Lakewood Plaza Limited Partnership v Downey Construction Limited

[2022] NZHC 3286

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2022-404-001236

[2022] NZHC 3286

IN THE MATTER

of the Arbitration Act 1996

BETWEEN

LAKEWOOD PLAZA LIMITED PARTNERSHIP

Applicant

AND

DOWNEY CONSTRUCTION LIMITED

Respondent

Hearing:	29 November 2022
Appearances:	D Bigio KC and F B Collins for Applicant C Walker KC for Defendant
Judgment:	8 December 2022

JUDGMENT OF VENNING J

APPLICATION FOR LEAVE TO APPEAL

This judgment was delivered by me on 8 December 2022 at 11.30 am, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Solicitors:           Gibson Sheat, Wellington

Norris Ward McKinnon, Hamilton

Counsel:D Bigio KC, Auckland C Walker KC, Auckland

LAKEWOOD PLAZA LTD PARTNERSHIP v DOWNEY CONSTRUCTION LTD [2022] NZHC 3286 [8

December 2022]

[1]    Lakewood Plaza Limited Partnership (Lakewood) seeks leave to appeal an interim Award dated 22 April 2022 (the Award) of the Hon Rhys Harrison KC (the Arbitrator) on questions of law. Downey Construction Limited (Downey) opposes the grant of leave.

[2]    Lakewood has also applied to set aside the Award in reliance on cl 34 of sch 1 of the Arbitration Act 1996 (the Act). Counsel have however previously obtained directions by consent from the Court that the application for leave to appeal is to be heard first and that the application for setting aside is to be heard subsequently (and, if leave is granted, at the same time as the substantive appeal on the questions of law).

[3]    Lakewood has also, after this fixture for the leave application was allocated, filed an application for reassessment of the costs and expenses fixed by the Arbitrator in the final award. Counsel agree that the application for reassessment of costs and expenses should be treated in the same way as the application to set aside the award. As a result, the only matter before the Court for determination is the application for leave to appeal on questions of law.

Background

[4]I take the background from the Arbitrator’s summary as follows:

8.Mr Downey is a qualified quantity surveyor who in 1995 formed his own construction business in Hamilton before going into residential development projects. Mr Clarke’s background is in residential investment, and property management and development. He also operated his business interests in the Waikato.

9.The first project undertaken jointly by Messrs Downey and Clarke was a 72 studio complex in McKenzie Road, Mangere, followed by two studio complexes in Papatoetoe, a 99 studio complex in Mangere East, and a 119 apartment complex in Hall Avenue, Mangere Bridge. While the legal entities and structures varied between these projects, they reflected the joint nature of the parties’ enterprises and their modus operandi of purpose building apartments to lease to rental companies, such as subsidiaries of LJ Hooker, which would in turn sublease them for accommodation. On completion of the development, the joint enterprise would sell the underlying freehold interest in the property to a third party.

10.Mr Walker summarised the common elements of the projects in this way:

(a)Formation of a joint vehicle – a company, a partnership or a limited partnership – to develop and manage the project, with Mr Downey taking the lead role.

(b)A contract between the development entity and Mr Downey’s company to construct the building.

(c)Project funding primarily from third parties, with the construction contract pricing approved by an independent quantity surveyor in order to satisfy the financiers’ lending requirements.

(d)Mr Clarke or his associated entities taking the lead on the marketing and sales of the residential units.

(e)Equal distribution of the profit through the joint vehicle after paying the costs of development, including all construction costs.

Lakewood

11.Against that background, the legal interests selected by the parties for the Lakewood development, which was of the same residential apartment type as the earlier projects but on a larger scale, were:

(a)[Downey Construction Limited (Downey or DCL)] which had been incorporated on 1 June 1995 and owned by Mr Downey and NWN Trustees 100 Limited (which is associated with Mr Downey). He is the sole director. Its function was to act as building contractor for the development.

(b)Duval Developments Limited (Duval), owned by Duval Group NZ Limited. Its shares are held by Charlotte Clarke, Mr Clarke’s wife, and Karapiro Corporate Trustees Limited, in which Mr and Mrs Clarke are the shareholders. Mr Clarke and a lawyer, Owen Culliney, are Duval’s directors. Its function was to develop the design concept and promote marketing and sale of the apartments

(c)Steelgrave Investments Ltd, in which Paul Bary, his wife and a trustee are the shareholders. Mrs Clarke is Mr Bary’s niece. Steelgrave was to participate as a passive investor.

(d)Lakewood Plaza Limited Partnership, formed on 30 September 2014, the shares being held as to 40% by each of Downey Management Limited (DML), which has the same ownership and directorship structure as DCL, and 40% to Duval. Steelgrave holds the remaining 20%. The limited partnership was to be the ownership vehicle.

