Federal Commercial Construction Limited v Leading Edge Fabrication Limited

[2020] NZHC 2352

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2020-404-000418

[2020] NZHC 2352

BETWEEN

FEDERAL COMMERCIAL CONSTRUCTION LIMITED

Applicant

AND

LEADING EDGE FABRICATION LIMITED

Respondent

Hearing:

13 August 2020

Further submissions received on 25 August 2020

Appearances:

K Puddle for Applicant R A Idoine for Defendant

Judgment:

10 September 2020

JUDGMENT OF ASSOCIATE JUDGE P J ANDREW

This judgment was delivered by Associate Judge Andrew on 10 September 2020 at 4.00 pm

pursuant to r 11.5 of the High Court Rules Registrar / Deputy Registrar Date………………………

FEDERAL COMMERCIAL CONSTRUCTION LTD v LEADING EDGE FABRICATION LTD [2020] NZHC

2352 [10 September 2020]

Introduction

[1]    This is an application to set aside a statutory demand pursuant to s 290 of the Companies Act 1993. At issue are obligations to pay retentions and liquidated damages under a construction subcontract subject to the Construction Contracts Act 2002 (the CCA).

[2]The dispute arises subsequent to an adjudication award under the CCA.

[3]The statutory demand seeks payment of two inter-dependent sums of money:

(a)Retention monies of $45,523.20; and

(b)A conditional adjudication award of $96,025.

[4]    The applicant’s position is that the statutory demand was issued prematurely and before the debt which it demanded fell due. The critical issue I must determine is whether there is a genuine and substantial dispute that the date for release of the retention sum under the subcontract, triggering obligations to pay both retentions and liquidated damages, has not passed.

Factual background

[5]    The applicant, Federal Commercial Construction Ltd (Federal), was the main contractor in the development of seven commercial units in Highbrook, Auckland. These were known as the Parade Units.

[6]    Federal subcontracted the respondent, Leading Edge Fabrication Ltd (LEF), to do the structural work for the Parade Units (the Subcontract). Federal says that, as a result of LEF’s inadequate performance of the Subcontract, the parties have been in dispute since at least July 2018.

[7]    The Subcontract was entered into on 16 May 2018. The critical clause at issue in this case is cl 1.16, which reads:

RETENTIONS

Retentions are 5% of the subcontract price. Retentions will be released as follows:

a)   2% of the total retained 31 days after Practical Completion of the main contract or release of retentions to Federal Commercial Limited.

b)   3% of the total retained 12 months after Practical Completion of the main contract or release of Maintenance Retentions to Federal Commercial Limited.

Or as amended on the Subcontract Agreement.

Release will only be made after receipt by the Company [that is, Federal Commercial Ltd] of a separate GST invoice for each subcontract for the appropriate sum and once all outstanding requirements on the subcontract have been completed and upon release of the retentions held by the client.

[8]Clause 1.15, entitled ‘Maintenance Period’ reads:

Any defects which become apparent in the subcontract works during the construction, the maintenance period, or the guarantee period and which arise from the use of incorrect materials or poor workmanship, shall be made good by the Subcontractor at the Subcontractors [sic] own cost. This shall be done on notification from the Project Manager of such defects.

[9]    On 21 January 2019, the final units in the complex achieved a state of practical completion.

[10]In September 2019, LEF issued a notice of adjudication under the CCA.

[11]   In his determination of 4 November 2019 (the Determination), Mr John Green, the adjudicator, held that Federal was liable to pay LEF the sum of $344,889.54. In reaching that conclusion, he upheld Federal’s entitlement to deductions in the aggregate amount of $109,620.55.

