PPR RIccarton Limited v W Gartwhore Limited
[2023] NZHC 485
•13 March 2023
IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY
I TE KŌTI MATUA O AOTEAROA TAURANGA MOANA ROHE
CIV-2022-470-127
[2023] NZHC 485
BETWEEN PPR RICCARTON LIMITED
Applicant
AND
W. GARTSHORE LIMITED Respondent
Hearing: 21 February 2023 Counsel:
JA Frampton for the Applicant M Beech for the Respondent
Judgment:
13 March 2023
JUDGMENT OF ASSOCIATE JUDGE BRITTAIN
This judgment was delivered by me on 13 March 2023 at 2.30 pm, pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
Solicitors:
Lane Neave, Christchurch Bush Forbes, Tauranga
Counsel:
M Beech, Regional Chambers, Tauranga M Paddison, Tauranga
PPR RICCARTON LIMITED v W. GARTSHORE LIMITED [2023] NZHC 485 [13 March 2023]
Introduction
[1] PPR Riccarton Limited (PPR) operates a “PappaRich” restaurant from premises it leases in Westfield Riccarton mall, Christchurch. W. Gartshore Limited (Gartshore) is a construction company. PPR engaged Gartshore to construct the fitout of its restaurant premises. The parties entered into a construction contract dated 6 October 2021 (the construction contract) and a term loan agreement dated 24 November 2021 (the loan agreement).
[2] On 10 October 2022, Gartshore served a statutory demand on PPR, demanding payment of $244,671.11 under the loan agreement. PPR applies to set aside that demand. Gartshore now claims that PPR is indebted to it for amounts due under the construction contract and the loan agreement.
Background
[3] The construction contract provided for a fixed price for the construction work of $1,230,500 including GST, subject to any variations.
[4] The construction work commenced in October 2021, and the parties subsequently executed the term loan agreement dated 24 November 2021. The principal due under the loan agreement was stated to be $172,500, repayable by six equal monthly instalments of $28,750. There is a dispute regarding when the first instalment fell due.
[5] It is common ground that PPR took possession of the premises and the construction work in April 2022. On 29 April 2022, one of PPR’s directors, Peter Kuok, sent an email to Gartshore including photographs of defective work. The copy of the email produced in evidence does not include the photographs. It is common ground that Gartshore carried out some remedial work. A code compliance certificate was issued for the construction work on 5 June 2022.
[6] PPR remained dissatisfied with the quality of the construction work. In June 2022, PPR engaged Maynard Marks to carry out a survey of the work. The survey was completed by a registered building surveyor, Scott Mcilraith. Mr Mcilraith
produced a report dated August 2022 which records that it was issued on 6 September 2022. Mr Mcilraith gave affidavit evidence in support of PPR’s application to set aside the statutory demand.
[7] Mr Kuok’s evidence is that PPR engaged third parties to carry out some remedial work from March to July 2022, incurring costs of $78,659.35. PPR’s position, based on Mr Mcilraith’s evidence, is that further substantial remedial work is now required.
[8] Gartshore issued 14 invoices to PPR. There are issues regarding whether those invoices were validly served payment claims under the Construction Contracts Act 2002 (the CCA). Putting those issues to one side, according to the face of the documents, the invoices were as follows:
Date Amount and narration 5-10-21 $460,000 including GST, for the deposit 25-10-21 $264,500 including GST, described in the narration as “Progress claim” 25-11-21 $264,500 including GST, described in the narration as “Progress claim” 01-12-21 $39,069.79 including GST, for variations 1, 2 and 3 24-01-22 $28,750 including GST, described in the narration as “Finance Payment 1 as per Loan agreement” 15-02-22 $28,750 including GST, described in the narration as “Finance Payment 2 as per payment plan” 18-03-22 $28,750 including GST, described in the narration as “Finance Payment 3 as per payment plan” 08-04-22 $64,496.18 including GST, for variations 4–20 08-04-22 $69,000 including GST, described in the narration as “Practical Completion Invoice” 01-05-22 $28,750 including GST, described in the narration as “Finance Payment 4 as per loan Agreement” 24-05-22 $28,750 including GST, described in the narration as “Finance payment 5 as per Loan Agreement” 23-06-22 $28,750 including GST, described in the narration as “Finance
payment 6 as per loan agreement”
23-06-22 $4,072.44 including GST, for variation 21 29-08-22 $8,640.21 including GST, described in the narration as “Commissioning of PappaRich systems HVAC”
[9] Gartshore issued statements to PPR that confirm that from 31 October 2021 to 4 May 2022, PPR paid Gartshore numerous instalments that did not coincide with Gartshore’s invoices. The total of the payments was $1,051,069.79.
