasonable. Mr Arnerich says that the correct amount in respect of which contractual interest might be awarded is $147,260.63.
[69] Mr Arnerich also disputes the contractual interest rate of 12.4 per cent relied on by DHC. Mr Arnerich submits that contractual interest on any amounts to which it applies should be calculated in accordance with the rates certified by DHC’s bank manager.
[70] As regards DHC’s claim to interest on the amounts in respect of which clause 12.7.3 of the General Conditions does not apply (in other words the sum of
$136,115.72), Mr Arnerich says the basis of the claim remains unclear. Mr Arnerich says that the fact that the Adjudicator’s determination was entered as a judgment of the District Court on 11 May 2017 following an application made under s 75 of the Construction Contracts Act, renders Mr Arnerich’s liability for interest to be in the
17 Court of Appeal judgment, above n 2, at [185].
nature of damages, and that interest thereon is to be calculated pursuant to s 87 of the Judicature Act.
[71] Mr Arnerich notes that pursuant to s 87 of the Judicature Act the Court has a discretion to award interest, and may award interest at a rate not exceeding the prescribed rate of five per cent. Mr Arnerich submits that in exercising its discretion to award interest on any sums to which clause 12.7.3 of the General Conditions does not apply, interest should be awarded commencing 11 May 2017 in respect of the amounts which were entered as a judgment in the District Court, or alternatively from the date of judgment, having regard to DHC’s failure to succeed on those claims as made to either the Contract Engineer or the Adjudicator, and at a rate calculated in accordance with the internet site calculator maintained under s 13 of the Interest on Money Claims Act 2016, but not exceeding five per cent per annum.
Discussion
[72] Before addressing the issue of interpretation of the contract, it is necessary to briefly review the manner in which the parties dealt with the issues that arose during the course of the construction works and when progress claims were made by CCL as showing their understanding of the contract as regards contract variations and the charging of P&G costs.
CCL claims for P&G costs
[73] As a component of its variation claims CCL also claimed for the associated P&G costs attributed to the extra work required by reason of the ASB generated variations. Apart from two occasions when a lesser rate was charged, CCL charged a straight 12 per cent of the variation cost as its P&G costs. CCL did not however include a P&G charge when issuing variation claims for variations required by Vaco itself, as opposed to those it requested on behalf of the ASB.
[74]As I noted in my 2 October 2019 judgment:
[121] In his evidence Mr Moore who, prior to Mr McClatchy taking up the role of project manager in late November 2011, was involved during the initial negotiations between CCL and the defendant, said that prior to CCL submitting its first variation claims which included the P&G charges, he
discussed the matter of CCL including P&G costs in relation to ASB generated variations with Mr Arnerich. Mr Moore said that Mr Arnerich was aware of the charge and agreed to it. Thereafter, CCL included the charge in its ASB variation claims which Mr Arnerich approved for payment. I accept Mr Moore’s account of his conversation with Mr Arnerich.
[122] On 4 December 2012, having obtained copies from CCL, Vaco provided ASB with all of the bank’s variation costs to that date on the basis that they were full and final claims for costs to be met by the ASB. Having reviewed the variation claims provided to it, on 11 December 2012 the ASB requested Vaco to provide a detailed cost breakdown of the P&G costs. In a reply to the defendant’s request for CCL to provide those details, Mr Tim Fraser, who is a quantity surveyor employed at CCL, briefly explained each of the ASB variation cost claims, and said:
…
In response to the request for detailed breakdown of P&G costs for all of the variations in question below; these have been applied on a fixed basis of 12% of the variation cost across the board for all of the variations. This has remained unchanged since the first variation price request for the stairs was provided, and subsequently accepted, and was not questioned in this instance and neither has it been questioned throughout the project, until now. As this was never questioned, and applying on a percentage basis is an accepted norm, we have not traced all costs directly attributable to each variation and therefore to be able to give you a breakdown of these costs at the last minute is not possible and, in our opinion, unreasonable.
We believe that in some cases the P&G applied to the variations does not cover our costs. Take for example variation number 387045; although the end outcome was only the changing of the fixing detail the amount of time that was spent in dealing with subcontractors working through the numerous design options proposed by the ASB, costing automated louvres, fixed louvres, manually adjustable louvres, all the while changing fixing details, was huge in comparison to the $78 charged in P&G for this variation.
We do not believe that the applied percentage on these variations is excessive, we are unable to go back and extrapolate these costs so far past when they were incurred and as we have never had these costs questioned before, when they have been known for so long, we believe these amounts are due.
Please let me know if any additional information is needed.
…
CCL/DHC — variation claims
[75] The manner in which CCL and Vaco dealt with variations to the contract works is set out in my judgment of 2 October 2019.18 Over the course of the construction work approximately 80 variations were requested and the work undertaken. In each case the variations were documented and identified in CCL’s construction programme reports which were presented for the monthly PCG meetings and the regularly held design meetings. Mr Arnerich received all the reports and attended most of the meetings. The monthly payment claims submitted by CCL to the Contract Engineer included a “Variation Schedule” which listed the contract variations which had already arisen and stated the amount being claimed by CCL in relation to them.
[76] A summary of how these variations were handled during the course of the construction is set out in the 2 October 2019 judgment as follows:
[73] Although the construction contract stipulated that compensatable variations would be kept to an absolute minimum, as earlier noted, a large number of contract variation instructions, most of which originated from the ASB, were progressively received by CCL during the course of the project. During the initial phase of the project, Vaco presented CCL with a series of formal written VPR instructions in which the defendant instructed CCL to proceed with the variation. However in many other instances the variation requests were made in a less formal manner with Vaco sending ASB’s variation requests on to CCL by email. In some instances the variation requests were made by the defendant verbally to CCL’s site manager when the defendant was on site, or over the telephone to the CCL project manager. Such variation requests were usually confirmed by CCL in an email to Vaco. Upon receipt of each variation price request, CCL would record and track it in a spreadsheet document entitled “Variation and Price Request Summary” (the variation schedule) on which each variation order (VO) was allocated a reference number, dated and the cost of the variation noted. When the cost or value of the variation was agreed that would also be recorded on the schedule.
