Minister of Education v Pxa Limited
[2015] NZHC 1330
•12 June 2015
IN THE HIGH COURT OF NEW ZEALAND CHRISTCHURCH REGISTRY
CIV-2014-409-000787 [2015] NZHC 1330
IN THE MATTER of Heaton Normal Intermediate School BETWEEN
THE MINISTER OF EDUCATION First Plaintiff
THE SECRETARY FOR EDUCATION Second Plaintiff
THE BOARD OF TRUSTEES OF HEATON NORMAL INTERMEDIATE SCHOOL
Third Plaintiff
AND
PXA LIMITED First Defendant
HIGGS CONSTRUCTION LIMITED Second Defendant
Hearing: 8 June 2015 Appearances:
W Potter for Plaintiffs
T Sage for First Defendant
K W Clay and P O'Dea for Second DefendantJudgment:
12 June 2015
JUDGMENT OF ASSOCIATE JUDGE MATTHEWS
[1] This proceeding arises from the design, development and construction of an administration block at Heaton Normal Intermediate School in Christchurch, in 2005 and 2006. The plaintiffs say that there are defects with the building, as a result of which it is not weathertight. Causes of action are brought in tort against the first defendant in relation to its design, inspection, observation and project management services, and against the second defendant in relation to its construction of the
building.
THE MINISTER OF EDUCATION v PXA LTD [2015] NZHC 1330 [12 June 2015]
[2] It is common ground that Higgs Construction Limited (HCL) submitted a tender for construction work to the first defendant, and that its tender was accepted (with agreed revisions) on behalf of the third plaintiff (the Board). None of the plaintiffs, nor either defendant, has located a signed construction contract. Whilst in open correspondence in February 2015 the solicitors for the plaintiffs accepted that the Board and HCL entered a contract in the form provided by the New Zealand Institute of Architects as its standard conditions of contract SCC1 2000, their
position now is that this point is not proved.1 They accept that the Board envisaged
that the terms of engagement of HCL would be based on that document, but say that there is no evidence before the Court that such a document was ever signed, or in particular, that cl 94 of Section K of document SCC1 2000 is part of any contract between the Board and HCL. HCL relies on cl 94 as an agreement to arbitrate, binding on all plaintiffs.
[3] HCL appears under protest to jurisdiction. It says that the first plaintiff, the
Minister of Education (the Minister) gave notice of a referral to arbitration on
18 November 2014, and that this proceeding must be referred to arbitration. It applies for an order staying the proceeding and referring the dispute to arbitration.
[4] The Minister, the Secretary for Education and the Board of Trustees of the school oppose the application on four grounds, which are the issues for determination of this application:
(a) There is no arbitration agreement between the parties.
(b) If there is an arbitration agreement, that agreement is inoperative.
(c) If there is a written arbitration agreement, and it is operative, the agreement is not enforceable under s 11 of the Arbitration Act 1996.
(d) If there is an enforceable arbitration agreement between the Board and
HCL, it has not been invoked.
1 New Zealand Institute of Architects NZIA Standard Conditions of Contract SCC1 2000.
First issue: is there a written arbitration agreement between HCL and the Board?
[5] Article 8(1) of Chapter 2 of the Arbitration Act 1996 provides:
8 Arbitration agreement and substantive claim before court
(1) A court before which proceedings are brought in a matter which is the subject of an arbitration agreement shall, if a party so requests not later than when submitting that party’s first statement on the substance of the dispute, stay those proceedings and refer the parties to arbitration unless it finds that the agreement is null and void, inoperative, or incapable of being performed, or that there is not in fact any dispute between the parties with regard to the matters agreed to be referred.
[6] The first two issues arise from this article.
[7] Evidence for HCL is given by Mr S M Fraser, a director. In his first affidavit he says that construction of the administration block was undertaken pursuant to a contract between the Board and HCL, the terms and conditions of which are contained in NZIA SCC1 2000. As an exhibit to his first affidavit he produces nine pages, none of which is signed or bears any initials, and which comprise a cover sheet, four pages described as Addendum B1, one page described as Addendum B2, two pages described as Addendum C1 and two pages described as Addendum C3. I have no doubt these pages are part of a document intended to be a contract between the Board and the successful tenderer for the administration block building. The building is described, and the name of the first defendant as the architect for the project appears on all the pages. There are references to further information being added once a tender has been accepted.