[10] In July and early August 2021, another director of PPR, Steven Loh, exchanged emails with Gartshore regarding payment of Gartshore’s outstanding invoices. There was no mention of defective work in Mr Loh’s emails.
[11] PPR made a further payment of $80,000 on 5 August 2022. On 8 August 2022, Gartshore emailed PPR a statement advising that the outstanding balance was
$207,068.62. The statement did not record any default interest.
[12] On receipt of the Maynard Marks report issued on 6 September 2022, Mr Kouk emailed Gartshore disputing liability to pay the amount outstanding and raising the issue of defective work.
[13] Further emails were exchanged between PPR and Gartshore in August and September 2022. The emails confirm that PPR requested that Gartshore attend site to review defects, and there was an attempt to agree terms for further payments from PPR to Gartshore. The parties did not find a resolution. On 10 October 2022, Gartshore served the statutory demand.
Setting aside a statutory demand
[14] When a statutory demand is issued under s 289 of the Companies Act 1993, it may be set aside by the Court if:
(a)there is a substantial dispute as to whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off or cross demand and the amount specified in the demand less the amount of the counterclaim, set-off or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.1
1 Link Electrosystems Ltd v GPC Electronics (New Zealand) Ltd [2007] NZCA 501, [2008] NZCCLR 19 at [13].
[15] For an alleged debtor to succeed in setting aside a statutory demand, some material short of proof is required to support the claim that the debt is in dispute; mere assertion of a dispute will not suffice.2 In deciding an application, the task for the judge is not to resolve the actual dispute but to determine whether there is in fact a genuine and substantial dispute as to whether the debt is due.3
[16] If the ground relied on is the availability of a set-off, the alleged debtor must show that it has “clear and persuasive grounds” for the claimed set-off with the consequence that the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt.4
The payment terms of the contracts
[17]Clause 3.1 of the construction contract provided:
3.1The Client shall pay the Contract Price plus variations on the due date. The Parties agree that the due date for the Client to make payment(s) pursuant to the Construction Contracts Act, shall be the date of which the following milestones occur or as otherwise stated on the Payment Claim.
The client shall pay the Contract Price plus variations to the Contractor as follows:
(a)Thirty seven percent (37.3831775) of the Contract Price plus GST on the parties signing this Agreement (“the Deposit”);
$460,000.00 including GST.
(b)Progress claims to be submitted for the months of October and November 2021, to be submitted to the client on the 25th of each month and payment received by the 30th of the same month the claim is issued.
(c)The remaining Amount of $150,000.00 plus any applicable variations, plus GST of the contract value will be financed over the following 6 months January – June 2022, as per the attached payment plan.
(d)The Borrower agrees to enter into a loan agreement to be provided by W Gartshore Ltd, on or before noon Friday 8th of October 2021. It is further agreed that such loan agreement will include various undertakings, including but not limited
2 Link Electrosystems Ltd v GPC Electronics (New Zealand) Ltd, above n 1, at [17].
3 At [17].
4 Bryanston Finance Ltd v de Vries (No 2) [1976] CH 63 (CA) at 78 and Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272 (CA) at [11].
to, personal guarantees, PPSA etc, all as determined by W Gartshore Ltd.