[12]In relation to the issue of liquidated damages, Mr Green determined as follows:

226In respect of the claim for deduction of liquidated damages, Federal  is entitled to the deduction on an interim basis only. There is, I accept, a genuinely and reasonably held concern on the part of LEF that HDL [the Principal] will not in fact levy liquidated damages against Federal and, in acknowledgement of that concern, an unless order is the appropriate and proper remedy at this time, namely that:

Unless the equivalent deduction of liquidated damages in the amount of $83,500 is actually levied by HDL [the Principal] against Federal and the deductions certified by the Engineer in a final payment schedule for the Project prior to the date for release of the final tranche of LEF’s retentions under the Subcontract, Federal will become liable to pay LEF that amount on that date. (The unless order)

[13]   Federal paid LEF the sum of $344,889.54 within two working days of the Determination.

[14]   On 4 February 2020, LEF’s solicitors sent Federal’s solicitors a letter requiring the release of the retentions and asserting that the unless order obligation had been triggered. LEF’s solicitors claimed the date for release of retentions ($45,523.20) said to be “now payable” under the Subcontract was 21 January 2020, being 12 months and one day after practical completion under Federal’s head contract. The letter contained a GST invoice from LEF addressed to the “Federal Group” dated 21 January 2020 and in the sum of $45,523.20. LEF further claimed that Federal’s deferred payment obligation under the “unless order” also occurs on the date for release of the final tranche of LEF’s retentions under the Subcontract, being the same date of 21 January 2020.

[15]   On 11 February 2020, the solicitors for LEF made demand of Federal for payment of the total amount of $141,548.20.

[16]   By letter dated 13 February 2020, Federal’s solicitors responded, claiming that Federal was still waiting for the Principal to issue confirmation that all outstanding requirements, including any defect remediation requirements had been completed. As such, the date for release of retentions had not occurred. The solicitors for Federal further claimed that the obligation pursuant to the unless order had also not fallen due. It was claimed that the final payment schedule (yet to be issued) would end the defects liability period and certify any liquidated damages.

[17]   The statutory demand dated 21 February 2020 referred to the two outstanding debts as follows:

(a)$96,025.00 being the amount awarded by John Green on 4 November 2019 pursuant to an Adjudication under the Construction Contracts

Act 2002 (BDT19-081154 Leading Edge Fabrication Limited v Federal Commercial Construction Limited) that is due and owing and which remains unpaid; and

(b)$45,523.20 being the amount Federal Commercial Construction Limited was entitled to withhold as retention monies under a subcontract with Leading Edge Fabrication Limited and which are overdue for release to Leading Edge Fabrication Limited.

[18]   A final defects list was issued by the engineer in March 2020. Two defects arising from LEF’s work were identified.

[19]   Federal says that LEF refused to carry out remedial works identified in relation to Unit D and that it had to engage a third-party contractor to carry out those works. This was completed on 21 July 2020.

[20]A final Completion Certificate has not yet been issued by the engineer.

Relevant legal principles

[21]   The Court’s jurisdiction to set aside a statutory demand is contained in s 290(4) of the Companies Act 1993. That section reads:

290     Court may set aside statutory demand

…

(4)The court may grant an application to set aside a statutory demand if it is satisfied that—

(a)there is a substantial dispute whether or not the debt is owing or is due; or

(b)the company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c)the demand ought to be set aside on other grounds.

[22]   The Court of Appeal has recently confirmed the principles the Court should apply in exercising this jurisdiction.1 The principles are:

1      AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq) [2015] NZCA 559, [2016] NZAR 1338 at [17]. See also Carroll Civil Ltd v Texco Drilling and Piling Ltd [2019] NZHC 260 at [19].

(a)The applicant must show that there is arguably a genuine and substantial dispute as to the existence of the debt.

(b)The mere assertion the dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.

(c)If such material is available, the dispute should normally be resolved other than by means of proceedings in the Court’s Companies Act jurisdiction.

