Morning Star (St Lukes Garden Apartments) Limited v Canam Construction Limited HC Auckland CIV 2003-404-6265

[2005] NZHC 1756

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV 2003-404-6265

BETWEENMORNING STAR (ST LUKES GARDEN APARTMENTS) LIMITED

Plaintiff

AND  CANAM CONSTRUCTION LIMITED

Defendant

Hearing:         29, 30 November & 1, 3, 6, 7 & 8 December 2004

28 February 2005

Appearances: RJ Latton for Plaintiff

GJ Christie and A Welsh for Defendant Judgment:     13 May 2005

RESERVED DECISION OF LAURENSON J.

In accordance with r 540(4) I direct the Registrar to endorse this judgment with the delivery time of 4pm on Friday 13 May 2005.

Solicitors:

Lowndes Associates, PO Box 7311, Auckland for Plaintiff Simpson Grierson, Private Bag 92518, Auckland for Respondent

MORNING STAR (ST LUKES GARDEN APARTMENTS) LIMITED V CANAM CONSTRUCTION LIMITED HC AK CIV 2003-404-6265 [13 May 2005]

Introduction

[1]    The plaintiff (“Morning Star”) is a property development company owned by Mr Arthur Morgenstern. In 2001 it become involved in preparations to develop an apartment complex at 51A St Lukes Road, Mt Albert, Auckland (“the project”).

[2]    At the outset, Mr Morgenstern hoped the cost would be about $30 million. The project was planned to proceed on a not unusual basis i.e.:

[a]A conditional purchase of the site.

[b]Pre-sales of apartments to purchasers at purely indicative prices.

[c]Cost of development to be determined in this case on the basis of a contractor’s gross maximum price (“GMP”).

[d]The project was not to proceed unless the plaintiff in its discretion  and subject to financiers approval, decided there were sufficient pre- sales to ensure that the project would succeed.

[3]    The first defendant (“Canam”) is a construction company which had constructed another similar project at Lynfield for Quad Star Housing Ltd in which Mr Morgenstern was also a director.

[4] Originally, the second and third defendants were the directors of the first defendant. The claims against these defendants were later withdrawn: see para [26].

[5]    Because of his satisfactory experience with Canam with the Lynfield project, Mr Morgenstern approached the second and third defendants with a view to engaging Canam to construct the St Lukes project as the design and build contractor. These defendants were receptive to this proposal such that on 19 June 2002 the first defendant entered into a Working Together Agreement (“WTA”). This included an obligation on the part of Canam to provide a GMP so that Morning Star would, in turn be in a position to make decisions relating to the viability of the project, and then finally confirm and then settle the site purchase.

[6]    From the point of view of Canam the WTA was intended to give some assurance that it would be appointed as the main construction contractor thereby ensuring that the considerable amount of work involved in providing the  GMP would not be wasted.

[7]    Morning Star alleges that Canam did not provide the GMP timeously in accordance with its obligations under the WTA, and that this resulted in a significant delay in the commencement of the project. This in turn meant that Morning Star incurred significant interest costs during the period of delay.

[8]    Canam, on the other hand, has alleged that it did do all it could to provide the GMP promptly but it was frustrated in its attempts to do so by the failure of Morning Star to attend to its obligations and, in particular, in relation to the appointment of consultants and the obtaining of various resource consents.

[9]    Despite these difficulties the defendant alleges that, although no GMP figure was agreed upon and no written contract was entered into, Canam was in fact appointed as the contractor to carryout the main construction contract. The defendant says that, not only was it told this was the case by Mr Morgenstern, but that he also represented this was the case publicly.

[10]   Canam says that it accordingly set about preparing to commence the main construction work and indeed embarked on some of this work. It accepts that Mr Morgenstern had not accepted the GMP figure provided by it but it had done all it could to produce a GMP figure as near as possible to that sought by Mr  Morgenstern. He, however, had contrary to at least the intention of the WTA, started getting price indications from other contractors.

[11]   The point was reached where Mr Morgenstern decided to call for tenders for the main construction work. By this stage, Canam were thoroughly frustrated and therefore declined to be involved in this process.

[12]   In about June 2003 Morning Star engaged another contractor, Kalmar Construction Ltd, as the main construction contractor.

[13]   Although Canam had decided to tender for this contract, it still expected, however, to be paid for certain work carried out by it and in respect of some  of which Mr Morgenstern had accepted liability. It was not paid. It therefore served a statutory demand for the amount alleged to be owing. Morning Star then lodged an objection to the statutory demand followed by the present proceeding. Canam did not proceed with the statutory demand. Instead, it counterclaimed for the  amount claimed in the statutory demand plus further sums which had not been acknowledged by Mr Morgenstern.

The plaintiff’s claim

[14]   Morning Star claims that, at the outset, it made a number of matters clear to Canam, namely:

[a]Morning Star was incurring significant holding costs on the site purchased for the property.

[b]The design was to be substantially the same as that for the Lynfield project.

[c]The   expected   budget   for   design   and   construction work was

$29,500,000.

[d]If Canam was to be the design and construction contractor, then the GMP would have to be close to that figure.

[e]Morning Star intended to enter into pre-sale agreements of the apartments in the project. Those agreements would contain provisions for cancellation if completion was delayed beyond a certain date.

[f]To meet that commitment, the project had to commence no later than 1 April 2003.

[15]   Morning Star then alleges it entered into the WTA with Canam, which granted Canam the exclusive right to become the design and construction contractor for the project providing Canam undertook certain pre-construction tasks.

[16]   It is further alleged by Morning Star that it was induced to, and did enter into the WTA, having received certain representations made by the second and third defendants on behalf of Canam. These included:

[a]That Canam’s construction project team led by Mr Mark Medima, and the second defendant that had worked on the Lynfield project, would also undertake the project.

[b]Canam had sufficient resources to allocate to the project to complete a cost plan and GMP and other pre-construction tasks in time to allow construction work to commence on a date between 1 October 2002 and 1 April 2003 at the latest.

[c]Canam would allocate sufficient resources for the project to complete a cost plan and GMP and other construction tasks in time to allow construction work to commence on a date between 1 October 2002 and 1 April 2003 at the latest.

[17]Morning Star alleges that the WTA included the following expressed terms:

[a]Canam was to prepare a cost plan and GMP for the project.

[b]The cost plan and GMP would be at or about the plaintiff’s budgeted design and construction costs figure for the project of $29,500,000.

[c]The cost plan and GMP had to be completed at least one month prior to the date of commencement of construction of the project.

[d]Construction work on the project would not commence until the cost plan and the GMP had been finalised.

[e]Canam would ensure that all construction documentation including plans and designs were prepared within sufficient time to ensure the cost plan and GMP would be completed at least one month prior to the commencement of the construction of the project.

[f]Canam would ensure that the pre-construction tasks would be completed in time to allow construction work to commence on a date between 1 October 2002 and 1 April 2003 at the latest.

[g]Construction of the project would commence on a date between 1 October 2002 and 1 April 2003.

[h]The second defendant would be the project manager of the project.

[18]Morning Star pleaded that these express terms of the contract were:

[a]Recorded in documents named “GMP Proposal” and “Working Together Agreement” forwarded to Morning Star by Canam under cover of a letter dated 18 June 2002.

[b]Agreed orally between Mr Morgenstern for the plaintiff and the second and third defendants and Mr Don Greenaway on behalf of Canam on or about June 2002. And further, that the contract contained an implied term that Canam would use such standards of skill and care as are reasonable in the construction industry in preparing the cost plan and GMP.

[19]   Following agreement of the contract, Morning Star commenced selling apartments in the project. The sale and purchase agreements for those apartments provided that cancellation in the event that construction was not completed  by certain dates.

[20]Morning Star alleged that, Canam misrepresented the position, in particular:

[a]It did not allocate the project team led by Mr Mark Medima and the second defendant, or either of Mr Medima or the second defendant to the project.

[b]It did not allocate sufficient resources to the project to allow a cost plan, GMP and other pre-construction tasks to be completed in time for construction work on the project to commence on 1 April 2003.

[21]   As a result of Canam’s alleged failures to fulfil the representations, construction did not start by 1 April 2003. It did not start until 27 October 2003. The 6 months and 27 days delay in commencing construction has, it has been alleged, caused Morning Star to have additional carrying costs for the project amounting to

$1,054,709.60. As a result of Canam’s alleged failure to fulfil the representations Morning Star had to put the contract for the construction of the project to a competitive tender process. The cost of the tendering process to the plaintiff amounted to $100,000.

[22]   Morning Star has further pleaded against all defendants a breach of ss9, 11 and 13 of the Fair Trading Act 1986 based on essentially the same alleged misrepresentations. It has also pleaded a breach of contract based on essentially the same allegation.

[23]   Finally, Morning Star has alleged negligence, repeating the same allegations but alleging negligence in the preparation of a GMP produced in October 2002, and similarly, in respect of a further revised GMP produced in February 2003.

Preliminary comments

[24]   As noted above, Morning Star’s pleadings included four separate causes of action:

[a]Misrepresentation [inducing it to enter into the WTA].

[b]Breach of Fair Trading Act.

[c]Breach of contract.

[d]Negligence.

[25]   The misrepresentations relied on to found the first two causes of action were the same in each case. It was pleaded that,

The second and third defendants are directors of the first defendant and the representations were made by them and the first defendant or were authorised by them or were known to them.

