Lexall Limited v Maruonz Construction Limited (in liquidation)
[2017] NZHC 599
•29 March 2017
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2014-404-000980 [2017] NZHC 599
BETWEEN LEXALL LIMITED
Plaintiff
AND
MARUONZ CONSTRUCTION LIMITED (IN LIQUIDATION) First Defendant
HO JIN YI
Second Defendant
Hearing: 2 February 2017 Counsel
M Locke for Plaintiff
No appearance for DefendantsJudgment:
29 March 2017
JUDGMENT OF WHATA J
This judgment was delivered by me on 29 March 2017 at 4.30 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date: ………………………….
Solicitors: Turner Hopkins, Auckland
LEXALL LIMITED v MARUONZ CONSTRUCTION LIMITED (IN LIQUIDATION) [2017] NZHC 599 [29
March 2017]
Introduction
[1] This is an application for formal proof for alleged:
(a) Breaches by the first defendant, Maruonz Construction Limited (in liquidation) (MCL) of a Deed of Settlement requiring completion of constructions works within a specified time; and
(b)Breach by the second defendant, Ho Jim Yi, of a Deed of Guarantees in respect of MCL’s liability under the Deed.
[2] Lexall Limited (Lexall) claims against both defendants:
(a) Damages in respect of additional construction costs of $34,797.34;
(b) Damages in respect of loss of income from the rest home of
$417,113.54;
(c) Interest on the above sums pursuant to the Judicature Act 1908, from the date of actual completion, namely 14 January 2014; and
(d)The plaintiff’s costs of and incidental to this proceeding either on a solicitor and own client/indemnity basis pursuant to the Deed of Guarantee and Indemnity or 2B costs pursuant to Schedules 2 and 3 of the High Court Rules 2016.
Background
[3] On 21 May 2012 Lexall and MCL entered into a construction contract whereby MCL would, as head contractor, supply construction services to the Lexall in relation to building an extension to a rest home property owned by the plaintiff. Mr Yi is the sole director of MCL.
[4] Lexall paid MCL $2,648,194 for services rendered up to and including the seventh progress claim. Between 15 January 2013 and 1 February 2013, MCL’s performance failed in many crucial aspects, including breaching the construction
schedule and failing to obtain a Code Compliance Certificate (CCC) for the project, and a dispute arose between the parties regarding payment. The eighth progress claim was suspended by Lexall. Subsequently, in April 2013, Lexall and MCL entered into a Deed of Settlement in order to settle the disputes arising, and Lexall and Mr Yi entered into a Deed of Guarantee and Indemnity.
The Deed of Settlement
[5] The Deed of Settlement provided (inter alia):
(a) That it would be in full and final settlement of all outstanding matters, claims, rights and remedies arising from the initial contract save that the standard conditions, specifications, warranties and guarantees included in the initial contract would continue (clause 1 of the Deed of Settlement);
(b) The contract price would be varied to a total fixed lump sum price of
$2,800,000.00 plus GST (clause 2);
(c) The new practical completion date would be six weeks from the date of recommencement of the works on 29 April 2013. The new practical completion date would therefore be 10 June 2013 (clause 6);
(d) New construction (Schedule ‘A’) and payment (Schedule ‘B’)
schedules were agreed to (clause 7);
(e) If MCL fell behind in the new programme schedule by more than one week Lexall would have the right to stop payment under the Deed of Settlement and/or immediately terminate the contract at Lexall’s sole discretion (clause 7);
(f) MCL was responsible for obtaining the CCC. The date for application for the CCC was 10 June 2013 (clause 10);
(g)MCL undertook to maintain the required level of resources on the project at all times to complete the project in as timely a manner as possible. If Lexall found that the required level of resources was not being maintained or was inadequate and provided written notice, then MCL would increase the level of resources to meet the project schedule, with time being of the essence. If the level of resources was not sufficiently increased in one week then Lexall had the right to stop payment and/or terminate the contract (clause 13);
(h) MCL would settle the amount unpaid to the subcontractors (clause
14); and
(i)In the event that MCL was unable to complete the works in accordance with the new project schedule Lexall could stop payment and terminate the contract and the personal guarantee of Mr Yi contained in the Deed of Guarantee and Indemnity would cover the construction cost to complete, and all business income losses and associated costs for Lexall including the cost for Lexall’s bank caused by the delays (clause 15).