(d)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

[23]The Court of Appeal also stated:2

[22] It is important to keep in mind the words of the statute. What the applicant must show is that the dispute it raises has substance; the applicant must explain to the Court what the dispute is; and the dispute so shown must be a real and not a fanciful or insubstantial dispute. The Court must bear in mind that it is operating in the summary jurisdiction, with the accompanying disadvantages that brings for any applicant. The Court must also keep in mind the requirement that what is intended to be a summary hearing should not be converted into a full-blown trial.

(footnotes omitted)

Analysis and decision

[24]   In substance, this is a dispute about contractual interpretation and, in particular, whether the date for release had passed at the date the statutory demand was issued. It is, of course, not my role to make a final determination resolving that issue; rather, my role is to determine whether Federal has established that there is a genuine and substantial dispute that the debt is not owing because the date for release had not passed at the date the statutory demand was issued.

[25]   The parties are agreed that there are a series of cumulative steps that must occur under the Subcontract before the date for release passes. They are expressly provided for in cl 1.16 of the Subcontract and include the following:

2      AAI Ltd v 92 Lichfield Street Ltd (in rec and in liq), above n 1.

(a)Federal must receive a GST invoice for the appropriate sum; and

(b)All “outstanding requirements” of the Subcontract must have been completed.

[26]   On the face of cl 1.16, there is a further and third requirement, namely that there be a release of retentions “held by the client”, (that is, the Principal/Head Contractor).   However, both parties agree that that requirement is void pursuant to   s 18I of the CCA. That section renders void any term that purports to make the payment of retention money conditional on anything other than the performance of the subcontractor’s obligations under the contract.

[27]   The parties are in agreement that the date 12 months after practical completion (that is, the date contemplated by cl 1.16(b)) was 21 January 2020. They are therefore in agreement that the “defects liability period” (DLP) under the Subcontract expired on 21 January 2020.

[28]   As Mr Idoine, for LEF, submitted, cl 1.16 allows Federal to withhold the retention sum for a minimum of 12 months after practical completion but does not otherwise provide a fixed drop-dead date for release. Instead, release is to occur once all “outstanding requirements” under the Subcontract have been completed and upon receipt of a “GST invoice” by Federal.

[29]   The parties appear to agree that the meaning of “outstanding requirements” under the Subcontract is linked to the identification and/or notification of defects. Where the parties differ is on whether a defect must be notified to LEF during the “maintenance” or DLP for it to be treated as an “outstanding requirement” under the Subcontract or whether, as Federal contends, it is entitled to wait until a final defects list or final payment schedule is issued by the engineer to Federal. While the DLP expired on 21 January 2020, the final defects list was issued after the statutory demand and no final payment schedule has yet been issued by the engineer to Federal.

[30]   LEF contends that there is no genuine and substantial dispute because the clear meaning of cl 1.16 is that it is necessary for a defect to be identified or notified to LEF

during the DLP for it to constitute an “outstanding requirement” under the Subcontract. LEF argues that the inclusion of the word “outstanding” in cl 1.16 adds a gloss to the otherwise bare contractual meaning of “requirement”. For something to be outstanding, LEF says, it must have accrued but yet to be unfulfilled. If there were no actual or known defects that LEF needed to remedy as at 21 January 2020, which LEF had also either failed or refused to remedy, then it cannot be said that any requirements were “outstanding”.

[31]   In response, Federal contends that there were unperformed obligations of LEF at the time the statutory demand  was issued.   In its evidence, it claims that, on        8 February 2019, LEF completed all outstanding structural items in the Parade Units. However, paint touch-ups were acknowledged to be a work in progress and were being treated as a defect process. In February 2019, LEF had contractors on site carrying out painting touch-ups. Federal assumed that the touch-ups which had been notified to LEF had been completed. LEF was notified of painting defects within the maintenance period in the Subcontract and they were defects which LEF was liable to remedy.