[8] Mr Fraser describes these pages as a true copy of the NZIA SCC1 2000 standard conditions of contract. Equally clearly, that is wrong on his own evidence, as he then states that at Section K, paragraph 94, the contract provides that if a dispute arises between the Board and HCL about certain matters, they must refer the dispute to arbitration. However, no part of any section headed “K” is included within the pages he produces.
[9] In the single affidavit filed in opposition by the plaintiffs, no issue is taken
with Mr Fraser’s evidence in relation to Section K. The affidavit is sworn by
Ms Halpin who contracts to the Ministry to run its litigation programme in relation to defective schools. There is no suggestion that she was involved when the contract was entered. None of the plaintiffs took the opportunity to introduce evidence about what occurred at that time. Ms Halpin does say, however, that none of the plaintiffs has located any signed copy of the NZIA SCC1 2000 document which HCL maintains was the contract it entered with the Board.
[10] Mr Fraser swore a second affidavit, supposedly in reply, but in fact giving significantly more evidence in relation to the contract. He says, again, that HCL does not have a copy of a signed contract. He produces HCL’s tender and the first defendant’s letter of acceptance of it. Neither refers to an intention to enter a contract in the NZIA SCC1 2000 form, though in its acceptance letter the first defendant indicates it will prepare contract documents for signing.
[11] Mr Fraser then produces another version of NZIA SCC1 2000, which differs from the version first produced by the inclusion of details of the tender and the contractor. The latter is described as Higgs Builders Limited, which I take for present purposes (though the point was not raised either in evidence or submissions) to be HCL.
[12] Mr Fraser describes this as “a true copy of the NZIA standard conditions of contract (key documents)” relating to the building.
[13] Mr Fraser then produces two further exhibits. He describes the first as “a true copy of the Disputes Section (K) from the same contract”. In relation to this he says:
Although we do not have the signed contract, I confirm that that Disputes Section was part of the contract that was signed by the Board of Trustees and Higgs.
[14] This exhibit is headed “Disputes Section K” and contains three clauses relating to resolution of disputes. HCL relies on cl 94 which is discussed below. Neither of the two pages of this exhibit has the name of the first defendant at the foot of the page, as is the case with each page of the previous exhibit.
[15] The final relevant exhibit is a document headed “Specification”. It relates to the intended building work and appears to have been prepared for the purposes of the tender process, as details relating to this process are shown on page 5. The architect’s name is not at the foot of any of these pages either, but from the terms of this document it seems likely it was prepared for use in the tender process. The index makes it clear that the document would have run to at least 52 pages, and also includes reference to drawings, the NZIA SCC1 Addendum A, NZIA Conditions of Tender Addendum C, and NZIA SCC1 2001, as well as Ministry of Education insurance clauses. So far as NZIA SCC1 2001 is concerned, the index states that a copy of that document is held in the architect’s office, from which it may be inferred that this document was not attached to, or provided with, the specification, but plainly it was available and intended to be taken into account. The reference to 2001 instead of 2000 in the description of the standard contract document would appear to be an error.
[16] Mr Fraser says that this document was prepared for the tender process and when HCL was awarded the contract, it was amended by the addition of addenda A1, B1, B2, C1 and C3. As well, having noted the reference in the index to the NZIA Standard Conditions of Contract SCC1 2001, Mr Fraser says that this document included Section K, which contains cl 94 on which HCL relies.
[17] Although there was some debate in submissions about which addenda were or were not attached to the contract which Mr Fraser maintains applied to the construction of the administration block, the key question is whether cl 94 in Section K was part of the contract. The most telling point against this is the fact that the version of Section K produced in evidence has no connection, on its face, with any draft contract between the Board and HCL, there being no reference to the project or to the name of the first defendant architects on the two pages produced. These pages could have been copied from a blank copy of NZIA SCC1 2000.
[18] On the other hand, there is evidence supporting the proposition that Section K was part of the intended form of contract. First, the tender submitted to HCL by the first defendant, as architect for the Board, refers to plans and specifications. It is a reasonable inference that the plans and specifications were made available to HCL
for the purposes of preparing its tender, as it would not seem possible that it could do so without them. The specification includes NZIA SSC1 2001.
[19] Part of the specification which is produced expressly refers to the project in question, and to the first defendants, and contains in its index a list of documents, which includes NZIA SCC1 2001. There is no suggestion that this specification differs in any material way from the specification which HCL would have had when it prepared its tender. The acceptance of the tender refers to HCL then intending to prepare contract documents for signing, and there is no reason to suspect that these may have been other than in terms of the specification provided to HCL for tendering purposes.
