DHC Assets Ltd v Arnerich
[2019] NZHC 1695
•27 September 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-307
[2019] NZHC 1695
UNDER The Companies Act 1993 BETWEEN
DHC ASSETS LIMITED
Plaintiff
AND
ANTONY IVO ARNERICH
Defendant
Hearing: 31 October, 1, 2, 5, 6, 7, 8, 9, 12 November 2018, 11, 12, March
2019
Counsel:
F J Thorp & L Turner for Plaintiff
J D McBride & A J Steel for Defendant
Judgment:
27 September 2019
Reissued:
2 October 2019
JUDGMENT OF PAUL DAVISON J
This judgment was delivered by me on 27 September 2013 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 ASSETS LTD v ARNERICH [2019] NZHC 1695 [27 September 2019]
TABLE OF CONTENTS
Introduction [1]
Background [5]
Ownership of Vaco Investments (Lincoln Road) Ltd and Lincoln Road [5]
The ASB tenancy [11]
The construction contract with Clearwater Construction Ltd [14]
The Design Build construction contract documents [23]
The Contract Performance Agreement (CPA) [25]
The “Contract Agreement” [29]
The agreement to lease – Vaco and ASB [33]
The General Conditions of Contract – NZS 3910:2003 [34]
Time for completion and extension of time claims [44]
Process for resolving disputes arising under the contract [46]
Engineer’s Review [48]
The pilings and foundations delay commencement of construction [49]
CCL assigns contract to DHL [70]
Plaintiff ’s payment claims [71]
CCL notifications of its intention to lodge extension of time claims [80]
The four extension of time claims [96]
Vaco disputes the EOT claims and challenges CCL’s contract
variation claims [97]
CCL charging of Preliminary & General costs on ASB contract variations [120]
Mr Arnerich comments on Payment Claim 16 to the contract engineer [125]The CCL letter to Mr Beagley (6 March 2013) enclosing EOT
related materials and submissions [129]CCL Payment Claim 17 [131]
Vaco settles the sale of Lincoln Road and the proceeds are appliedand distributed [137]
The contract engineer certifies $0.00 for Payment Claim #17 [142] Draft Engineer’s Review No 2 (24 April 2013) [143] CCL renews efforts to obtain determination of its payment claims [162] Vaco settles variation claims with the ASB [189]
Vaco is put into voluntary liquidation [192]
High Court grants leave to DHC to commence adjudicationproceedings against Vaco [203]
The arbitration [216]
The plaintiff’s claim [219]
The defendant’s case and submissions [221]
Law [238]
Duty of directors to act in good faith and in best interests of company [238]
Director’s duties and trustee duties [250]
The debt and issue estoppel [254]
CCL’s position as a creditor [270]
The construction contract [276]
Variations [277]
Extensions of time [282]
Resolving those disputes [285]
The Contract Engineer [288]
The period following the sale of Lincoln Road [292]
The distributions [292]
The status of CCL’s claims during the period from early 2013
to Vaco’s voluntary liquidation [309]
Did Mr Arnerich breach his director’s duties? [328]
Do the matters relied on by Mr Arnerich justify him proceeding on the basis that CCL was never a creditor of Vaco and need not
have been considered when making or authorising payments by Vaco
which would leave it without funds with which to meet CCL’s debt? [331]Payments made to the Vaco Trust [331]
No personal guarantee [334]All work on Lincoln Road had concluded and as determined by the contract engineer there were no outstanding monies due and owing by Vaco and no
legal proceeding had been commencedby CCL [335]
ANZ had retained $561,115 to be held on term deposit to cover costs to complete should the engineer decide to approve some of the CCL claims
in Payment Claim 17 or any future claims relating to the project. [340]
Conclusion [345]
Section 301 [346]
Result [352]
Introduction
[1] The plaintiff claims pursuant to s 301(1)(c) of the Companies Act 1993 to recover from the defendant the amount it says it is owed as an unpaid creditor of Vaco Investments (Lincoln Road) Limited (Vaco). The defendant was formerly the sole director of Vaco which developed commercial premises at Lincoln Road, Henderson which were leased to the ASB Bank. Following completion of the development the Lincoln Road property was sold, and on 1 July 2014 Vaco was placed into voluntary liquidation pursuant to a shareholder resolution.
[2] The plaintiff, DHC Assets Limited (DHC) trading as Clearwater Construction Ltd, undertook the design and construction of the commercial building upon the Lincoln Road property under a construction contract with Vaco dated 18 October 2011. It says that it has not been paid for all the work it performed pursuant to the construction contract, and that it is an unpaid creditor of Vaco for $1,088,156 together with interest.
[3] DHC alleges that following the sale of the Lincoln Road property and before placing Vaco into voluntary liquidation, the defendant procured Vaco to pay or distribute all of Vaco’s funds either to himself or to interests or persons associated with himself, despite knowing that DHC claimed to be an unpaid creditor of the company and despite knowing that by making the payments and distributions Vaco would be left without sufficient funds to satisfy DHC’s claim.
[4] DHC says that by procuring distributions and payments by Vaco shortly prior to it being placed into liquidation, the defendant breached his director’s duties by failing to act in good faith, by failing to act in Vaco’s best interests, by distributing Vaco’s assets to the detriment of a creditor, and by preferring his interests and those of other persons associated with him over the interests of Vaco’s creditors. DHC also claims that the defendant procured the payment of retention moneys held in an ANZ Bank account jointly for Vaco and the plaintiff, for the benefit of himself and third parties and in breach of Vaco’s contractual obligation not to distribute that retention money.
Background
Ownership of Vaco Investments (Lincoln Road) Ltd and Lincoln Road
[5] Mr Antony Arnerich (the defendant) is an experienced commercial property developer. On 5 November 2010 his company Vaco Investments Limited (VIL) entered into an agreement to purchase the property at 288-290 Lincoln Road (Lincoln Road) for the sum of $1.4 million. Mr Arnerich is the sole director and shareholder of VIL.
[6] On 15 April 2011, Mr Arnerich incorporated Rawhiti Property Holdings Limited, and on 16 August 2011 he changed the name of that company to Vaco Investments (Lincoln Road) Limited, (“Vaco”). Mr Arnerich incorporated Vaco to be his corporate entity and vehicle for the Lincoln Road development. VIL was the sole shareholder of Vaco, and Mr Arnerich was its sole director.
[7] Pursuant to a subsequent agreement dated 19 October 2011, VIL and the vendor of Lincoln Road agreed that the purchase price for the property would be reduced to $1.325 million, and the agreement noted that VIL had nominated Vaco to be the purchaser, with settlement scheduled for 4 November 2011.
[8] On 4 November 2011, the defendant settled the Vaco Investments (Lincoln Road) Trust (the Vaco Trust), and Vaco was appointed as the sole trustee.
[9] The scheduled settlement date for the sale and purchase of 4 November, was however deferred to 17 November 2011. Then on 17 November 2011 VIL entered into an agreement for sale and purchase with VDT Securities Ltd (VDT), which was another of the defendant’s companies, pursuant to which VDT agreed to purchase Lincoln Road for $1.325 million. Also on 17 November 2011, VDT entered into an agreement for sale and purchase with Vaco, pursuant to which Vaco as trustee of the Vaco Trust, agreed to purchase Lincoln Road from VDT, for the sum of $3.2 million.
[10] The plaintiff says that as a director of Vaco the defendant’s duties to its creditors were the same, irrespective of whether Vaco held the property as trustee for
the beneficiaries of the Vaco Trust or as beneficial owner of the property in its own right.
The ASB tenancy
[11] As is often the case with commercial property developments, the concluding of tenancy arrangements is crucial to the financial viability of the project. In this case the ASB Bank’s tenancy of a substantial portion of the building to be constructed was essential to the financial viability of the development. In April and May 2011 the defendant was engaged in discussions with the ASB regarding the bank taking a tenancy for the majority of the lettable space in the proposed building. During these negotiations the bank provided the defendant with a “Pre-Launch Checklist” which contained a detailed and prescriptive list of the bank’s requirements in relation to the construction of the building and the amenities it required for its tenancy.
[12] In June 2011 VIL entered into an agreement to lease with The Coffee Club Properties (NZ) Ltd (The Coffee Club), for a much smaller tenancy of approximately 200 square metres on the ground floor of the building. Other than the proposed ASB tenancy, that left approximately 280 square metres of remaining space to be let as retail space.
[13] On 7 July 2011, VIL and ASB entered into a written agreement to lease retail commercial banking premises to be constructed on the Lincoln Road site. The lessor was VIL “or an associated company related to the Lessor yet to be formed.” The agreement provided for ASB’s detailed and specific requirements to be incorporated into the design and construction of the premises, and the bank was to have a significant input into the planning and design of the building. The agreement to lease stated that ASB could engage its own contractors to complete the fit out of the premises, and where there were variations to the premises as a direct result of ASB’s requirements then the bank was to meet the additional cost over and above what was to be provided by Vaco to the Contractor for the building. The agreement to lease was subject to conditions, including VIL obtaining the necessary finance to complete the development. The agreement to lease stated that practical completion of the building would be achieved by 14 August 2012, and stipulated that in the event that practical
completion was not achieved until after that date, then ASB could in its discretion require Vaco to pay compensation for its reasonable costs caused by the delay up to a maximum of $600.00 per day. The lease agreement further provided that the compensation figure could be mirrored in Vaco’s construction contract as a component of a liquidated damages provision.
The construction contract with Clearwater Construction Ltd
[14] In May 2011 the defendant approached Clearwater Construction Limited (CCL) to discuss a proposed design and build project for the Lincoln Road property. The defendant had some initial discussions with Mr Mike Sullivan and Mr Martin Fahey of CCL, and the defendant thereafter presented CCL with concept plans and elevations prepared by the ASB’s architect, CPRW Fisher, together with an ASB checklist detailing the Bank’s tenancy requirements (the Pre-Launch Checklist). Andrew Moore (Mr Moore) who was a Commercial Manager at CCL, then used these to prepare a preliminary structural design to assist with costing the project. He also prepared an “elemental budget” in which he calculated the construction cost of the proposed building as $2,329,838.