[26]   At the conclusion of the hearing on 8 December 2004, I enquired of Morning Star’s counsel whether it intended to persist with its claims against the second and third defendants because neither had been cross-examined in relation to the alleged misrepresentations, which they had denied. Counsel indicated that he thought not, but, he needed to obtain instructions on the matter. When the hearing resumed for the purpose of hearing final submissions on 28 February 2005, counsel advised that Morning Star’s claim against the second and third defendants had been withdrawn.

[27]   The plaintiff had pleaded that the express terms of the agreement were agreed orally between Mr Morgenstern for the plaintiff, and the second and third  defendants, and Mr Don Greenaway on behalf of Canam on or about June 2002. Given that the plaintiff withdrew its allegations of misrepresentation against the second and third defendants, there remained the question whether Mr Greenaway had made all or any of the alleged misrepresentations on behalf of the  first defendant.

[28]   Mr Greenaway had been employed by Canam as its Business Development Manager from October 2001 until he resigned following a dispute as to his terms of employment in April 2003. He was subpoenaed to give evidence on behalf of the plaintiff. He said in evidence:

[a]He had been extensively involved in obtaining the opportunity for Canam to work on the project.

[b]He had concerns about Canam’s capacity to undertake the project in view of its other commitments.

[c]The second and third defendants as directors of Canam were, however, keen to get the project.

[d]The three of them concluded that the similarities between the Lynfield project and the project and Canam’s experience on the Lynfield project, would assist Canam in maximising its profit on the project. Having control of the design should have, in Canam’s view,  allowed it to make significant cost savings on the project.

[e]On behalf of Canam, he assured Mr Morgenstern, on a number of occasions, that Canam had the capacity to undertake the project.

[f]He did a lot of work getting the project signed up from about April 2002. He assisted in drawing up the WTA and GMP proposal.

[g]After the WTA was signed a project team was formed. He was not involved with this after the first meeting, but he did not think sufficient reserves were allocated to allow a GMP to be produced.

[29]   Mr Greenaway was cross-examined at length. At the conclusion of his evidence I asked him to clarify his concerns as to Canam’s capacity to undertake the work required to compile the GMP on the work that would have been required to construct the project later on. He said:

I believe Canam had resources to do or undertake the GMP proposal, however, they may not have had the resources available at that specific time to undertake the contract. However, Canam may have been able to resource persons from the industry but it was a very different [sic] time due to market conditions.

[30]   More importantly, however, it was not put to Mr Greenaway that he  had made any of the representations pleaded by the plaintiff and relied on as a basis for the first two causes of action.

[31]   In view of these matters, I note again that the plaintiff has not provided any allegations of misrepresentation against the two directors, and in particular, Mr Loukas, who headed the Canam project team. Absent any evidence that any other person made misrepresentations on behalf of Canam, I cannot see that there is any evidence to support any basis for liability based on the first two causes of action.

[32]   In Morning Star’s final submissions there is, so far as I can see, no reliance placed on the last cause of action, namely, negligence. The whole tenor of these submissions is directed solely to the third cause of action i.e. breach of contract. Counsel for Morning Star summed up its position as follows:

6.          Morning Star’s representation claim against Canam is dependent upon Morning Star establishing that Canam breached the WTA as Morning Star alleges. If the breach of contract claim fails, the misrepresentation claim must also fail. If Morning Star succeeds in obtaining damages for breach of contract, those damages will be the same as any damages for misrepresentation.

7.        The position is the same in respect of Morning Star’s negligence claim.

8.        Accordingly these submissions deal only with Morning Star’s allegation that Canam breached the WTA.

[33]In the light of these matters, I in turn have addressed only two issues:

[a]the plaintiff’s claim now based on an alleged breach of contract; and

[b]the first defendant’s counter-claim.

The plaintiff’s claim based on breach of contract

[34]   Morning Star now submits that, Canam breached the express terms of the WTA and, in particular:

[i]failed to undertake necessary pre-construction tasks; and

[ii]failed to provide a GMP.

[35]Morning Star’s case under this head was summarised as follows:

BREACH OF THE WORKING TOGETHER AGREEMENT

11.        Morning Star’s case is that the WTA obliged Canam to take a number of preparatory pre-construction steps to ensure that a GMP could be agreed, a construction contract based on NZS 3910:1998 agreed, and construction work could begin on the St Lukes Garden Apartments Project (Project) by 1 April 2003.

12.        Morning Star relies on the following breaches of the WTA by Canam:

(a)Canam’s failure to undertake other pre-construction tasks to allow construction to commence by 1 April 2003, including in particular, failing to:

(i)Take    design    review    and    total    construction responsibility for the Project.

(ii)direct the efforts of architects, engineers and consultants;

(iii)ensure that all construction documentation including plans and designs were prepared;

(iv)prepare the cost plan from preliminary drawings and specifications;

(v)get    input   into   the   design   form   experienced subcontractors and suppliers;

(vi)co-ordinate and review construction documents.

(b)Canam’s failure to produce a GMP;

(c)Canam’s failure to use such standards of skill and care as are reasonable in the construction industry in preparing the cost plan and GMP.

Failure to undertake necessary pre-construction tasks

[36]   Morning Star submits that, the above matters were to be attended to by Canam, as part of its obligations under the WTA, whereas Canam submits the primary object of the WTA was to establish the GMP. It was only after this had been established that Canam was or could be able to assume those responsibilities.

[37]   The determination of this issue depends on an interpretation of the WTA. Before doing so, it is necessary to endeavour to identify what is meant by a “gross maximum price”. Having heard the evidence relating to this, it is my understanding

that a GMP is a price which the parties accept is the maximum price a project will cost. It is formulated by adding together:

[a]The cost of identifiable items e.g. lifts.

[b]The cost of any labour provided by the contractor.

[c]The contractor’s preliminary and general costs.

[d]Agreed contingency sums.

[e]The contractor’s profit margin.

[f]A mechanism for determining the costs of subcontractors and suppliers. The object being to arrive at a market cost. In this case this was to be achieved by obtaining three competitive quotes in each case.

[38]   The purpose of this method of tendering is to establish from the outset a price which will satisfy both parties. On the one hand, the developer will know its maximum liability, and the contractor will be less exposed to the risk of under- quoting. Conversely, the developer is less likely to be penalised by having to pay greater amounts for items which are not known precisely, and for which the contractor may over-estimate in order to eliminate risk. There is a further advantage, namely, that the final sum actually paid could be less than the original GMP. If this does occur, then provision is made for any excess to be divided on an agreed basis.

[39]   In the present case the parties agreed that they wished to proceed on a GMP basis. They both apparently accepted that, if they were to do so, this would necessarily involve the contractor, Canam, incurring a considerable cost which, in  the normal course, it would only recoup if it was ultimately accepted as the  contractor to carryout the project.

[40]   Mindful of this, it requested the plaintiff to enter into the WTA, the essence of which was that both parties would work together to produce an acceptable GMP.

This was to be compiled in the first instance by Canam in conjunction with the plaintiff and its consultants. If there was any dispute as to the GMP produced by Canam, then this was to be referred to an independent quantity surveyor to review and verify in order to ensure that it was fair and reflected market rates.

[41]   Nowhere is it said in the WTA that the resulting figure would have to be accepted by Morning Star. It seems to me, however, to be implicit from the nature of the WTA that, the outcome would, in the normal course, be the acceptance of Canam as the main contractor.

[42]   Whether a construction contract is to be on a GMP basis or a fixed priced basis there is one common factor. Before there can be any tender, the contractor has to know what it is that is being tendered for. There has to be plans and specifications. The WTA anticipated that the contractor would have an involvement with Morning Star and its consultants as to these matters once the essential scope of what was required had been determined by Morning Star.

[43]   It is the nature of that involvement by Canam, prior to the determination of the GMP, which is really the crux of the first issue in this case. Morning Star alleges that, the involvement was an essential obligation under the WTA, and such that Canam was, from the very outset, obliged to “drive the contract” by co-ordinating  the efforts of Morning Star’s consultants to define the scope of the project, thereby enabling Canam to have a firm basis on which to collate the GMP. Canam alleges that there was no such obligation. There was, however, an ongoing requirement to “drive the contract” in this sense once the GMP had been agreed upon, and then, if it was awarded the construction contract.

The Working Together Agreement

[44]   This document, as drafted, is an excellent example of why the preparation of legal documents should be left to lawyers in the same way that the construction of large buildings should be left to the expertise of building contractors. It is, in a word, ambiguous. However, the essential terms of the contract appear to be as follows:

[a]1.0      PURPOSE

The following document records the agreement between Morning Star St Lukes Garden Apartments Ltd and Canam Construction Ltd to work together for the design and construction of the St Lukes Garden Apartment project.

…

2.4Morning Star St Lukes Garden Apartments Ltd has engaged Woodhams/Meikle Architects to prepare outline drawing specifications and other architectural work necessary for the facilitation of sales. These and any other consultants will be novated to Canam prior to the signing of the GMP contract.

2.5The parties wish to conclude negotiations and enter into a formal GMP contract based on NZS 2910:1998 before work commences on site.

…

[b]3.0      GENERAL DUTIES OF THE PARTIES

3.1The parties  shall work  harmoniously to fulfil  their  shared   and separate obligations, responsibilities and objectives.