(e)Lakewood General Partner Limited, incorporated earlier on 27 March 2014, as the general partner with the members of the limited partnership holding the shares in proportion to their interests in that entity. Its directors are Messrs Downey, Kristen Holland (who is Duval’s nominee), and Bary. Its

function was to manage the business of the general partnership. Mr Holland is a well-qualified and experienced quantity surveyor who commenced work with Duval in October 2018 as its development and construction director.

…

14.Consistently with their previous joint ventures, the partners agreed to introduce minimal capital to the Lakewood project. Funding was from third party lenders - Industrial and Commercial Bank of China (NZ) Ltd (ICBC) and Varde Ltd which agreed to advance $39.250m and

$20m respectively. The partnership’s capital contributions were

$500,000 from Steelgrave and $250,000 from DML. As Duval was unable to contribute capital, it was agreed that its contribution was to be through project management services.

15.Mr Walker observes that this model offered the potential benefit of a good return for minimal outlay. Each project faced the same risk – that the limited capital plus the agreed third party funding may prove insufficient, either temporarily because of negative cashflow or permanently due to a loss on the project. In the event that funds were exhausted, the members of the limited partnership would have to introduce extra capital or refinance. However, if they were unable to achieve that result, one partner would have to carry the costs until funds became available from any surplus to repay the lender.

Formation and Implementation of Lakewood Construction Contract

…

17.On 31 March 2017 Downey contracted with Lakewood to construct a 17 storey, 151 residential apartment building with two basement level carpark and amenities at 8 Lakewood Court, Manukau. The design was later amended to incorporate a podium level of commercial spaces. The contract was on the standard NZS 3910:2013 form as modified by the Special Conditions in Schedule 1 and Schedule 2. In summary, it provided for (a) a lump sum price of $44.396 m; (b) DCL to give a performance bond of $2m; (c) possession of the site to DCL on 19 June 2017; (d) a completion date of 18 months from commencing work; (e) liquidated damages fixed at $5,375 per working day; and (f) a defects notification period of three months.

18.The contract appointed Michael Casey of Kingstons, quantity surveyors, or his nominee as the Engineer. The general conditions obliged DCL and the Engineer each to notify the other in writing as soon as they became aware of any matter which was likely to materially alter the contract price or delay completion of the contract works; if DCL failed to notify the Engineer of a matter which it ought reasonably to have done so, any variation arising out of it should be valued as if notification had been given and might reasonably have resulted in its impact being avoided and reduced. Lakewood was obliged to ensure that there was an engineer at all times.

19.The parties had started planning for the Lakewood project some years earlier. A Downey entity purchased the land in June 2013. Auckland Council granted DCL a resource consent on 12 March 2014. Over the

next three years the parties incorporated all the participating legal entities in the structure to govern the building project which was to be in three construction stages. On 8 December 2016 Auckland Council issued what is described as the Stage 1 building consent, enabling demolition of the existing building, earthworks, and construction of the substructure and superstructure.

20.As with their previous projects, the parties did not open the Lakewood construction contract for competitive tenders. Mr Bigio described this process as “non-traditional”. Downey submitted its tender based on design drawings by an architectural firm, Archimedia (described as being “for construction” for Stages 1 and 2, and “for consent” for Stage 3 on the premise that it was by then at least 90% designed). Cameron Puckey, DCL’s commercial manager, who is also a well- qualified and experienced quantity surveyor, gave evidence that he undertook a full measure of quantities and obtained subcontractor and material tenders for each building element when assessing the construction costs on Archimedia’s drawings. Kingston Partners independently assessed the tender and price and submitted a full report to the prospective lenders for funding purposes. Mr Clarke understood that Kingston’s report expressed its satisfaction that DCL had properly priced the project. The firm also prepared drawdown reports to the lenders progressively during the course of the project.

21.Downey’s tender was submitted on 31 March 2017 and forms part of the formal contract. According to Mr Downey, but disputed by Mr Clarke, DCL’s tender price was fixed on the same basis as was used in the previous projects where the contractor was to receive its actual, reasonable costs of construction. To the extent that the price paid under the contract, including a 4% margin, exceeded DCL’s actual costs, the balance would be returned to the partnership. Equally, to the extent that the price being paid under the contract did not capture all of DCL’s actual costs, the difference would be paid before the partners took their shares. The partnership’s accountant, at the end of each project, assembled all of the costs, including DCL’s costs, allowing the difference between total costs and price received from sales as the partnership profit to be divided in the agreed proportions.

22.DCL’s lump sum tender price included direct overheads (“Preliminary & General”), which were estimates of actual costs. Kingston had reported on this item as an estimate of 10% - an approximation of costs rather than a percentage share or uplift. On Mr Downey’s evidence, a margin is normally added to cover indirect overheads, risk and profit. DCL included a margin of 4% on direct costs including overheads. If the contract was at an arm’s length, DCL would not consider charging a margin less than 8%.

