Main Rd Holdings Ltd v Thor Construction Group Ltd
[2020] NZHC 745
•15 April 2020
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2019-485-738
[2020] NZHC 745
BETWEEN MAIN RD HOLDINGS LTD
Plaintiff/Respondent
AND
THOR CONSTRUCTION GROUP LTD
Defendant/Applicant
Hearing: 12 March 2020 Appearances:
J McDougall and M Chester for the plaintiff/respondent D Abricossow for the defendant/applicant
Judgment:
15 April 2020
JUDGMENT OF ASSOCIATE JUDGE JOHNSTON
Introduction
[1] This is a winding up proceeding in which the plaintiff, Main Rd Holdings Ltd (“MRH”), is seeking an order under pt 16 of the Companies Act 1993 appointing a liquidator over the defendant, Thor Construction Group Ltd (“TCG”). TCG has filed and served an interlocutory application for an order staying the proceeding (and prohibiting advertising) under r 31.11 of the High Court Rules 2016. This judgment deals with TCG’s interlocutory application.
[2] I mention at the outset that both parties sought to introduce late evidence. For its part, TCG filed and served a supplementary affidavit prior to the hearing in order to update the evidence relating to its financial position. I allowed this affidavit in on the basis that TCG had already included in its affidavit evidence in chief earlier versions of the financial statements in question and expressly signalled that it anticipated putting in an updated version prior to the hearing. That is all it has done.
MAIN RD HOLDINGS LTD v THOR CONSTRUCTION GROUP LTD [2020] NZHC 745 [15 April 2020]
There are no material changes between the earlier versions and the most recent version (which is still not in final form). MRH sought to put in further affidavit evidence relating to exchanges between the parties. I was not prepared to allow this evidence in. As described to me by Mr McDougall, it was evidence that was available at the time MRH filed its evidence in chief and it should have been included at that stage.
Background
[3] MRH is a single project property development company. Its sole shareholder and director is Mr Arthur Shew.
[4] TCG is a building company. Its sole shareholder and director is Mr Kumar Vasist.
[5] In December 2017 the parties entered into a contract pursuant to which MRH engaged TCG to build a residential dwelling house on a property owned by MRH at 120 Main Road, Titahi Bay, Porirua.
[6]The only aspects of the contract that need to be recorded here are the following:
(a)The build was to take place over a 6-month period with an expected completion date of 30 June 2018;
(b)The total fixed price for the build was $480,000 (incl of GST) which was payable on the achievement of various milestones over the term of the build;
(c)The contract was only variable by written agreement between the parties.
[7] Whilst I do not perceive this to be relevant other than contextually, it is fair to say that the build did not go smoothly. It is entirely unnecessary in this judgment to attribute blame for this. However, the impression I have from the affidavit evidence is that both parties must share in the responsibility for how matters developed. MRH’s Mr Shew is not experienced in property development, and certainly does not appear
to have placed much store on obtaining competent advice (including legal advice). TCG’s performance in terms of the build itself is not one which I imagine Mr Vasist will look back on with unqualified pride.
[8] The original projected completion date of 30 June 2018 came and went, by which stage it was apparent to both parties that the build was going to take considerably longer than originally expected.
[9] Various difficulties were arising and the project was already in danger of faltering when, following local territorial authority inspections, the work completed by TCG’s bricklayer who was responsible for the façade was effectively condemned.
[10] Plainly, the parties perceived that the development needed to be rescued. On 2 October 2018, Mr Shew and Mr Vasist, on behalf of the two companies, entered into a written variation agreement. Here is what it said:
Following the Porirua City Council (PCC) inspection on 12 Sept 2018 that did not pass, the Council has requested that the entire brick cladding be taken down and then relay.
You have asked that Main Rd Holdings help you to resolve this problem. This will require the existing bicks to be taken down. Building paper to be removed and new building paper put up and the building made weather tight.
The bricklayer will then put up the new bricks to existing building code. The bricklayers will obtain a Pass Inspection with PCC for all their work.
Thor Construction Ltd is responsible for all costs for labour, materials and consultancy in relation to this work. All costs for this work will be paid immediately when due by Thor Construction Ltd.
Sign below to this understanding between the 2 parties to resolve the problem.
[11] So, MRH was stepping in to take responsibility for ensuring that the bricklaying was completed satisfactorily on the basis that any costs it incurred in that process would be payable to it by TCL.