…

[c]4.0      SPECIFIC OBJECTIVES

4.1 The parties agree  to  work  together  to  establish  the Guaranteed Maximum Price (GMP).

…

4.9The GMP contract prices shall be agreed by the parties at least one month prior to the commencement of the construction works.

4.10An independent Quantity Surveyor shall be appointed by Morning Star St Lukes Garden Apartments Ltd to review  and verify the Canam GMP. This is to ensure that the GMP is fair and reflects market rates.

4.11The anticipated start date is 1 October 2002, but this  date can be adjusted to accommodate presale and other financial conditions by up to 6 months.

4.12Should Morning Star St Lukes Garden Apartments Ltd be unable to obtain sufficient sales at values which in its sole discretion, justify the completion of the development then it shall be entitled to end this agreement without recompense or other obligations to Canam.

[45]   Attached to the WTA is a schedule – “GMP Proposal” the relevant terms of which are:

[a]I    SUMMARY OF PROJECT GOALS AND OBJECTIVES

Canam guarantee full project value as it relates to design, budget, time and quality. Our pre-construction service tasks include: conceptual design review, value engineering, programming of work, preparation of cost plan and review of budgets through final working drawings.

…

[b]II    DESIGN AND PRECONSTRUCTION STAGE

1.Design Review and Total Construction responsibility for your project from preliminary design through completion and handover.

2.Pre-Construction Services

(a)     Team Approach – Canam Construction employ a ‘team approach’ to construction. Our team takes a proactive approach in assisting you the client to make decisions and directing the efforts of the Architect, Engineers and Consultants. The TEAM works together to build the right project for you.

[46]The argument between the parties can be summarised as follows:

[a]Morning    Star    alleges    the    pre-construction    services    included obligations to “drive the contract” prior to the acceptance of the GMP.

[b]Canam argue that, the reference to pre-construction services, relates only to obligations which arose after the GMP had been accepted.

[47]   Morning Star’s principal argument is founded on clause 4.7 of the WTA which states:

Canam shall perform the pre-construction services, but not limited to the ones detailed in the attached GMP proposal.

[48]   It submitted that, this term, when read in conjunction with the terms I have referred to in the GMP proposal, reveals an obligation on Canam to in effect control the contract from the moment it signed the WTA on 19 June 2002.

[49]   Canam firmly rejects this view and contends that, the obligations, if they can be called that, in the GMP proposal, only arose when the GMP was accepted and it was appointed as the construction contractor.

[50]   As I have already noted, I confess to having had real difficulty in being able to state with any degree of precision exactly what this agreement achieves. Ignoring for the moment the imprecise terminology, it seems to me the following matters are clear, namely, the parties agreed:

[i]They would work together towards agreeing on a GMP.

[ii]Mechanisms for determining the GMP were provided.

[iii]The GMP proposal specified what was to be undertaken by Canam, this included what was to be done in the pre-construction and construction stages.

[51]   The references to what the pre-construction services and tasks were are not clear. Read in isolation, they could indeed apparently refer back to Canam’s involvement following the execution of the WTA. Having considered the terms of the WTA agreement and the GMP proposal schedule together, I have concluded that the above interpretation cannot be correct. I have reached this conclusion for the following reasons:

[a]The GMP could only have been defined at the end of the process referred to in the WTA. That was the expressed object of that agreement.

[b]Once a GMP proposal had been accepted and, the contractor was then appointed as the construction contractor, then two categories of responsibility remained.

[i]Pre-construction work i.e. an ongoing involvement with matters relating to design amendments, review of cost plan and the final tendering by the subcontractors. Here it is important

to note that the GMP could include tenders based on drawings which were only at that point 90% to 95% complete. In other words, further drawings still had to be completed after the GMP had been accepted. It seems to me that any such drawings must come within the description of pre-construction work.

[ii]The actual construction work.

The short point is that there was defined pre-construction work which had to be done after a GMP was accepted. In other words, reference to pre-construction work did not necessarily apply to work done prior to the acceptance of the GMP.

[c]Morning Star has contended that there was an obligation on Canam to “drive the contract” in the period prior to the acceptance of the GMP. In my view, that is quite inconsistent with clause 2.3 of the WTA i.e.

Morning Star St Lukes Garden Apartments Ltd wishes to enter into a negotiated design and build GMP (Guaranteed Maximum Price) contract with the consultants novated to Canam at a later stage.

Until the consultants were novated to Canam (which I take to mean the creation of some legal obligation requiring the consultants to accept the direction of Canam in lieu of or in addition to that of Morning Star), there was no way in which Canam could drive the contract without the concurrence and co-operation of Morning Star.

[d]More importantly, until a GMP had been agreed, there was no contract to drive. There was only a situation where two parties had agreed on a procedure to produce a price (the GMP) which could result later in a contract between them.

[e]During the period prior to the formulation of the GMP, Canam were not receiving any payment for their efforts. This being the case, I find it difficult to see on what basis they should have imposed on them any

greater obligation other than to co-operate with the plaintiff in establishing as clearly as possible the basis for formulating the GMP.

[52]   There remains the submission that, the terms of clause 4.7, did nevertheless impose the obligation suggested by Morning Star, namely, during the period prior to the formulation of the GMP. Clauses 4.2 to 4.8 set out in effect what  matters are to be included in the GMP. In my view, clause 4.7 is one of those matters. It is included to make it clear that the GMP submitted will include the pre-construction services still to be done after, and if the GMP is accepted. It does not impose any additional obligation during the period beforehand. Quite apart from my interpretation of the WTA in this respect, it would be quite inconsistent for it to do so given the other reasons I have referred to.

[53]   For the above reasons I am satisfied that Morning Star has failed in its allegation that Canam breached the WTA by failing to undertake pre-construction tasks which, it submitted, were required by Canam under the WTA. The reason for this finding being that the WTA did not impose upon Canam the pre-construction tasks alleged by Morning Star.

Failure to provide a GMP

[54]   Mr Latton in his closing address submitted that, Canam failed to provide Morning Star with a GMP, and that this failure caused loss to Morning Star, namely, additional building costs (interest) on the project arising from the start of the construction on the project being delayed.

[55]   The WTA provided (clause 4.11) that the anticipated start date was 1 October 2002 but this date could be adjusted to accommodate pre-sale and other financial considerations by up to six months i.e. 1 April 2003.

[56]   The actual pleadings in relation to this issue under the heading of “Breach of Contract” were:

27.In breach of the contract the first defendant failed to:

(a)ensure that all construction documentation including plans and designs were prepared within sufficient time to ensure the cost plan and GMP would be completed at least one month prior to 1 April 2003;

(b)produce a cost plan, GMP and undertake other pre- construction tasks to allow construction to commence by 1 April 2003.

[57]   Canam submitted that, this pleading was at odds with the pleadings in paras (34-37), which dealt with the same issue under the heading of “Negligence”. These were:

34.        On or about October 2002, the first defendant prepared a cost plan and GMP (together, First GMP) which exceeded the plaintiff’s budgeted design and construction costs figure by $4,500,000.

35.        On or about November 2002, the third defendant on behalf of the first defendant informed the plaintiff that the First GMP contained numerous errors and needed to be revised. The employer of the first defendant who produced the First GMP was dismissed by the first defendant.

36.        On or about February 2003, the first defendant produced a revised cost plan and GMP figure (together, Revised GMP). The Revised GMP contained a GMP figure of $31,500,000. Given the proximity of this figure  to the plaintiff’s design and construction costs figure, the plaintiff and the first defendant agreed to work together to reduce the revised GMP figure.

37.        On or about March 2003, the first defendant informed the plaintiff that the Revised GMP contained errors, that the Revised GMP was in fact

$34,000,000 and that further design work was necessary before another cost plan and GMP figure could be produced.

[58]   Canam submitted that, Mr Morgenstern, at the outset, had an idea as to the eventual cost based on the costings for the Lynfield project. His  original specification for the project comprised 180 units. In the months that followed this was reduced to 167 units and later to 214 units. According to the evidence of Mr Meikle, Morning Star’s architect, the reduction to 167 units involved quite considerable design changes in respect of the general layout, particularly roading. In addition, Mr Morgenstern was endeavouring to achieve a higher standard in relation to the interior designs.

[59]   I have concluded that the changes referred to above did involve Canam in additional work when they were endeavouring to prepare a GMP. Furthermore,

during the period of approximately October 2000 to March 2003 Canam were presented with a further difficulty, namely, that the consultants engaged by Morning Star were reluctant to engage in design work because it was not clear whether they were to be paid. Ultimately, this was resolved by Mr Morgenstern’s undertaking that he would meet their fees.

[60]   A further difficulty throughout this time was Mr Morgenstern’s reluctance to accept figures put forward by Canam. He throughout, appeared to be determined to achieve a figure which accorded with his expectation of the price, rather than the realities being presented to him by Canam. The WTA provided that, once a GMP was presented by the contractor, then, any disagreements as to individual items were to be resolved by the quantity surveyor. So far as I can see Morning Star never engaged in this process.

[61]   Against this background, the evidence showed that Canam did supply to Morning Star a number of “price indications”. These were all designed to achieve a total cost which came within Mr Morgenstern’s expectation. These were set out in a schedule to Canam’s final submissions which is set out below. These also included reference to prices received from other contractors in order to place the Canam figures in context.