[15] On 1 July 2011, Mr Moore forwarded Mr Arnerich a copy of the NZS 3010:2003 contract documents that CCL proposed to use for the development project. Mr Moore described the documentation as generic, and said that schedules would be prepared to adapt the provisions to suit Vaco’s particular requirements. He said:
We also require some form of Contract Documentation (drawings/specification) that can be inserted into the Contract Agreement as the basis of the “construction costs” we have given to you, that we believe can be achieved using the design and build approach that should meet the requirements of you end user/tenant (ASB). There still needs to be an agreed “benchmark” building that can also be used as a tool to measuring the performance specification against.
[16] During June and July 2011 Vaco had drawings for the project prepared by Pacific Environments Architects Ltd, and these were forwarded to CCL. On 29 July 2011 CCL forwarded the defendant their “design and build” lump sum tender for the project of $2,129,838 which they explained was based on: the drawings received from Pacific Environments’ Architects; design build lump sum contract; general conditions of contract – NZS 3910:2003; special conditions of contract (to be agreed – draft copy
attached); and as otherwise set out in detail in their letter. During September 2011 CCL and the defendant on behalf of Vaco negotiated the proposed terms of a design build lump sum tender. Vaco had also been provided with plans prepared by ASB’s architect, CPRW Fisher, which were to be used together with the Pacific Environments Architects’ plans for the project, and this led to CCL revising their tender.
[17] ASB preferred the scheme plan prepared by CPRW Fisher and wanted this plan used for the resource consent application, while Pacific Environments’ plans would be used as the working drawings for the project.
[18] On 12 September 2011 the defendant advised CCL that he had still not finally decided who the architects for the project would be. On 14 September 2011 Mr Martin Fahey of CCL suggested the name of another architect to the defendant, commenting that by not having an architect in place they had probably already lost a month of design time, which could soon put the proposed project end date in jeopardy.
[19] Although the construction contract was yet to be finalised both Vaco and CCL commenced preliminary work on the project and proceeded on the basis that the construction contract documents would be finalised in the near future. A first project design meeting was held on 15 September 2011. A final version of the CCL tender for the Lincoln Road project was signed by CCL and by the defendant on behalf of Vaco on 26 September 2011.
[20] On 4 October 2011 Vaco transferred the engagement of its architects Pacific Environments to CCL. The defendant says that from that point on he understood that it was CCL’s responsibility to ensure that the design consultants performed their work on time to enable the work programme to procced in accordance with the timeframe which had been set for work on the site to commence in late October.
[21] On 10 October 2011 the ANZ Bank conditionally approved Vaco’s application for project finance, with a facility agreement for $5.155M. On 10 February 2012 Vaco as trustee of the Vaco Trust, entered into a Facility Agreement with ANZ National Bank Ltd. The ANZ Facility Agreement names the Vaco Trust as the borrower of the facility funds. Vaco Investments (Basque Road) Limited as trustee of the Vaco
Investments (Basque Road) Trust, and the defendant are named as sureties of the finance facility.
[22] On 11 October 2011 the resource consent for the project was issued by Auckland Council and the defendant on behalf of Vaco authorised CCL to get underway with the test drilling required to determine the piling and foundation design for the building. Also, on 11 October, Mr Scott Beagley of the firm Davis Langdon accepted appointment as engineer to the contract. Another design meeting was held on 10 October. At this meeting, which was attended by the defendant and representatives of the Pacific Environments and CCL, it was noted that demolition and structural drawings needed to be completed and submitted to Council for consent, and that in accordance with Vaco’s requirements, work was scheduled to commence in November. However, that was dependant on the “Value Engineering/Design/Consent/ Programme.”
The Design Build construction contract documents
[23] The construction contract, between CCL as “Contractor” and Vaco as “Principal” is entitled: “Design Build Lump Sum Contract” and is dated 18 October 2011 (the contract). 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 in a collection of documents comprising eight parts.
[24] Part 1 is entitled Contract Performance Agreement (CPA), and it includes correspondence and a spreadsheet work programme showing a completion date of 29 June 2012. Part 2 is the Second Schedule, Contract Agreement; Part 3 is the 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, Conditions of Contract for Building & Civil Engineering Construction (the General Conditions): and Part 8 is entitled,“ Agreed Correspondence (if applicable).”
The Contract Performance Agreement (CPA)
[25] 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).
[26] In a 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 recognised 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.
[27] 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 requirements of this Contract Performance Agreement, the scope of the works, the specifications, the drawings, and all of the other Contract Documents including the obtaining of 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.
[28]The CPA provided for variations to the contract as follows:
4.1 VARIATIONS 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.
4.2 CLAIM 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.
4.3 VARIATION 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 stated.
…
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.
4.4 VALUING 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 expensed 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”
[29] The Part 2 Second Schedule of the contract 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 list includes: the CPA, the Contract Agreement, the CCL tender and scope documents dated 29 July 2011 and 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), and the General Conditions.
[30] The Vaco acceptance of tender letter dated 23 September 2011, states that Vaco accepted the CCL design build lump sum tender subject to the terms and conditions set out in the letter. The list of terms and conditions stipulates the “Conditions of Contract” as being “NZS 3910:2003 and Special Conditions.” The “Special Conditions” relevantly include:
1. $600.00 per calendar day excluding G.S.T. Liquidated Damages to commence from 27 July 2012until 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)
…
16. The Engineer to the Contract shall be Scott Beagley of Davis Langdon Limited (ANZIOS).
17. All Contract Documents are of equal status. …
[31] A further section of the Vaco acceptance of tender letter headed, “General” includes:
No claim for variations or extra time will be entered into.
…
Vaco has agreed to enter into a direct agreement between the contractor itself and the lender ANZ National Bank in lieu of any personal guarantees whatsoever.
[32] 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.
The agreement to lease – Vaco and ASB
[33] As noted, the agreement to lease between Vaco and the ASB provided that should practical completion of the building not be achieved until after 14 August 2012, the ASB as lessee could require Vaco to pay compensation for any reasonable costs incurred by the bank as a consequence of the delay up to a maximum amount of $600 per day. The contract provided that liquidated damages would be applied at the rate of
$600 per calendar day from after 27 July 2012.1
The General Conditions of Contract – NZS 3910:2003
[34] The General Conditions of the contract NZS 3910:2003 was issued by Standards New Zealand and was widely used in the building, construction, engineering and infrastructure industries.2 The General Conditions contain provisions describing the type of contract which they are intended for, and set out contractual
1 The liquidated damages date specified in the construction contract is 27 July 2011, which is clearly an error, and which should have read 27 July 2012, which is the date that the parties worked to.
2 NZS 3910:2003 has been superseded by NZS 3910:2013.
terms covering the matters and procedures required for the performance and administration of construction contracts.
[35] The General Conditions include provisions described as “Guidelines” which are explained as follows:
These guidelines are part of NZS3910 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 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.
[36] The General Conditions provide for three types of construction contract: a “lump sum contract,” a “measure and value” contract, and a “cost reimbursement” contract.3
[37] The General Conditions provide for lump sum contracts in clause 2.2 as follows:
2.2.1 In a lump sum contract the Contractor shall carry out the work described in the Contract Documents and fulfil its obligations thereunder. The Principal shall pay the Contract Price to the Contractor.
[38] Section 6 of the General Conditions deals with the contract engineer’s powers and responsibilities, and provides for the contract engineer to undertake a dual role in relation to the administration of the contract. Clause 6.2 of the General Conditions provides:
6.2 Role of Engineer
6.2.1The dual role of the engineer in the administration of the contract is:
(a) As expert adviser to and representative of the Principal, giving directions to the Contractor on behalf of the Principal and issuing Payment Schedules on behalf of the Principal at due times; and
(b) Independently of either contracting party, fairly and impartially to make the decisions entrusted to him or her under the Contract Documents, to value the work and to issue certificates.
6.2.2 The Engineer shall exercise the powers entrusted to him or her by the Contract Documents without undue delay.
3 Clause 2.1.
…
6.2.4 If the Contractor suffers delay in the completion of the Contract Works or incurs additional Cost by reason of the failure or inability of the Engineer to carry out properly his or her duties as described in the Contract Documents, that failure shall be treated as a Variation.
[39] In the “Guidelines” section of the General Conditions the role of the contract engineer is addressed. It relevantly provides:
G6.2.1 This clause is intended to reflect the common law and to record that while the Engineer is retained by the Principal and has certain duties owed exclusively to the Principal, the Engineer is also vested by both parties to the contract with the power to make certain decisions which become binding on them both, and in the latter role is bound to act fairly and impartially.
…
In a number of matters the Engineer is called on to exercise his or her own professional judgment and must act independently of either party in the sense that his or her own professional decision must be made …
…
The fact that the Engineer is required to act independently in such matters does not prevent consultation with the Principal and taking note of the Principal’s concerns. Nor does it preclude consultation with the Contractor and taking note of the Contractor’s concerns, but the decision must be the honest decision of the Engineer exercising his or her own professional judgment.
[40] The General Conditions stipulate a process by which the Contractor’s payment claims are to be assessed and processed by the contract engineer leading to the issue of a final payment schedule.4 These provisions require the Contractor to submit their payment claims to both the Principal and to the contract engineer at monthly intervals during the period of contract work.