[74] Variations and their status were noted in the Construction Reports prepared and distributed by CCL for the PCG meetings, and the variation schedule was attached to the Construction Reports. By means of the variation schedule CCL provided Vaco, the contract engineer and the ASB with a full running summary of the status of all variations on the project including, the date the variation had been submitted, what was agreed, what had been paid, and any relevant comments regarding the variation. The variation schedule also noted estimated and projected values of as yet unpriced variations, and noted any items which it considered to be variations.
[75] Variations were discussed at the PCG meetings and site meetings. The monthly [PCG] meetings were attended by Mr Beagley and Mr Parkin of
18 October 2019 judgment, above n 1, at [64] and [71]–[79].
Davis Langdon, and the defendant. Variations were also discussed and notified at the site meetings attended by the defendant, and CCL requested Vaco to issue variation instructions.
…
[78] CCL’s claims for payment for variations were included in the CCL monthly payment claims and paid in full or in some cases part paid for. When paid for in full CCL took that as being acceptance of its variation claim, and where part payment was made it was taken as an indication of there being some dispute as to the amount claimed. The CCL Payment Schedule thereby became the means by which CCL was notified by Vaco and the contract engineer as to which variation claims and their amounts were disputed.
[77] Also described in the 2 October 2019 judgment are the events and correspondence between the parties in which CCL notified its intention to make extension of time claims.19 The issue of delays to the construction project was first raised in November 2011, and on 23 February 2012 Mr McClatchy wrote to the Contract Engineer, Mr Beagley advising that CCL intended to apply to the engineer for an extension of time. Thereafter CCL proceeded to lodge three extension of time claims which were notified to the Contract Engineer and detailed in the construction reports prepared for the regular meetings and copied to Mr Arnerich. However, it was not until after CCL had submitted three extension of time claims that Mr Arnerich questioned CCL’s entitlement to claim compensation for extensions of time.
[78] However, in this context it is appropriate to also note Mr Arnerich’s evidence regarding DHC’s extension of time claims. On 15 August 2012 Mr Arnerich sent an email to Mr McClatchy saying:
Hi Stuart
As discussed in the last PCG meeting regarding the ASB [extension of time] claim please provide a break down for each individual item that you believe have caused a delay and attribute the appropriate time you are claiming against them.
Also please urgently finalise all of the ASB VPR’s etc so that they can finalise their budgets as discussed.
Thanks,
Antony Arnerich.
19 At [80]–[96].
[79] The following day, 16 August 2012, Mr Arnerich sent a further email to Mr McClatchy which he copied to the Contract Engineer Mr Beagley, and to several other addressees including Mr Moore at CCL. He said:
Hi Stuart
Further to your call yesterday to clarify the procedure for your potential [extension of time] claim….
What I require is a full break down of the [extension of time] attributable to each of the ASB variations so:
1 - I am able to identify the variation costs and,
2 - pin point the impact on the programme and identify the costs if any and, 3 - be in position to totally substantiate the claim back to the ASB.
This needs to be in format on an individual variation basis and also be marked on the programme to show how each variation request has or has not delayed the programme and the cost of any delay per variation.
With this in hand it will be very simple to identify [any] delays to the programme as a result of the [variation] requests and reduce any delay in processing these from their side also.
I realise your position wanting to raise one variation but that will not suffice in this case. Also I am not sure but if you haven’t already can you please also send the [extension of time] to Scott Beagley.
Thanks
Antony Arnerich.
[80]In his evidence referring to these emails Mr Arnerich said:
This was an important email. I was following what I understood to be the contract processes for variation claims and time extensions, and asking for this to be sent to me in a format that would enable it to be processed and considered. While the contract expressly precluded any claims for extensions of time, if the claims to delays were legitimate, then I would simply pass them across to ASB to explain why the project had been delayed. Similarly, despite the contractual exclusion for extensions of time, any claims for costs in relation to the time delays could be passed through to ASB for their consideration, if there was a legitimate basis for them. I had no need to be hard-nosed or difficult about any of this, if DHC had genuine complaints about ASB creating problems for them meeting the practical completion date. Obviously, this was not my fault and it was just a matter of co-ordinating between DHC, ASB, and the engineer Mr Beagley.
[81]On 24 September 2012 Mr Arnerich wrote to the Contract Engineer. He said:
Hi Scott
Further to our discussion regarding the above please accept this as notice of the withdrawal of the Liquidated damages from DD11. I am happy to take your advice on this and agree that its probably better to focus on getting the building finished at this point.
However please note in you report to the bank that these are due and that they will be applied at the full rate for the next drawdown.
In terms of the [extension of time] claims it is my understanding that you will [assess] these in due course against the terms and conditions of our contract to establish entitlement in the normal manner like any other claim that contractor may submit.
To that end I would like to take this opportunity to outline my position on what was agreed per the signed contract.
First and foremost Vaco has expressly contracted out of any extensions of time according to the Design Build Contract documents acceptance letter dated 23 September 2011. This was done in two separate instances. The first instance was intended to remove any inclement weather delays in clause 8 of the special conditions and the second instance was intended to remove any untoward variations (other than instructed by Vaco) or extra time claims. This is found in the general category on page 4 of the acceptance. Both of these conditions were inserted to mitigate these risks specifically.
This was done intentionally if you read the preceding clause/sentence sequentially they read: “It is the contractors responsibility to assess the extent of the works to be completed.” Then the next clause follows on with the removal of the [extension of time] tag provision. In effect what I was contracting them into was... that according to these terms and conditions it is up to you (the contractor) to figure out the extent of the job and deliver it on time and it’s your risk because we will not be entering into any extensions of time claims.