SCHEDULE

September 02  $25M plus consultant’s fees

October 02  $26M

12 November 02  Budget est $28.3m

(167 Aptmts)

14 November 02  Fixed price P&G margin

(167 Aptmts)  $2.9M

14 February 03  Fixed price $25.4

(167 Aptmts)

10 March 03  Multiplex $34m

(214 Aptmts)

30 April 03  $33.4 GMP budget

(213 Aptmts)

16 May 03  $30m Target budget
(213 Aptmts)

19 May 03  Multiplex $34.5 (not GMP). (214 Aptmts)

3 June 03  GMP $35.9m

(213 Aptmts)

5/9 June 03  Costs 1 to 4

(30.3m to $34.6)

18 June 03  GMP $35.6m

(214 Aptmts)

7 August 03  $34.7 (Cunninghams not GMP) (214 Aptmts)

Sept/Oct 03  $32.7/Kalmar (prov sums). No

(218 Aptmts)  allowance for parking structure.

Not GMP

[62]   It is clear that all the price indications given by Canam were not GMP’s in terms of the WTA but it seems from the pleadings and minutes of meetings that the references to GMP, Budget GMP, Budget, Target Budget, at certain points become blurred. Certainly, it was not clear just precisely what was being requested of Canam at different times.

[63]   Some measure of the difficulties being faced by Canam become apparent from the “Outline of Final Costs and Associated Proposed Revisions” (doc. 4-155). This is dated 6 May 2003. It sets out four separate proposals. So far as I can see, these are not referred to in the design team meeting No. 8, held on 6 May 2003. It is significant, however, that in the following meeting on 13 May 2003 the following is recorded.

4.        BUDGET

It was agreed that the information on the drawing is inadequate to fix the price. The client instructed WMZ to allocate more resources to complete drawings faster. The client instructed Kingston Partners to work with Canam to prepared schedules for pricing. Canam to go out to the market to obtain prices for all building services, trades and other large dollar value trades to establish costs more accurately. Canam to prepare letting schedule and manage the consultants to produce appropriate documentation as required. Tender the foundation to Block A and submit proposal to client for approval. All costs to be approved by the client prior to proceeding with the work. Kingston Partners to certify all payments.

[64]   Whether or not the price indications provided by Canam were GMP’s or not, what is clear, however, in my view is that by 19 February 2003 Canam had provided Morning Star with sufficient information as to price to enable it, Morning Star, to confirm the purchase of the site and settle the purchase with funds drawn down from its financiers. This necessarily implies:

[a]Morning   Star   had   arranged   a   sufficient    number of pre-sales apartments in the project; and

[b]It was sufficiently confident it would be able to meet the costs of the project even though these had not been finally agreed.

[65]   So far as the second of these matters is concerned, Morning Star was able to reach this conclusion because on 14 February 2003 it had received from Canam a fixed price tender of $25.4 million to construct the project which, at that stage, had been reduced from 180 to 167 units.

[66]   As an aside, it is relevant to note that at this point the necessary resource consent, which was Morning Star’s responsibility, was not obtained until 26 November 2002 and the appeal period did not expire until 19 June 2003.

[67]   The conclusion I reach on the basis of the above matters is that, whatever  may have been the description of the prices provided by Canam, it had supplied to Morning Star as early as October 2002 figures which Morning Star could regard as being at least clearly indicative of the cost of the project. Changes were made to the scope of the project. The initial basis of 180 units was reduced to 167 late in 2002 and apparently increased to 240 in March 2003. Prior to this, there had been difficulties in obtaining the necessary work from Morning Star’s consultants who were obviously uneasy as to whether they would be paid. Likewise, Canam was confronted with unrealistic expectations from Mr Morgenstern.

[68]   Despite Morning Star’s allegations to the contrary, I am satisfied that Canam, throughout the relevant period, did have and did allocate sufficient resources to go as far as they possibly could to meet Mr Morgenstern’s pricing demands. I am quite

satisfied that the reality was that he was simply trying to obtain a “price” from Canam, which accorded more with his expectations rather than that which Canam had found to be realistic.

[69]   The short point is, however, that before 1 March 2003 Canam had provided him with a sufficient degree of certainty to enable him to commit Morning Star  to the project, which he did on 19 February 2003.

[70]   This being the case, to say that Canam had either failed to provide a GMP at all or, “to ensure the cost plan and GMP would be completed at least one  month prior to April 2003” simply cannot be sustained. I have concluded that there was no breach of contact under the first two heads advanced. Furthermore, I am satisfied  that the delay in commencing the main construction contract cannot be attributed to any fault on the part of Canam.

[71]   There was a good deal of evidence as to just how precisely the delay in commencing construction came about. Having considered that evidence, I am satisfied that the best explanation was that provided by Mr Day, a structural engineer involved in the project, who was subpoenaed by Canam to give evidence. He had been engaged by Morning Star. At p139 line 29 of the Notes of Evidence there appears the following:

FTC.- There is an allegation that this whole progress got about 4 or 5  months behind, didn’t start soon enough. Are you able to point to any one thing that determined that it was delayed in that way, from your own perception of the position?

MR DAY… Certainly, the Council appeared to want all the Is dotted and the Ts crossed before they would issue the building consent or the foundation consent. Typically in a foundation consent and in particular this case,  consent has been certified by a certifier which says it complies with the building code, it is then submitted to the Council for approval, then it is one to two weeks to obtain consent. In this instance the Council insisted that all of the resource consent conditions be complied with, all of the infrastructure conditions be complied with, prior to issue of a foundation consent. Previous projects that I have been involved, all of those conditions are not to be complied with until the main building consent is to be issued.

FTC.- Have you any idea why the different position was adopted in this case?

MR DAY.- No.

FTC.-   Who would know then? MR DAY…       the Council, maybe. QUESTIONS ARISING:

MR LATTON…        You didn’t apply for foundation consent until after April 03?

MR DAY… In April 03, yes.

MR CHRISTIE… In the time when matters were being reviewed by Council was Morning Star’s consultants liaising with Council to address their concerns?

MR DAY… Yes.

MR CHRISTIE… Those consultants included City Design? MR DAY… Yes.

MR CHRISTIE… Do you know whether the reserved contribution had been, or a bond for it had been paid by Morning Star before or at the time the foundation consent was lodged?

MR DAY… No, I don’t know.

MR CHRISTIE… Could the foundation consent have been lodged any earlier in your view?

MR DAY… I don’t believe so.

FTC.- By that you meant the foundation consent application? MR CHRISTIE… Yes.

MR CHRISTIE… Could the intersection work have been done by sooner? MR DAY… The work or consent?

MR CHRISTIE… Start with the consent then address the work.

MR DAY… The application for the consent was done as earlier as was feasible, starting construction couldn’t occur until we received that consent.

MR CHRISTIE… Do you believe any more construction work could have been done on site earlier in 03 in Canam’s time?

MR DAY… Not without consents, no.

[72]   The obtaining of the resource consent was the responsibility of Morning Star. It is quite clear to me that, the delay in the commencement of the construction of the main contract, stemmed almost entirely from the difficulties involved in relation to

the obtaining of the resource consent. Canam had, in the meantime, done what it could to comply with the WTA. It was faced throughout, however, by Mr Morgenstern’s determination to keep trying to obtain a figure for the project which was quite unrealistic. In the ultimate result this is borne out by the comparative prices received from other contractors and, in particular, the contract price finally provided by Kalmar Construction Ltd.

Failure to use standards of skill and care as are reasonable in the construction industry in preparing the cost plan and GMP

[73]   It follows from my discussion under the previous head, and the difficulties encountered by Canam, that I am not satisfied that Canam failed to standards of skill and care as are reasonable in the construction industry in preparing the cost plan and GMP.

[74]   For the above reasons I find that Morning Star’s claim based on the cause of action which it finally relied on, namely, breach of contract, must fail. I have also come to the conclusion that the Morning Star claim lacked any merit from the outset. Mr Morgenstern complained throughout his evidence that he had not been provided with GMP’s to enable him to reach any firm conclusions relating to the progress of the project. On the basis of the evidence which I have referred to I find this is simply not correct. Furthermore, had there been concerns held by him I would have expected that these would have been noted in the minutes of the various design meetings. This does not appear to have been the case. I regret to say that I found Mr Morgenstern to be a witness who did not present to me as being either reliable or credible in far too many important respects.

Canam’s counterclaim

[75]   The Design and Build Contract for the construction of the project was ultimately awarded to Kalmar Construction Ltd in July 2003. This was a set price contract for $32.7 million which included provisional sums. Right up until June 2003 Canam was continuing to work in an endeavour to provide a further adjusted GMP. When it learned that the contract was to be put out to tender and was not to be

awarded on the basis of the GMP produced in accordance with the WTA it declined to enter into that tendering process.

[76]Its reasons for doing so were basically twofold.

[a]It considered that Morning Star was in breach of the WTA by putting the contract out for tender when it had failed to negotiate a final contract price as required by the WTA. In particular, Morning Star’s quantity surveyors had not, so far as it was aware, become involved in the exercise, or, if they had, Canam had not been involved in that exercise.

[b]More importantly, it considered that it had been awarded the main construction contract as early as 7 March 2003. A contract had been prepared but not signed. Despite this, and acting on Mr Morgenstern’s representations that it was in fact the head contractor, Canam proceeded to accept instructions and enter into a wide array of tasks required to be undertaken as part of the pre-construction requirements under the main construction contract.

[77]   In his final submissions, Mr Christie provided a summary comprising some seven pages of specific instances in support of Canam’s contention in this regard.