(emphasis in original)
[18] The “payment plan” referenced in cl 3.1(c), and attached to the contract, was as follows:
Due Date Amount (Ex GST) GST 15% Amount (Incl. GST) Deposit 6-Oct-21 $ 400,000.00 $ 60,000.00 $ 460,000.00 Progress Claim 1 1-Nov-21 $ 230,000.00 $ 34,500.00 $ 264,500.00 Progress
Claim 2
1-Dec-21 $ 230,000.00 $ 34,500.00 $ 264,500.00 Progress Claim 3 31-Dec-21 $ 60,000.00 $ 9,000.00 $ 69,000.00 SUB - TOTAL (A) $ 920,000.00 $ 138,000.00 $ 1,058,000.00
Due Date Amount (Ex GST) GST 15% Amount (Incl. GST) Finance Payment 1 30-Jan-22 $ 25,000.00 $ 3,750.00 $ 28,750.00 Finance Payment 2 28-Feb-22 $ 25,000.00 $ 3,750.00 $ 28,750.00 Finance
Payment 3
31-Mar-22 $ 25,000.00 $ 3,750.00 $ 28,750.00 Finance Payment 4 30-Apr-22 $ 25,000.00 $ 3,750.00 $ 28,750.00 Finance
Payment 5
31-May-22 $ 25,000.00 $ 3,750.00 $ 28,750.00 Finance Payment 6 30-Jun-22 $ 25,000.00 $ 3,750.00 $ 28,750.00 SUB - TOTAL (B) $ 150,000.00 $ 22,500.00 $ 172,500.00
TOTAL (A+B) $ 1,070,000.00 $ 160,500.00 $ 1,230,500.00
[19]Below the payment plan was the following statement:
Terms & Conditions for making provision for the above payment plan will be outlined in a loan agreement to follow.
Which is to be signed on or before noon Monday 11th October 2021.
[20] Variations were to be charged according to a formula prescribed in cl 3.6 of the construction contract and would be due for payment as set out in cl 3.1(c).
[21]Clause 6.1 of the construction contract provided:
6.1The phrase “the Date of Practical Completion” means the earlier of the date upon which the Client takes possession of the Premises or alternatively, the date upon which the Contractor has given notice that the Contractor’s work is substantially completed.
[22] The principal sum of $172,500 due under the loan agreement was consistent with the sum of $150,000 plus GST referenced in cl 3.1(c) of the construction contract. Table B of the annexure schedule to the loan agreement provided for the monthly repayments to commence one month after practical completion:
[23] Robert Gartshore gave affidavit evidence on behalf of Gartshore. Mr Gartshore confirmed that Gartshore had agreed to the method for calculating the repayment dates for the loan as recorded in the loan agreement.
The parties’ positions
[24] PPR argues that it is entitled to impeach the statutory demand on one or more of the following grounds:
(a)PPR’s principal argument is that it has a counterclaim, set-off or cross-demand as a consequence of the defective work, that exceeds the
amount specified in the statutory demand, entitling the Court to set aside the demand under s 290(4) of the Companies Act.
(b)Gartshore failed to achieve practical completion, so that payment for the variations and the six finance instalments of $28,250 have not fallen due.
(c)Gartshore’s invoices did not comply with the requirements for payment claims prescribed by s 20 of the CCA.
(d)If the payment claims do comply with s 20, Gartshore failed to validly serve them.