23.This issue featured prominently in the evidence of Messrs Downey and Clarke and in Mr Walker’s opening. However, in closing Mr Walker accepted that with DCL’s withdrawal of its second cause of action, to which I shall return, the issue was now moot.

Construction Phase Delays

24.Downey commenced construction work on 19 June 2017 in accordance with the Stage 1 building consent. The Stage 2 building consent for fitout and services was issued on 7 December 2017; its terms are not in dispute. Stage 3 will be the subject of further consideration. The expected completion date was 18 January 2019, just over 18 months away. In fact, the works were not completed until 5 October 2020, a delay of some 20 months.

25.DCL attributes the major delays in completion, leading to its claims for variations or extensions of time, to four major factors: [1] Additional groundworks required; [2] a major redesign of the façade including fire protection and fresh air ventilation; [3] an extensive redesign of the podium; and [4] the consequences of COVID-19 lockdowns. I shall summarise each separately.

[5]    As the Arbitrator recorded, practical completion under the contract was not achieved until 5 October 2020. Prior to that, on 31 July 2020, the engineer to the contract, Mr Casey, had confirmed Downey was responsible at that point for 246 days of delay.1 As a result, Lakewood deducted liquidated damages of $1,322,250. On 22 September 2020, Downey claimed for variations, extensions of time for the full period of delay (435 working days), time related costs and interest, which amounted to a total claim of $13,145,323.01.

[6]    In the award the Arbitrator noted that, in closing, Mr Walker KC had recast and reduced Downey’s claim to a total of $9.687 million made up of:

(a)$3,987,838 for the base costs of 70 individual variations;

(b)$492,613 for preliminary and general and associated base costs on those variations;

(c)$3,652,922 for time related and P&G thickening costs; and

(d)$1,563,576 for interest.

1      The document is dated 21 August 2020.

[7]    Lakewood disputed liability and raised an affirmative defence based on late notification and prejudice. It counterclaimed for $596,725 to recover variation payments which it alleged were incorrectly certified or agreed.

The Award

[8]In the Award the Arbitrator concluded, inter alia:

(a)Downey should be granted an extension of time of 50 working days to be taken into account against the existing delay of 243 working days for the period from 31 July 2019 to 31 July 2020 for which an extension had not been granted;

(b)that Downey’s net claim for time related costs of $1,531,576 was sustainable for 50/243rds of its existing quantification to represent the extent to which the extension claim was allowed; and

(c)Lakewood was liable to pay Downey’s claim for thickening costs of

$1,414,319 (described as the additional overhead costs associated with the approved variations).

[9]The Arbitrator then went on to make a series of consequential declarations:

(a)reducing Lakewood’s entitlement to liquidated damages;

(b)quashing the call of the bond or setting the call aside pending the parties’ recalculation and settlement of the respective entitlements in terms of the Award;

(c)directing Lakewood to repay $200,000 retentions to Downey; and

(d)confirming Downey’s entitlement to an award of interest on a recalculated amount according to the terms of the Award.

[10]Costs were reserved.2

The grounds for leave to appeal

[11]   In its application for leave, Lakewood set out the following grounds of challenge to the award:

(a)the Arbitrator was wrong in law to determine that Downey was entitled to an extension of time of 50 working days;

(b)the Arbitrator erred in determining that Downey was entitled to payment in full for the base costs of 70 variations;

(c)the Arbitrator erred in determining that Downey was entitled to the amount of $1,414,319 for P&G thickening; and

(d)the Arbitrator erred in determining that Downey was entitled to the release and payment of $200,000 in retention moneys.

[12]In his written submissions for Lakewood, Mr Bigio KC refined the issues as:

(a)Issue One: Did the Arbitrator err in awarding Downey an extension of time of 50 working days when there was no cogent evidence that that there had been any causative delay to the completion date caused by design changes to the podium?

(b)Issue Two: Whether the Arbitrator erred in awarding Downey the amount of approximately $1.8m in variations which are based on events or circumstances that arose prior to 6 December 2018 without regard to:

a.whether there was in fact any contractual entitlement; and

b.an admission by Mr Downey that it had no further variation claims, beyond what had already been claimed and paid, prior to the date.

(c)Issue Three: Did the Arbitrator err in awarding Downey the amount of $1,414,319 in 'P&G thickening’ when he failed to undertake the assessment required under the Contract?

2      Costs and expenses were subsequently fixed in the final Award.

[13] Mr Bigio KC did not pursue the fourth ground for leave in submissions (noted at [12](d) above) before the Court. I need not consider that further.

Jurisdiction

[14]   The jurisdiction under the Act for appeals from arbitration awards is deliberately constrained. Clause 5 of the Second Schedule to the Act applies to the present application. Lakewood may only appeal on a question of law and with leave of the Court.