CCL accepted that risk as evidenced by the signed document.
In looking at entitlement it is my view that there is no entitlement to any extensions of time claim according to the provisions in our contract furthermore in many PCG meetings it was outlined clearly by Davis Langdon and Vaco to the contractor to build into the ASB VPR’s any extra time as that was the only way they would be to recover these costs-they did not do this.
Secondly if the above provisions weren’t in the contract I believe that you then would need to go back the responsibilities of the contractor under the Full Design and Build contract as ours is.
On many occasions during the PCG meetings etc CCL have outlined clearly to Davis Langdon that all of the delays were ASB related-We could never be held accountable for these as they aren’t party to the contract. In terms of front end delays it is the contractors responsibility to manage the design risk in every instance excluding the Resource Consent which was issued 11 October 2011 and the contract date is as at 18 October 2011 and to mitigate in any potential delay that may have occurred during that process-They did not.
Also they have the ability to mitigate any delays during the construction process by accelerating the programme which again they did not choose to do. Again they had many opportunities to add into the VPR’s any potential delay that may have occur they chose not to.
I would have thought that a contractor of this “wide experience in commercial projects” that this was a risk that they could have and should have managed better. [In] any event this is not relevant given the removal of the [extension of time] conditions at the time of contract.
To conclude in my view by looking at the terms and conditions in the contract there is no entitlement to an [extension of time] not even 1 day as we have quite clearly and categorically contracted out of this. CCL in my view are manufacturing [extensions of time] to in some way hope that they can be credited against the Liquidated Damages provisions in the contract. I do not understand why CCL elected not to recover any of these “ASB Delays” when they had the chance to.
Please call to discuss if you need to I think all of this will come to a head at next month’s drawdown as we will by then be applying $39,000+GST of LD’s.
Let’s hope they have it finished by then!! Thanks
Antony Arnerich
DHC’s extension of time claims — quantum
[82] DHC’s claim for time-related costs incurred as the net effect of the four extensions of time allowed by the Adjudicator relies on the evidence of its expert witness Daniel Johnson who is a quantity surveyor and principal of the firm Quantum Limited. Mr Johnson gave evidence outlining his professional qualifications and experience, and noted that he has worked for large multinational contractors including Fletchers, Westfield and has worked on large scale projects including Wembley Stadium (London), Canary Wharf (London), Whitehall (London), Sky City Casino, Sylvia Park, and Westfield Albany. He has previously given evidence as an expert witness on a number of occasions and has provided professional services to government bodies, local government councils, and large corporations in New Zealand, including the Ministry of Business, Innovation and Employment (MBIE), the Auckland City Council, the New Zealand Fire Service, Vero Insurance, QBE Insurance (International) Ltd and others.
[83] At the request of DHC Mr Johnson made an assessment of the fair and reasonable costs claimable by the contractor relating to the extensions of time awarded
by the Adjudicator to DHC. Mr Johnson produced his report which comprised his briefs of evidence at trial. They were admitted by consent and he was not cross- examined by counsel for Mr Arnerich.
[84] Mr Johnson gave evidence that he would expect P&G costs on a construction project of the type and scale of Vaco’s Lincoln Road development to be in the region of seven to 10 per cent of the contract value. He said that he considered the P&G costs claimed equating to approximately 8.1 per cent to be reasonable. Mr Johnson also considered the amount of time project staff were allocated to the project and found that DHC’s project staff allowances in the P&G equated to a Site Manager being involved for 100 per cent of the time, a Site Supervisor (who oversees several projects) being involved 22 per cent, and the Quantity Surveyor 33 per cent, which he considered reasonable. Mr Johnson also noted that DHC had claimed for time spent by a Design Manager in relation to the contract variations which led to the claims for the extensions of time. Mr Johnson said that on the basis of DHC’s other evidence regarding the need for design work arising from the variations DHC was required to undertake, he considered the inclusion of costs relating to a design manager to be reasonable, and he included that cost in his calculations.
[85] Mr Johnson explained that he had apportioned the P&G costs claimed by DHC into categories of “establishment”, “time” and “disestablishment”. He said that the establishment related costs relate to one-off costs at the start of the project. The time- related costs relate to ongoing time-related items that increase or decrease with the duration of the project, such as the hireage of site sheds. The disestablishment costs are items that are one-off costs at the end of the project such as the removal of site sheds. He said that in the case of an extension of time, it is the time-related costs that increase, while the establishment and disestablishment costs generally remain the same. He assessed the weekly rate claimed by DHC in relation to the extensions of time and found it to be close to the weekly rate he calculated DHC to have claimed for time-related costs in its original contract programme of nine months or 39 calendar weeks. Mr Johnson also considered the hourly rates charged for each of the staff identified in the original P&G and concluded that the claimed hourly rates exceeded the amounts derived from a comparison with the original P&G, meaning that the claimed hourly rates were higher than they ought to be if based on the rates relied on
in the original P&G. Mr Johnson also undertook an analysis to check the number of extension of time days awarded to see whether any of the delays claimed overlapped. He found that there did not appear to be any overlapping delays claimed.
[86] Mr Johnson then made an assessment of the extension of time related costs limited to the days awarded in the Adjudicator’s determination by reference to his assessments of the weekly and hourly rates to reach his evaluation of the reasonable costs for each of the four extension of time claims, and adjusted it to remove any potential double-up. Adopting this approach he determined the time-related costs to be $159,423.26.
[87] He also calculated the extension of time costs on the basis that the additional hours claimed outside the delay period were also claimable. Adopting this approach he calculated the total extension of time costs to be $191,386.98. He commented that the issue of whether the extension of time claims for periods outside the period of the contract delay could be recovered pursuant to clause 9.3.13 of the General Conditions was a matter for the Court to determine.