[78]   In addition to these matters Mr Christie submitted that, if there was any doubt that Morning Star had indeed entered into the main construction contract with Canam, then any such doubt was dispelled if regard to two letters sent to  Canam. The first was a letter dated 29 May 2003 addressed to Mr M Coleman of Canam. It stated:

29 May 2003

Mr Nick Coleman Coleman Construction 295 Lincoln Road

Private Bag 93116

Henderson Auckland 8

VIA FACSIMILE 837 2449

Re: St Lukes Garden Apartments Dear Nick

I am in receipt of your project minutes as minuted at our 27 May 2003 meeting.

The construction contract was negotiated and agreed between Loukas Petrou of Canam and Arthur Morgenstern of Morning Star (St Lukes Garden Apartments) Limited, subject to final comments from Loukas to Chapman Tripp’s revisions. This contract must be approved and then executed by both Canam and Morning Star prior to Friday, 6 June 2003 not Sunday, 15 June 2003 as minuted. Please amend your minutes to reflect this.

I have asked on a number of occasions that the target budget be fully rationalized as to agreed sums and P.C. sums. All P.C. sums will need full details, elemental take-offs and unit prices.

The contract value will be $30,000,000 subject to P.C. sum adjustments. My time line is critical.

Please disclose full information to Roger Fairhead as to assist Kingston Partners to pier review the contract value.

Yours sincerely

MORNING STAR ENTERPRISES LIMITED

[Arthur Morgenstern]

c.c. Roger Fairhead, Kingston Partners

[79]   The second letter was sent by Morning Star to the second defendant, Mr Petrou on 25 June 2003. This stated:

25 June 2003

Mr Loukas Petrou General Manager Canam Construction 295 Lincoln Road Henderson

VIA FACSIMILE 837 2449 & MESSANGER

RE:     ST LUKES GARDEN APARTMENTS

Dear Loukas

Thank you for meeting with me yesterday afternoon.

Morning Star welcomes Canam’s interest in tendering for the construction of the St Lukes Garden Apartments. In order to ensure that the tender process is administered in a fair, transparent and professional manner, we would need to ensure Canam’s tender is submitted on the basis that it supersedes the previous arrangements between Morning Star and Canam. Also, to ensure that the site is presented in the right manner to all potential tenderers, could you please ensure that Canam vacates the site (51A St Lukes Road) as soon as possible and remove any reference to Canam Construction from the site. I am sure you understand the process involved and would appreciate your co- operation in this regard.

Even though Canam’s tender will supersede the previous arrangements, I confirm that Morning Star will pay for the construction works that Canam has undertaken to date and which have already been previously approved by Morning Star. Morning Star acknowledges that the construction works previously undertaken by Canam are separate and independent of the tender process.

Yours sincerely

MORNING STAR ENTERPRISES LIMITED

[Arthur Morgenstern]

[80]   Mr Morgenstern confirmed that this letter had been drafted by his solicitors and did correctly address his concerns at that time.

[81]   After Morning Star had taken this action Canam sought to recover monies due to it for work done in connection with pre-construction which fell within the ambit of the work required by the main contractor and including, in particular, demolition works and road realignment works, which they had organised through subcontractors. These were originally sent in an invoice dated 19 June 2003 (docs. 5- 144 and 145). (Copy of invoice attached to this decision as annexure “A”).

[82]   Morning Star’s argument was that there was no contractual arrangement entered into between it and Canam. It referred to Fletcher Challenge Energy Ltd v Electricity Corporation of New Zealand Ltd [2002] 2 NZLR 433, where Blanchard J said at 444, the prerequisites to the formation of a contract were:

(a)An intention to be immediately bound (at the point where the contract is said to have been agreed); and

(b)An agreement, express or found by implication, or the means of achieving an agreement (eg an arbitration clause) on every term which:

(i)was legally essential to the formation of such a bargain;

(ii)was regarded by the parties themselves as essential to their particular bargain.

A term is to be regarded by the parties as essential if one party maintains the position that there must be agreement on it and manifests accordingly to the other party.

[83]   Morning Star alleges that there never was an “intention to be immediately bound” and there was no agreement on terms (price) that were legally essential and regarded by the parties as essential.

[84]   Morning Star further alleges that the main construction contract prepared in May 2003 which was not signed did nothing to determine whether the parties were  in fact contractually bound to each other. In this regard, reference was made to Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385 where Cooke J said at 388:

…the purpose of the negotiations was to have prepared…an important commercial agreement of some complexity. In such circumstances we think the normal inference in New Zealand is that the parties do not intend to be bound before the agreement has been drawn up and executed on both  sides…

[85]   Canam had submitted on the issue of price that the WTA agreement had provided a formula to determine this i.e.

[a]pricing by going to the market to subcontractors as had been occurring and had been directed by Morning Star; or

[b]using an independent quantity surveyor as provided for in the WTA.

In answer to this submission Morning Star submitted that neither of these was as mechanism to agree to the main contract price. Whilst these were mechanisms to hopefully achieve an agreed GMP, there was nothing in the WTA which required that these mechanisms would necessarily produce a GMP acceptable to Morning Star.

Discussion

[86]My analysis of the relationship between the parties under the WTA was:

[a]The WTA provided a procedure which it was anticipated would lead to agreement as to the cost of the main contract.

[b]That procedure was predicated on the basis that Morning Star would define what was to be included in the project. Thereafter Canam was to work closely with Morning Star and its consultants to determine how, or to what extent, the project could be achieved and then provide a GMP which, if accepted, would provide the cost of the project which would in turn enable the parties to enter into a main construction contract.

[c]The WTA did not provide any guarantee that an acceptable GMP would be resolved but, the co-operative nature of the WTA process plus the manner in which subcontract prices were to be obtained i.e. three subcontractors were to tender in each case and then be evaluated by an independent quantity surveyor, meant that in the normal course, the WTA contractor would be appointed as the main construction contractor.

[87]   In the present case, Canam in my view did all it could to achieve its part of the WTA process. It was, however, presented from the outset with significant difficulties.

[a]The original indication given to it was that the project was to comprise 180 units with a number of associated facilities. At some point prior to November 2002 this was reduced to 167 units without the associated facilities. Later in about March 2003 this was increased to 214 and then further reduced to 213 units.

[b]The project was first advanced on the basis that it would be comparable in design to the Lynfield project. In fact it soon became clear that a significantly higher standard was expected for the project in some respects.

[c]In the period October to November 2002, Morning Star consultants were not actively participating in the project because of concerns as to who would pay them. This issue was not resolved until March 2003.

[d]The resource consent and conditions were not finally advised until 26 November 2002.

[e]Unrealistic expectations of Mr Morgenstern as to price.

[88]   Despite these difficulties, Canam did provide a number of what I would describe as “pricing indications” in the period September to October 2002. On 12 November 2002 it submitted a fixed price of $28,374,205 for 167 units. Mr Petrou said in his evidence in chief that, in relation to this:

32.WE submitted to Arthur on 12 November 2002 a price for 167 apartments of $28374,205. I recall that Arthur wanted the figures re- done, for his funding purposes. Arthur was trying to convince me to include lower provisional sums for items we had already priced. I refused. The feeling I was getting at the time was that Arthur wanted to manipulate the prices to achieve an attractive proposal for the Bank. Arthur was also suggesting we should leave costs out or transfer them into the next stage. I told Arthur I was not comfortable with that and that was not a risk I was prepared to take. If the price was unrealistic then the funding would be insufficient and we would be the ones at the end of the project looking for payment not covered by the bank funding.

33.ARTHUR then requested a P&G and margin tender only for his funders, excluding design fees which he said he would negotiate himself. We provided this to him on 14 November 2002. Our letter

of 14 November recorded that we could not guarantee those budgets nor did they constitute a fixed price as too much was still uncertain and unclear including that there was still no resource consent and therefore no knowledge of any conditions associated with it. We offered to run the project on an open book basis. The Trade Summary attached to our letter of 14 November did not include  P&G and margin or design fees. However, our letter did fix  P&G and margin as detailed in the letter at $2.9 million plus GST. Arthur did not like the inclusion of the paragraph that it was not a fixed price. Canam therefore resubmitted the previous P&G and margin budget to Arthur on 19 November 2002. Again, P&G and margin were fixed and it was an open book proposal. Arthur was happy with the fixed P&G and margin prices. He knew we were in no position  to fix the price of the other aspects given the state of the design. I suggested to him that he needed to properly engage the consultants as none of them had been engaged by anyone or been paid. He agreed he would do that. Although the meetings stopped in late October when the resource consent position was unclear, and the consultants were reluctant to do any further work on the no fee basis, Canam continued to price and work with Morning Star on the St Lukes project.

[89]   The resource consent was made available to Canam in early December 2002. It seems to me that it was really only at that point that any clear plans could be made to progress the project. Mr Petrou summarised the position at this point in his evidence in chief:

34.EARLY in December we received a copy of the resource consent from Arthur. A meeting took place shortly after that between Canam and Day Consultants to allocate responsibilities for resolving and addressing the various conditions imposed by the resource consent and several of those conditions required further consent, prior to the commencement of work. Condition 1 listed the various drawing and landscape design that the design had to follow. This obviously was no longer applicable as the design had changed from that submitted with the original application for Innovative Housing. An amendment to the resource consent would need to be made by Arthur and was required to be approved prior to the start of construction. In addition the resource consent made completion of changes to the intersection alongside the site a prerequisite to commencement of the project. However, before the work could be done on the intersection it had to be designed. This would require a specialised traffic design engineer. This was Condition 39 of the resource consent. Also, before a building consent could be issued acoustic privacy issues had to be resolved. This was Condition 42 of the resource consent.