[15]   Clause 5(2) confirms the Court must not grant leave (the threshold point) unless it considers that:

having regard to all the circumstances, the determination of the question of law concerned could substantially affect the rights of 1 or more of the parties.

[16]   If the threshold is satisfied, the full Court of the Court of Appeal in Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd identified the following considerations that the Court should then take into account when deciding whether or not to grant leave:3

·The strength of the challenge/nature of point of law

·How the question arose before the arbitrator

·The qualifications of the arbitrator

·The importance of the dispute to the parties

·The amount of money involved

·The delay in going through the Courts

·Whether the contract provides for the arbitral award to be final and binding

3      Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd [2000] 3 NZLR 318 (CA).

·Whether the dispute is international or domestic.

[17]   Importantly, any appeal under cl 5 is limited to questions of law. In Gold and Resource Developments, the Court of Appeal noted:

[55] While not expressing a final view, we see some force in the argument that whether there was any evidence to support a particular finding of fact made by the arbitrator is not a question of law in the context of the 1996 Act. In Edwards (Inspector of Taxes) v Bairstow [1956] AC 14 at p 29 Viscount Simonds said that findings of fact made by a tribunal could be set aside by a Court if it appeared that the tribunal had acted without any evidence, or upon a view of the facts which could not reasonably be entertained. The authors of Mustill and Boyd, Commercial Arbitration assert at pp 592 – 593 and 596 that this principle cannot be applied to the review of arbitral decisions. To do so, they say, would be to broaden the basis on which arbitral awards can be appealed on questions of law. This would be contrary to the general principle that the arbitrator is master of the facts (now to be found in this country in art 19(2) of the First Schedule to the 1996 Act) and to the specific aims of the legislation, which include the promotion of finality in arbitral awards and the limiting of judicial intervention. See also David Williams QC, Arbitration and Dispute Resolution [2000] NZ Law Review 61 at pp 77 – 78, citing Russell on Arbitration (21st ed, 1997) para 8-057.

[18]   The Act was subsequently amended by s 9 of the Arbitration Amendment Act 2007 by the introduction of cl 5(10) to sch 2. Clause 5(10) provides:

Clause 5 of Schedule 2 is amended by adding the following subclause:

(10)For the purposes of this clause, question of law—

(a)includes an error of law that involves an incorrect interpretation of the applicable law (whether or not the error appears on the record of the decision); but

(b)does not include any question as to whether—

(i)the award or any part of the award was supported by any evidence or any sufficient or substantial evidence; and

(ii)the arbitral tribunal drew the correct factual inferences from the relevant primary facts.

[19]   To support the proposed amendment of cl 5(10)(b), the Law Commission referred to the following statement by Lord Mustill in Pupuke Service Station Ltd v Caltex Oil NZ Ltd:4

Where the criticism is that an arbitrator has made an error of fact, it is an almost invariable rule that the Court will not interfere. Subject to the most limited exceptions, … the findings of fact by the arbitrator are impregnable, however flawed they may be.

[20]The authors of Williams & Kawharu on Arbitration note:5

Clause 5(10)(b) was added to cl 5 by the Arbitration Amendment Act 2007 to resolve uncertainty which had arisen in a series of cases on whether the second and third categories identified in Wotherspoon were available grounds for appeal against an arbitral award … With these categories now expressly excluded from cl 5, only a conventional legal question remains as the sole basis for an appeal. For the purpose of an appeal, therefore, the facts are assumed to have been correctly stated by the tribunal in its award. … Questions of fact dressed up as questions of law are impermissible. …

[21]   As to the approach to granting leave, the Court of Appeal confirmed in Gold and Resource Developments (NZ) Ltd that when considering the strength of the challenge, if it is a one-off point without precedent value either generally or to the parties on another occasion then, unless there are very strong indications of error, leave should rarely be given. Even in other cases (which may have some precedent value) the Court will be looking for a strongly arguable case for leave to be granted.

[22]   Finally, I note that in Gold and Resource Developments the Court helpfully noted as to process:6

[58]      If the Judge decides to grant leave, reasons should ordinarily not be given. It is undesirable that the Judge who is to hear the substantive argument should be embarrassed or influenced by the existence of written reasons.

[59]      If leave is not granted, the Judge should deliver a short judgment for the benefit of the parties indicating, where necessary, whether the matter in issue is considered to be one-off, and why the case did not meet the required standard. A detailed analysis of the alleged error of law is not required.

4      Pupuke Service Station Ltd v Caltex Oil NZ Ltd Appeal No 63/94, 16 November 1995 reported as an appendix to Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd, above n 3, at 339, cited in Law Commission Improving the Arbitration Act 1996 (NZLC R83, 2003) at [123].

5      David AR Williams Williams & Kawharu on Arbitration (2nd ed, LexisNexis, Wellington, 2017) at [18.4.2] (footnotes omitted).