The Deed of Guarantee and Indemnity
[6] The Deed of Guarantee and Indemnity provided:
(a) Mr Yi personally guaranteed the obligations of MCL pursuant to the
Deed of Settlement; and
(b)Mr Yi personally guaranteed any business losses whatsoever and all banking and funding costs of any bank with regard to the project that Lexall may suffer, any cost for the completion of building by Lexall if any, and any or all costs of enforcement of the guarantee.
Breaches
[7] Lexall claims that MCL breached the Deed of Settlement as follows:
(a) Breached clause 7 by failing to follow the construction schedule deadlines in Schedule A by more than a week during the period 18
June 2013 to 2 September 2013;
(b) Breached clause 7 by not achieving practical completion by 10 June
2013;
(c) Breached clause 10 by not applying for a CCC after practical completion;
(d)Breached clause 13 by failing to maintain the required level of resources on the project at all times to complete the project in as timely a manner as possible, and by not increasing the level of resources within one week after written notice was given on 23
August 2013; and
(e) Breached clause 14 by failing to settle all unpaid amounts owing to the subcontractors.
Aftermath
[8] As a result, Lexall exercised its right to stop payment of the sixth instalment, and on 2 September 2013 exercised its right to terminate the contract under clauses
7, 13 and/or 15. It now seeks the damages.
[9] On 19 February 2015 MCL was placed into liquidation. The liquidators do not oppose the present claim proceeding, however they advise that MCL’s liabilities exceed its assets so there is no prospect of recovery from it.
Criticism of previous claim
[10] In response to issues raised Muir J in relation to a previous attempt at formal proof, the pleadings have been amended to, in short, focus the claim on breach of the Deed of Settlement and Deed of Guarantee and provided a revised assessment of loss
in response to the issues raised by Muir J. This has resulted in a substantial reduction in claim.
Procedural background
[11] As recorded in the minute of Courtney J, dated 31 May 2016, this proceeding has had a long and difficult procedural history. An initial statement of claim filed in
2014 was defended. However, the defendants have taken no steps since 2014 and were debarred from defending the proceedings in February 2015. Initially the matter was scheduled for formal proof in 2015, but that date was adjourned so that Lexall could attend to potential flaws in its case. It was adjourned again in November 2015 to enable Lexall to consider whether to file a second amended statement of claim. That was deemed to be unnecessary by Courtney J, referring to a minute of Woodhouse J who made an order requiring an amended statement of claim to be filed no later than 25 May 2016, with directions as to service. An amended statement of claim was filed and served on both defendants. No statements of defence have been filed and the matter was set down for formal proof, initially for
9 November 2016 and then adjourned to the present hearing.
Threshold
[12] Rule 15.9 in the High Court Rules 2016 provides for a formal proof hearing:
15.9 Formal Proof for other claims
(1) This rule applies if, or to the extent that, the defendant does not file a statement of defence within the number of working days required by the notice of proceeding, and the plaintiff seeks judgment by default for other than a liquidated demand.
(2) The proceeding must be listed for formal proof (and no notice is required to be given to the defendant).
(3) After a proceeding is listed for a formal proof hearing, no statement of defence may be filed without the leave of a Judge granted on the ground that there will or may be a miscarriage of justice if the judgment by default is entered, and on such terms as to time or otherwise as the Judge thinks just.
(4) The plaintiff must, before or at the formal proof hearing, file
affidavit evidence establishing, to a Judge’s satisfaction, each cause
of action relied on and, if damages are sought, providing sufficient information to enable the Judge to calculate and fix the damages.
(5) If the Judge before or at the formal proof hearing considers that any deponent of an affidavit filed under subclause (4) should attend to give additional evidence, the Judge may direct accordingly and adjourn the hearing for that purpose.
Principle
[13] As Palmer J stated in Andrews v Grant: 1
Rules 15.7, 15.8 and 15.9 provide for the consequences of failing to file a statement of defence in time. A plaintiff may seal judgment by default in relation to a liquidated demand (r 15.7) or recovery of land or chattels (r
15.8). Where judgment by default is sought ‘for other than a liquidated demand’, the proceeding is to be listed for formal proof hearing (r 15.9).