35.THE various responsibilities that had to be attended to as a result of the resource consent’s conditions were allocated and copied to both Woodham Meikle (Maria) and Arthur. Condition 1 concerning new layouts and the need for revised drawings and amended resource consent was to be attended to by the architects and Arthur. The intersection design to satisfy the resource consent condition was to

be attended to by Arthur and the designer who was expected to be Traffic Design Group. Tony Day was to chase Arthur up on Morning Star engaging Traffic Design Group. The acoustic issue created by the resource consent condition was also to be attended to by Arthur and his consultants.

36.OBVIOUSLY revisions in the architectural/structural, civil and landscaping design had to be undertaken by the consultants engaged by Arthur. They were also considering how the resource consent’s requirements and conditions could be met by other options eg shifting the roadway as Tony Day suggested to the architects before Christmas 2002.

[90]   In late January 2003 there was a further development, namely, Canam became aware that Mr Morgenstern had been seeking an estimate from another contractor. Mr Petrou referred to this and the events afterwards in his evidence in chief:

38.I then had discussions with Arthur in late January 2003 and I asked him to get his Quantity Surveyors who I understood to be Kingston Partners to check our price. Arthur told me that he was going to do this although it was never given to us. Also at this time be brought to my desk an estimate from Kalmar Projects. When I saw this, I told him that I did not believe it was right for Arthur to have done this, as Canam was supposed to have exclusivity for the project and be the appointed contractor. Arthur told me that he was just getting other pricing, to help Canam with its pricing. I protested at this and told Arthur that it was unethical. I understood that Kingston Partners were his Quantity Surveyors and that they should have been the ones assisting with pricing and under the Working Together Agreement they were to verify the GMP anyway.

39.IN reviewing Kalmar’s budgets it was obvious that either they were given a different brief or there were things missing from their budgets.

[91]   I have set out in full the above references to Mr Petrou’s evidence because, I am satisfied, having heard Mr Morgenstern under cross-examination, that Mr Petrou’s evidence can be taken as both a reliable and credible account of what did occur.

[92]   The minutes of the design team meeting No. 1 held on 17 March 2003 (doc. 4-66) record:

Canam to produce a design process and construction programme as soon as possible. Programme is to take account of staging of the construction process and to indicate due dates for submitting information from all consultants.

[93]   In his closing submissions (at para (91)), Mr Christie referred to some seven pages of instances which all supported the contention that Canam was in fact acting as the main contractor from at least the time of that meeting.

[94]   Mr Latton submitted that none of these matters were evidence that a main contract had been agreed. He said:

Many of the “aspects” said to evidence the main construction contract (Canam’s submissions para (91)) are tasks that Canam was obliged to undertake under the WTA.

And further that,

Certain specific matters including the obtaining of approval of the project, signboard, approving subcontracts for the demolition and roading realignment contract and establishing and clearing the site, were undertaken solely pursuant to a separate demolition and associated roading contract.

[95]   What is clear, however, is that those and other matters did not fall within the terms of the WTA and was work which, had the arrangements between the parties gone according to plan, would have been within the main contract.

[96]   Morning Star has argued that the fact that these matters were dealt with by separate contracts is a very good indication that they were not intended to be part of the main contract.

[97]   Canam submitted, however, that Morning Star’s stance in relation to this was quite equivocal. It referred to an affidavit by Mr Morgenstern filed in connection with the statutory demand proceeding issued by Canam as follows:

18The Roadworks Agreement was at all times considered to be part of the Project, and work undertaken under it was subject to the same procedures as was other parts of the Project. For example, any claim for payment by Canam needed to [sic] verified and approved by the Project Quantity Surveyor before payment was made.

19Shortly after the Roadworks Agreement was agreed, other work was being undertaken on the Project. This work also involved  demolition, and was known as “Site and Associated Works”. A copy of a budge from Canam dealing with this work is exhibited to this affidavit marked ASM 8. This work all came within the scope of the Contract, and was not part of the Roadworks Agreement.

20I do not accept that the sums claimed in the statutory demand arise from the Roadworks Agreement. The unpaid figures in Schedule 1 to the statutory demand, and of the items claimed in Schedule 2 of the statutory demand are not within the scope of the Roadworks Agreement. They all relate to preliminary parts of the clearing and preparation of the site to allow construction to begin, and were part of the “Site and Associated Works”.

…

23 Looking at them now, I can confirm that most of  the work approval forms attached to the statutory demand relate to work on the “Site and Associated Works” and were not part of the Roadworks Agreement.

[98]   Morning Star further submitted that, even though it may have publicly announced Canam as being the main contractor, and describing it as such to Morning Star’s partner (doc. 4-103) the fact nevertheless remained that, despite outward appearances, no contract had been concluded between the parties. The reason for this being that no price had been agreed.

[99]   It is clear from the evidence that the parties never agreed on a price for the main construction contract.

[a]The minutes of the design team meeting on 16 June 2003 (doc. 5-93) records:

A two-week deadline was announced (24-06-03) by AW for the client and Canam to conclude a final construction budget acceptable to the client MTG with MO, AW and GM on Wednesday.

And:

AM informed that if the advised budget cannot be met by Canam and AW the project will go out to tender and the lowest bidder will be successful – AM further noted this would be a condition of funding. Canam to continue requesting tenders for Block A and apply costs to total project. AM suggested break up into smaller projects–block to allow for smaller subcontractors to tender for price advantage.

[b]On 18 June 2003 Canam wrote to Morning Star (doc. 5-112) enclosing its latest design budget for $35,596,932 and protesting that the threat to tender the project was contrary to the terms of the WTA.

[c]On 19 June 2003 Morning Star’s consultants, Hargraves, wrote to cancel the meeting on 20 June 2003.

[d]On 20 June 2003 the solicitors who were at that time acting for Morning Star wrote disclaiming any contract (doc. 5-146A).

[100]   The question remains as to whether, despite the absence of agreement as to price, there nevertheless subsisted an agreement for the construction of the project. In other words, did the parties have an intention to be immediately bound to a main construction contract from the point when Mr Morgenstern told Mr Petrou Canam was the main contractor on or about 22 February 2003.

[101]   On that date Mr Morgenstern told Mr Petrou that Canam was the contractor and that:

We just needed to work together to find ways to bring the budget down.

[102]   This was in response to Mr Petrou’s offer to withdraw from any arrangement provided Mr Morgenstern paid for the design suite and other costs which had been incurred.

[103]   Thereafter on a number of occasions Mr Morgenstern confirmed that Canam was the main contractor. Canam is referred to as such in design team meetings.

[104]   Canam proceeded to do work which was, I consider, outside the scope of the WTA and within the scope of what would be required of the main contractor.

[105]   Despite what he said, it seems to me to be clear that Mr Morgenstern  regarded himself free to negotiate with others. For example, on 3 March 2003 he wrote to Multiplex Construction (NZ) Ltd stating, inter alia:

1.Kalmar will, in partnership with Multiplex, provide me with a lump sum fixed price for stages one and two (214 No. units) by no longer than 21 March 2003. Multiplex will provide an indicative price for the development on Friday 7 March 2003.

2.Multiplex will be the contracting party should their bid be successful. Kalmar would be actively involved in the project in

terms    of    providing    resources  in   terms   of supervision and management, but always “under the banner” of Multiplex.

3.Morning Star will grant Multiplex a “preferred contractor” status and should Multiplex meet the required budgets of $29,000,000 plus GST ($29 million plus GST) for stages one and two on terms acceptable to Morning Star. Furthermore we will grant Multiplex first option to negotiate Stage 3 of the project comprising of a further 80 units.

[106]   Furthermore, on 7 April 2003 Mr Morgenstern wrote to his partner, Structured Finance (NZ) Ltd (doc. 4-103) stating:

I enclose herewith for your information a copy of Naylor Love Construction offer of tender for the above reference development Stage 1a and b only – 167 units in the amount of $22,432,200.

Note this tender excludes appliances. I have not worked through any project savings with Naylor Love, as I have appointed Canam to the site their tender is only for general pricing reference.

[107]   Canam remonstrated by letter dated 27 March 2003 (doc. 4-83). Despite that, the minutes of 1 April 2003 clearly show that Canam was retained to keep progressing the project (doc. 4-97).

[108]   On 29 May 2003 (doc. 4-256) Mr Morgenstern wrote to Canam stating, inter alia:

I am in receipt of your project minutes as minuted at our 27 May 2003 meeting.

The construction contract was negotiated and agreed between Loukas Petrou of Canam and Arthur Morgenstern of Morning Star (St Lukes Garden Apartments) Limited, subject to final comments from Loukas to Chapman Tripp’s revisions. This contract must be approved and then executed by both Canam and Morning Star prior to Friday, 6 June 2003 not Sunday, 15 June 2003 as minuted. Please amend your minutes to reflect this.

I have asked on a number of occasions that the target budget be fully rationalized as to agreed sums and P.C. sums. All P.C. sums will need full details, elemental take-offs and unit prices.

The contract value will be $30,000,000 subject to P.C. sum adjustments. My time line is critical.