6      Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd, above n 3.

Threshold issue — Could determination of the questions of law proposed by Lakewood substantially affect the rights of one or both of the parties?

[23]   Lakewood submits the financial effect of awarding an extension of time of 50 working days is substantial. It resulted in a reduction of Lakewood’s liquidated damages’ claim of $268,750 and Lakewood was ordered to pay time related costs to Downey in the sum of $353,603. Further, Lakewood was ordered to pay Downey a sum equivalent to 50/243rds of its time for time related cost constituting part of variation 110 totalling $315,139.09 together with interest.

[24]   Next, the allowed variations of approximately $1,800,000 were significant. Lakewood was also ordered to pay P&G thickening of $1,414,319.

[25]   I accept that determination of the proposed questions of law (if they are properly assessed as such) could substantially affect the financial position and thus the rights of the parties.

[26]   I then turn to the matters identified by the Court of Appeal that the Court must consider when determining whether to exercise its discretion.

The strength of the challenges

[27]   The first issue is whether it is strongly arguable that the Arbitrator erred in law as suggested by Lakewood.

The extension issue

[28]   Mr Bigio submitted the Arbitrator’s analysis at [150] and [151] of the Award in which he concluded the Lakewood initiated podium redesign had a consequential effect on Downey’s completion of the work was wrong in law as:

(a)his assessment was wrongly premised on the proposition the reference to a “fair entitlement” permits a notional estimate to achieve what he may have considered to be “job site justice”; and

(b)putting aside the critical path methodology was a fundamental departure from the contractual provisions which required an assessment of the knock on effect to the completion date.

[29]The relevant paragraphs of the Award were:

150.In closing Mr Walker postulated that while Mr Walton’s analysis is neither perfect nor ideal, and has apparent limitations, the contractual threshold of a ‘...fair entitlement...” does not require proof to a high forensic standard. I agree. However, it does require an evidential foundation falling generally within the realm of reliability on which the fairness threshold can be evaluated. Downey did not discharge that onus here. It follows that I reject Mr Walker’s associated submission that Lakewood bore an onus of advancing an alternative analysis. It was DCL which was obliged to prove its claim; I agree with Mr Bigio that Lakewood carried no affirmative burden of disproving it.

151.Nevertheless, I repeat that this is quintessentially a factual inquiry. Downey’s expert evidence has not carried the day. But, putting aside the critical path methodology, I am satisfied from all the relevant evidence that the Lakewood initiated podium redesign did in fact have a consequential adverse effect on Downey’s completion of the podium fitout work. Like Mr Walton, Ms Simnor acknowledges the reality that variation works can be disruptive and increase the time for completion of construction. On the other hand, she draws attention to statements made in DCL’s July, September and October 2019 reports referring to reglazing work, rain damage and elevation problems which caused a two or three week delay in fitout work on the upper levels.

[30]   Mr Bigio noted the Arbitrator’s reference to a “fair entitlement” and referred to the Arbitrator’s earlier reference to an “unfettered discretion of whether to award an extension of time”. He submitted that an entitlement to an extension of time is not an unfettered discretion or based on a fair entitlement. It must be an objective and logic based exercise having regard to the critical path of the project and an event relied on for an extension must be shown to have caused a “knock on effect” to the due date for completion.

[31]   Mr Bigio submitted that missing from the Arbitrator’s analysis was the fact that an extension of time can only be assessed by whether an event actually caused a “knock on effect” to the completion date. He submitted that, contrary to the authority of John Barker Construction Ltd v London Portland Hotel Ltd,7 which required a

7      John Barker Construction Limited v London Portman Hotel Limited (1996) 83 BLR 31.

logical analysis of the impact of the changes on the programme the Arbitrator had effectively made an impressionistic assessment of the time taken by relevant events. Putting aside the critical path methodology was a fundamental departure from the contractual provisions which required an assessment of the knock on effect to the completion date.

[32]   Further, despite concluding that Downey had not discharged its onus in establishing the evidential foundation the Arbitrator had erred by going on to award an extension of 50 days.

[33]   Mr Bigio argued the Arbitrator had erred by focusing on design changes to the podium and by treating the podium (commercial space) redesign changes as events in isolation to the rest of the project without regard to other ongoing culpable delays by Downey. He had ultimately made an assessment without cogent evidence of what, if any, causal effect it had on the completion date.

[34]   Mr Walker’s first point in response was that Lakewood’s criticism that there was no cogent or probative evidence overlooked the clear wording of cl 10(b) of sch 2 to the Act which excludes from a question of law any question whether the award was supported by any or any sufficient or substantial evidence. The point was clearly a factual one rather than a question of law.