[14] In order to meet r 15.9(4), the Judge must be satisfied that the plaintiff’s evidence “is much the same as it would be if the proceeding had gone to trial.”2
However, a Judge in a formal proof hearing is not required to engage with any matters of affirmative defences, set-off or counterclaim.3 As Courtney J noted in Kim v Cho:4
[5] The objective of r 15.9 is to achieve just, speedy and inexpensive determination of the proceedings. Decisions under that rule can be varied or set aside if it appears there may have been a miscarriage of justice. But there is no indication that a Judge considering the formal proof of a claim can consider matters beyond proof of the claim and calculation of damages.
[6] …As it currently stands, the scheme of r 15 only permits a miscarriage of justice to be addressed after judgment has been entered.
Assessment
[15] The formal requirements for formal proof listed at r 15.9 (failure to file defence and an unliquidated sum sought) are satisfied. I turn then to examine whether the evidence establishes the causes of action claimed, and that sufficient
information is provided to fix damages.
1 Andrews v Grant [2015] NZHC 2934 at [9], per Palmer J.
2 Ferreira v Stockinger [2015] NZHC 2916 at [35].
3 Kim v Cho [2016] NZHC 1771 at [4].
4 At [5]-[6], per Courtney J.
Evidence of breach
[16] Lexall has filed a further affidavit of its director and shareholder, Mr Seung Hoon Leenoh, sworn 21 December 2016, in support of its formal proof hearing, and also seeks to rely on affidavits filed in support of its previous formal proof hearing:
(a) Mr Leenoh sworn 11 April 2015;
(b) Mr Colin Craig Gardner (an accountant employed by the plaintiff)
sworn July 2015;
(c) Seong Hwa Lee (the project architect) sworn 14 April 2015; and
(d)Graeme Turner (the Auckland City Council building inspector for the project) sworn 14 April 2015.
[17] The affidavit of Mr Leenoh identifies the breaches of the Deed of Settlement listed at [7], and provides supporting evidence including correspondence between the parties relating to delays and lack of resources, and Lexall’s payment of subcontractors. The evidence also confirms that the Deed of Settlement did not resolve the problems, requiring Lexall to assume responsibility for obtaining requisite code compliance, and attributes the delays caused to MCL. This evidence is supported by the affidavit of Mr Lee, the architect, which confirms that there were ongoing serious delays caused by the main contractor.
[18] Mr Turner was the council inspector. He has 40 years building experience. He did an inspection 30 August 2012 and the final inspection 24 July 2013. He noted a fire rating problem was serious and had to be amended. He identified serious mistakes and observed that, as a whole, the works were as bad as he has seen. He opines the contractor did not have requisite expertise. As to delay, had the building been compliant at the time of the inspection on 24 July 2013, he would have issued a CCC, but ultimately the standards were not passed until 11 December 2014, with a CCC issued on 14 January 2014. He noted that it was issued late because requisite producer statements were not provided, and due to the Christmas break.
[19] Overall I am satisfied on the evidence that the first defendant, MCL, failed to perform the contracted tasks by 10 June 2013 in breach of the Deed of Settlement.
Liability
[20] MCL is plainly liable for the loss caused by the failure to properly perform the contracted tasks by 10 June 2013 in accordance with the Deed of Settlement. The Deed of Guarantee and Indemnity expressly establishes the Mr Yi’s liability to cover any obligations of MCL as well as any business losses whatsoever and all banking and funding costs of any bank with regard to the project that Lexall may suffer, any cost for the completion of building by Lexall if any, and any or all cost of enforcement of the guarantee. Accordingly, Mr Yi is liable for the losses caused by MCL’s breach.
Quantum
[21] Turning to the quantum of damages, numerous invoices are provided by Lexall fixing the amount of additional construction costs paid. Mr Gardner quantifies this amount at $34,747.34.
[22] The amount of the business losses are also transparently expressed by Mr Gardner in terms of loss of profits, that is daily rates that could have been obtained by the rest home had the contract been completed on time, less costs that would have been incurred in the period 11 June 2013 (being the contract date for practical completion) and 14 January 2014 (being the date CCC was issued). This is quantified at [2].