Evidence of Raymond Bryant
[88] DHC also called evidence from another expert witness, Mr Raymond Bryant. Mr Bryant is a Registered Civil Engineer having over 50 years’ experience in the field of construction and project management. His experience includes being the Construction Manager for a nuclear power station in the United Kingdom, the General Manager (Construction) for high rise and commercial buildings in Auckland, and 25 years as the General Manager for Octa Associates Limited, which is a project management company undertaking assessments of roof feasibility, design, and construction of numerous commercial and public projects including the award winning ASB Headquarters at Wynyard Quarter, Auckland; four international Air New Zealand Lounges throughout Australasia; and Sovereign House in Takapuna.
[89] Mr Bryant’s specialist areas of expertise include the procurement and engagement of design services, contract conditions for construction projects, and critical path master programmes. This work includes the preparation of contract master programmes, including funding, design and construction, and monitoring them
during the project. As an engineer to the construction contract he has experience in assessing formal claims for extensions of time made by parties to construction contracts and also making day-to-day assessments of the impact of delays on constructions programmes and the adjustment of programmes to take account of such delays.
[90] Mr Bryant was engaged by DHC to provide his expert opinion on the four extension of time claims made by DHC and to consider whether the delays which had in fact occurred, were the result of variations and changes to the contract, and whether they entitled DHC to extensions of time to the contract programme totalling 147 days.
[91] Mr Bryant said that as a result of his analysis of the relevant contract and construction programme documents and information regarding DHC’s extension of time claims, the construction programme submitted in respect of each of the four extension of time claims made by DHC and the relevant correspondence with the Contract Engineer, he concluded that the critical path of the original tender and contract programme was extended as a result of variations to the original contract by a period of 21 calendar weeks.
Legal principles applicable to interpretation of the contract
[92] The proper approach to contractual interpretation was explained by the Supreme Court in Firm PI 1 Ltd v Zurich Australian Insurance Ltd:20
[60] … It is sufficient to say that the proper approach is an objective one, the aim being to ascertain “the meaning which the document would convey to a reasonable person having all the background knowledge which would reasonably have been available to the parties in the situation in which they were at the time of the contract”. This objective meaning is taken to be that which the parties intended. While there is no conceptual limit on what can be regarded as “background”, it has to be background that a reasonable person would regard as relevant. Accordingly, the context provided by the contract as a whole and any relevant background informs meaning.
[61] The requirement that the reasonable person have all the background knowledge known or reasonably available to the parties is a reflection of the fact that contractual language, like all language, must be interpreted within its overall context, broadly viewed. Contextual interpretation of contracts has a significant history in New Zealand, although for many years it was restricted
20 Firm PI 1 Ltd v Zurich Australian Insurance Ltd [2014] NZSC 147, [2015] 1 NZLR 432 (footnotes omitted).
to situations of ambiguity. More recently, however, it has been confirmed that a purposive or contextual interpretation is not dependent on there being an ambiguity in the contractual language.
…
[63] While context is a necessary element of the interpretive process and the focus is on interpreting the document rather than particular words, the text remains centrally important. If the language at issue, construed in the context of the contract as a whole, has an ordinary and natural meaning, that will be a powerful, albeit not conclusive, indicator of what the parties meant. But the wider context may point to some interpretation other than the most obvious one and may also assist in determining the meaning intended in cases of ambiguity or uncertainty.
[93] More recently the Supreme Court in Bathurst Resources Ltd v L&M Coal Holdings Ltd cited those passages from Firm PI and commented that they can be regarded as settling the general approach to contractual interpretation.21 The Supreme Court further said:
[45] The Court in Firm PI also clarified the principle of commercial absurdity in relation to contractual interpretation, which is often linked to the use of extrinsic material. McGrath, Glazebrook and Arnold JJ, while emphasising the primacy of the text, accepted that “if a particular interpretation produces a commercially absurd result, that may be a reason to read the contract in a different way than the language might suggest”. However, this does not mean that a court should conclude that a contract does not mean what it says simply because this interpretation would be unduly favourable to one party. There is a need for caution in this area, when “commercial absurdity tends to lie in the eye of the beholder”, and courts are not necessarily well placed for the assessment of what can be industry-specific considerations. Moreover, the compromises that occur in commercial negotiations may not be easily perceived or understood by a court in hindsight, even if exposed as part of the relevant background. Therefore, the conclusion that an ordinary and natural meaning of contractual language produces a commercially absurd result “should be reached only in the most obvious and extreme of cases”.
[46] The objective approach as articulated in Firm PI is one grounded in the policy objectives identified above: the desirability of providing the certainty needed to facilitate the efficient conduct of commerce; of holding people to the bargains they make; and of supporting access to justice through the efficient and just conduct of proceedings. Giving primacy to the written words of the agreement accords with the policy of providing commercial certainty. It also recognises that since the written contract contains the words the parties chose to record their agreement, the language used to do so has to be important. But by allowing a contextual reading of those words, the Firm PI approach recognises both that words have to be read in context and that the promotion of commercial certainty should not be allowed to defeat what the parties actually meant by the words in which they recorded their agreement.
21 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85, [2021] 1 NZLR 696 at [43].
The objective approach to this contextual assessment is a legal construct designed as the best way of reliably determining the true agreement as recorded in the words of the contract. It rejects the parties’ subjective evidence of intent as irrelevant to what both parties meant and as generally unreliable. Rather, the court (embodying the reasonable person) assesses the evidence reasonably available to both (or all) of the parties at the point of contract which could bear upon the meaning of those words. Overall, this is a test which best supports the aim of the efficient and just conduct of proceedings.