[12] Things went from bad to worse, and on 27 October 2018 Mr Shew and Mr Vasist entered into a second variation agreement. This time they agreed:
Following the Porirua City Council (PCC) inspection on 12 September 2018 that did not pass the Council has requested that the entire brick cladding be
taken down and relay. The bricks have been taken down and a quote from Able Mason to relay the brick cladding has been accepted by Thor Construction Group Ltd (Thor Construction).
Thor Construction has stated that Main Rd Holdings Ltd is to pay Thor Construction $10,000 (Ten thousand Dollars) before further work continues on the site. This amount to be paid to Able Mason directly after Thor Construction has paid their portion of the deposit ($10,000).
The original contract amount of $480,000 as agreed in the Residential Building Contract for 120 Main Rd, Titahi Bay, Porirua. Main Rd Holdings Ltd agrees to pay $10,000 on top of the original contract amount in order for the project to continue. This is additional payment is conditional upon Thor Construction agreeing to complete the entire construction plus a Code Compliance Certificate issued by Porirua City Council by 31 January 2019.
If not completed by this date Thor Construction shall pay penalties of
$18,000.00 per month pro rata on a daily basis plus any other additional costs incurred by Main Rd Holdings Ltd as a result of the delay.
Please sign below to agree to this amendment.
[13] So, in essence MRH agreed to pay a further $10,000 to TCL to get the build moving on the understanding that it would be completed, to the point of having code of compliance certification, by 31 January 2019.
[14] The build was not completed by 31 January 2019. Indeed, by then it would appear that work on the job was intermittent and progress slow or non-existent. There were exchanges of emails between Mr Shew and Mr Vasist, and growing levels of frustration on both sides. By May 2019 the parties were openly talking about cancellation. However, on 9 May 2019 an exchange of emails took place that MRH thereafter treated as a third agreement to vary the contract. I set out the relevant emails below:
TCG to MRH:
As we spoken about, on Monday i will have my team there to finish all out the outside work ready for inspection.
MRH to TCG:
That is not good enough. You could have started on Monday this week.
Since you have lied to me constantly all the way through the project I want a commitment to finish the “close in” by the end of this month May which is plenty of time to pass the PCC inspection. Doing 10 % of the job to allow close in is simply not what we are expecting from a confident builder.
Since you have not been able or willing to do any work on the site since 28 March 2019, then you need to fulfil the terms and conditions of the contract.
TCG to MRH:
Sorry i mis read your email.
You have my commitments to close in before end of May. MRH to TCG:
To clarify we need to have received the PCC Pass for Close In on the Site Report by that date.
You will also need to agree to further $5000 a month penalty on top of the current penalties pro-rata on a daily basis and payable on demand, if you fail to make these commitments. Otherwise these commitments are meaningless.
MRH to TCG:
The commitment to close in is meaningless, unless there are consequences attached for non-delivery.
You have consistently failed to deliver on what you said you would and this appears to just another one of these if you refuse to accept the penalties.
If you fail to respond to this email by 9:00 pm tonight, I will take it that you do not wish to proceed with the contract and that you want to terminate it.
Either way your lack of response will be noted as non-compliance to the contract.
TCG to MRH:
Yes I accept.
[15] A month later the parties’ frustrations were in danger of boiling over and on 27 June 2019 MRH’s solicitor’s sent to Mr Vasist a notice of termination of the contract. In his affidavit evidence Mr Vasist says that on receipt of this email he contacted Mr Shew by telephone challenging MRH’s entitlement to terminate the contract and making it clear that TCG was prepared to complete it. There is a dispute between the parties as to whether this telephone conversation took place. I do not need to resolve that dispute because it is apparent from subsequent correspondence that whether or not the conversation took place and if so, whatever was said, any threat of termination at that stage was withdrawn.
[16] From the date of the first variation MRH had rendered a series of invoices to TCG claiming:
(a)Costs incurred by MRH in relation to the brickwork. These amount to
$18,885.64. I am told that TCG does not dispute that they are payable, though the company has not paid them;
(b)Invoices pursuant to the arrangements between the parties as to the payment of late completion costs (I am deliberately attempting to use neutral terminology in describing them in that way — avoiding for the time being referring to them as liquidated damages or penalties). These amount to $141,000. TCG disputes these.
[17]On 23 September 2019 MRH served a statutory demand on TCG for
$136,885.82. This included both categories of invoices said to have been due for payment by that date.