Please disclose full information to Roger Fairhead as to assist Kingston Partners to pier review the contract value.

[109]   By reference to these matters I have difficulty in determining precisely how Mr Morgenstern regarded the arrangement between himself and Canam. I have no doubt that Canam had a similar difficulty. My conclusion is that, he was very determinedly trying to obtain an unrealistically low price for the project, but, at the same time, being prepared to ensure that Canam remained with the project to ensure that he continued to have the advantage of all the work they were doing. This included obtaining prices, which would at least serve as a guide to any other quotes that he might have obtained, and also securing Canam’s services to complete preparatory works required before the actual construction activity commenced.

[110]   In determining whether there was an intention to be immediately bound, I bear in mind that that question cannot sensibly be divorced from a consideration of the terms expressed or implicit in the negotiation: Fletcher Challenge at [50]. Likewise, such an intention is to be assessed objectively: Fletcher Challenge at [54]. The Court has an entirely neutral approach when determining whether parties intended to enter into a contract: Fletcher Challenge at [58].

[111]   In the final analysis, I have concluded that Mr Morgenstern had no intention to be immediately bound to Canam when he told Mr Petrou Canam was the contractor.

[112]   On the other hand, I consider that Canam was prepared to proceed with the project on the basis it would be regarded as the main contractor but without any settled expectation that it would ultimately be appointed as such.

[113]   I am led to this conclusion by reference to Mr Petrou’s knowledge of Mr Morgenstern’s dealings with other parties plus, his intransigent reaction to Canam’s best efforts to provide what was being asked of it. Furthermore, the reaction by Canam to the news that the contract would be tendered out, and the limited nature of its claim at that time all served to indicate that Canam was not the least surprised to find that Mr Morgenstern denied there was a contract.

[114]   Put bluntly, Canam was given assurances which, in the normal course, they would have been entitled to accept at face value. The assurances were not, however,

given in the normal course, they were given by Mr Morgenstern, who, I find to be, a less than credible and reliable witness.

[115]   For the above reasons and noting that there is an onus on Canam to prove on the balance of probabilities that there was a contract in existence for the construction of the project, I find there was no such contract.

[116]The question remains, where does that leave Canam’s counterclaim?

[117]   After Morning Star had resolved to have the main construction contract tendered, and after Canam had declined to be involved in this process, Canam sought to recover monies which it claimed was for work done in connection with pre- construction work and including, in particular, demolition works and road alignment works, which they had organised through subcontractors. That claim was set out in an invoice (doc. 5-120) sent on 18 June 2003. (Copy invoice attached to this decision as annexure “B”).

[118]   Canam’s counterclaim includes the total of $253,456.72 but with the addition of GST making a total of $279,180.25. In addition, the counterclaim sought  judgment in the sum of $2,450,000 or an inquiry into and an award of damages in respect of Canam’s loss of margin on the main construction contract.

[119]   Dealing firstly with the items included in the invoice, during the course of the hearing, Morning Star’s counsel indicated that agreement had been reached as to the quantum of some of the items claimed by the defendant. Reference was made to the invoice dated 19 June 2003. Counsel advised at p103 line 33 of the Notes of Evidence:

In this list the following matters are disputed as to quantum:

(a)Display suite for the balance over $25,000.

(b)The administration costs totalling $6,400.

(c)Design management $104,000.

(d)In addition, it is agreed that a 7% margin is payable on all accepted items other than the display suite.

[120]   Although the concession is referred to as being a concession only as to quantum, it is my understanding that the concession as to quantum also extended to a concession as to liability. This certainly appears to be the position if reference is made to counsels’ final submissions. I therefore refer to the three matters which remain in dispute.

The display suite

[121]Clause 5 of the WTA stated:

5.1Canam will construct a display suite to the specifications of Morning Star St Lukes Garden Apartments Ltd for the purpose of marketing and selling the apartments. These costs are not to exceed the amount of $25,000 plus GST.

5.2The cost for the work associated with the display suite will be included in the GMP as part of the main contract.

5.3Should the project not proceed and not withstanding Clause 4.12 Morning Star St Lukes Garden Apartments Ltd are to pay Canam Construction Ltd for all costs associated with the display suite, within seven days of presentation of the relevant invoice.

[122]   On 19 August 2002 (doc. 193) Canam had written to Mr Morgenstern advising, inter alia:

1.The display suite has now been fully completed (including remedial items) in accordance with Woodhams-Meikle Architects documentation.

2.The following cost apportionment/breakdown details the full costs incurred by Canam, which will be included into our GMP price when the project proceeds. Should the project not proceed for any reason all costs as stated will be directly invoiced to you for payment.

The letter then set out a detailed list of costs totalling $35,951 plus GST. The letter concluded by saying:

Should you have any queries in relation to the above please do not hesitate to contact me.

[123]   No queries were forthcoming. Canam was not, however, engaged as the main construction contractor and it now seeks to recover the above sum.

[124]Morning Star accepts liability for $25,000 plus GST but contends:

[a]its total liability was limited to $25,000 plus GST in accordance with clause 5.1 of the WTA; and alternatively

[b]the counterclaim only refers to an increased claim of $27,245.44.

[125]   Canam submitted, however, that the provisions of clause 5.3 of the WTA removed any limit on the amount to be claimed if the project did not proceed.

[126]   Dealing with the second matter first, I am satisfied in light of the contents of the letter dated 19 August 2002 (doc. 7-04) that the amount claimed in the counterclaim was in error. Given the lack of objection to the itemised amount in that letter, I consider it appropriate that the quantum be amended.

[127]   As to the second issue as to liability, I find that Canam is entitled to judgment for the full amount of $35,951 plus GST for the following reason.

[128]   The WTA was entered into at the stage when the parties were contemplating a project very similar to the Lynfield project. It soon became clear that Morning Star was intending to incorporate more expensive fittings. Mr Meikle, Morning Star’s architect, directed what these were to be. There was in my view a variation of the understanding which provided the basis for the nominated sum of $25,000 plus GST. No objection was taken when the total cost, including the more expensive work, was notified in the letter dated 19 August 2002.

The design management and administration costs

[129]   Mr Petrou in his evidence gave details as to how, and more importantly, when these costs were incurred. He made it clear they were only those costs incurred after mid-February 2003 and were based on cost reports which had been discovered but not included in the agreed bundle of documents. Apart from this point he was not challenged regarding these two claims.

[130]   Canam submitted that payment of these two amounts, which were included in the total of $279,180.25, was agreed to by Mr Morgenstern at a meeting with Mr Petrou on 24 June 2003 (doc. 5-162). Mr Morgenstern wrote to Mr Petrou the following, noting inter alia:

I confirm that Morning Star will pay for the constructions works that Canam has undertaken to date and which have already been previously approved by Morning Star.

[131]Mr Petrou replied on 26 June 2003 (doc. 5-205):

At our meeting on Tuesday we also agreed that Morning Star will pay for the cost of the display suite at a fair compensation for Canam’s involvement on the project from August 2002 to date.

I will appreciate your confirmation of this please. Please also advised whether you would like Canam to remove the hoarding or to leave it in place.

[132]   In fact, Mr Petrou has made it clear that the sums claimed under this head were only those which arose from February 2003 on.

[133]   Morning Star’s main submission under this head was that there is no pleading in the counterclaim relying on any such agreement. I have some difficulty in understanding just how the claim for these two items is pleaded. The first set off and counterclaim is apparently pleaded on the basis of the separate demolition and associated road contract. The second set off and counterclaim is pleaded on the basis of a breach of the WTA. However, the parties seem to agree that these claims were also presented on the basis of the alleged main contract, which I have found did not exist.

[134]   The evidence is, however, that these costs were incurred from mid-February 2003 until Morning Star terminated its association with Canam in June 2003.

Discussion

[135]   Under the WTA the parties were required to work together to provide  a GMP. There were meetings associated with that process, namely, the design meetings. The first of these was on 12 September 2002 (doc. 7-23). The GMP

Proposal specified the obligations to be undertaken by Canam after a GMP was agreed upon. From that point on the WTA provided that Canam’s position changed. It became responsible for the pre-construction work including:

·     Conceptual design review

·     Value engineering

·     Programming of work

·     Preparation of cost plan and review of budgets through final drawings

[136]   Later, in the normal run of events, it would carry on with the actual construction.

[137]   I have concluded that, despite being told it was the main contractor in mid- February, in fact no main contract was concluded. What appears to have occurred was a hybrid arrangement. As I see it, if a GMP had been agreed in mid-February in the normal course:

[a]The main building contract would have been signed.

[b]The consultants would have been novated to Canam.

[c]Design team meetings would have commenced.

[d]Canam would proceed with the pre-construction work which I have referred to, and then the construction work.

[138]What did happen was:

[a]no GMP was agreed; but

[b]Canam was told it was the main contractor; but

[c]no contract was signed; but

[d]despite the absence of an agreed GMP and main contract Canam did in fact, at the request of Morning Star, go ahead with the pre- construction work specified in the GMP proposal.

[139]   This is clear from the minutes of the first design meeting on 17 March 2003 (doc. 4-66). As already noted, para 2.1 said:

Canam to produce a design process and construction programme as soon as possible. Programme is to take account of staging of the construction process and to indicate due dates for submitting information from all consultants.