(e)The “pay now argue later” provisions of the CCA do not apply to the payments that are outstanding, relying on s 11(b)(ii)(A) of the CCA, which provides:
11 When Act does not apply
This Act does not apply to—
…
(b)a construction contract to the extent that it contains—
(i)provisions under which a party undertakes to carry out construction work as a condition of a loan agreement with any person; or
provisions under which a party undertakes—
(A)to lend money or to repay money lent; or
(B)to guarantee payment of money owing or repayment of money lent; or
(C)to provide an indemnity for construction work carried out under the construction contract; or
… (emphasis added)
(f)The statutory demand was defective because it caused substantial injustice. It made no reference to the construction contract and PPR’s director, Mr Kuok, was confused by the amount it demanded and its description of the debt as “being the principal and interest amount owing which was due for payment on or before 7 September 2022 pursuant to clause 8 of the Term Loan Agreement dated 24 November 2021.”
[25] Mr Kuok deposed that PPR has to date incurred costs of $78,659.35 investigating and remediating defective work by Gartshore. PPR relied on the evidence of Mr Mcilraith regarding the continuing existence of 34 defects, and affidavit evidence from a quantity surveyor, Mr Watson, which estimates the cost of the required remedial work to be $212,856.16 including GST. The admissibility of Mr Watson’s affidavit, which was filed late, is in issue. Mr Kuok asserts that the restaurant will be required to close during the remedial work, which will result in a loss of income.
[26] Gartshore does not accept that any defect or irregularity in the statutory demand, as a result of it referring solely to the loan agreement, caused substantial injustice to PPR. Gartshore says that the demand should not be set aside on that basis.
[27] Gartshore concedes that the six payments of $28,500 under the loan agreement were due to commence on 31 May 2022, arguing that practical completion occurred in April 2022.
[28] Gartshore argues that PPR was in default in payment of payment claims made under the CCA prior to January 2022, so that in January 2022, Gartshore was entitled to call up all PPR payments, including all six payments due under the loan agreement, relying on cl 4.6 of the construction contract, which provides:
4.6Without prejudice to the Contractor’s other remedies contained within this agreement or at law the Contractor shall be entitled to cancel all or any part of any order of the Client which remains unfulfilled and all amounts owing to the Contractor shall, whether or not due for payment, become immediately payable in the event that:
(a)any money payable to the Contractor becomes overdue, or in Contractor’s opinion the Client will be unable to meet its payments as they fall due; or
(b)the Client becomes insolvent, convenes a meeting with its creditors or proposes or enters into an arrangement with creditors, or makes an assignment for the benefit of its creditors; or
(c)a receiver, manager, liquidator (provisional or otherwise) or similar person is appointed in respect of the Client or any asset of the Client.
[29] Gartshore seeks to rely on the construction contract and the “pay now argue later” provisions in the CCA, asserting that the total due to it is $230,661.69, comprising:
(a)$76,081.47 including GST due under the construction contract, including interest of $16,363.22.
(b)$154,580.22 including GST due under the loan agreement, including interest of $4,734.65.
In doing so, Gartshore treats the variations as payable under the construction contract, rather than the loan agreement.
[30] Gartshore argues that all of the invoices were payment claims that complied with s 20 of the CCA, validly served under r 10 of the Construction Contracts Regulations 2003 on the basis that PPR agreed to service by email. Accordingly, Gartshore relies on s 79 of the CCA which provides:5
79Proceedings for recovery of debt not affected by counterclaim, set- off, or cross-demand
In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if—
(a)judgment has been entered for that amount; or
5 Section 79 is applicable to statutory demands: see Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243.
(b)there is not in fact any dispute between the parties in relation to the claim for that amount.
[31] Gartshore contends that s 11(b)(ii)(A) of the CCA does not apply in the present case, because Gartshore did not actually lend any money to PPR. Instead, Gartshore says that the construction contract and the loan agreement, in substance, created a regime for deferred payments due under the construction contract.
[32] Gartshore submits that PPR cannot raise a counterclaim, set off or cross- demand to impeach the statutory demand. In the alternative, Gartshore argues that PPR’s claim is speculative. PPR’s expert evidence questions the installation of the kitchen linings and the decorative timber panels fixed to the ceiling in the restaurant, recommending further reports from registered engineers, rather than presenting affirmative opinions that the work is defective.