[35]   Next, he made the point the premise of the challenge was incorrect. While the Arbitrator had accepted Downey had failed to discharge its evidential burden of proving its claim, that was in relation to the full extension sought of 435 working days. The Arbitrator was nevertheless satisfied from all the relevant evidence that the Lakewood initiated podium redesign did in fact have a consequential adverse effect on Downey’s completion of the podium fit-out work. For that reason he had allowed the 50 working days’ extension.

Analysis — the extension issue

[36]   While the Arbitrator referred to an “unfettered discretion” that was in the context of his reference to cl 10.3.1 of the General Conditions which provided for an extension if the Contractor is “fairly entitled to the extension” by reason of one or

more of the qualifying factors.8 The Arbitrator was not suggesting the discretion should be exercised in an unprincipled way or without regard to the evidence.

[37]   I consider Mr Bigio’s reliance on the Arbitrator’s comments at [151] of the award where he referred to putting aside the critical path methodology as being overstated. The Arbitrator was quite clear about the importance of the critical path methodology. He discussed it at [128] through to [133] of the Award before then considering the four time windows identified by Mr Walton. The Arbitrator rejected the first three but then concluded an allowance of 50 working days was appropriate in relation to window 4. The Arbitrator took into account the contract construction programme allowed 99 working days for the podium fitout. Mr Walton’s window 4 evidence was unchallenged that the process took 243 working delays, a delay of 144. The Arbitrator also accepted Mr Walton’s evidence of 13 major variations to the fitout works necessitated by the podium redesign, ranging from revised ventilation and extract designs to vents added to kitchen cabinetry. He accepted the cumulative effect would have been materially disruptive to completion of the construction programme which by implication must have affected the critical path.9 The Arbitrator then concluded a modest allowance of 50 working days as appropriate to recognise the impact of the variations on the time taken. That was not so much an “impressionistic assessment” of the time taken by the relevant events but rather was a factual finding of the appropriate allowance on the basis of the evidence.

[38]   I do not consider Lakewood to have an arguable case the Arbitrator made an error of law in the way he assessed Downey’s fair entitlement to the extension of time under general conditions, cl 10.3.1 of the contract.

The variations

[39]   Next, Lakewood submits the Arbitrator erred in awarding Downey the amount of approximately $1.8 million in variations based on events or circumstances that arose prior to 6 December 2018. Mr Bigio submitted that the Arbitrator erred as he did not undertake any assessment of Downey’s contractual entitlement to the claimed

8      Award, above [1], at [128]

9 At [152].

variations and ignored Mr Downey’s concession in cross-examination there were no outstanding variations prior to refinancing in December 2018.

[40]Clause 9.1.1 of the General Conditions of Contract provided:

The Engineer may order any Variations to the Contract Works within the scope of the Contract that:

(a)Increase or decrease the quantity of any work;

(b)Omit any work;

(c)Change the character or quality of any Material or work;

(d)Require additional work to be done; or

(e)Change the level, line, position, or dimensions of any part of the Contract Works.

[41]   Mr Bigio submitted that, to be entitled to a variation Downey had to demonstrate it was entitled to the variation under cl 9.1.1 or, where something was not ordered by the engineer to the contract and where Downey considered it a variation, it had to give notice of that in accordance with cl 9.2.3. On this basis he argued that the Arbitrator erred in law in failing to undertake an assessment under the contract as to whether the variations claimed for work that pre-dated December 2018 actually qualified as variations.

[42]   Mr Walker noted that, during the course of the arbitration senior counsel for Lakewood had advised that Lakewood did not really dispute that the work in question was additional had been done and that the cost claimed in respect of it had been incurred. Nor was it in dispute that the works in question were not in the original scope of work. The defence had been that Downey was contractually responsible for the design and consents so the differences could not constitute variations. The Arbitrator considered that submission but rejected it. It followed the items were variations under cl 9.1.1.

[43]   To support the argument that Mr Downey had made a concession there were no outstanding variations, the particularly relevant concluding passage in the evidence Mr Bigio relied on was:

Q. Mr Downey, I'm trying to be as precise as possible and I want to talk about the actual and not the theoretical. All that existed in December 2018 was the theoretical possibility that you would be making variation claims in the future; isn't that right?

A.       Correct.

[44]   Mr Walker submitted that the background to the financing of the contract explained why Downey did not submit its variation in December 2018. Further, he submitted that on the evidence of the transcript read as a whole there was no concession but that, in any event, whether there was a concession or not was a question of fact rather than law.

Analysis — variations

[45]   The theme of Lakewood’s defence on this point was that the parties had effectively settled entitlements in respect of variations prior to 6 December 2018. However, the Arbitrator rejected that.10 It was open to him to do so.

[46]   The Arbitrator was then left with Mr White’s analysis of the variations which, subject to the issue of whether Lakewood was prejudiced by the lateness of the claim (discussed below) were properly claimable by Downey under cl 9.1.1.