[32]   Federal further says that the final defects list provided by the engineer in March 2020 contained two remedials which were LEF’s responsibility. One of those was a painting remedial in relation to a touch-up. Federal says it has had to engage a third- party contractor to carry out some of these remedials. Federal says that, by itself, that is the complete answer to the statutory demand. Federal argues that the purpose of retentions is security against unperformed obligations. As at the date of the statutory demand, LEF had unperformed obligations and retentions can legitimately be held until they are resolved.

[33]   Federal further says that because the final defects list had not been issued by the time of the statutory demand, neither party had reason to believe that LEF had performed all its obligations. This is not a case, Federal says, of it holding onto the retentions in the event that some defect may come to light at some indefinite time in the future. Federal was waiting for the final defects list from the engineer, which was going to arrive, and would clarify all matters for all parties. The date for release had therefore not passed.

[34]   LEF may well be correct to contend that the term “outstanding” means that there must be some extant and incomplete obligation, and that for something to be outstanding, it must have already accrued and be unperformed at that time. However, it is clearly arguable that that proposition does not necessarily mean that the passing of 12 months after the expiry of the DLP is the date when all outstanding obligations were completed. As Mr Puddle, for Federal, submitted, with reliance on Chitty on Contracts, the purpose of a defect liability period is to allow a contractor to remedy the defect at their own cost, but the passing of the period does not absolve the contractor of responsibility for the defects:3

The effect of the “defect liability” provisions is not to render the contractor liable to correct defects (such liability existing in any event) but to afford the contractor a right to receive notice of defects in the stipulated period and to have the opportunity of correcting them at his own expense, as opposed to what may be the greater expense of bringing in other contractors.

[35]   In my view, there is a regrettable degree of ambiguity on the face of cl 1.16 as to the meaning of “all outstanding requirements” and thus the date of release for retentions. I was informed that the clauses in dispute, including both cls 1.15 and 1.16, which form part of “standard specifications for sub-contract”, have been used by Federal for some considerable time and have not been updated. On the face of cl 1.16 itself, there is some tension between the expiry of the period 12 months after practical completion and the release condition of completion of “all outstanding requirements”. I find that Federal has established that there is a genuine and substantial dispute as to the meaning of the date of release and whether it has been triggered; that critical issue cannot be determined in this proceeding on a summary basis. In my view, the full factual matrix would need to be determined following the testing of evidence at trial.

[36]   I accept that cl 1.16 makes no express reference to the issue of a final defects list as being the sunset date for the date of release. Equally, however, the date for release is not expressly tied to the maintenance period or the expiry of the DLP.

[37]   The following passages from the Laws of New Zealand provide some general support for the interpretation for which LEF contends.4 The authors note as follows:5

3      HG Beale (ed) Chitty on Contracts (33rd ed, Sweet & Maxwell, London, 2018) vol 2 at [37-113].

4      Michael Weatherall Laws of New Zealand Building and Construction (online ed).

5 At [173].

Up to practical completion, the contractor will normally be required to rectify defective work before leaving the site. On practical completion, the contract will usually permit the contractor to hand over the work and leave the site, notwithstanding the existence of minor defects. The “defects liability period” is a period during which the contractor will be required to attend to such minor defective work and other defects that appear.

And:6

The issue of a final certificate, or final payment certificate however, is usually evidence that the work complies with the contract, subject to stipulated exceptions. Therefore, unless the contract contains a sufficiently wide arbitration clause, or provisions to the contrary, the general rule is that once a contract administrator has certified satisfaction with the works, the employer will be precluded from complaining of defects.

[38]   However, while obviously relevant, such principles could not lead me to safely conclude that there is no genuine and substantial dispute about the meaning of the date of release. Equally, I reject the submission of LEF that Federal’s argument would potentially mean that LEF would be unable to call in the retention sum for possibly years after the DLP had expired, irrespective of whether there were actually any known or unknown defects to the Subcontract work. Federal does not contend for such an open-ended obligation but rather ties the date of release to a finite date, namely the date when the final engineer’s certificate has been issued.