Discussion
[18] In terms of s 289 of the Companies Act 1993 TCG had 15 working days to comply with that statutory demand by either paying the amount claimed or applying within 10 working days of service to set it aside in accordance with s 290. It did neither. Mr Vasist’s evidence is that he consulted the company’s solicitors, who “advised me that the best way to deal with the statutory demand was to write to Main Rd’s lawyers to try and resolve directly. [They] did not tell me to apply to the Court to have the statutory demand set aside. I cannot recall [them] mentioning this at all”. Mr Vasist goes on to describe various exchanges between the parties and their advisers relating to the statutory demand. None of these lead to a resolution.
[19] As already said, the net result of this is that the statutory demand expired on 14 October 2019 without TCG having either paid the amount demanded or applied to set it aside.
[20] It goes without saying that for a solicitor not to make it absolutely clear to a client in receipt of a statutory demand that it must, if it disputes the debt, apply to set
the statutory demand aside before the expiry of the 10 working day period within which it is entitled to do so, and that there is no scope for the Court to extend that period of time, would be irresponsible in the highest degree. I record that TCG’s solicitor, who is not the solicitor with the carriage of TCG’s defence in this proceeding, may or may not have been invited to swear an affidavit, and I do not assume that his or her version of events would necessarily coincide with Mr Vasist’s. Be that as it may, as matters stand, Mr Vasist’s evidence in relation to this is unchallenged and for the purposes of this application I am prepared to accept his explanation.
[21] The core dispute between the parties in this case, and the principal focus of counsel’s argument, concerned whether the late completion payments were properly recoverable by MRH against TCG. On one view, it is not necessary to address this issue to resolve the case. However, given the extent to which counsel focussed on the issue it seems appropriate to deal with it.
[22] It is elementary that the law will not enforce a provision in a contract that entitles one party to impose penalties on another, that is to say a provision entitling “A” to demand from “B” payments on the happening of an event which bear no relationship to any loss which may accrue as a result of the happening of that event.
[23] For many years the law in this area was considered to be settled by the House of Lord’s judgment in Dunlop Pneumatic Tyre Co Ltd v New Garage Motor Company Ltd [1915] AC79 at 86–87 where Lord Dunedin contrasted a clause providing for liquidated damages which were a genuine pre-estimate by the parties at the time of the contract of the loss likely to flow from a particular breach, and a clause providing for penalties designed to punish the party in breach or otherwise induce performance of the contract. Generations of lawyers have proceeded on that deceptively simple basis.
[24] The United Kingdom’s Supreme Court’s judgment in Cavendish Square Holding BV v Makdessi [2015] UKSC 67 reconsidered the law in this area, and developed a new test as to when clauses of this sort in contracts will be regarded as unenforceable.
[25] Counsel referred me to several recent cases, all of which I accept are relevant. But the leading case in this country is now the Court of Appeal’s judgment in 127 Hobson Street Ltd v Parbhu & Others.1
[26] In 127 Hobson Street, Kós P identified a “disproportionality” test as being the primary basis for determining whether a provision constitutes an unlawful and unenforceable penalty. Here is how his Honour described the test:2
[31] The primary test for a penalty is now the disproportionality test. The essential question is whether the secondary obligation challenged as a penalty imposes a detriment on a promisor out of all proportion to any legitimate interest of the promise in the enforcement of the primary obligation. The disproportionality test gives greater credence to freedom of contract, and the enforcement of bargains made by free agreement. It recognises that contracting parties, particularly those who are commercial entities, are likely to be the best judges of their own interests.
[32] The bar — “out of all proportion” — is a particularly high one. Lord Mance, in Cavendish, posited a similar test of whether the provision made to protect the promisee’s legitimate interest is in all the circumstances “extravagant, exorbitant or unconscionable”. These are tests not easily satisfied. The casual or opportunistic complaint of disadvantage is swiftly spurned by them.
[33] The disproportionality test is a more sophisticated and demanding one than the comparative damages test which prevailed under Dunlop. As Lords Neuberger and Sumption observed in Cavendish, damages are not necessarily the only legitimate interest that the innocent party may have in the performance of the defaulter’s primary obligations. In many cases the protected interest of the innocent promisee will equate to available compensation for breach. That is particularly so where the primary obligation requiring protection is simply the payment of a sum of money. In such a case, the legitimate interest of the promisee may well be entirely satisfied by payment of the sum plus interest plus costs. But Wilaci shows that it is not necessarily the case and, moreover, that circumstances (such as, in that case, profound risk) may justify the party setting a scale of secondary obligation that would in other circumstances seem usurious. As Lord Hodge observed in Cavendish, the focus on disproportion between specified sum and damages capable of pre-estimation makes sense in the context of the damages clause, “but is an artificial concept if applied to clauses which have commercial justification”.