The issues
[33]PPR’s application gives rise to the following issues:
(a)Is the statutory demand defective so that PPR will suffer a substantial injustice if it is not set aside?
(b)Should the Court read the affidavit of PPR’s quantity surveyor, Mr Watson, given that it was filed late?
(c)What is the correct interpretation of the payment terms in the construction contract and the loan agreement?
(d)Are the amounts now outstanding due under the construction contract or the loan agreement, and does s 11 of the CCA apply?
(e)Has PPR established clear and persuasive grounds for a set-off?
Is the statutory demand defective so that PPR will suffer a substantial injustice if it is not set aside?
[34]Section 290(5) of the Companies Act provides:
(5) A demand must not be set aside by reason only of a defect or irregularity unless the court considers that substantial injustice would be caused if it were not set aside.
[35] I accept that Mr Kuok may have at first been confused by the wording of the statutory demand and the amount demanded. It was reasonable for Mr Kuok to read the demand as relating solely to amounts due under the loan agreement.
[36] This affected PPR’s approach to its application to set aside the demand, because PPR’s originating application and Mr Kuok’s first affidavit in support did not deal with issues arising from the application of the “pay now argue later” provisions of the CCA. It was not until Gartshore served its notice of opposition and Mr Gartshore’s first affidavit that it became apparent to PPR that Gartshore was seeking to rely on what Gartshore asserted to be validly served payment claims under the CCA. Further, in his evidence Mr Gartshore refined the amounts that Gartshore claims are outstanding under the construction contract and the loan agreement.
[37] However, any prejudice to PPR was minimal and remedied when PPR filed affidavits in reply from both Mr Kuok and its building surveyor, Mr Mcilraith. In his reply affidavit, Mr Kuok was able to give evidence pertinent to the CCA issues.
[38] Similarly, there was no prejudice to Gartshore when Mr Kuok introduced this evidence for the first time in his reply affidavit, because Mr Gartshore subsequently filed an affidavit sworn on 15 February 2023, giving further evidence regarding service of the disputed payment claims.
[39] PPR cannot meet the threshold of establishing a substantial injustice required to set aside the statutory demand on the basis of a defect or an irregularity in the demand.
Should the Court read the affidavit of PPR’s quantity surveyor, Mr Watson, given that it was filed late?
[40] Mr Watson’s affidavit was sworn on 16 February 2023. His evidence is that he considered Mr Mcilraith’s report, reissued on 20 October 2022, and costed the remedial work set out in that report. Mr Watson does not state when he was engaged
by PPR, and Mr Kuok has not given any evidence explaining why there was a delay in instructing Mr Watson.
[41] Despite that, I am prepared to read the affidavit on the basis that admission of the evidence will cause no material prejudice to Gartshore. Gartshore’s position is that the defects are only very minor, and the defects can be remediated for a cost of
$2,442.50. It is readily apparent that Gartshore does not accept that the vast majority of the defects identified by Mr Mcilraith exist. In substance, the dispute is not about the cost of repairing the defects identified by Mr Mcilraith, the dispute is about whether defects exist. At this stage there is no direct challenge to Mr Watson’s quantity surveying exercise. It is the earlier stage of the process, the identification of defects, that is challenged.
[42] Counsel for Gartshore did not submit that Gartshore wished to adduce expert evidence to contradict Mr Watson. Even if Gartshore did so, such evidence would not assist the Court at this juncture because it is not appropriate for the Court to resolve a dispute between quantity surveying experts in a summary hearing.
What is the correct interpretation of the payment terms of the construction contract and the loan agreement?
[43] To ascertain when payments were due from PPR, it is necessary to consider the relevant provisions of the construction contract, the relevant provisions of the loan agreement and the invoices rendered by Gartshore.