(footnotes omitted)
[94] The Supreme Court in Bathurst also addressed the issue of the admissibility and relevance of prior negotiations and post-contractual conduct of the parties as informing their contractual intentions. As regards evidence of prior negotiations of the parties as being relevant to and informing an assessment of the parties’ contractual intentions, the Supreme Court said:
[75] The issue for a judge is whether evidence of prior negotiations tends to prove anything relevant to the notional reasonable person. Evidence of the content of prior negotiations will be inadmissible to the extent that it proves only a party’s subjective intention or belief as to the meaning of the words, or what their undeclared negotiating stance was at the time. That is because such evidence is irrelevant to the objective task of interpretation. Often the prior negotiations will not have addressed (even by necessary implication) the issue that has arisen in the proceedings, because that was an issue not identified by the parties prior to contract formation. Often they will also reveal no more than a negotiating stance adopted by one party that is not agreed to by the other.
[76] However, if evidence shows what a party intended the words to mean, and that this was communicated, it may tend to show a common mutual understanding as to the meaning of the contract. Logically, the party who claims to have communicated their intention would have to be able to point to something – even if just silence (in circumstances where a reply might be expected) – on the part of the other party to bring that intention into the realm of mutual understanding. Such an understanding is relevant to the objective search for meaning. The evidence will be relevant and, subject to the s 8 assessment, admissible. …
[77] This interpretation and application of these provisions of the Evidence Act align well with its principles and purposes. In terms of those purposes, it is fair to admit evidence tending to objectively prove what parties intended the words to mean to assist with the interpretation of the text of the contract – fair because it is the approach most consistent with holding the parties to their true bargain. But it is also an approach which avoids unjustified expense in litigation by excluding purely subjective evidence (subjective in the sense that it is not reasonably available to the other contracting parties) as irrelevant, and which allows for the exclusion of duplicative or low quality evidence under s 8.
(footnotes omitted)
[95] As regards the admissibility and relevance of post-contractual or subsequent conduct, the Supreme Court considered its earlier decision in Gibbons Holdings Ltd v Wholesale Distributors Ltd and observed that the law was not settled on this point.22 The Court said:23
[89] … We agree with Tipping J that the approach to the admissibility of subsequent conduct should be the same as the approach to the admissibility of prior negotiations. Applying the provisions of the Evidence Act, the court must ask itself whether the subsequent conduct tends to prove anything relevant to the objective approach to interpretation. Subsequent conduct need not necessarily be mutual, but non-mutual conduct is more likely to be relevant to a claim of estoppel. Further, in assessing the relevance of subsequent conduct, it must not be forgotten that the court is interpreting the contract as at the time it was made.
[90] To the extent that evidence of subsequent conduct may cross the relevance threshold (which we suggest will not be often), s 8 is likely to come into particular play. Care will be needed to assess the probative value of that evidence. For example, conduct that occurs post-dispute is very unlikely to be admissible. By then, the parties will have retreated into their respective corners, and their conduct may well be self-serving. Its admission is likely to add time and cost, especially in light of the inevitable calling of rebuttal evidence. …
Interpreting the construction contract
[96] The construction contract entered into between the parties on or about 18 October 2011 for the construction of the commercial building on the Vaco site, was recorded in a collection of documents comprising eight parts.
[97] The relevant context of the formation of the construction contract was that the commercial building to be constructed was to be leased to the ASB as commercial premises. Apart from other comparatively small tenancies, the ASB would be the major tenant and it would itself undertake the interior fit-out of the premises. It was anticipated by the parties that the bank was likely to require some amendments to the original plans and specifications of the building in order that it would be tailored to its specific requirements. The terms of the CPA referred to this context:
The scope of work covered by this Contract principally covers the design and construction associated with the providing [of] two levels of commercial office and retail space (primarily for the ASB Bank) and an undercroft car park beneath the building.
22 See Gibbons Holdings Ltd v Wholesale Distributors Ltd [2007] NZSC 37, [2008] 1 NZLR 277.
23 Bathurst, above n 21 (footnotes omitted).
[98] Paragraph 1.1 of the CPA headed “SCOPE OF WORK AND OVERRIDING BASIS OF AGREEMENT”, stipulated that the Contractor was obliged to undertake the work summarised in that section of the document, for the contract price:
… to the intent that no work which is necessary to achieve the outcomes described in this section shall justify extra payment even if a Variation to the specification & drawings is necessary to achieve these outcomes, (non compensatable variations).
[99]And in the section headed, “OVER RIDING BASIS OF AGREEMENT”, states:
The emphasis on the project is on “end results” obligations and it must be clearly understood that it is the responsibility of the Contractor to include within the Contract Price all of its compensation entitlement for achieving those end results on time.
Having regard to the design build nature of this Contract, it is intended that compensatable variations shall be kept to an absolute minimum and that no compensatable variation shall be recognized unless it is instigated by the Principal and the Contractor has fully complied with the VPR [variation price request] procedures set out in the Contract.
[100] And in the section headed “General Notes for Pricing” the intention that the contractor would construct the building for the agreed lump sum fixed price stated in the contract documents was repeated:
2.1DESIGN BUILD LUMP SUM CONTRACT
Because of the wide experience of the Contractor in commercial projects, and its wide experience with design build contracts, the Contractor hereby guarantees that for the agreed lump sum fixed price, it will meet all of the requirements of this Contract Performance Agreement, the scope of works, the specifications, the drawings, and all of the other Contract Documents including the obtaining of the Building Consents and the Code Compliance Certificate(s) and commission, handover and deliver a fully functioning completed building ready to occupy and fit for the intended purposes.
The Contractor shall absorb within the lump sum fixed price, the cost of all works (not necessarily addressed within the Contract Documents) which an experienced Contractor could reasonably be expected to have foreseen in a project of this nature. There shall be no extra payment and no compensatable Variations other than tenants’ Variations, or changes in scope requested by the Principal which are significant and would not be reasonably foreseen by an experienced Contractor.