[34] The expression “legitimate interest” itself recognises a wider array of considerations than would a substitute, such as “financial” or “economic” interests. Some interests, commercial or non-commercial, will justify imposition of a super-compensatory burden. Dunlop was such a case. As we noted in Wilaci, it involved a resale price maintenance provision, with a
1 127 Hobson Street Ltd v Parbhu & Others [2019] NZCA 122.
2 I have omitted the footnotes from this (possibly over lengthy) quote from Kós P’s judgment as being unnecessary for present purposes.
penalty that was 11 times the illicit discount allowed by the hapless defendant garage owner. The sanctity of the agreed trade arrangement justified enforcement of an arguably disproportionate secondary obligation. Another example is the secondary appeal in Cavendish, ParkingEye Ltd v Beavis. A shopping mall offered free parking for two hours. But a motorist overstaying his or her welcome became liable to a charge of £85. By no means could that payment be said to be a pre-estimate of loss arising from a motorist staying a few minutes over two hours. But the Supreme Court recognised the legitimate interest of the mall operator in the throughput of customers via a continuous turnover of parking spaces. As Lord Mance observed:
What is necessary in each case is to consider, first, whether any (and if so what) legitimate business interest is served and protected by the clause and, second, whether, assuming such an interest to exist, the provision made for the interest is nevertheless in the circumstance extravagant, exorbitant or unconscionable.
[35] As we noted in Wilaci, the prohibition against penalties retains a limited philosophical connection with equity and the distinct prohibition against unconscionable bargains. Imbalance in bargaining power and unconscientious conduct is relevant to assessing the proportionality test. In Cavendish Lords Neuberger and Sumption observed that the penalty rule originated with the concern that the courts prevent exploitation in an age when credit was scarce and borrowers were vulnerable. But the modern rule is substantive, not procedural.” A finding that a secondary obligation is a penalty does not depend on a finding that advantage was taken unconscientiously. Lord Mance put the point plainly:
In judging what is extravagant, exorbitant or unconscionable, I consider (despite contrary expressions of view) that the extent to which the parties were negotiating at arm’s length on the basis of legal advice and had every opportunity to appreciate what they were agreeing must at least be a relevant factor.
[Footnotes omitted]
[27] Kós P went on to say that the disproportionality test might also be cross checked by what his Honour described as a “punitive purpose” test:3
[36] … whether the predominant purpose of the secondary obligation is to punish the promisor rather than protect the legitimate interest of the promisee in performance of the primary obligation. These tests are two sides of the same coin. The punitive purpose test arises because, as we said in Wilaci, the remedial function of the common law of contract is confined to the achievement of performance expectations. Enforcing punishments forms no part of that. The prohibition against penalties is a rule of contract law based on that public policy:
It is a question of construction of the parties’ contract judged by reference to the circumstances at the time of contracting; the public
3 Footnotes are omitted.
policy is that the courts will not enforce a stipulation for punishment for breach of contract.
[37] The interconnection between the two tests is demonstrated in the judgment of Gageler J in Paciocco. As we observed in Wilaci, that judgment was more focused on whether the exclusive purpose of the clause was to punish, in order to deter breach. Gageler J regarded the imposition of an in terrorem secondary obligation as capturing the essence of the conception to which the whole of the penalties analysis was directed. But as he also observed:
The relevant indicator of punishment lies in the negative incentive to perform being so far out of proportion with the positive interest in performance that the negative incentive amounts to deterrence by threat of punishment.
[38] The punitive purpose test is concerned with predominant rather than sole purpose. We adopted the predominant purpose test in Wilaci. In doing so, we rejected the sole purpose test postulated by Gageler J in Paciocco. The approach in Wilachi is consistent with that in England, expressed in Cavendish. The predominant purpose test was also preferred by Keane J in Paciocco. French CJ and Keifel J did not expressly take a position.
[Footnotes omitted]
[28] It is unnecessary in this judgment further to analyse the modern approach to ascertaining whether a provision in a contract is unenforceable as providing for a penalty.
[29] The key factors advanced by Mr Abricossow in support of his contention that the provisions in the second and third variation agreements provided for unlawful penalties were that:
(a)In the second and third variation agreements, the parties referred to the relevant payments as “penalties”. This description of them persisted until such time as MTH engaged solicitors whereupon the terminology changed. Clearly, Mr Shew and Mr Vasist viewed the arrangements in those terms and the language is apt;
(b)At no material stage did Mr Shew explain to Mr Vasist how he calculated the amounts involved ($18,000 per month; $5,000 per month). The first explanation, and assertion that the amounts were calculated having regard to the losses that MRH contemplated suffering
if the milestones were not met, came after the dispute arose and the parties’ solicitors became involved;
(c)Even as explained in hindsight, the amounts involved are out of all proportion to any realistic assessment of loss, especially in the context of a contract in which the original completion date was only ever an estimate and time was not expressed to be of the essence.