[44]The first three payments are uncontroversial:
(a)A deposit of $460,000 including GST, paid on 6 October 2021.
(b)A first progress claim of $264,500 including GST, due at the end October 2021.
(c)A second progress claim of $264,500 including GST, due at the end of November 2021.
[45] Clause 3.1 of the construction contract and the payment plan do not expressly state that a third progress claim payment of $69,000 including GST would fall due on practical completion. The payment plan states that the due date was to be 31 December 2021, but this was because the parties anticipated that practical completion would be in December 2021.
[46] The invoice for $69,000 was issued by Gartshore on 8 April 2022, which is the day before PPR took possession of the premises. The invoice is described as the “Practical Completion Invoice”. It stated that the payment was due by 8 May 2022.
[47] The final payment of $172,500 including GST of the fixed price was to be “financed” over six months following practical completion in April 2022. That is confirmed by Table B of the annexure schedule to the loan agreement (replicated in para [22] above). Clause 3.1(c) of the construction contract unambiguously states that variations would also be financed over six months on the same basis as the $172,500.
[48] The variations had not been invoiced when the loan agreement dated 24 November 2021 was prepared, so it is unsurprising that the variations are not mentioned in the loan agreement. The loan agreement did not contain any provisions which provided for the stated principal sum of $172,500 to be increased by the addition of variations pursuant to cl 3.1(c) of the construction contract.
[49] I find that it was the objective intention of the parties that the variations were to be financed by Gartshore on the same basis as the final $172,500 of the fixed price, by increasing the amount of the six monthly payments to take into account the addition of the variations, and that the terms of the loan agreement would apply to the entire amount financed by Gartshore. The final $172,500 including GST of the fixed price, together with the variations which total $116,278.62 including GST, were to be financed by six equal monthly payments commencing on 31 May 2022.
[50] The result is that when PPR took possession in April 2022, the amount that had fallen due under the construction contract was $989,000 including GST, comprising the deposit and the first two progress payments. The amounts that were yet to fall due under the construction contract were:
(a)$69,000 including GST triggered by practical completion, due on 31 May 2022.
(b)The final $172,500 including GST of the fixed price and the variations of $116,278.62 including GST.
Are the amounts now outstanding due under the construction contract or the loan agreement, and does s 11 of the CCA apply?
[51] Gartshore produced various written statements which record the payments made by PPR, which ranged from $3,000 to $104,000 and did not correlate with the amounts due in the invoices rendered by Gartshore. Between 31 October 2021 and 4 May 2022, PPR paid the total sum of $1,051,069.79. If that is applied to the amounts that had fallen due by 4 May 2022, which total $989,000 including GST, then it is arguable that by 4 May 2022 PPR had overpaid by $62,069.79, putting to one side any interest that may have accrued under the construction contract on late payments, due to PPR’s part payments.
[52] Clause 4.1 of the construction contract provided that interest would accrue on overdue invoices at the rate of “two and a half per cent (2.5%) compounding per calendar month”. There is no evidence that this default interest rate was applied by Gartshore following the numerous part payments made by PPR in respect of the first three invoices from Gartshore, for the deposit and the first two progress payments.
[53] The next payment that fell due was $69,000 on practical completion, due on 31 May 2022. It is arguable that PPR’s overpayment of $62,069.79 should be applied to the practical completion payment of $69,000 due on 31 May 2022. Gartshore’s evidence was that payments were applied to the oldest outstanding invoices. On the same basis, it is arguable that PPR’s last payment of $80,000 on 5 August 2022 should also be applied first to the practical completion payment. On that basis, it is arguable that all payments that fell due under the construction contract up to and including the practical completion payment were made.
[54] It is helpful to also consider the position if PPR’s payments are applied pro rata to all obligations that fell due on 31 May 2022:
(a)The practical completion payment of $69,000.
(b)The first finance instalment of $28,750.
(c)One-sixth of the total cost of the variations, being $19,379.77.