[41] The payment claims are to include prescribed details and estimates relating to the extent and value of the contract work performed and variations claimed. Upon receipt of the Contractor’s payment claim, the contract engineer is required to assess each of the payment claims and may amend them if necessary to comply with the terms of the contract and his or her valuation of the work carried out.5 Within seven working days after receipt of a contractor’s payment claim, the engineer is required to issue a
4 Clause 12.
5 Clauses 12.1.2; 12.1.3; 12.1.4.
certificate in the form of a provisional Progress Payment Schedule to the Principal with a copy sent to the Contractor (the provisional PPS). In the provisional PPS, the engineer is required to show the sum certified by the engineer as shall comprise the value of the Contractor’s payment claim amended as necessary, less any previous payments certified or other deductions required by the terms of the contract.6
[42] Within three working days after receipt of engineer’s provisional PPS certificate, the Principal may notify the engineer of any amendments or deductions that the Principal requires to be made to or from the sum certified by the engineer. Such notice must show the manner in which any amendments or deductions have been calculated, and the reasons for any such amendments or deductions.7 Thereafter within two working days of receiving a notice from the Principal requiring any amendments or deductions, and in any event not later than 12 working days after the receipt of the Principal’s notice, the engineer acting as the Principal’s agent, must issue a Progress Payment Schedule (PPS) showing the particulars required in a Contractor’s payment claim and also any amendments or deductions which the Principal has notified but which are not included in the sum certified by the engineer, and the sum certified by the engineer as the value of the Contractor’s payment claim as amended.8
[43] The engineer is required to send the PPS to both the Principal and the Contractor, and the certified amount together with GST is to be paid by the Principal to the Contractor within five working days of the date of the PPS.9 However the general conditions also provide:
12.2.7 Failure by the Principal to notify the Engineer under 12.2.3 that it requires any amendments or deductions, or failure to deduct any such sums from the amount paid to the Contractor under 12.2.6 shall not prevent the Principal from requiring any such amendments or deductions to be included in subsequent Payment Schedules, or prejudice any other method of recovery of such sums or the Principal’s right to dispute the sum certified by the Engineer.
6 Clause 12.2.1.
7 Clause 12.2.3.
8 Clause 12.2.4.
9 Clauses 12.2.5 and 12.2.6.
Time for completion and extension of time claims
[44] The General Conditions also provide for time for completion of the contract works, including provision for extensions of time, and the issue of a certificate of Practical Completion by the contract engineer. 10 Clause 10.3.1 provides:
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 the 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.
10.3.3 …
10.3.4 Upon receipt of notice of a claim for extension of time the Engineer shall investigate the claim. The Engineer shall within 20 Working Days or as soon as practicable thereafter determine whether or not the contractor is fairly entitled to an extension and shall notify the Contractor of his or her decision.
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.
10.3.6 …
10 Clause 10.
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.
[45] In the “Guidelines” to the General conditions the process by which the Contractor can seek an extension of time to the completion date stipulated in the contract is explained. It reads:
G10.3 Extension of time
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. The Contractor may be able to insure against delay Costs suffered by the Contractor otherwise than as a result of breach by late completion, but the Contractor is unlikely to obtain cover for liquidated damages.
…
An extension of time under 10.3.1(b) to (e) does not provide any compensation to the Contractor for Costs of delay or reinstatement, but it deprives the Principal of liquidated damages or other compensation from the Contractor for loss caused by the delay. The latter loss may be insurable by the Principal. In every case the Contractor must show that it is fairly entitled to an extension by reason of the matters relied on. Questions can arise under (e) as to the effect of the words “not due to the fault of the Contractor.” … In each case a decision must be reached as to whether the circumstances can properly be described as “not due to the fault of the Contractor”, and whether the Contractor “is fairly entitled to an extension”.
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.
Process for resolving disputes arising under the contract
[46] The General Conditions also provide for the determination and resolution of disputes between the Contractor and the Principal by means of: an engineer’s review;
mediation; adjudication pursuant to the Construction Contracts Act 2002, and arbitration.11
[47]Clause 13.1 provides:
13.1 General
13.1.1 No decision, valuation, or certificate of the Engineer shall be questions or challenged more than three Months after it has been given or more than one Month after the date on which any relevant Adjudicator’s Determination is given to the parties, whichever is the later, unless notice has been given to the Engineer within that time. This subclause 13.1.1 shall not apply to a Progress Payment Schedule.
13.1.2 Every dispute or difference concerning the contract which is not precluded by the provisions of 12.4, 12.6 or 13.1.1 shall be dealt with under the following provisions of this Section.
13.1.3 The Principal and the Contractor may at any stage agree to suspend any dispute resolution under this Section 13 due to any Adjudication proceedings, but in the absence of any such agreement the provisions of Section 13 shall continue to apply and neither party shall be entitled to suspend or delay any dispute resolution under this Section 13 due to any Adjudication proceedings.
Engineer’s Review
[48] The provisions setting out the procedure for an Engineer’s Review relevantly provide:
13.2 Engineer’s review
13.2 .1 Every dispute or difference under 13.1.2 shall be referred to the Engineer not later than one Month after the issue of the Final Payment Schedule or more than one Month after the date on which any relevant Adjudicator’s Determination is given to the parties, whichever is the later. The Engineer shall give his or her decision in writing. Except in the case of a decision under 13.2.4 the Engineer may correct or modify his or her decision in writing.
13.2.2 The Engineer or the Contractor may before or after the Engineer has a decision (other than a decision under 13.2.4) ask for a meeting, and in such case the Engineer and a representative of the Contractor shall meet as soon as practicable and endeavour to resolve the dispute amicably.
13.2.3 …
13.2.4 Unless the dispute or any question arising in connection with it has been referred under 13.2.3 and is awaiting a recommendation from the agreed
11 Clause 13.
expert, the Engineer may, at any time, in respect of any dispute or difference under 13.2.1 give a decision (in this Section called “a formal decision”) which states expressly that it is given under this subclause 13.2.4. The Engineer shall give a formal decision on the matter within 20 Working Days of receiving notice in writing from the Principal or the Contractor requiring him or her to give a formal decision and expressly referring to this subclause 13.2.4. Upon making a formal decision the Engineer shall forthwith send copies of it to both the Principal and the Contractor. The Engineer’s formal decision shall, subject to 13.312 and 13.413 or any Adjudication proceedings, be final and binding.
The pilings and foundations delay commencement of construction
[49] The defendant said in evidence that it was his understanding that CCL was contractually bound to do all the works for Vaco under the construction contract for the fixed price of $2.13 million, and that there would be no or minimal variation claims from CCL, other than for variations required by the tenants.
[50] At the time the contract was executed on 18 October 2011 design details for the building to be constructed were yet to be finalised, and CCL were awaiting instructions from Vaco and directly from the ASB regarding the design of the building. As noted, the Vaco acceptance of tender letter, included as one of the contract documents, provided that the fixed contract price was subject to a geotechnical investigation and confirmation of structural requirements to be carried out. The contract programme, incorporated as one of contract documents, provided for the resource consent application to be lodged on 10 October and for a geotechnical report being obtained by Vaco to be provided by 19 October 2011. The programme of works specified a project completion date of 29 June 2012.
[51] On the 18 October 2011, being the same date on which the contract was executed, Mr Moore of CCL advised the defendant that although the geotechnical engineer’s written report was yet to be received the test drilling results were not good. It appeared that deep piling under all foundations which were heavily loaded would be required, and also engineering work required to develop solutions.
[52] A geotechnical report was received on 25 October 2011, and thereafter Mr Moore obtained cost indications for the necessary engineering work. On 27 October
12 Clause 13.3 provides for the mediation of disputes.
13 Clause 13.4 provides for the arbitration of disputes.
2011 Mr Moore emailed CPRW Fisher and the defendant regarding design changes and the need for urgent communication. At the design meeting held on 28 October 2011, Mr Moore reported that the results of the ground investigation works had shown that there was a need for piled foundations, and he noted that design of the required foundations would be carried out to allow pricing and a variation agreement with Vaco.
[53] In early November 2011 CCL received revised plans from ASB’s architect incorporating design changes required by the ASB. They included new layout drawings incorporating an internal stairway and changing the location of a services platform from the rear deck to the roof. Mr Moore acknowledged receipt of the revised plans and in a reply email, copied to the defendant, he noted that due to the changes required by ASB, which had altered the design contained in the resource consent drawings, CCL were incurring delays in their current design programme that needed urgent attention in order to produce consent documentation in accordance with their contract obligations.
[54] On 4 November 2011 prior to the settlement of the Lincoln Road purchase which took place on 17 November, the defendant settled the Vaco Investments (Lincoln Road) Trust (the Vaco Lincoln Road Trust). Pursuant to the trust deed, Vaco was appointed as the sole trustee. The Vaco Lincoln Road Trust was apparently settled for the purpose of becoming the beneficial owner of the Lincoln Road property.
[55] On 10 November 2011 Mr Moore sent an email to Mr Beagley (copied to the defendant) in response to their discussion of a proposal that the ANZ bank provide a letter to CCL confirming Vaco’s funding facility for the project with the bank, and that the construction contract sum was to be paid via direct credit from the ANZ to CCL as “identified by Davis Langdon acting for the ANZ”. Mr Moore said:
Scott
Further to the below we respond as follows:
1. We are happy to proceed on the basis of the ANZ providing a letter with acceptable wording and conditions (as suggested by yourself) that would supersede our previous requirement for a direct agreement. Please forward [a] copy when you have received from the ANZ for formal review/approval.
2. We are happy to proceed with the retention scheme as proposed, we may in fact offer up a bond in lieu of the defects liability retention to Vaco.
3. We confirm the GMP [guaranteed maximum price] for the piling requirements will be $162,000 and remove our ground condition qualifications accordingly.
4. As indicated previously we still have some work to do on the programme implications (Martin [Fahey] will respond separately later today), on first review this may have about 4 weeks construction delay, we don’t believe the piling requirement will effect our design and consent timeframes.