[30]As against those points, Mr McDougall submitted on behalf of MRH that:
(a)Neither of the parties in this case were particularly sophisticated, neither had the benefit of legal advice and Mr Shew’s choice of terminology cannot be determinative of the outcome;
(b)Although Mr Shew did not articulate his calculations of the losses he anticipated MRH would likely suffer as a result of any delay, the
$18,000 and $5,000 figures were intended to reflect such losses and are a realistic pre-estimate of these;
(c)There is no sense in which the arrangements are disproportionate. This was a half million dollar contract and MRH was dependant on TCG’s performance and entitled to be compensated by one means or another for that company’s failure to perform its contractual obligations within a reasonable period of time;
(d)Under the modern test contractual freedom is an important starting point. It is not suggested in this case that either party did not understand the arrangements they were entering into. Indeed the evidence indicates that Mr Vasist was at each stage confident of TCG’s ability to perform and that MRH would not be entitled to call upon it to pay the compensation in question.
[31] At this stage of the proceeding the Court is not charged with determining this issue. All that needs to be determined is whether TCG has a reasonably arguable case
as to whether the additional charges rendered by MRH are unlawful and unrecoverable.
[32] I have little hesitation in concluding that there is a genuine contest in relation to this, and that it is not a contest which should be resolved summarily in winding up proceedings. That conclusion leads me to the next point.
[33]In his written submissions Mr Abricossow for TCG submitted:
The only relevant issues are whether [TCG] is solvent, and whether the debt [MRH] alleges is owing by [TCG] is due and payable.
[34]I agree, and in my judgment the answers to those questions are:
(a)The evidence as to TCG’s solvency is inconclusive. On the one hand MRH is able to point to the rebuttable presumption of insolvency arising from TCG’s failure to respond to the statutory demand. On the other hand there is some evidence explaining why TCG failed to do so, and TCG has put before the Court a copy of draft financial statements for the year ending 31 March 2019, albeit that there is no evidence from TCG’s accountant, or other expert accounting evidence, as to the reliability of those draft accounts and that it is apparent on the face of them that they make no provision for the undisputed component of MRH’s claim. In those circumstances, I am not satisfied that TCG has established its solvency to the necessary standard;
(b)It is common ground between the parties that an amount in excess of
$1,000 is payable — and, indeed, overdue — to MRH by TCG. That being so, there is a sense in which any dispute relating to the balance of MRH’s claim as contained in its statutory demand is irrelevant.
[35]Prima facie then, TCG’s application is not a strong one.
[36] Those things said, it is appropriate to restate my view that there is a genuine dispute relating to the lion’s share of MRH’s claim as set out in its statutory demand
— the component which TCG categorises as a penalty.
[37] Had the undisputed component of MRH’s claim been paid at the time that I heard TCG’s application I would have concluded that it was entitled to the order it seeks.
[38] In those circumstances it appears to me that what is called for is an order tailored to the particular circumstances of this case giving TCG an opportunity to secure the outcome it seeks by making good on its expression of willingness to pay the undisputed debt and dispute the balance.
Order
[39] For those reasons, I make an order that if, within ten working days of the date of this judgment, TCG pays to MRH the sum of $18,885.64 being the undisputed component of the statutory demand dated 23 September 2019 and served by MRH on TCG on 23 September 2019 then there will be an order pursuant to r 31.11 of the High Court Rules staying MRH’s winding up proceeding herein permanently and prohibiting the advertising of the same. If, however, that payment is not made within 10 working days, then MRH’s application will be dismissed.
[40] Costs are reserved. I have not heard from counsel in relation to these. My preliminary view is that by applying to the Court for the orders it has without first paying the undisputed debt, TCG has disentitled itself to a costs order, even although it might claim to be the successful party. On that basis, it appears to me that the proper order in this case may be that costs are left to lie where they have fallen. If, however, even with the benefit of that indication, counsel are unable to settle costs, they may come back to the Court by memorandum in the usual way.
Associate Judge Johnston
Solicitors:
Holland Beckett, Tauranga for the plaintiff/respondent Morrison Kent, Wellington for the defendant/applicant
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