[39]   It may be, as Mr Idoine submitted, that Federal has not adopted a consistent position on the disputed issue of interpretation. It does appear that Federal had originally adopted the position that it was entitled to hold the retentions only until the expiry of the DLP on 21 January 2020 (although there is some ambiguity in the submission of Federal dated 6 September 2019 at para 94). However, that cannot be decisive of the issue of interpretation and does not preclude Federal from maintaining the position it now adopts.

[40]   LEF further submitted that in circumstances where a subcontractor diligently attends to remedial works and confirms in no uncertain terms that the work is completed, the obligation to notify “resets”. It contends that Federal did not indicate that it considered the remedial works to be “outstanding” or otherwise not to its satisfaction until at least March 2020, namely some 13 months and six weeks after the

6 At [177].

DLP had expired. However, I find that even if LEF is ultimately correct that the obligation to notify “resets”, the contrary arguments made by Federal are reasonably arguable – namely that there is no basis under any of the contractual documents for the subcontractors’ unilateral confirmation of work completed and the contract documents provide a remedy for a failure to inspect within a reasonable time. That remedy is by way of variation of loss suffered, not (arguably) a deemed completion of the work. In any event, I find that there is disputed evidence about the issues of confirmation and notification, and I can reach no conclusion about them in this summary process.

[41]   I accept the submission of Mr Idoine that the trigger for the payment of the unless order made by Mr Green is the date for release. However, Mr Green made no determination on the question of when the date of release arises and the words of his “unless order”, which refer expressly to the certification by the engineer and a final payment schedule, do not materially assist in resolving the interpretation issue before me. It would appear that Mr Green himself had some concerns about what the date of release actually was. At paragraph 240 of his determination he held:

In the end however, the parties have made their bargain as regards the amount of retentions to be held and the date for release and it is not the role of an adjudicator to interfere with that bargain or attempt to reallocate risk.

[42]   I accept that Mr Green was concerned that the terms of his unless order accommodate the genuine concern by LEF that the head contractor would not in fact levy liquidated damages against Federal. That is why he adopted the particular terms of his “unless order”. The terms of that order do, of course, contemplate a finite date by which Federal will have to pay LEF the liquidated damages, but the position that Federal now takes does respect the need for a finite date and does not, as I have already concluded, defer Federal’s  obligation for an  indefinite  and uncertain period.  As  Mr Puddle submitted, all parties have an incentive to trigger the date for determining the fate of the liquidated damages.

[43]   For all of these reasons, I conclude that Federal has established a genuine and substantial dispute as to whether or not the subject of the statutory demand is owing. On that basis I find that the statutory demand should be set aside.

[44]   In the circumstances, it is not necessary for me to determine the remaining grounds of Federal’s application. That includes the issue of whether the (alleged) GST invoice issued by LEF in the wrong name and with no address meets the requirements of cl 1.16 because it was not a valid GST invoice. Likewise, I make no determination of the claim as to whether Federal has a substantial, and as yet unresolved, claim against LEF with respect to LEF’s performance in the Subcontract.

[45]   I do, however, note that the obligation to pay the liquidated damages pursuant to the “unless order” does not involve a challenge by Federal to the determination made by Mr Green. Rather, what is at issue is an interpretation as to the meaning of that “unless order”. In relation to the liquidated damages obligation and the interpretation of Mr Green’s order, no issue under s 79 of the CCA arises.

Supplementary submissions addressing the incorporation of the Head Contract

[46]The preamble to the Subcontract reads:

The work, as scope specified below, shall be carried out in accordance with the full intent and meaning of the contract documents of the Head Contract, Federal Commercial Construction Limited Standard Specification for Subcontract SSO1 (“SSO1”) and all tender documents and drawings. The Head Contract documents are all available for Inspection by the Subcontractor, whose responsibility it is to examine them.