…
[56] Later on 10 November 2011, Mr Beagley for Davis Langdon sent a Project Review Report prepared for Vaco to the ANZ bank. The report stated that Vaco had entered into a design and build fixed price lump sum contract with CCL to carry out the construction works for the sum of $2,129,838 and noted:
In addition to the above Variations will be instructed to include Design Consultant Fees ($190,000 approximately) and a Guaranteed Maximum Price (“GMP”) of $162,000 for the design and build of a piled foundation and associated ground condition risks.
[57]The Project Review Report also noted:
Key project and construction related risks are noted as follows:
Ground conditions – this risk has effectively now been removed by way of the Contract providing a Guaranteed Maximum Price in respect of a piled foundation and associated ground condition risk.
[58] On 11 November 2011 the ANZ forwarded a letter to CCL in which the bank set out the manner in which it would process CCL’s progress claims under the contract. In its letter signed by the Property Finance Manager, the ANZ Bank said:
VACO INVESTMENTS (LINCOLN RD) LIMITED – BANKING AND RETAIL CENTRE AT 290 LINCOLN ROAD, HENDERSON
With regard to the above project, I can confirm as follows:
ANZ National Bank Limited (the “Bank”) has an approved Development Facility available to Vaco Investments (Lincoln Rd) Limited that includes an allocation sufficient to meet the Construction Contract Sum of $2,129,838 (excluding GST). Upon receipt of QS certification of each progress claim and subject to there being no defaults under the Transaction Documents, the Bank will pay the progress claim direct to the account nominated by Clearwater Construction Limited.
The Bank will retain the monthly retention sums within the Development Facility until Practical Completion has been achieved. Upon Practical Completion being achieved and the initial release of retentions having been certified, the balance of the retentions will be paid to an account in the joint name of Vaco Investments ( Lincoln Rd) Limited and Clearwater Construction Limited for subsequent payment in accordance with the Construction Contract.
If you have any queries, please let me know. Kind regards
Michael Wright
Manager – Property Finance
[59] On the date of settlement of its purchase of Lincoln Road (17 November 2011), Vaco Investments Ltd (VIL) entered into a sale and purchase agreement with another of the defendant’s companies, VDT Securities Limited (VDT Securities), pursuant to which VDT Securities purchased the Lincoln Road property from Vaco Investments Ltd for $1.325 million. That same day VDT Securities entered into an agreement for sale and purchase with Vaco pursuant to which Vaco, as trustee of the Vaco Lincoln Road Trust, purchased the Lincoln Road property for $3.2 million. As evidence of this transaction the defendant relies on a settlement statement dated 17 November prepared by Vaco’s solicitors Martelli McKegg, on which the purchase price paid by Vaco to VDT Securities Ltd as vendor is stated as being $3,200,000. However the plaintiff says that there must be real doubt as to whether the VDT to Vaco transaction did in fact take place, as a statement dated 22 November 2011 also prepared by Martelli McKegg, states the amount Vaco was required to pay in order to settle the purchase as
$1,335,410.30, and that the settlement was effected with funds advanced by the ANZ National Bank. The defendant says that the balance of the purchase price paid by Vaco to VDT Securities was satisfied by means of a loan from VDT Securities to Vaco, although there is no reference in Martelli McKegg’s statements of 17 and 22 November 2011 to such a loan advance from VDT Securities to Vaco.
[60] Before work on the project could commence CCL’s structural engineer was required to produce structural calculations for the foundations to enable the first stage building consent to be obtained. On 30 November 2011, Pacific Environments sent an email to Mr Moore (copied to the defendant) noting that the architectural detailed design was behind programme and they were waiting for CCL’s revised programme
to reflect the current expectations. The author, Mr Peter Eising of Pacific Environments, noted that although they had received the structural layout, they were waiting on the structural sizes for beams, which was holding up progress. He further noted that any ASB generated changes would come to Pacific Environments only via CCL and would be subject to variations.
[61] In late November 2011, CCL appointed Mr Stuart McClatchy as Project Manager of the construction project. The construction contract provided that CCL was to be given possession of the site on or before 21 November 2011, but because of the delay caused by the need to design the piling and the awaiting of design instructions from the ASB, apart from some minor site excavation works, CCL did not commence work at the site until 9 January 2012. Shortly following his appointment Mr McClatchy prepared another construction programme dated 9 December 2011 which was based on the programme in the contract documents, but which included additional detail regarding the required tasks and recorded the net effect of the delays that had been encountered to that point due to the piling design and works that were required (the project programme).
[62] Mr McClatchy tabled the project programme at the design meeting held at the Lincoln Road site office on 16 December 2011. The minutes of the meeting record the tabling of the project programme and note that the defendant and CCL were to discuss the dates applicable to the ASB. The 16 December 2011 meeting was “Design Meeting No. 10”, and was attended by several CCL staff, an architect from Pacific Environments’ staff, an electrical and communications contractor, and the defendant.
[63] The project programme was also provided to the contract engineer Mr Beagley and copied to the defendant on 19 January 2012, and it was thereafter treated as being the applicable construction programme for the project, with progress monitored and tracked by reference to it. From January 2012 throughout the remainder of the construction of the building Mr McClatchy continued to amend and update the project programme to show the aspects of the construction work that had been achieved and the remaining planned work en route to completion. Updated versions with tracked changes were distributed for each monthly Project Control Group meeting (PCG) or design meeting.
[64] At an early stage of the construction phase of the project the ASB notified its requirements for variations from the original drawings involving alteration to the building plans that CCL had priced the building work on and which had been submitted for building consent. At a Development Control Group meeting attended by the defendant for Vaco, representatives of ASB and ASB’s architect on 2 February 2012, a number of new or altered design features were discussed. It was noted at this meeting that any changes to the original plans required by ASB would be treated as variations under the construction contract. Over the course of the construction project ASB progressively required approximately 80 contract variations, some of which were significant and resulted in additional planning, construction work and time for CCL .
[65] From February 2012 onwards, each month during the construction CCL prepared and circulated detailed Construction Reports for presentation and discussion at the monthly PCG meetings. These reports covered such matters as: Safety and site issues; Progress and Program; Design and Documentation; Local Body Authorities; Quality Control; Subtrades; and Financial. The current project programme showing progress to date was attached to the Construction Reports together with photographs showing progress, a summary of any accidents, a summary of potential time extensions, a contractor appointment schedule and a contract variation schedule.
[66] The project programme spreadsheet displayed the construction programme in grey together with the actual progress achieved with each task in blue and in the case of critical task progress, in red. On any occasions when the project programme was not distributed as an attachment to the Construction Report for that month, it was nevertheless tabled for discussion at the relevant PCG meeting.
[67] The monthly PCG meetings were attended by the defendant, the contract engineer, representatives of CCL and DHC, and on some occasions by an ANZ bank representative as Vaco’s financier.
[68] As well as the monthly PCG meetings for which it prepared Construction Reports, throughout the course of the construction CCL or DHC also arranged and co- ordinated regular site meetings and design meetings. A series of 14 design meetings were held between September 2011 and February 2012. DHC prepared minutes of
each of these meetings which were distributed to all attendees. The site meetings were initially held fortnightly from March 2012. The purpose of these meetings was to review progress on site, address and discuss any contract variations or technical issues. DHC prepared minutes of each of these site meetings and they too were distributed to all attendees.
[69] The defendant attended the construction site almost every week day during the course of the project and construction. A review of the meeting minutes shows that the defendant attended most of the site meetings, design meetings, and the PCG meetings. In those instances when he did not attend his apologies were noted and the minutes of the meeting were subsequently sent to him. The defendant dealt directly with Mr Beagley as contract engineer and also dealt directly with the ASB. In November 2011 the defendant directed Mr Moore of CCL that CCL was not to communicate with ASB regarding the Lincoln Rd project unless the communication had his prior express approval.
CCL assigns contract to DHL
[70] With Vaco’s consent, CCL subsequently assigned its rights and interest under the construction contract to the plaintiff by deed effective 1 April 2012. Pursuant to the deed DHC covenanted with Vaco that it would be bound by and perform the covenants conditions and stipulations contained or implied in the construction contract to be performed by CCL.
Plaintiff ’s payment claims
[71] Initially, each month during construction CCL would submit its payment claims to both Vaco and the contract engineer, Mr Beagley. The first payment claim was issued on 31 October 2011 in relation to the period 1 - 31October 2011. Each payment claim comprised a tax invoice addressed to Vaco and referenced the contract price and any contract variations. The payment claims also included a “Contract Schedule” which set out each component of the contract price (such as drainage, carpentry, plumbing, roofing), and the percentage of work carried out during the period covered by the payment claim and the amount claimed for it. Also included with each payment claim was a “Variation Schedule” which listed the contract variations which
had already arisen and the amount claimed by CCL in relation to them. The variation schedule also identified additional items which CCL considered would constitute variations even where it did not claim any payment in respect of that item. The first payment claim included a variation claim for a total of $119,827.05 for consultant fees relating to the engagement of an architect, a civil engineer, a fire engineer and a geotechnical engineer and driller, in accordance with fee proposals agreed to by Vaco.
[72] As noted, the General Conditions provided for the contract engineer upon receipt of a payment claim to issue a Provisional Progress Payment Schedule (PPS) in which he certified the amount payable in respect of each payment claim. The contract engineer would then provide the PPS to Vaco for comment and to enable it to notify the contract engineer of any amendments or reductions it contended should be made to it. The contract engineer was then required to issue a Progress Payment Schedule (PS). Payment of the amount certified by the contract engineer in the PS was then made on Vaco’s behalf by the ANZ bank pursuant the development facility Vaco had established with the ANZ in relation to the project.
[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 PGC meetings were attended by Mr Beagley and Mr Parkin of 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.