(d) Total — $117,129.77.
It remains arguable that the amount of $117,129.77 was paid in full, even allowing for some default interest on late payments, by applying PPR’s overpayment of $62,069.79 and PPR’s last payment of $80,000.
[55] That then leaves the other amounts financed by Gartshore, provided for by cl 3.1(c) of the construction contract, which referred to these amounts being “financed over the following 6 months”. The payment plan attached to the construction contract referred to the six payments of $28,750 as “Finance Payment[s]”.
[56] The loan agreement was prepared using an Auckland District Law Society standard form term loan agreement. It unambiguously provides for a loan advance. The default interest rate in the loan agreement was 12 per cent per annum, which contrasts with the agreed interest rate in the construction contract of 2.5 per cent per month. The loan agreement also provided for additional securities, including a general security agreement and a specific security agreement over the assets of PPR.
[57] The invoices raised by Gartshore for the payments of $28,750 described them as either a “Finance Payment … as per loan agreement” or a “Finance Payment … as per payment plan”. Gartshore’s statements recorded default interest under the loan agreement as “Loan Portion Interest”. An email from Gartshore to PPR on 4 July 2022 referred to the amounts “provided by way of a loan”.
[58] I do not accept Gartshore’s argument that there was no loan advance from Gartshore to PPR. It is not necessary for there to be an advance of cash to create a debt obligation. It was the objective intention of the parties to create a debt obligation, by way of a loan advance from Gartshore to PPR, for the final $172,500 of the fixed price due under the construction contract and cost of the variations.
[59] The substance and form of the construction contract and the loan agreement must be given effect to. On practical completion at the earliest, and by 31 May 2022 at the latest, the final instalment of the fixed price, $172,500 including GST, and the cost of the variations fell due under the construction contract. These payments were in substance paid on the due dates under the construction contract by loan advances from Gartshore to PPR pursuant to the terms of the loan agreement.
[60] Based on the above analysis, it is arguable that all of PPR’s obligations under the construction contract, except possibly default interest, have been discharged. Gartshore seeks to enforce a loan agreement, and the CCA does not apply to a loan agreement.
[61] The outcome is the same if the loan agreement is construed as varying the deferred payment terms of the construction contract. That is because of the operation of s 11(b)(ii)(A) of the CCA. To the extent that a construction contract provides for a loan, then the CCA does not apply.
[62] For PPR, Ms Frampton submits that an agreement to defer payment of an amount due amounts to “money lent” under s 11. To the contrary, Mr Beech suggests that there must be a discrete advance of cash for there to be “money lent”.
[63] The terms “lend money” and “money lent” are not defined in the CCA. Their meanings fall to be determined on ordinary principles of statutory interpretation.6
[64] A useful starting point is the statutory definitions of those terms in other legislation. The Public Finance Act 1989 defines “lend money” as including “deferring payment for any goods or services supplied or works constructed for any person, organisation, or government”.7 The definition is germane because the CCA applies to all construction contracts entered into by the Crown.8
6 Legislation Act 2019, s 10.
7 Public Finance Act 1989, s 2(1), definition of “lend money”, para (a)(i). The definition was not present at the time of enactment and was inserted by the Public Finance Amendment Act 2013.
8 Construction Contracts Act 2002, s 8.
[65] Also of assistance is the Income Tax Act 2007, which defines “money lent” as encompassing “an amount of credit that a person gives, including by not enforcing a debt” or “an amount of money that a person lends, or credit that a person gives, under an obligation or arrangement”.9
[66] Both these definitions accord with the broader ordinary meaning of “lend”, which is defined by the Shorter Oxford Dictionary as “[g]rant[ing] the temporary use of (a thing) on the understanding that it or its equivalent shall be returned.”10
[67]The purpose of the CCA is set out in s 3:
3 Purpose
The purpose of this Act is to reform the law relating to construction contracts and, in particular,—
(a)to facilitate regular and timely payments between the parties to a construction contract; and
(b)to provide for the speedy resolution of disputes arising under a construction contract; and
(c)to provide remedies for the recovery of payments under a construction contract.