(emphasis added)
[101] However, although this section made it clear that it was the intention of the parties that the contractor would be required to absorb within the lump sum fixed price
any cost increases which an experienced contractor could reasonably be expected to have foreseen in a project of that kind, the contractor was not to be precluded from claiming increased costs due to any significant changes in scope requested by Vaco that it could not have reasonably expected to arise. And furthermore, although this section of the CPA stipulated that there was to be no extra payment and no compensatable variations claimed as regards Vaco apart from those resulting from a change in scope it requested, tenants’ variations were to be an exception and would be compensatable variations.
[102] The CPA then made detailed provision for the claiming and valuing of variations in the sections headed “Variation Procedure” and “Valuing Variations”. In this section of the CPA the terms of the contract specifically provide that where the parties are unable to reach agreement as to the value of a compensatable variation it would be valued by the “Principal’s Representative” having regard to a number of “basic principles” which included that:
All Preliminary and General costs and expenses relating to any changes shall be deemed included in the original Contract Price and therefore no further allowance will be made.
[103] Although Mr Arnerich says that this provision is clearly expressed and should be read as expressing the parties’ intention that the contractor was precluded from claiming P&G costs in relation to all and any contract variations, there are other contractual provisions which clearly indicate that the parties did intend that the contractor would be able to claim and recover P&G costs incurred as the net effect of variations.
[104] The NZS 3910:2003 General Conditions were included in the contract documents and they contained detailed provisions relating to the administration and performance of the contract. These included provisions for the claiming and valuation of variations, time for completion of the contract including provisions dealing with extensions of time for completion and the resolution of disputes by the Contract Engineer in the first instance, and otherwise by mediation or arbitration. Of particular relevance here are the provisions in clauses 10.2 and 10.3 dealing with the due date for completion and extensions of time.
[105] Clause 10.2 provides that the due date for completion is that provided for in the Special Conditions of the construction contract and all extensions of time, if any, awarded under clause 10.3. The corresponding provision of the First Schedule to NZS 3910:2003, which is one of the contract documents, states that the period for calculating the due date for completion of the contract works is 34 weeks from the site possession date of 21 November 2011.24
[106] Clause 10.3 is headed “Extension of time” and sets out five circumstances where the Contract Engineer “shall grant” an extension of time for completion of the contract work if the contractor is fairly entitled to an extension of time by reason of one or other of those five circumstances. The first such circumstance under paragraph
(a) is the “net effect of any Variation”. The guideline provision G10.3.1 provides that:
Where the Contractor is entitled to an extension of time under paragraph (a) of this clause, there will also be an entitlement to claim under 9.3.10 … for any time related Costs which result from the Variation. Time related Costs are not recoverable by the Contractor where an extension of time is granted on any other grounds.
[107] In my view, the inclusion of these provisions in the construction contract which:
(a)enable the contractor to make variation claims in respect of the tenant’s (ASB’s) requested variations;
(b)provide for the valuation of the variations allowed under the contract;
(c)provide for the granting of extensions of time for completion of the contract work if the contractor is fairly entitled to an extension of time; and
(d)provide that where an extension of time is granted by reason of the net effect of a variation, the contractor will be entitled to claim for any time-related costs which result from the variation;
24 Pursuant to [10.2.1] of the Special Conditions of Contract (First Schedule, NZS 3910:2003) the period specified to be used for calculating the due date for completion of the contract works is 34 weeks from the site possession date of 21 November 2011.
are properly to be interpreted as expressing the clear intention of the parties that DHC would be entitled to claim: variation costs arising from ASB initiated variations; extensions of time to the contract completion date caused by the variations; and extension of time related costs which result from the variations.
[108] While at first blush it might appear that the provisions of paragraph 4.4 of the CPA headed “Valuing Variations” and stating “[a]ll Preliminary and General costs and expenses relating to any changes shall be deemed included in the original Contract Price and therefore no further allowance will be made”, precludes the contractor from claiming time-related costs, in my view an alternative and purposive interpretation of the contract is available which reconciles the apparently contradictory provisions.
[109] It is clear from the contract provisions that Vaco and Mr Arnerich were concerned to ensure that Vaco was not itself confronted with claims for increased costs that it would be responsible for and that it could not pass on to the ASB. Vaco was not however concerned to prevent any claims for variation costs arising from changes to the contract works required by the ASB. That made perfect commercial sense. The ASB was Vaco’s key tenant and had entered into an agreement to lease for an extended period. Having the ASB as a major tenant of the premises added considerable value to the property, and as the ASB were obviously able to meet the cost of any variations to the building, facilitating the Bank’s requirements was a commercially sensible and advantageous approach for Vaco to take. The provisions of the CPA which state that there shall be no extra payment and no compensatable variations “other than tenants’ Variations”, is consistent with that interpretation.
[110] Similarly, if the variations related to the tenant and could be passed on by Vaco to the ASB there was no additional cost to Vaco whether the charges related to or resulted from increases in materials or other construction costs, or by reason of associated P&G costs. In either case those costs would be passed on by Vaco to the ASB. Indeed that is exactly what happened. As noted, at an early stage in the construction programme and prior to CCL submitting its first variation claims Mr Moore, who was CCL’s project manager, discussed the matter of CCL including P&G charges in relation to ASB generated variations with Mr Arnerich who agreed and thereafter the claims including P&G costs were made, approved, and paid.
[111] I also note that in Vaco’s letter dated 23 September 2011 to CCL which is one of the contract documents, Mr Arnerich listed a total of 17 “Special Conditions” which included:
8. No extensions of time for inclement weather.
…
13. No cost fluctuations at all.
…
17. All Contract Documents are of equal status. If an item is specified but not drawn, or drawn but not specified, it shall be deemed both drawn and specified. …
[112]And in a paragraph headed “General”:
No claim for variations or extra time will be entered into.