[76] An example from Construction Report 5 to which the variation schedule was annexed, appears under a heading, “Anticipated Variations and Design Options” which states:
Variations are expected to eventuate from the ASB and their design team as they determine their final needs. The variations shown on the schedule are ones that Clearwater considers to be as such at present and includes the client instructions passed on by our client. This schedule will be updated to reflect variations when confirmation has been received.
· The Coffee Club; doors to entrance and rear, windows design changes, additional bathroom plumbing etc $15,000.
[77] Another example of the way in which variations were treated by the parties is evident from the Minutes of the Site Meeting No. 12 which was attended by Mr McClatchy and Mr Scott Hunter from CCL, and by the defendant for Vaco. Under the heading, “5.0 Design” are the following entries:
…
5.05 Storage area to the basement has been discussed as being framed and using mesh with lockable gates. CCL believe that this is a variation to the contract and asked that they can be instructed on this.
…..
5.11 [Mr Arnerich] advised that he wanted to install a fence between his building and the Toyota tenancy. CCL to sketch up and price. CCL also advised that they considered this as a variation to the contract.
[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.
[79] As earlier noted, some of the contract variations generated by Vaco and the ASB required CCL to plan and undertake work that resulted in additional time being required than had been allowed for under the original scope of work of the construction contract. When these circumstances arose, CCL notified Vaco of its intention to submit claims under the contract for:
(a)The costs of the compensatable variations generated by the ASB which would include P&G costs fixed by reference to the cost of the variation item.
(b)The cost of compensatable variations generated and instructed by Vaco, but which did not include any P & G costs.
(c)Where the provision of variations had caused delay in progressing the contract works, claims for:
(i)Extensions of time in respect of the delays caused by those variations; and
(ii)All time related costs incurred by CCL as a result of those delays.
CCL notifications of its intention to lodge extension of time claims
[80] During the course of the construction of the building, CCL had consistently notified Vaco and Mr Beagley of its intention to make extension of time claims as variations arose which caused construction progress delays.
[81] On 9 November 2011, Mr Beagley requested Mr Moore to provide a forecast of the time implications associated with the design and construction of piled foundations. Mr Moore replied the next day by email copied to the defendant, saying:
…
As indicated previously we still have some work to do on the programme implications (Martin [Fahey]) will respond separately later today), on first review this may have about 4 weeks construction delay, we don’t believe the piling requirement will effect [sic] our design and consent timeframes.
[82] On 23 February 2012 Mr Fahey of CCL wrote to Mr Beagley to respond to his request for information regarding progress with the specific aspects of the project including, the building consent; design status; and the construction programme. Mr Fahey’s email was copied to the defendant. Mr Fahey said that the design status was 95 per cent complete although the ASB requirements would “throw changes at the building as they have indicated with the attached programme.” He further advised that CCL would be issuing a revised construction project programme that afternoon in which it had incorporated the project delays based around design approval, consents and additional piling work, and that he and the defendant would be meeting with the ASB the following day. Mr Fahey wrote:
We will then formally apply to the Engineer to the Contract for an Extension of time. Projected completion date is 10.09.2012 and access for ASB fit out start of their 14 week requirement is 5.06.2012. Currently we are on target to meet these dates.
[83] In its Construction Report No. 1 dated 29 February 2012 for the first PGC meeting, CCL said:
2.0 Progress and Program
·Progress Overall
· The construction program is indicating that we are approximately three weeks behind program. We have taken some steps to
accelerate the program and we are hoping to pull a further two weeks back with the structure.
· Please see the attached program for progress to date.
…
·Extensions of Time
· We have notified our intention to claim for an extension of time for the piling works.
·Other program comments
· Last minute changes from the ASB are continuing to frustrate progress and may lead to further time extensions.
[84]In Construction Report No. 2 for the March 2012 PGC meeting, CCL said:
2.0Progress & Program
Progress Overall
· The construction program is indicating that we are approximately two weeks behind program. However we have incurred further delays with late decisions from the ASB which will potentially show a further three week delay on next month.
· Please see attached program for progress to date.
…
·Extensions of Time
· We have notified our intention to claim for an extension of time for the piling works and for the time delays at the front end of the project with getting responses back from the ASB.
· We have incurred further delays from last minute changes from the ASB and we predict this will have at least a three week impact on structural steel for the stage 2 area which is a critical path item. The roof area for stage 2 is still on hold pending confirmation on the changes.
·Other program comments
· Last minute changes from the ASB are continuing to frustrate progress and may lead to further time extensions. Drawings need to be frozen if we are [to] commit to a completion date for the ASB to take over for the fit out.
[85] In an email dated 14 May 2012, Mr Eugene Reyneke, who was a Project Manager at ASB, asked the defendant to confirm the committed handover date for the tenancy by close of business the following day, at the latest. The ASB email was copied to several other staff at the ASB and to Mr Fahey and Mr McClatchy. Mr McClatchy sent an email to the defendant shortly after 7.30 am the following morning in which he said:
….
I’m going to struggle to have a revised program back to you today. I know the ASB want this time frame a.s.a.p. but they need to acknowledge that they have made some huge changes here that have had a major effect on the program and the implication of these changes takes time to sort out. Currently all of our time has gone into implementing these changes to try and mitigate any further lost time. If I can have another couple of days on this I would appreciate it.
[86] The defendant himself then wrote to the ASB. In his email to Mr Reyneke on 15 May 2012 he said:
As discussed last night Clearwater are very aware of the importance of getting a confirmed handover date. They are endeavouring to have this by the end of today or latest tomorrow. Please note that they will be locking into this date once and for all and to do that they have to be sure of the implications of changes to date and be sure that there will be no more major changes forth coming [sic].
You must understand that some of the latest instructions/changes are quite major e.g. roof and structural changes that didn’t eventuate or more recently the installation of the bollards? While this sounds like a simple exercise what has actually eventuated in terms of drawings are custom made stainless steel bollards that need to be specially made and fixed into the [ground] with additional base structure.
…..
[87] In Construction Report No. 4 dated 31 May 2012 and which was emailed to the defendant on 12 June 2012, CCL said:
2.0Progress & Program
Progress Overall
· The construction program is indicating that we are approximately 5 weeks behind program. All of these delays have been caused by late instructions from the ASB which has held up steel fabrication in Stage 2
…
·Extensions of Time
· We have notified our intention to claim for an extension of time for the piling works and for the time delays at the front end of the project with getting responses back from the ASB. (This will be formalized in EOT1)
· We have incurred further delays from late design changes from the ASB that has impacted the installation of the structure and the roof as noted in our last report. (These delays will be formalized as EOT 2)
· The ASB has now noted that they do not want to proceed with the plywood on the roof as we will need to further review this as to what impacts this has had with us as we were originally instructed to proceed with this item.
·Other program comments
…
· A late instruction for additional steel to support the bollards has also been issued. Impact still to be reviewed.
· With all of the recent design delays that we have incurred to date we have had to revise the program and reconfirm the fit out date with the ASB. This has been done between [the defendant] and ourselves and [the defendant] sent an email back to the ASB advising that the revised date would be the 7th of September providing that there was no further changes. This has been accepted by the ASB.
[88] Construction Report No. 6 dated 31 July 2012 noted that the construction programme was running approximately four weeks behind. The report included the following update of progress with the construction programme and extension of time claims:
2.0 Progress and Program
…
·Extensions of Time
CLEARWATER CONSTRUCTION LTD
· EOT 1 will incorporate the time claim for delays with information at the front end of the project which delayed the design works. Approximate delay time is estimated at 4 weeks.
· EOT 2 has now been formalized and will be submitted this week the total time frame claimed in this delay is 5 weeks.
· EOT3 will be a claim for the piling delay this was an item tagged in the contract and we estimate that this delayed the works 3-4 weeks. (Note this has been split from EOT1)
·Other program comments
· ASB fit out date of the 7th of September still looks achievable. Our [contract] works will not be completed but the ASB should have a closed in shell as requested to start their works
…
· Coffee Club shop front requires urgent finalization [as] this is stopping works progressing on this and [the] retail shop window. We are now getting into a potential delay situation here.
· Design of the Mechanical platform for the ASB has taken a long time to rationalize with the consultants and we are potentially in a delay situation with this item as well.
…
[89] On 6 August 2012 Mr McClatchy of CCL wrote to Mr Beagley giving notice of an extension of time claim. The letter was copied to the defendant. He said:
Dear Scott
Re: ASB Lincoln RD Extension of Time Claim for late Structural Changes Generated by the ASB (EOT 2)
As you are aware from advice provided both at Site meetings, PCG meetings and email correspondence the Phase 2 steel fabrication and erection for this project was delayed by late design changes from the ASB. These changes included
·Reposition and enlargement of the stairwell void.
·Reposition and enlargement of the skylight in the roof.
·Reposition of the safe locations.
·Redesign of the front parapet between Grids 2 and 5
·Late requests to move structural columns to line up with the interior changes.
·Late requests on additional priming to steel.
·Requests to ply the main roof and the subsequent reversal of this instruction.
·Requests to redesign the roof structure so that purlins were located on top of the rafters.
·Late instruction on additional structure for the bollards in the drive through
·Installation of internal Down Pipes redesign
Given the lateness of the instructions and the amount of redesign work that was required by the Design Consultants, the steel fabrication and erection works for Stage 2 were subsequently delayed 5 weeks. These changes were a
direct delay to the critical path and have delayed progress on site by 5 weeks. We therefore consider under clause 10.3 of the contract we are entitled to an extension of time of 25 working days to the completion date to compensate for this delay.
The delay period is a total of 1 weeks delay for the stair void move which meant that the shop drawings were put on hold while the final position was being finalised, and the redesign the structure was being done and a further 4 weeks for the subsequent changes requested by the ASB. All of these changes
required redesign work to be done by the consultancy team and in a number of instances costs were requested before instruction would be issued to proceed.