[47]   Next, Mr Downey’s “concession” must be read with his earlier evidence when he discussed the reason why the variations were not submitted by December 2018. At p 57, line 11, the following exchange took place:

Q.Sorry, I may not have phrased my question elegantly. What underpins the approach in this letter, is that the Limited Partnership or Mr Clarke and his interests don't accept that the costs that Downey Construction have incurred are necessarily claimable under the Contract as variations; don't you agree?

A.No, I don't agree with that. I think he knows they're variations at this stage and he certainly mentions there that, you know, you need to fund the project until you are able to submit the variations. He knew that we couldn't submit them at the time because the LP had no cash.

[48]The Arbitrator was alive to the issue. He identified it:

10 At [110].

90.By way of background, Downey’s  position is that on 6 December   2018 Lakewood’s existing funding facility did not allow DCL sufficient leeway to claim and receive payment in full of its claim of

$1.135m or thereabouts. Any payment claim, if made, with an appropriate payment schedule, was likely to trigger capital contribution obligations from the limited partnership in accordance with the facility. Downey pleads the existence of what is said to be a Claims Understanding that DCL would withhold payment claims for variations and other matters, giving rise to an entitlement to additional payment and where necessary an extension of time on the understanding that these claims would be submitted at the end of the project when funding was available.

[49]   While Lakewood did not accept that position, ultimately the Arbitrator accepted Downey’s position:

93. What then is the relevant factual context? By early December 2018 Lakewood’s funding lines were nearly exhausted. The partnership’s existing mezzanine loan facility with Varde was onerously expensive. It was negotiating with Clearwater Partners Ltd to refinance that debt. At the same time Downey was suffering delays and incurring substantial costs related to both the extra groundworks and the façade redesign. Mr Downey knew that DCL’s claims for the associated costs were going to challenge Lakewood’s contingency limit in the financing facility for construction overruns. Underlying Mr Downey’s financing concerns was his knowledge that Mr Clarke and his interests were not in a position to contribute further capital to the project if the financiers withdrew. On the other hand, Mr Holland knew that Downey was being stretched by the Engineer’s limitation on Preliminary & General claims; that as a result the company was having to bear all costs associated with the project delays and variations; and that it wanted a prompt agreement on those issues by the parties’ joint direction to Mr Casey.

[50]   The Arbitrator rejected Lakewood’s argument that on 6 December 2018 Downey had agreed to accept a payment in full settlement of its existing or future variation claims. He then went on to note that it was common ground that Downey was late in providing its variation claims after 6 December 2018 but that there was no time bar on submitting variation claims. He identified the ultimate issue was whether Lakewood had suffered prejudice as a result of the delay.

[51]   The Arbitrator concluded that Lakewood had not been prejudiced and the revised claim for its base costs for the 70 variation claims, fixed by reference to Mr White’s expert evaluation, was fair and reasonable. They are factual findings that were open to the Arbitrator. The claim for the variations was not precluded by any waiver by Mr Downey.

[52]   Again Lakewood fails to make out an arguable case the Arbitrator erred in concluding that the items claimed for variations were properly claimed.

The P&G thickening claim

[53]Lakewood says the Arbitrator erred in law by:

(a)misdirecting himself as to the contractual test by simply accepting all of Downey’s costs claimed for P&G thickening costs as fair and reasonable under cl 9.3.9; and

(b)the Arbitrator did not apply or assess a reasonable percentage despite that being an express requirement of the contract.

[54]   Lakewood argues that, having identified a detailed regime for value and variations the Arbitrator failed to apply that regime. Downey could not explain the basis of the cost claimed or explain why some of the amounts claimed under P&G thickening were for periods before any variations arose. Mr Bigio noted P&G thickening was not a term under the contract.

[55]   Mr Bigio submitted that cl 9.3.9 applied and that the Arbitrator had not used a reasonable percentage when fixing the P&G overheads:

9.3.9For On-site Overheads, where the Special Conditions state that the prices and rates in the Schedule of Prices are exclusive of On-site Overheads or where 9.3.7 applies, there shall be added to the Base Value a percentage to cover all On-site Overheads (except those covered under 9.3.11, 9.3.14, and 9.3.15). This percentage shall be determined as follows:

(a)Subject to 9.3.12, where the Special Conditions or Schedule of Prices nominate a percentage for On-site Overheads, the percentage so nominated shall be used; or

(b)Where no percentage is nominated, a reasonable percentage shall be used; and

(c)To the extent the prices or rates in the Schedule of Prices include allowance for On-site Overheads, no percentage shall be added.

[56]   Mr Bigio drew the Court’s attention to the original pricing for the job. Preliminary and Generals were assessed at $3.86 million. The total price was $42.6 million, so the P&G’s originally represented approximately nine per cent of the cost of the job. Lakewood’s case is that if the original P&G represented about nine per cent of the price it was disproportionate to allow the increased claim which was close to 33⅓ per cent.