[23] I am satisfied that the quantum of liability is properly established save in one respect. The proper start date for the quantum of loss of profits is the earliest date that the CCC could have issued, namely 24 July 2013. Mr Locke contended that the proper date was the practical completion date, as he says that the balance of the rest home could have been opened on that date. But there is no evidence supporting that assertion.
[24] I have recently received counsel’s memorandum on costs and interest. The Court may order a party to pay indemnity costs when the party claiming is entitled to indemnity costs under a contract or deed.5 As the Court in Beecher v Mills observed:6
…In the case of a contract [giving an indemnity for costs] it must in the end be a matter of determining what recovery is expressly or impliedly intended. In principle, anything less than a full indemnity for costs properly incurred must leave the indemnitee with part of the liability for which the indemnifier is prima facie responsible… In the absence of a contrary indication it is not to be assumed that the parties intended such a result. Nor can there ordinarily be any room for the exercise of a judicial discretion to order less costs and thereby erode the contractual protection the indemnity was intended to provide.
[25] The Court asked to make an order on indemnity costs by way of contractual right must consider whether the costs claimed are reasonable, bearing in mind that reasonable does not import a discretion in the usual sense.7 To this end the statement of Fisher J in Frater Williams & Co Ltd v Australian Guarantee Corporation (NZ) Ltd is relevant: 8
…in principle one party may contractually bind itself to pay the other party’s full solicitor-client costs. In such a case the Court must decide what tasks attract a costs indemnity on a proper construction of the contract, whether the task undertaken in the instant case was one of those contemplated in the contract, whether the steps taken were reasonably necessary in pursuance of that task, whether the rate at which they were then charged was reasonable having regard to the principles normally applicable to solicitor-client costs, and whether any other principles drawn from the general law of contract would in whole or in part deny the claimant its prima facie right to judgment. These are all matters of objective assessment.
[26] Helpfully, upon request, counsel has provided a further memorandum as to the reasonableness of costs claimed. They accept that the usual proportion of costs awarded for disbursements on experts is in the region of two thirds of the actual cost.9 But they also accept that a second forensic accountant report from Mr Gardner
was carried out due to the first report not making allowance for cost of sales. Some
5 High Court Rules 2016, r 14.6(4)(e).
6 Beecher v Mills [1993] MCLR 19 (CA).
7 Black v ASB Bank Ltd [2012] NZCA 384 at [77]-[78], citing Frater Williams & Co Ltd v
Australian Guarantee Corporation (NZ) Ltd (1994) 2 NZ ConvC 191,873 (CA).
8 At 191,887, cited with approval in Watson & Son Ltd v Active Manuka Honey Association
[2009] NZCA 595 at [20].
9 See Progressive Enterprises Ltd v North Shore City Council (2005) 17 PRNZ 919 at 926.
further discount must be made to reflect this, although I accept Mr Leenoh’s evidence that this did not result in substantial unnecessary expenditure. In the circumstances, then, I reduce costs awarded in relation to Mr Gardner’s fees by 50 percent to reflect these considerations.
[27] I am also not satisfied that the total cost claim is reasonable, particularly given that the initial pleadings needed to be amended substantially. Consequently, costs in the sum of $88,199.25 claimed on an indemnity basis, reduced by 20 percent on attendances to reflect this, and by 50 percent in relation to Mr Gardner’s fees, are awarded.
[28] Turning finally to the issue of interest, it is claimed on the additional construction costs and loss of profits claims. The Supreme Court has endorsed the term “debt or damages” in s 87 of the Judicature Act 1908 being one of wide import.10 I am willing to grant the interest claim, save that the loss of profits claim should only run from 24 July 2013, per [23] above. I appreciate counsel’s acknowledgement that the interest rate should better reflect the prevailing commercial rates of the period. I am satisfied the appropriate rate for the relevant period, based on the average Official Cash Rate, is 2.85 percent. That daily rate of
interest on additional construction costs and lost profits is applied, running from 24
July 2013 in the case of lost profits until the date of entry of judgment.
10 Judicature Act 1908, s 87; Worldwide NZ LLC v New Zealand Venue and Event Management Ltd
[2014] NZSC 108, [2015] 1 NZLR 1 at [20], [23], [36].
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