Please also note that with the phase 2 erection of the steel the whole structure had to be built as one unit so that the crane could work its way progressively off site as there was no physical position to lift the steel from outside the site, as we were restricted by the overhead power lines and distance to the site if the works were done from the road. Therefore until all of the roof changes had been implemented we were unable to complete construction of the ground and level 1 floors and unable to continue with the concrete works here which were also critical to the program. The late decisions by the ASB with the roof structure had a major impact with the delays here.
Please find attached two programs which demonstrate the impacts of the delay and a timeline which outlines the sequence of events.
Regards
Clearwater Construction ltd
Stuart McClatchy Contracts Manager
[90] On 8 August 2012 Mr McClatchy wrote to Mr Beagley giving notice of another extension of time claim for a further five weeks. This letter was also copied to the defendant Mr McClatchy said:
Dear Scott
Re: ASB Lincoln RD, Extension of Time Claim for Additional Piling Works (EOT3)
As you are aware from previous advice the original contract program made no allowance for ground conditions or piling. These items were tagged in our letter of offer dated the 29 July 2011 and this tag was accepted in Vaco Investments acceptance letter. Given this we believe under clause 10.3 the additional piling works form a variation to our contract and that we are entitled to make a claim for an extension of time for the additional time required to do this work of 5 weeks (25 working days).
Attached is a copy of two progress tracked construction programs from the
8.2.12 and the 15.3.12 which identify the Piling being critical and also reflect the actual time frames the work took to do. Attached also are copies of the relevant documents in the contract.
Please do not hesitate to contact us if you require any further information here or documentation.
Yours faithfully
Clearwater Construction ltd
Stuart McClatchy Contracts Manager
[91] Mr McClatchy telephoned the defendant on 15 August 2012 to ask him about the process he wanted CCL to follow with regard to the extension of time claim attributable to the ASB requirements and the contract variation that the bank had generated. The defendant had by then received EOT’s 2 and 3. The defendant wrote to Mr McClatchy on 16 August 2012 referring to Mr McClatchy’s telephone call and setting out his requirement for a breakdown of EOT attributable for each of the ASB variations. He said:
…
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 delays to the programme as a result of the variations requests and reduce any delay in processing these from their side also.
[92] Construction Report No.7 is dated 31 August 2012. It noted that the construction programme was indicating that the project was five weeks behind the current updated construction program, which was approximately 15 weeks behind the contract completion date of 29 June 2012. The report further noted that CCL was still “on-track” for the hand over to the ASB on 7 September as had been agreed, and stated that the projected completion date was now 15 October 2012. The report also noted that another EOT was to be made as in reviewing earlier delays CCL had determined that it had experienced a delay caused by contaminated soils which would be formalized in EOT 4.
[93] The ASB took possession of its tenancy area in the building on 7 September 2012. This was later than had been initially provided for but was a date on which the parties had agreed. When confirming the agreed date with the ASB the defendant said in an email to the bank.
As discussed in our recent telephone conversation regarding the handover date I have a confirmed date [from] Clearwater Construction of 7 September 2012. We have collectively tried very hard to keep as close as possible to the end of August. Clearwater realise the importance of this handover date and really put in the extra effort to make this happen.
[94] Mr McClatchy sent the minutes of Site Meeting No.12 to the defendant by email on 21 September 2012. The site meeting had been held that same day, 21 September, and the defendant had attended with Mr McClatchy and Mr Scott Hunter of CCL. The minutes noted that three extension of time claims had already been lodged and that CCL was waiting on a response to them. The defendant emailed Mr McClatchy in reply commenting that he did not think that the meeting at the site was a “site meeting”, however he nevertheless addressed a number of issues referred to in the minutes. Commenting on the notes in the minutes which referred to the CCL having lodged three EOT claims on which it was waiting for a response, and to CCL looking at proportioning the ASB time claim to the variations that caused delays, the defendant wrote:
Davis Langdon to review and assess against contract as to entitlement.
[95] Construction Report No.8 is dated 30 September 2012 and was emailed to Mr Beagley and the defendant on 10 October 2012. This report noted that the ASB had taken possession of the tenancy area on 7 September as planned, but that the overall programme was being pushed out due to the late supply of electricity which was in turn delaying the commissioning, the Code Compliance Certificate sign off, and the consultants’ signing off. The report said that the construction programme was running six weeks behind the current updated construction programme which was 16 weeks behind the construction completion date of 29 June 2012. As regards the EOT claims the report included the following:
Extensions of Time
…..
We will be lodging a further time claim for a delay with the late change in the power requirements from the ASB which is now having a knock on affect with getting the power on, commissioning services and getting compliance documentation off the trades for the CCC processing.
The four extension of time claims
[96] As it had clearly signalled in the course of a series of site meetings, construction reports, and PCG meetings, CCL made a total of four extension of time (EOT) claims which it submitted to Mr Beagley as contract engineer. They related to:
(a)Delays in completing design work as a result of the need for piling works following the receipt of the geotech report which was only obtained by Vaco shortly before the contract works were planned to start and for which a seven week time delay was claimed. EOT 1 was submitted by letter dated 5 September 2012.
(b)Late structural design changes generated by the ASB for which a time extension of five weeks was claimed. EOT2 was submitted by letter dated 6 August 2012.
(c)Delays caused by the need to construct the piling works for which a time extension of five weeks was claimed. EOT 3 was submitted by letter 8 August 2012.
(d)Delays caused by a late instruction to upgrade the electric power to the ASB tenancy which in turn resulted in delays in obtaining the Code Compliance Certificate and practical completion for which a time extension of four weeks was claimed. EOT 4 was submitted on 9 January 2013.
[311] On 6 March 2013 Mr McClatchy sent Mr Beagley a letter and supporting information and materials relating to the CCL EOT claims which it had referred for engineer’s review.
[312] CCL’s Final Payment Claim 17, submitted to Mr Beagley and copied to Mr Arnerich on 15 March 2013 sought payment of $553,095 plus GST. Mr Arnerich knew at the time that Payment Schedule 17 was submitted, that CCL’s variation claims were with Mr Beagley for engineer’s review, and upon receipt of payment claim 17 he requested Mr Beagley to add the “new items in this claim” to the review he was undertaking. Mr Arnerich reviewed Payment Claim 17 and provided Mr Beagley and Mr Parkin with his comments by marking the items which Vaco did not accept or agree with. In his comments to Mr Beagley, Mr Arnerich said that CCL was 231 days late in achieving practical completion resulting in, and therefore being liable for, liquidated damages.
[313] Mr Arnerich was also aware that Mr Fraser of CCL had met with Mr Parkin shortly after CCL had submitted Payment Claim 17 to review and explain each of the variation claims. Mr Parkin sent Mr Arnerich a copy of an email from Mr Fraser in which he referred to the variations, and also sent him a copy of his assessment of some
of the claims. In his evidence Mr Arnerich said that in light of the assessment that had been made by Mr Parkin and the lateness of CCL’s EOT claims, at that time he considered there to be no prospect of any further payments to CCL being certified by Davis Langdon. However, irrespective of the view he took of the validity and merit of the CCL claims it is clear that Mr Arnerich was aware that the review process was underway and yet to be finalised by the issue of Mr Beagley’s formal decision.
[314] This then was the state of affairs regarding CCL’s contract claims at the date when Vaco settled the sale of Lincoln Road on 3 April 2013, and shortly thereafter Mr Arnerich proceeded to pay and distribute the net proceeds of sale form Vaco to his associated entities and parties. It is quite clear that as of early April 2013, CCL was claiming a substantial sum from Vaco and although Mr Arnerich was adopting a dismissive attitude to the claim, the contract engineer, as reported to ANZ, regarded the claims as presenting a significant liability risk for Vaco. In my view, the CCL claims and their yet to be determined status meant that CCL was a contingent creditor of Vaco and Mr Arnerich’s director’s duties required him to have proper regard to CCL’s interests as a contingent creditor when making decisions about distributing Vaco’s assets resulting in it being unable to satisfy CCL’s debt should it be established, and its quantum crystallised.
[315] In my view the steps taken by Mr Beagley and Davis Langdon to issue the Provisional Progress Payment Schedule on 15 April 2013, and by Mr Beagley sending his draft Engineer’s Review No 2 to Mr Arnerich on 24 April 2013, and by Davis Langdon’s issuing the Final Payment Schedule No.17 on 1 May 2013, did not alter or affect the position of CCL as regards it being a contingent creditor of Vaco. Despite being described as a Final Payment Schedule No.17, as regards the EOT claim the schedule stated that, “Further requests for information submitted…” thereby indicating that not all matters had been addressed and determined.
[316] CCL was unaware of the draft Engineer’s Review No.2 and so had no opportunity to challenge either it or the final version of the Review report until after it was finally provided to it on 20 January 2014. Had it been provided with Engineer’s Review reports, CCL would most certainly have challenged the findings and would
have questioned why Mr Beagley had not addressed the detailed supporting information and submissions made by Mr McClatchy in his letter of 6 March 2013.
[317] Mr Arnerich said in evidence that because he had heard nothing from CCL following receipt of Final Payment Schedule No 17 he had concluded that CCL must have accepted that it had no further claims against Vaco. Despite his assertions to that effect, I do not consider that Mr Arnerich could have actually held that subjective belief, as no sensible basis existed for him to reach such a conclusion. Moreover, and without taking any steps to ascertain whether his belief that CCL had abandoned its claims against Vaco was indeed correct, he proceeded with energy and haste to secure release of the retention funds held by the ANZ. He approached Mr Beagley on 6 May 2013 requesting him to advise the ANZ that the retained funds could be released to Vaco as they were needed to pay final accounts for the fit out and tenancies of Lincoln Road. All of this occurred before the completed Engineer’s Review No 2 had been issued, despite a draft having been circulated to Mr Arnerich, and while dispute resolution mechanisms for establishing its claim were still available to CCL under the contract.