[57]   Mr Walker submitted the point Lakewood now takes that because the Arbitrator accepted the claim costs as being fair and reasonable and did not apply or assess a reasonable percentage to the base value as required by cl 9.3.9(b) was not a point made at the hearing itself. Downey had quantified the additional P&G costs globally in variation 110 rather than ascribing a particular type and quantum to each variation.

[58]   Mr Walker submitted the alleged errors only raise questions of fact rather than law. Even though the alleged error had been reformulated in submissions Downey had led evidence of its claims in respect of additional P&G costs through both Mr Puckey and its expert Mr White. Mr White went through each of the costs under variation 110, including the time related or thickening costs. It was open to the Arbitrator to accept that evidence. Whether the Arbitrator had sufficient evidence for his finding the variations entailed $1,414,319 in thickening and P&G costs was a question of fact. If Lakewood wanted to know what percentage the $1,414, 319 represented of the net costs of the variations awarded whether globally or individually it could divide the former by the latter.

Analysis — P&G thickening

[59]   I agree with Mr Walker’s point that Lakewood’s approach on this issue assumes that there was a proportionality between the original work and the varied work. But the evidence was this was a project that was essentially extended by 50 per cent which required a substantial amount of additional work. More to the point, the construction was altered in such a way it was highly causative of increased costs. Those were matters of evidence for assessment by the Arbitrator.

[60]   What constituted a reasonable percentage would have required consideration of the additional items of P&G claimed. Otherwise to fix a percentage without regard

to those items would have been arbitrary. The Arbitrator effectively reviewed the evidence of the additional P&G claims and concluded the items claimed were reasonably claimed. While he did not express them in a percentage, he could have. The Arbitrator’s approach was a practical one. I consider it to have been open to him.

[61]   The terms of special condition 9.3.9 do not assist Lakewood’s argument that a reasonable percentage had to be expressly identified.

[62]Special condition 9.3.9 provided:

(b)The prices and rates in the Schedule of Prices are exclusive of On-site Overheads and the allowance for On-site Overheads to be added in accordance with 9.3.9 is

(i)Agreed percentage

which was then noted as:

Preliminary and general costs on variations are to be assessed and agreed with the Contract Admin QS / Engineer to the contract (%).

[63]   Notably, the special condition provided for the P&G costs on the variations to be assessed (and agreed). It is a question of fact whether the amount assessed by the Arbitrator for the P&G costs on the variation was ultimately a reasonable percentage.

[64]The Arbitrator worked out the individual variations globally under variation

110. As Mr Walker submitted, it would be a relatively simple matter to work out what percentage of the variations that global amount represented. If the individual amounts claimed were themselves reasonable then it is difficult to see how the resultant percentage, whatever it was, could be said to be unreasonable, or, put another way, to be so unreasonable as to amount to an error of law.

[65]   I do not consider Lakewood to have a strongly arguable case for error of law on this point.

Other relevant factors

How the question arose

[66]   The issues Lakewood now raises are issues which were directly the subject of arbitration, namely the claims for extensions, variations and increased P&G costs. Generally, if the proposed questions are the very reason for the arbitration (as they are in this case) that will weigh against leave.

The qualifications of the Arbitrator

[67]   Where the Arbitrator is legally qualified (here a retired Judge of the Senior Courts) it is more difficult to obtain leave on a question of law.11

Importance of the dispute and the amount of money involved

[68]   These factors run together in the present case. I accept that there are important financial consequences to both parties.

Whether the contract provides for the arbitral award to be final and binding

[69]   The submission to Arbitration provides it will be final and binding.12 That underscores the need for scrutiny as to whether the proposed questions of law are strongly arguable.

Precedential value

[70]   Despite Mr Bigio’s submissions I consider the points raised to be the application of general principles to the facts of this particular case and not to raise any particular issues of construction of the relevant contractual provisions.

Delay

[71]   Mr Walker made the point that if leave were granted it would be some months before the appeal would be heard. In the meantime, there are a number of other issues

11     Gold and Resource Developments (NZ) Ltd v Doug Hood Ltd, above n 3, at [54].

12     At cl 1.1 of the Agreement to Arbitrate.

between the parties. For example, oppression proceedings have already been issued relating to the way the business has been conducted. Also Duval Developments Ltd has now sought to liquidate both the company and the partnership.

Summary/result

[72]   I do not consider Lakewood to have made out it has strongly arguable questions of law which this Court should consider. Taken overall, the remaining general considerations do not support the grant of leave.

[73]   For the above reasons the application for leave to appeal the Award is dismissed.

Costs

[74]The respondent is entitled to costs on a 2B basis to be fixed by the Registrar.

Venning J