[113] Mr Arnerich’s special conditions contained in this letter, including that there were to be no claims for variations or extra time, are obviously inconsistent with the specific provisions of the CPA dated 18 October 2011 which specifically provide for CCL to make variation claims with regard to ASB generated variations. And they are also inconsistent with the terms of NZS 3910:2003 which make specific provision for extension of time claims. In my view the intention of the parties apparent from the inclusion of the NZS 3910:2003 General Conditions was that those provisions would be applicable to the contract and provide a workable basis on which variations, extension of time and other procedures contained in the General Conditions would be utilised and relied on by the parties during the construction programme and as setting out the terms of their agreement. It would make no sense whatsoever to include those detailed provisions regarding variations and extensions of time if they were not intended to have any effect.
[114] I also note that Mr Arnerich’s approval of the practice adopted by CCL of making claims for the costs arising due to variations and including P&G costs in those claims lends support for an interpretation of the contract which finds that process and CCL’s entitlement to those costs to have been the intention of the parties. I also note that despite CCL (Mr McClatchy) having signalled its intention to make extension of time claims in February 2012, and thereafter CCL submitting a succession of three
extension of time claims which were tabled and discussed by the Contract Engineer and which were notified to Mr Arnerich, his failure to challenge or dispute CCL’s ability to make extension of time claims even when corresponding with Mr McClatchy in emails sent on 15 and 16 August 2012 and even then not until his email to the Contract Engineer on 24 September 2012 questioning whether CCL was able to make extension of time claims. I consider that his knowledge of and acquiescence in the process adopted by CCL of making approximately 80 variation claims and including P&G claims in some of those variation claims, provides further support for the interpretation that extension of time claims pursuant to NZS 3910:2003 were part of the intended contractual framework upon which the construction contract was conducted. Because I consider Mr Arnerich’s subsequent conduct to be relevant to and further inform that interpretation of the contract, I find that evidence is therefore admissible.
[115] It follows that I respectfully disagree with the conclusion reached by the Adjudicator that the provisions contained in paragraph 4.4 of the CPA present an insuperable barrier to DHC’s ability to claim and recover extension of time costs resulting from the ASB variations.
[116] However, the Adjudicator’s findings allowing the four extension of time claims and his determination of the amounts which CCL/DHC is entitled to recover from Vaco are not susceptible to challenge by Mr Arnerich in the context of this hearing. As I noted at the outset of this judgment, the scope of this hearing is that stated by the Court of Appeal when remitting the matter back to this Court for determination of what, if anything, Vaco owes to DHC over and above the amount determined by the Adjudication process, if that issue is relevant to the award of relief under s 301 of the Companies Act in this proceeding.
Conclusions
Time-related costs
[117] I find that in accordance with the terms of the construction contract and pursuant to clauses 10.2 and 10.3 of NZS 3910:2003, CCL was entitled to make the claims it made for the four extensions of time to extend the completion date for the
contract works due to the delays caused by the net effect of the ASB generated variations. I further find that the total amount claimed of 147 calendar days was reasonable and substantiated by the evidence of DHC’s witnesses, particularly Mr McClatchy, and Messrs Johnson and Bryant.
[118] Furthermore, I find that in accordance with the provisions of clause 10.3.1 and G10.3.1 of the General Conditions that CCL/DHC is also entitled to claim and recover the time-related costs incurred by reason of the net effect of the ASB variations. I find that Mr Johnson’s calculation of the extension of time costs in respect of all four extension of time claims, in the sum of $191,368.98 being the sum he calculated in relation to the time-related costs incurred over a greater period than the delay to the contract works as a whole, is justifiable and reasonable. And I accordingly find that DHC is entitled to recover that sum from Vaco.
Contract interest on the time-related costs sum of $191,368.98
[119] Clause 12.7 of the General Conditions contains contractual provisions pursuant to which the contractor is entitled to interest on amounts claimed in a payment schedule and which remain unpaid after the expiry of the time provided for payment:
12.7.1 The Principal shall pay the Contractor interest compounding Monthly on all scheduled amounts shown as payable in any Payment Schedule and remaining unpaid after the expiry of the time provided for payment.
…
12.7.3 In the event of unreasonable deduction of any amount from any Contractor’s payment claim or final payment claim being made in any Payment Schedule, and where such amount is later paid by the Principal or found by an adjudicator to be payable by the Principal, the Contractor shall be entitled to interest compounding Monthly on that amount from the date on which it would have been payable if the unreasonable deduction had not occurred down to the date of payment.
12.7.4 The rate of interest shall be equal to one and a quarter times the average Monthly interest rate as certified by a chartered accountant or trading bank manager, which is currently payable or which would be payable by the Contractor for overdraft facilities.
12.7.5 The right to interest shall be additional to any other remedy to which the Contractor may be entitled at law.
[120] The circumstances in which Vaco deducted CCL’s four extension of time claims is detailed in my judgment of 2 October 2019.25 I summarised my findings in paragraph [291]:
[291] I therefore find that because Mr Beagley failed to carry out his responsibilities as the contract engineer in accordance with the terms of the General Conditions, in a number of respects that Mr Arnerich had full knowledge of, Mr Arnerich could not legitimately place any reliance on Mr Beagley’s Payment Schedules and Engineer’s Review determinations as he well knew that they were not the product of Mr Beagley’s independent assessments. Furthermore, Mr Arnerich knew that although Mr Beagley issued what purported to be a Final Payment Schedule 17, in fact not all of CCL’s claims had been considered and determined in that Schedule.
[121] Having regard to the manner in which the Contract Engineer and Mr Arnerich dealt with CCL’s extension of time claims, I find that Vaco’s deduction of the amounts claimed from CCL’s Final Payment Claim (Final Payment Schedule 17), was clearly unreasonable. I accordingly find that DHC is entitled to interest on the amounts unreasonably deducted from its Final Payment Claim in accordance with clause 12.7.3 of NZS 3910:2003.