[47]   At the hearing, I expressed some surprise that the Head Contract was not in evidence before me. At the conclusion of the hearing, I directed that the parties were to confer with a view to trying to reach agreement on the filing of the Head Contract and the relevant New Zealand Standard: Conditions of Contract for Building and Civil Engineering Construction (NZS 3910:2013).

[48]   The parties subsequently agreed to the filing of the Head Contract and the relevant standard, and the Court has received further submissions from both of them dated 25 August 2020 addressing matters arising from them.

[49]   Under cl 12.3.2 of the Special Conditions of Contract (cl 4.2), Defects Liability Retention is released as follows:

0% released at Practical Completion

60% released at completion of all of the following:

·     Remediation of defects raised at the Practical Completion inspection.

·     Issue of final operation and maintenance manuals. 40% released on issue of Final Completion Certificate

[50]   Two issues arise from the reference in the preamble to the Head Contract. They are:

(a)Whether the provisions of the Head Contract have been incorporated into the Subcontract; and

(b)If so, what are the consequences of that incorporation for the disputed interpretation issue?

Incorporation of the Head Contract

[51]   The authors of Keating on Construction Contracts refer to the incorporation of main contract terms in the following manner:7

The parties sometimes seek to incorporate the main contract or some of it. This is inherently likely to cause problems having regard to the difference of subject matter and is not to be recommended. If such incorporation is attempted, each contract must be construed according to its own words. …

[52]   The authors of the Laws of New Zealand take a similar view on incorporation and note that it can often give rise to difficulties of interpretation.8 A subcontract will stand alone unless provisions of the head contract are imported into it either expressly or by implication.

[53]   As counsel for LEF has acknowledged, the issue of incorporation is fact- specific and will depend on the language used in the subcontract.

[54]   In the circumstances of this case, it is reasonably arguable that at least some provisions of the Head Contract are to be imported into the Subcontract, either

7      Stephen Furst and Vivian Ramsey (eds) Keating on Construction Contracts (10th ed, Sweet & Maxwell, London, 2016) at [13-087].

8      Michael Weatherall Laws of New Zealand Building and Construction (online ed) at [64].

expressly or by implication. At the very least, where the Subcontract is on its face somewhat uncertain, it arguably provides important context for the interpretation issue. However, I find that, again, this is not an issue that is appropriate for summary determination. Federal has established the threshold of a genuine and substantial dispute, including a dispute about the issue and extent of incorporation, and it would be inappropriate for me to make any further comment.

[55]   As to the issue of what effect a conclusion that the critical terms of the Head Contract are imported into the Subcontract might have, that is again an issue on which I can reach no firm conclusion. I accept there is some force in the arguments of LEF that the final defects list here did not comply with the time requirements in cl 11.2.1 of the Head Contract, and that that might mean that remediation of a previously notified defect is not a “live” consideration for the “final completion certificate”. Equally, there would appear to be merit to the contention of LEF that the “final completion certificate” is not the correct procedure for identifying “outstanding requirements” because, amongst other things, it relies on prior valid identification of defects under cl 11.2.1. However, I find that none of the additional submissions advanced in relation to the Head Contract and its implications provide a proper basis for me to conclude, at this interim stage, that there is only one tenable interpretation of the Subcontract. Rather, the submissions reinforce my view that Federal has established a genuine and substantial dispute as to that interpretation, and that is the sole matter that I am required to determine. It is regrettable that there is a degree of uncertainty about what is obviously an important provision in a construction contract.

Result

[56]   The application by Federal Commercial Construction Ltd to set aside the statutory demand pursuant to s 290 of the Companies Act 1993 is granted. The statutory demand is set aside.

[57]   As to costs, I am of the preliminary view that Federal, having succeeded, is entitled to costs on a 2B basis. On the basis of the evidence and materials before me, I do not see that there is any basis for an award of indemnity costs or increased costs as sought by Federal.

[58]   If the parties cannot agree on costs, then written submissions (no more than three pages) should be filed and served within 21 days.

Associate Judge P J Andrew