[318] Mr Fraser of CCL advised Mr Beagley in an email on 13 May 2013 that CCL did not accept the assessments of its claims as had been made in the Final Payment Schedule No 17. So, it was clear to Mr Beagley that CCL had not abandoned its claims. However, on 16 May Mr Beagley sent ANZ an email advising that as the tenant fitout works had been completed, the retained cost to complete funds of $354,537 could be released to Vaco for settlement of the final fitout contributions to be negotiated with the ASB Bank. The following day, 17 May 2013, Mr Arnerich requested Mr Beagley and ANZ to authorise the release to Vaco of all of the remaining retained money. Neither the ANZ Bank, Mr Beagley, nor Mr Arnerich notified CCL of the intention to release the retained funds. For his part Mr Beagley knew that CCL were challenging the decisions he had made on the claims in Final Paymnent Schedule 17, and it is remarkable that he did not see fit to ensure that CCL were made aware of the proposed release of the retention funds to Vaco, when he knew that CCL was still pursuing its claim.
[319] On 20 May 2013 ANZ deposited the retained funds totalling $561,916.32 into Vaco’s ANZ account in which it held funds as trustee of the Vaco Investments (Lincoln Road) Trust. As a result, the retention funds held by ANZ for the purpose of meeting outstanding claims relating to the project, including from CCL, were released to Vaco without CCL being given any opportunity to object. The money was promptly applied by Vaco to settle the outstanding liability to ASB regarding the Lincoln Road premises.
[320] I am satisfied that throughout this sequence of events that Mr Arnerich did not believe that CCL had abandoned its claims. Furthermore, having regard to the “Dispute” provisions of Section 13 of the General Conditions, I am satisfied that Mr Arnerich could not, and did not, conclude that CCL had exhausted its legal avenues for seeking to establish its claim against Vaco.
[321] In the period that followed the release of the ANZ retention money, CCL continued to maintain its entitlement to be paid the amount of its claim. Mr Arnerich went away on an overseas holiday from late May 2013 until mid-September 2013. On 8 August Mr McClatchy endeavoured to contact Mr Arnerich and his email was answered by means of an automated message advising that Mr Arnerich was away. Mr Arnerich nevertheless received Mr McClatchy’s email and referred it to Mr Parkin. By this stage Mr Beagley had left Davis Langdon, and it appears that Mr Parkin was uncertain as to the status of CCL’s claim. Surprisingly, in emails sent on 19 September 2013 Mr Arnerich told Mr Beagley that a final payment schedule had been sent to CCL. As Mr Beagley was purportedly the author of the Final Payment Schedule No 17, it is unclear as to why he needed to be provided with a copy of his own document.
[322] When Mr Beagley belatedly issued his Engineer’s Review No 2 on 21 October 2013 he did not comply with the requirement in the General Conditions requiring him to send it to both parties. When it was finally brought to CCL’s attention and provided to it on 20 January 2014, CCL promptly responded the same day noting that the Engineer’s Review was well outside the prescribed time provided by clause 13.2.4 of the General Conditions. Mr Arnerich then engaged Davis Langdon to comment on the situation and to prepare a draft reply for Vaco to send to CCL. Davis Langdon’s opinion was erroneously founded on the assumption that Mr Beagley had provided a copy of his Engineer’s Review to CCL and that there had been no challenge to his
determinations, and that being the case the Final Payment Schedule No.17 could be considered as the Final Payment Schedule
[323] On 7 February 2014 Mr McClatchy sent an email to Mr Arnerich which was copied to Davis Langdon. In this email he strongly challenged the Davis Langdon opinion that Final Payment Claim 17 should be treated as having any validity when it was issued without regard to the information and submissions that had been provided by CCL. He also challenged their conclusion disallowing the EOT without taking his letter of 6 March 2013 into account. Mr McClatchy concluded by saying that CCL maintained that it had not been overpaid, and in fact it was owed money. Then on 14 February 2014 CCL provided what it described as its formal response to Engineer’s Review No 2 in which it sent Davis Langdon its detailed response to the determinations contained in the Review. These emails, also sent to Mr Arnerich and Vaco, mean that Mr Arnerich could have been in no doubt that CCL was still pursuing its claims against Vaco.
[324] CCL continued to pursue resolution and payment of its claim during 2014. It engaged a construction law specialist to advise and represent it. When a further attempt to negotiate a resolution of its claim failed, CCL advised Vaco that it would be referring the dispute to an adjudicator under the Construction Contracts Act. Less than a week later, Mr Arnerich as sole director of Vaco put the company into voluntary liquidation.
[325] It is quite clear on the evidence that throughout 2014 during the period prior to the voluntary liquidation of Vaco, Mr Arnerich was endeavouring to obstruct and frustrate the attempts by Mr McClatchy and CCL to finalise their claim. Suggestions for meeting were deflected on the grounds that he needed more information, and the issues needed to be investigated before he was prepared to attend such a meeting. By the date of the voluntary liquidation, Mr Arnerich had paid out all of the remaining funds held by Vaco and it had no funds with which to pay any creditors.
[326] I find that Mr Arnerich’s decision to place Vaco into liquidation was another means by which he sought to frustrate CCL from pursuing its claim. This finding is reinforced by the actions taken by Mr Arnerich since he placed it into liquidation. The
steps he has taken to fund the liquidator to oppose the plaintiff and seeking to head off CCL’s application for leave to bring proceedings by way of adjudication are consistent with him being motivated to prevent the plaintiff pursuing its claim to be entitled to recover the amount of its contractual claims against Vaco.
[327] Accordingly, I find that certainly from the date it issued its final payment claim No.17, Vaco and Mr Arnerich as its director were required to regard CCL as a creditor of Vaco. That situation pertained throughout the time that Mr Arnerich carried out the payments and distributions of the Lincoln Road sale proceeds commencing around 8 April 2013. I also find that Mr Arnerich was aware that CCL was asserting itself as a creditor, and that Mr Arnerich was aware that there was a real dispute between the parties. I also find that Mr Arnerich did not believe that CCL’s claims had been finally determined by Final Payment Schedule 17.
Did Mr Arnerich breach his director’s duties?
[328] Pursuant to s 131 of the Companies Act 1993, as a director of Vaco Mr Arnerich was required to exercise his powers and perform his duties in good faith while acting in what he believed to be the best interests of the company. A director’s assessment of what is in the best interests of their company while subjective, cannot be undertaken without consideration of the creditors of the company where the company is contemplating making payments or distributions that would exhaust its funds and extinguish any ability to pay its creditors.
[329] In the present case, Mr Arnerich’s intention was to distribute the entire assets of Vaco following its sale of Lincoln Road in April 2013. The distributions were made by Vaco as corporate trustee of the Vaco Investments (Lincoln Road) Trust to a number of parties associated with Mr Arnerich. The intention and objective of distributing the entire assets of Vaco necessarily meant that once the distribution payments had been made there would be no funds or other assets from which Vaco could satisfy debts due to its creditors.
[330] Mr Arnerich said in evidence that as at the date he arranged payment of the ASB invoice he had not heard anything further from CCL regarding Final Payment Schedule No. 17. He said that he was “comfortable” paying the invoice as the ASB
was a creditor of Vaco and he considered that it was in the best interests of the company that it be paid at that time. Mr Arnerich also said in his evidence that at the time he made or authorised distribution of the sale proceeds of Lincoln Road in April 2013 he was “entirely comfortable” with making the distributions to his interests notwithstanding the situation whereby CCL were maintaining their claim for further payment for the cost of variations. Mr Arnerich said that he was entirely comfortable with making the distribution payments at the time for several reasons, specifically:
(a)the payments were payments that were being made by the Vaco Trust, to its creditor the ANZ bank and to its beneficiaries.
(b)CCL and DHC had contracted with Vaco and not the Vaco Trust.
(c)CCL had acknowledged that he had no personal liability and their recourse for payment pursuant to the contract was with the ANZ bank, which would pay on receipt of a certificate issued by the contract engineer.
(d)CCL’s work at Lincoln Road had concluded, and there were no outstanding monies owing as had been determined by the contract engineer, and despite threatening to commence legal proceedings in an email of 27 December 2012, CCL had not taken any steps.
(e)ANZ had retained $561,115 to be held on term deposit to cover costs to complete should the engineer decide to approve some of the CCL claims in Payment Claim 17 or any future claims relating to the project.
Do the matters relied on by Mr Arnerich justify him proceeding on the basis that CCL was never a creditor of Vaco and need not have been considered when making or authorising payments by Vaco which would leave it without funds with which to meet CCL’s debt?
Payments made to the Vaco Trust
[331] The first and second reasons relied on by Mr Arnerich was that CCL had contracted with Vaco and not the Vaco Trust , and that the payments were being made
by the Vaco Trust to its creditors including the ANZ bank, and to the beneficiaries of the Vaco Trust. However the fact that Vaco held the Lincoln Road property as a corporate trustee does not alter the nature and extent of Mr Arnerich’s duties as a director of Vaco as regards creditors of the company.
[332] I respectfully agree with the statements of Heath J in Levin v Ikiua and by Associate Judge Bell in his judgment in this proceeding, cited previously. The fact that Vaco was holding the Lincoln Road property as a corporate trustee does not defeat a claim by a creditor brought against the company or against a director of the corporate trustee company who has become subject to duties to have regard to the interests of creditors in the same way as the director of any other company may. Accordingly the corporate trustee position of Vaco does not afford Mr Arnerich any protection from liability as a director of Vaco.
[333] Furthermore, CCL entered into the construction contract with Vaco on 18 October 2011, prior to the establishment of the Vaco Trust on 4 November 2011. When CCL assigned its interest under the construction contract to DHC Assets Ltd with Vaco’s consent, there was no mention of Vaco holding the property as a corporate trustee.