[122] I further find that the rate of interest to be applied is that determined by the Adjudicator of 12.4 per cent compounding monthly, commencing on the date that Payment Claim 17 ought to have been paid, namely 4 May 2013 and continuing thereafter to the date of payment. I am however also satisfied that DHC has established the interest rate claimed by reference to the certificate prepared by a Senior Manager of the ANZ Bank which is attached to DHC’s written submissions, and which sets out details of the average monthly interest rates that DHC would have been required to pay over the period commencing May 2013 to November 2021 together with a one per cent per annum line fee which would apply to any overdraft facility.
[123] Under this head of its claim DHC is entitled to interest on the amount of the unreasonably deducted time-related costs which it claimed in its Final Payment Claim 17 and which totalled $191,386.98. I therefore find that DHC is entitled to recover interest from Vaco on that sum at the contract rate of 12.4 per cent compounded monthly commencing 4 May 2013 to the date of payment. I find that DHC has proven
25 October 2019 judgment, above n 1, at [282]–[291].
that the interest payable on the sum of the unreasonably deducted time-related costs is that set out in the schedule annexed to its written submissions, namely $378,414.74 as at 4 February 2022.
Contract interest on the sum of $151,928.80 found by the Adjudicator
[124] The Adjudicator determined that the sum payable by Vaco in respect of CCL’s Payment Claim 17 was $151,928.80. Accordingly it is that sum which bears interest at the contract rate of 12.4 per cent. The Adjudicator found that the contract interest at 12.4 per cent on that sum as at the date of his determination (5 October 2016) was
$79,723.60. By reference to the schedule annexed to DHC’s written submissions and for the reasons set out above, I am satisfied that DHC has established that the correct calculation of the contract interest on the amount of $151,928.80 commencing 4 May 2013 is the sum of $300,096.06 as at 4 February 2022, which includes the $79,723.60 contract interest sum found payable by the Adjudicator. DHC is entitled to further and continuing interest calculated on that basis until payment is made.
Interest on unpaid amounts which do not attract contract interest
[125] I further find that DHC is also entitled to recover from Vaco interest on the sum of $136,115.7226 at the rate of five per cent per annum from 11 May 2017 (being the date on which the District Court entered judgment for DHC against Vaco)27 until the date on which payment is made, which DHC calculates as at 10 November 2021 to be
$30,626.03. Interest on the $136,115.72 shall accrue at five per cent per annum until payment.
Summary of DHC’s entitlement to recovery from Vaco
[126]To summarise I find that DHC is entitled to recover from Vaco:
(a)The sum of $367,768.12 being the amount awarded to CCL/DHC by the Adjudicator in his determination dated 5 October 2016.
26 See the explanation for this sum above at [56(c)], n 38.
27 DHC Assets Ltd v Vaco Investments (Lincoln Road) Ltd (In Liquidation) DC Auckland CIV 2017- 044-546, 11 May 2017.
(b)Further contractual interest accruing on the sum of $151,928.80 from 5 October 2016 to the date of payment, but which as at 4 February 2022 was $220,372.4628 and which shall continue to accrue until payment.
(c)Interest on the sum of $136,115.7229 at the rate of five per cent per annum from 11 May 2017 until payment is made, which DHC calculates as at 10 November 2021 to be $30,626.03, and which shall continue to accrue at five per cent per annum until payment.
(d)Time-related costs of $191,386.98.
(e)Contractual interest on the time-related costs of $378,414.74 as at 4 February 2022 and which shall continue to accrue until payment.
Order pursuant to s 301(1)(c) of the Companies Act 1993
[127] In my judgment of 2 October 2019, I found that Mr Arnerich breached his duty of good faith as a director of Vaco. Having determined in this judgment the amounts that DHC is entitled to recover from Vaco, and for the reasons I gave in my prior judgment, I find that DHC is entitled to recover the full amount of its entitlement as compensation directly from Mr Arnerich pursuant to s 301(1)(c) of the Companies Act 1993.
Result
[128]I make the following orders:
(a)An order that the defendant, Antony Arnerich, pay DHC the sum of
$1,188,568.33 being:
(i)The sum of $367,768.12 being the amount awarded to CCL/DHC by the Adjudicator in his determination dated 5 October 2016.
28 $300,096.06 as at 4 February 2022 per the plaintiff’s schedule, less $79,723.60 interest included in the Adjudicator’s award = $220,372.46.
29 See the explanation for this sum above at [56(c)], n 38.
(ii)Further contractual interest accruing on the sum of $151,928.80 from 5 October 2016 to the date of payment, but which as at 4 February 2022 was $220,372.4630 and which shall continue to accrue until payment.
(iii)Interest on the sum of $136,115.7231 at the rate of five per cent per annum from 11 May 2017 until payment is made, which DHC calculates as at 10 November 2021 to be $30,626.03, and which shall continue to accrue at five per cent per annum until payment.
(iv)The sum of $191,386.98 being DHC’s time-related costs in connection with its extension of time claims.
(v)Contractual interest on the time-related costs of $378,414.74 as at 4 February 2022 and which shall continue to accrue until payment.
(b)Such further and additional interest as has accrued or which may accrue in relation to each of the sums referred to in (ii), (iii) and (v) above until payment in full satisfaction of those amounts and all interest thereon is made.
Costs
[129] DHC has succeeded and is entitled to an award of costs. I direct DHC to file and serve a costs memorandum within 10 working days from delivery of this judgment. Following Mr Arnerich’s receipt of DHC’s costs memorandum, Mr Arnerich is to have 10 working days within which to file his costs memorandum in response. Following the filing of costs memoranda in accordance with this direction, I shall determine DHC’s costs on the papers. The costs memoranda are not
30 $300,096.06 as at 4 February 2022 per plaintiff schedule, less $79,723.60 interest included in Adjudicator’s award = $220,372.46.
31 See the explanation for this sum above at [56(c)], n 38.
to exceed three pages in length other than annexed schedules or receipts confirming claimed disbursements.
Paul Davison J
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