[140]It is significant, however, that the same minutes note:

3.2 Consultants are to be novated to Canam in terms of design? (To be clarified).

[141]   At the same time, Canam was still trying to provide GMP to Morning Star which, had the arrangement between the parties proceeded as originally intended, would have already been resolved.

[142]   The result is that Canam now seeks to recover the administration and design management costs which it incurred, and which would have been recoverable had  the main construction contract been in place.

[143]   As I have already noted, Mr Morgenstern denied that any agreement was reached at the meeting between himself and Mr Petrou on 24 June 2003. His evidence on this point is I think, revealing.

[144]His examination in chief is recorded at p60 line 8 of the Notes of Evidence:

XD MR LATTON… Mr Petrou has given evidence commencing at para 98 in which he states that he met with you following the decision to tender on Tuesday 24 June at a coffee house below your offices. Do you recall that meeting?

A.       I don’t recall the exact date but I do recall meeting with him.

Q.Mr Petrou says that at that meeting you told him that  Canam was to  be the contractor and he was getting prices to help him and that he told you that Canam would not be tendering for the job?

A. That is incorrect and all the tender documents after that were provided to Canam, there were many amendments to those tender documents, they were also provided at dates after that to Canam, at no time did Canam either inform me or any of the consultants including the architects that he was not tendering. It was quite the contrary by his actions he was tendering and in subsequent telephone conversations to me he confirmed he was tendering.

Q. Mr Petrou says that you told him that if Canam did not do the job he would pay for the display suite or that you would pay for the display suite and all of Canam’s costs to date, it says “all of our costs to date” at para 98?

A.I don’t know which conversation that refers to, part of that is correct, I had a contractual obligation to pay $25,000 plus GST for the display suite. I always understood Canam to be tendering, no other discussions than that took place, and I never guaranteed to pay for the display suite, I had a contractual obligation to do so i.e. I accepted the obligation without the need for any further guarantee.

[145]   Mr Morgenstern was cross-examined by Mr Christie at p69 line 33 of the Notes of Evidence:

Q. But you accept that it is made out for the value of Canam’s second progress claim?

A.I accept it  was made out for  the full  value and it  was  wrong and   never issued.

Q. Come to p162, the first line confirms you had a meeting  with Mr  Petrou?

A.       The first line does confirm that.

Q.       The day before which would make it 24 June?

A. By reason of deduction off the letter, yes I agree by reason of your deduction.

Q.Come to the last para  please,  at the end of the first line of the last  para you state there “Morning Star will pay …(counsel reads)… by Morning Star”, that’s what your letter said didn’t it?

A.The letter of June 25 03 was drafted by my solicitor Robert Parker it was signed by me. The last para in which Mr Christie is drawing my attention is a confirmation that I will pay for construction work undertaken to date by the terms of the contract with Canam on the same terms of obligations that we have worked with during our relationship.

Q.       That’s not what the letter says.

A.       That is my intent of what the letter says, that’s how I understand it.

Q.You wouldn’t have any involvement in the contract under your interpretation but that’s exactly what your letter says?

A.       I don’t understand.

FTC.- Aren’t you saying that you will pay for work previously  carried out by Canam?

A.       Yes.

[146]   Given the circumstances of that meeting, and particularly the position which had been reached between the parties, I do not accept Mr Morgenstern’s evidence on this point. I have no doubt that Mr Petrou did raise the question of administration  and design management costs and, that this is confirmed by his letter dated 26 June 2003 (doc. 5-205). However, as Mr Latton has pointed out, this agreement is not pleaded.

[147]   In my view there is no need for Canam to rely on this agreement because, under the hybrid nature of the arrangement between the parties, which developed after mid-February 2003, there was a clear agreement between them that Canam would do the pre-construction work which included administration and design management. Canam assumed, perhaps optimistically, that these would be recovered pursuant to a main construction contract later on. I am not able to reach any conclusion as to what Mr Morgenstern considered to be the position in this regard.  If, even at that early stage, he was contemplating another contractor being appointed as the main contractor, he certainly asked Canam to do the pre-construction work it did. Taking into account the considerable amount of pre-construction work actually done by Canam after mid-February, and certainly after the first design team meeting on 17 March 2003, it seems to be a reasonable conclusion that this work must have resulted in an equally considerable saving in the work required of the contractor which was appointed, namely, Kalmar Construction Ltd.

[148]In my view the position is:

[a]Mr Morgenstern ordered the pre-construction work to be done by Canam.

[b]Canam did the work.

[c]The project was progressed accordingly.

[d]Morning Star received a benefit from that work i.e. the  contractor who was appointed did not have to do the work later.

[e]Now, Mr Morgenstern seeks to avoid having to pay for it.

[149]   The short answer in my view is that, in this situation, Canam is entitled to be paid for this work on the basis of a quantum meruit to recover a remuneration proportionate to the benefit recovered by Morning Star.

[150]   Canam has not pleaded a quantum meruit. However, this Court may pursuant to R11 of the High Court Rules amend the pleadings:

11 Power to amend defects and errors

(1)  The Court may, either before, at, or after the trial of any proceeding, amend any defects and errors in the pleadings or procedure in the proceeding, whether or not there is anything in writing to amend, and whether or not the defect or error is that of the party (if any) applying to amend.

[(2) The Court may, at any stage of a proceeding, make, either of its own motion or on the application of any party to the proceedings, such amendments to any pleading or the procedure in the proceeding as are necessary for determining the real controversy between the parties.]

(3) All amendments made under subclause (1) [or subclause (2)] shall be made with or without costs and on such terms as the Court thinks fit.

[151]   Given the extent to which this issue was canvassed at trial, I have formed a clear view that this is an appropriate case to amend Canam’s counterclaim proceedings to include a claim for the administration and design management costs on the basis of a quantum meruit. Such an amendment will provide a proper basis for determining the real controversy between the parties on this point.

[152]However, in McGechan on Procedure at para HR11.04 it is noted:

Although the Court is empowered to act of its own motion under either subcl

(1) or subcl (2), a Court would be reluctant to act without allowing the  parties an opportunity to put their case. See J Leavey & Co Ltd v George H Hirst & Co Ltd [1994] KB 24; [1943] 2 All ER 581 (CA), at p 27.

[153]   This being the case, I reserve leave to the parties to file and serve memoranda on this point. The plaintiff is to file and serve its memorandum within seven days from the receipt of this interim decision. The defendants are to reply within a further seven days.

Claim for lost profits

[154]Canam’s claim to recover its loss of profit amounting to approximately

$2,450,000 is based on an allegation that it was an entitlement arising from the main contract which did not eventuate because Morning Star breached the WTA agreement.

[155]   In the final analysis, I am satisfied Morning Star did breach the  WTA and that it did not “work harmoniously to fulfil [its] shared and separate obligations, responsibilities and objectives” and further, it did not work together with Canam to establish the GMP. In particular, it:

[a]Failed to give Canam a clear specification for the job required. The size of the project was changed from that originally specified i.e. 180 units and the content of the project was different from that originally indicated i.e. as being similar to the Lynfield project.

[b]It failed to ensure that its consultants received sufficient assurances as to their remuneration to ensure their complete involvement in the project in the period October 2002 until March 2003.

[c]Most importantly, it failed to enter into any effective dialogue with Canam to resolve the GMP and/or budget proposals provided by Canam at various points.

[d]Ultimately, it withdrew from the GMP process and let the main contract to another contractor.

[156]   Canam’s claim for loss of profits is a claim for damages based on a lost opportunity. To succeed it must prove:

[a]That the opportunity was not too remote.

[b]The actions of Morning Star caused the loss of opportunity.

[c]That there are no factors requiring that that the loss should be discounted.

[157]   In the circumstances which I have referred to, I do not see that Canam can overturn the first obstacle of remoteness. Canam agreed to continue with the project under what I have described as a “hybrid” arrangement. As I see the position, their prospect of obtaining the main contract was at risk, even after they were told they were to be the main contractor. They knew that Mr Morgenstern was getting tenders from other contractors and, at one point, they offered to withdraw. They were met throughout the relevant time with Mr Morgenstern’s intransigent attitude in relation to agreeing on a GMP. They nevertheless elected to continue with the project. My clear impression is that, when all these matters are considered together, Canam were faced with the real prospect from an early stage that Mr Morgenstern was never going to accept the pricing indications that Canam was providing. In other words, the opportunity to make a profit was at all times a matter of real conjecture. This being the case, I find that the counterclaim for loss of profits must fail.

Summary to this point

[158]I set out a summary to this point as follows:

[i]The plaintiff has failed in its claim. The defendants are entitled to judgment accordingly.

[ii]The defendants have succeeded in their counterclaim for the amounts conceded by counsel at trial.

[iii]In addition, the defendants have succeeded in their counterclaim for the costs of providing the design suite i.e. $35,951 plus GST.

[iv]The question as to whether the defendants have succeeded on their claim for administration costs and design management costs still remains to be determined.

[v]The defendants have failed in their counterclaim for loss of profits.

Costs

[159]   The defendants are entitled to costs, disbursements and witness expenses on both the plaintiff’s claim and their counterclaim. So far as the first defendant is concerned, my preliminary view is that these should be assessed on the 2B formula. So far as the second and third defendants are concerned, I have already indicated that they should arguably be reimbursed for costs on a more generous basis. Counsel were advised that I would be reserving the position in this regard. I therefore request counsel to supply memoranda as to costs at the same time as the memoranda referred to in para [153] above.