[20] Secondly, it seems clear from the limited amount of the NZIA SCC1 2001 form of contract which is provided that it contained sections and various addenda, the latter apparently being optional and included only to the extent stated. It would have been preferable for the Court to have been provided in evidence with a complete copy of the NZIA document so that its format could have been analysed with more precision. However, there is sufficient information before the Court to show an intention that the complete contract comprised the drawings for the project, specific conditions of contract set out in Addendum B1, the conditions of tender set out in Addendum C, the Ministry of Education’s insurance clauses which were to appear in Appendices (i), (ii) and (iii), and NZIA SCC1 2000.
[21] As noted, cl 94 relied on by HCL appears in “Disputes Section K”. This is described as a section, and not as an addendum. I think this distinguishes it from the optional addenda which are selected, depending on their application to a particular contract, and in all likelihood places it within the standard conditions of NZIA’s contract.
[22] On balance I am satisfied that the parties intended to contract in accordance with NZIA SCC1 2000, and that Disputes Section K is part of the terms of this document. There were also specified addenda and, of course, plans and specifications for the project. Mr Fraser says that a contract was signed by the Board and by HCL and he says it included Section K. None of the plaintiffs has led
evidence to suggest otherwise, and as I have said, the solicitors for the plaintiffs said in an open letter in February 2015, that it is undisputed that their clients entered into NZIA SCC1 2000, including cl 94, within Section K.
[23] Mr Potter, for the Board, taking the position that it is not established that a contract was signed, says that in this circumstance terms appearing in supporting documents are only incorporated into a contract if reasonable notice has been given of them.2 He says that HCL has not established that the Board had reasonable notice of, or agreed to, the alleged arbitration agreement contained in the NZIA terms (a reference no doubt to Disputes Section K). I do not accept that submission. The contract documentation was prepared by the Board’s own architects, and in my view the Board must be taken to have agreed to those terms.
[24] I find, therefore, that HCL has established that Disputes Section K and, in particular, cl 94 within that section, were included in the contract for the construction of the administration block.
Second issue: is the arbitration agreement inoperative in terms of Article 8(1)?
[25] Mr Potter says that the plaintiffs claim damages for negligence against both the architects and the builder of the building on the basis that it was constructed with various defects mainly relating to weathertightness. As a result, it is said that the building will be damaged by weather ingress, that it does not comply with the New Zealand building code, and both investigative and remedial building works are necessary. It is said that the architect and the builder are jointly and severally liable for the costs of these works.
[26] Mr Potter says that this claim is not contemplated by cl 94 of the NZIA Disputes Section. He says that cl 94 is only intended to apply during the course of building work and the currency of the building contract, and is not intended to prevent litigation in respect of fundamentally defective architectural and building work many years after the contract has been completed. On that basis he says that
cl 94 of the contract terms is inoperative in terms of art 8.
2 Robinson v Balmain New Ferry Co Ltd [1910] AC 295 (UKPC).
[27] Mr Clay for HCL says that in its terms Section K applies to work to be undertaken by a contractor, that the allegations against HCL apply to exactly that and therefore cl 94 applies and the present dispute must be determined by arbitration.
[28] The word “inoperative” is apt, in my view, to describe an arbitration agreement which, whilst once applicable, is no longer applicable due to the passing of time, a change of circumstances, or both.
[29] Although Mr Clay is correct in his submission that cl 94 relates to disputes arising “about anything in relation to … the Contract Works”, the dispute resolution process provided for by cl 94 has mandatory steps which indicate that the process can only apply while the contract remains current. The first step is for either the principal or the contractor to notify the architect that there is a dispute, with details, and to require the architect to give a formal written decision on the dispute. This must be done within 10 working days, though this may be modified. It is final and binding unless either the principal or the contractor is dissatisfied, and by notice within a specified time, requires that the dispute be referred to mediation. There is then a time limit for mediation to occur (30 working days). If a mediation does not commence, or settlement is not achieved within that time, either the principal or the contractor must refer the dispute to arbitration. The contractor is not entitled to suspend work on the basis of the facts giving rise to the dispute unless the architect so directs. If the contractor has already suspended work, it must resume work as soon as notice of the dispute is given.
[30] There is a limited right to bring proceedings in court to recover any undisputed payment due under the contract, or to seek urgent injunctive or declaratory relief.