No personal guarantee
[334] As regards Mr Arnerich’s evidence that the fact that he had no personal liability to CCL under the terms of the construction contract provided him with comfort that he was entitled to distribute the Vaco funds without considering the effect of doing so on CCL, I agree with the plaintiff that the absence of any liability pursuant to a personal guarantee is beside the point. The issue here is whether Mr Arnerich is personally liable as a director if it is established that he has breached his duties to have proper regard for the position and interests of creditors of the company when paying away its assets so as to leave it unable to satisfy the creditor’s debt.
All work on Lincoln Road had concluded and as determined by the contract engineer there were no outstanding monies due and owing by Vaco and no legal proceeding had been commenced by CCL
[335] Mr Arnerich said in evidence that he derived comfort from the fact that the contract engineer had determined that no monies were owing under the contract to CCL. However I find that Mr Arnerich could not have legitimately or sensibly proceeded on that basis. Mr Arnerich well knew that Mr Beagley was not carrying out an independent assessment of the merits of CCL’s claims, as he was telling Mr Beagley whether or not Vaco would agree with or reject CCL’s payment claims. Whatever Mr Arnerich told Mr Beagley was then promptly adopted as the engineer’s determination of CCL’s payment claim. Mr Arnerich can be taken to have known that the role of the contract engineer required that he act fairly and impartially when assessing and determining CCL’s payment claims. In these circumstances Mr Arnerich could not have legitimately placed any real reliance on Mr Beagley’s certificates as confirmation that no further monies would be payable by Vaco to CCL.
[336] Moreover, Mr Arnerich knew that CCL had referred their claims to the engineer for determination, and that despite having provided detailed information to support the EOT claims in the letter of 6 March 2013, the Engineer’s draft Review No.
2 and the final version of the Review both erroneously stated that CCL had provided insufficient information. That would have been a clear indication to Mr Arnerich that the Engineer’s Review and the Final Payment Schedule 17 had been made without reference to the information provided by CCL to support those claims.
[337] Furthermore, irrespective of the determinations of the contract engineer, the General Conditions provided for a dissatisfied party to pursue their claim (or opposition to a claim) further by means of adjudication and arbitration proceedings, so that the contract engineer’s determinations and formal decisions were not final. The dissatisfied party had one month from the date of the issue of an Engineer’s decision under clause 13.2.4 to give notice of reference to arbitration or adjudication. Mr Arnerich had undertaken the first series of distributions from Vaco’s accounts commencing 8 April 2013 well before Mr Beagley had issued the Final Payment Schedule No 17 on 1 May 2013. In those circumstances he could not have been relying on a Final Payment Schedule. The Provisional Payment Schedule was issued by Mr
Beagley and Davis Langdon on 15 April 2013, and by then a substantial part of the proceeds from the Lincoln Road sale had already been distributed.
[338] Mr Arnerich also claims to have derived comfort from the fact that CCL had not followed up with the threat made in December 2012 of issuing legal proceedings. However, what Mr Moore of CCL said in his letter to Mr Arnerich and Mr Beagley of 27 December 2012 related to Progress Payment Certificate 14 in respect of which he noted that the disputes over the claims had been ongoing for some time. Mr Moore said that based on the Progress Payment Certificate, CCL was in disagreement and could see no reason to proceed with the disputed amounts pursuant to Clause 13.2 (Engineer’s review) as the Engineer had been involved in the initial meetings, discussions and correspondence, and had issued the Payment Schedule continuing to agree with the disputed items, while also noting that a “formal decision” had not been issued. He said that he was therefore giving notice of CCL’s intention to seek reimbursement of the disputed items pursuant to either Clause 13.3 (Mediation) or
13.4 (Arbitration) of the Conditions of Contract. CCL’s failure to pursue mediation or arbitration on their claims could not have provided any real indication that the claims were not being pursued. Moreover, as I have noted above CCL had clearly signalled their intention of pursuing their payment claims, and the fact that they had not commenced arbitration or mediation by April 2013, could not have provided Mr Arnerich with any indication that they were not committed to maintaining their claims.
[339] I accordingly reject Mr Arnerich’s evidence that he derived comfort from the certificates issued by the contract engineer, or that CCL’s failure to commence legal proceedings could have afforded him any measure of comfort whatsoever as to their position as a creditor of Vaco.
ANZ had retained $561,115 to be held on term deposit to cover costs to complete should the engineer decide to approve some of the CCL claims in Payment Claim 17 or any future claims relating to the project.
[340] Finally, Mr Arnerich said that he derived comfort from the fact that the ANZ Bank retained the amount of $561,115 to be held to cover the cost to complete should the engineer approve CCL’S claims in Payment Claim 17.
[341] While this ground was relied on by Mr Arnerich in his evidence, the plaintiff notes that it was not previously mentioned by Mr Arnerich in his earlier evidence contained in affidavits during the preliminary aspect of this proceeding. That being the case the plaintiff says that Mr Arnerich could not have genuinely relied on this as giving him comfort when distributing Vaco’s funds immediately following the settlement of the sale of Lincoln Road. However, I do not consider this point to be of any significance.
[342] Pursuant to its letter of 11 November 2011, the ANZ bank advised CCL that it would retain the monthly retention sums within the development facility until practical completion and upon practical completion being achieved and the initial release retentions certified, it would hold the balance of the retentions in a joint account in the names of Vaco and CCL “for subsequent payment in accordance with the Construction Contract”.
[343] The fact that the ANZ bank would be holding the retentions was intended to be of comfort to CCL, however by his actions of unilaterally requesting Mr Beagley and the ANZ bank to release the funds to Vaco without any reference to CCL, Mr Arnerich clearly demonstrated that so far as he was concerned CCL could no longer maintain a claim to have any interest in securing payment from the retained funds. As I have noted he proceeded to seek release of the retained funds a matter of days after Davis Langdon issued Final Payment Schedule 17 on 1 May 2013. In my view his actions in obtaining the release of the retention funds demonstrate that he could not have regarded them as providing any source of money which could be applied towards meeting CCL’s claims should they be upheld in the future. By taking the funds for Vaco Mr Arnerich ensured that the intended purpose of applying them in accordance with the construction contract was no longer possible.
[344] I accordingly find that the fact that the ANZ was holding the retention money could not have provided Mr Arnerich with any comfort when he was undertaking the distribution of Vaco’s funds.
Conclusion
[345] For all of the above reasons, I find that at the time Mr Arnerich made the distributions from the proceeds of sale to interests associated with himself, he was not acting bona fide and in good faith, as he was not having sufficient regard to the interests of CCL as an unpaid creditor of Vaco. His actions were conducted with disregard to CCL’s assertions as to its entitlements under the contract, with knowledge that the Engineer’s findings regarding those entitlements were not the product of independent judgment, and with knowledge that CCL had access to the dispute resolution procedures available under the contract to further advance its claim.
Section 301
[346] As noted earlier, the plaintiff seeks an order that Mr Arnerich be directed to pay compensation directly to it, for the losses arising out of his breach of the duty of good faith, pursuant to s 301(1)(c) of the Companies Act 1993.
[347] Consistently with the observations of Heath J in Sanders v Flay, to the effect that a creditor should be directly compensated when it has personally initiated proceedings against the errant director, in circumstances where the liquidator has elected not to, I consider that in this case it is appropriate for Mr Arnerich to compensate the plaintiff directly.
[348] The amount which I direct Mr Arnerich to pay to the plaintiff is the same amount as found owing in the adjudication. In the present circumstances, I consider that to be a just exercise of the Court’s discretion to determine the quantum of compensation. Mr Arnerich’s breaches of duty by distributing the assets of Vaco to his related interests, and thereby rendering Vaco insolvent, defeated the plaintiff’s ability to prosecute those claims against Vaco directly. Accordingly, as Mr Arnerich personally and via associated entities controlled by him benefitted directly from his breach of duty, I consider that he should personally compensate the plaintiff for the full amount of Vaco’s debt to the plaintiff.
[349] That amount is $367,768.12 being $300,763.12 (including interest and GST) for the claims the adjudicator found in DHC’s favour for; $29,775 for DHC’s costs of
the adjudication; $7,590 as reimbursement for the payment DHC had made to the adjudicator as security for its fees; and the further amount of $29,640.00, which DHC had to pay to meet the balance of the Adjudicator’s fees and expenses in order to uplift the Determination.
[350] I further find that the plaintiff is entitled to interest on that sum from the date of the adjudicator’s determination at the contractual rate of 12.4 percent, compounding on the fifth day of every month, as found by the adjudicator.
[351] The final amount of Vaco’s indebtedness to the plaintiff is yet to be determined and cannot be determined other than by means of the arbitration which is presently adjourned. This means that although the plaintiff may in the future succeed in establishing the claims it has referred to arbitration, it cannot recover any further sum found owing by Vaco, directly from Mr Arnerich pursuant to s 301(1)(c) of the Act, other than by means of a further proceeding. However unfortunate this situation, it is the consequence of the plaintiff having elected to pursue this proceeding before concluding the arbitration proceeding and thereby determining the full extent of Vaco’s indebtedness in accordance with the dispute provisions of the contract.
Result
[352] I find that Mr Arnerich, as director of Vaco, has breached his duty of good faith under s 131 of the Companies Act 1993.
[353] I accordingly order, pursuant to s 301(1)(c) of the Companies Act 1993 that Mr Arnerich pay directly to DHC the sum of $367,768.12, being the amount awarded to DHC in the adjudication proceedings, with interest from the date of the adjudication compounding monthly at the rate of 12.4 percent.
[354] The plaintiff is also entitled to costs. I direct that the plaintiff is to file a memorandum outlining its claim for costs within 10 working days of the date of this judgment. The defendant will have a further 10 working days to respond to the plaintiff’s costs memorandum. I will thereafter determine costs on the papers.
Paul Davison J
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