[31] In my opinion, these terms are consistent with this clause applying only during the currency of the contract. First, the architect has a primary role in ruling on the dispute promptly after it arises. It is unlikely that the architect would have this role after completion of the building. Secondly, there is a very limited period within which mediation is to take place, and a limited period within which an arbitration must be commenced, if mediation fails. These time limits are consistent
with a level of urgency, which in itself suggests a dispute resolution process which is taking place while the contract continues. Thirdly, there is a very limited right to take proceedings in court, with that right reserved only to recover undisputed payments, or to take urgent injunctive or declaratory proceedings. Both of these options are, again, consistent with the process being engaged during the currency of the contract. Finally, the contractor cannot suspend works and if it has done so, must return to work. This speaks for itself.
[32] If this clause applied after the contract works had been completed, there would not be any reason for the project architect to have a primary adjudicative role, for urgency in conducting a mediation or an arbitration, or a requirement that the contractor return to work. In my opinion the Board is correct in its submission that cl 94 applies only during the currency of the contract, and is not intended to prevent the parties from having recourse to litigation in respect of allegedly defective professional services on the part of its architect, and defective building work on the part of its builder, after the contract has been concluded. I therefore find that cl 94 is inoperative in the context of the present dispute and therefore that the exception to the direction in art 8 of Chapter 2 of the Arbitration Act is established.
[33] This finding is sufficient to determine the application now before the Court, but in deference to the arguments of counsel I will deal briefly with the third issue.
Third issue: is the arbitration agreement enforceable under s 11 of the Arbitration
Act?
[34] At the time the Board and HCL entered a contract, s 11 of the Arbitration Act provided as follows, to the extent relevant:
11 Consumer arbitration agreements
(1) Where –
(a) a contract contains an arbitration agreement; and
(b) a person enters into that contract as a consumer, -
the arbitration agreement is enforceable against the consumer only if –
(c) the consumer, by separate written agreement, certifies that, having read and understood the arbitration agreement, the consumer agrees to be bound by it; and
(d) the separate written agreement referred to in paragraph (c) discloses, if it is the case, the fact that all or any of the provisions of Schedule 2 do not apply to the arbitration agreement.
(2) For the purposes of this section, a person enters into a contract as a consumer if –
…
(a) that person enters into the contract otherwise than in trade; and
(b) the other party to the contract enters into that contract in trade.
…
(5) Unless a party who is a consumer has, under article 4 of Schedule 1, waived the right to object to non-compliance with subsection (1), an arbitration agreement which is not enforceable by reason of non-compliance with subsection (1) shall be treated as inoperative for the purposes of article 8(1) of Schedule 1 and as not valid under the law of New Zealand for the purposes of articles 16(1),
34(2)(a)(i), and 36(1)(a)(i) of Schedule 1.
(Emphasis added)
[35] If, in terms of this section, the Board is a consumer, any operative arbitration agreement between HCL and the Board is only enforceable against the Board if, by a separate written agreement, the Board certified that having read and understood the arbitration agreement it agreed to be bound by it. It is common ground that this did not occur; accordingly the arbitration agreement could not be enforced against the Board if it is within the definition of a consumer. This requires a decision on whether the Board entered the contract “otherwise than in trade”. I turn now to examine these issues in turn.
[36] Mr Clay for HCL submits that the Board was acting in trade when it entered the contract with HCL, and therefore it was not a consumer. He says that the role of the Board includes entering contracts and employing staff to carry out its statutory functions. In this instance it entered a commercial contract to provide a facility which would be used by both staff and members of the public. He says the overall
flavour of the transaction is that the Board was acting in trade when it entered the contract because this provided a significant asset, which he describes as commercial, for the benefit of the school.
[37] Mr Potter says that the role of the Board is to govern the school as required by the Education Act 1989. The Board does not provide services for profit. He says that even if this contract has commercial elements to it, that is not a sufficient basis for the Court to find that the Board operates in trade and is not therefore a consumer in terms of s 11.
[38] In this respect Mr Potter relies on Bowport Ltd v Alloy Yachts International Ltd.3 In that case, Bowport contracted Alloy Yachts to construct a vessel, which it used from time to time commercially, but otherwise privately. The Court found that the question of whether Bowport was a consumer to whom s 11(1) of the Act applies is one of degree. Neither the dominant or primary purpose of commissioning the vessel for private use, nor its occasional use commercially, was conclusive. The
Court found that on balance the degree of commercial charter use of the yacht was not sufficient to place Bowport in the category of acting in trade. The overwhelming use of the vessel was as a holiday home and the occasional use for charter did not displace the “consumer” character of the vessel’s acquisition. It followed that s 11(1) applied.
[39] There is no evidence before the Court on the role of the Board or the activities intended to be carried on in the administration block. The Court is therefore left to decide this issue on the basis of the role of a board established under the Education Act 1989, and such knowledge of the operation of schools as it may fairly take into account on this issue.
[40] A board of trustees is constituted under Part 9 of the Education Act 1989. It is required to prepare and maintain a school charter, the purpose of which is to:4
… establish the mission, aims, objectives, directions and targets of the Board
that will give effect to the Government’s national education guidelines and
the Board’s priorities, and provide a base against which the Board’s actual
performance can later be assessed.
[41] The charter must contain specified materials including the Board’s aims for the school, and its strategic long term plans as well as the Board’s objectives, directions, priorities and targets in relation to such matters as student achievement.5
A school charter has effect as an undertaking by the Board to the Minister of Education to take all reasonable steps to ensure that the school is managed, organised, conducted and administered for the purposes set out in the charter and that the school, its students and its community achieve the aims and objectives in the
charter.6
[42] The charter for Heaton Intermediate School was not produced in evidence. It may be assumed that it contains the provisions required by the Act and has the approval of the Ministry of Education. A charter is a high level document directed at governance, as can be seen from the brief description I have given. I would not expect it to include detailed provisions concerning the day to day operation and management of the school. Nor, in particular, what might be expected to occur in an administration block.
[43] I am therefore left to make such other reasonable assumptions as I can, from the limited knowledge the Court has about the operation of schools. The administration block is likely to include areas for the principal of the school and the school’s administrative staff to carry out their duties. It might include such facilities as meeting rooms and staff rooms. Whatever its detailed configuration may be, the building is a location for the administration of the school which, on a day to basis, is reposed in the principal, overseen as required by the Board.
[44] I cannot draw from any of this a conclusion that in building the administration block the Board acted in trade. My conclusion is that it was simply developing a building in order to provide an appropriate working environment for those whose task it is to actually run the school. The fact that some of these tasks may involve contracting for services and contracting for the provision of supplies,
and would inevitably involve the operation of the school’s bank accounts and the handling of its day to day finances does not, in my opinion, inject a sufficiently commercial flavour to find that the Board was acting in trade when it contracted to build this building. In my view the dominant purpose of the building project was to enable the staff of the school, who are under the control of the Board, to achieve the functions of the Board as set by the charter. There is little, if any, commercial flavour in those activities, nor sufficient from which to infer the Board acted in trade in contracting to build the building.
[45] For these reasons I find that the Board was a consumer in terms of s 11 of the Arbitration Act. As there was no separate written agreement to refer the dispute between the Board and HCL to arbitration, the arbitration agreement contained in the contract to build the building is not enforceable against the Board.
Fourth issue: has the arbitration agreement between the Board and HCL been invoked?
[46] This issue arises from the letter from the Board’s solicitors to HCL dated 18
November 2014 in which it referred this dispute to arbitration, though with a rider that the solicitors were still investigating whether there was any arbitration clause contained in relevant contract documents. The letter also advised that if it subsequently appeared that there were no applicable arbitration clauses, the notice would be withdrawn. In the event, that occurred by letter dated 19 February 2015 from the Board’s solicitors to HCL’s solicitors.
[47] Counsel accept that a notice of reference to arbitration can be withdrawn and it seems they accept that if the Board’s original notice has been withdrawn, either party may refer the dispute to arbitration if entitled to do so. In these circumstances, although this issue was raised, it does not fall for determination.
Outcome
[48] The application to stay this proceeding and refer the dispute to arbitration is dismissed.
[49] The plaintiffs are entitled to one award of costs against HCL. As discussed with counsel, in this circumstance HCL will pay to the plaintiffs costs on a 2B basis plus disbursements fixed by the Registrar.
[50] The first defendant also appeared, indicating that it will abide the decision of the Court on this application. Counsel for the first defendant, Mr Sage, did not specifically seek costs. The first defendant was not specifically engaged in this
application and an award of costs in relation to the first defendant is not appropriate.
J G Matthews
Associate Judge
Solicitors:
Meredith Connell, Auckland.
Duncan Cotterill, Christchurch. Helmore Ayers, Christchurch.
2
0
0