[68] As to the purpose of s 11, counsel could not find any relevant New Zealand case-law or commentary. Nor is there any indication in the Construction Contracts Bill, which simply states the obvious intention behind the provision, which is to exclude “certain classes of contractual provisions” from the Bill.11
[69] Some assistance may be derived from comments of the New South Wales Supreme Court in its interpretation of s 11’s equivalent in the Building and Construction Industry Security of Payment Act 1999 (NSW):12
… the purpose of s 7, stated broadly, may be seen to be to ensure that the rights and liabilities created by the Act, and the enforcement mechanisms that it
9 Income Tax Act 2007, s YA 1, definition of “money lent”, paras (b) and (c).
10 Shorter Oxford English Dictionary on Historical Principles (6th ed, Oxford University Press, Oxford, 2007), definition of “lend”.
11 Construction Contracts Bill 2001 (128-1) (explanatory note) at 4. At this stage of the drafting process, the provision was included in cl 9.
12 Consolidated Constructions Pty Ltd v Ettamogah Pub (Rouse Hill) Pty Ltd [2004] NSWSC 110 at [29].
provides, are confined to and operate only between the parties to the construction contract — as I have put it before, those who do the work and those who receive the benefit of it; and, further, to restrict the operation of the Act so that it does not affect construction contracts in so far as they may deal with financial arrangements.
(emphasis added)
[70] In enacting s 11, Parliament clearly intended that the CCA not apply to a construction contract “to the extent” it contained provisions in which a party undertook to lend money. This captures lending arrangements between a contractor and a principal.
[71] I reject Mr Beech’s submission that absent a specified purpose for s 11 and absent statutory definitions for “lend money” or “money lent”, Parliament must have intended a narrow conception of money lending. In my view, the terms were simply intended to carry their ordinary meaning.
[72] When a contractor agrees that a principal may defer payment of funds due, the effect of that agreement is that the contractor has given the principal temporary use of the contractor’s funds which the contractor expects returned on the agreed terms. Despite money not physically changing hands, the transaction is still in substance a loan of money. The situation is conceptually the same as vendor finance on the sale and purchase of real estate.
[73] I find that the arrangements between Gartshore and PPR in respect of payment for the last instalment of $172,500 of the fixed price and the variations of $116,278.62 were “money lent” by Gartshore to PPR, for a term of six months. Gartshore is confined to pursuing its rights under the loan agreement, and cannot rely on s 79 of the CCA, which would otherwise prevent PPR from raising a counterclaim, set-off or cross-claim if Gartshore had properly served valid payment claims. On that basis, it is not necessary for me to consider whether Gartshore complied with the requirements for service of a valid payment claim.
[74] To avoid the operation of s 11 of the CCA, Gartshore seeks to rely on cl 4.6 of the construction contract (quoted in para [28] above).
[75] Gartshore argues that PPR fell into default of its payment obligations under the construction contract before practical completion because of the drip-feed nature of PPR’s payments, which entitled Gartshore to accelerate the due date for all payments due under the construction contract, so that all of the amounts now outstanding are payments due under the construction contract and not the loan agreement.
[76] I reject that argument. Clause 4.6 only applies in a situation where PPR is in default and Gartshore elects to cancel the construction contract. The amounts that are accelerated on cancellation are those payments that are due up until the date of cancellation. By way illustration, if Gartshore cancelled the contract due to PPR’s failure to pay the deposit, Gartshore would not be entitled to accelerate payment for the entire fixed price of $1,230,500 including GST. Gartshore did not cancel the construction contract or the loan agreement.
Has PPR established clear and persuasive grounds for a set-off?
[77] There is no clause in the loan agreement that prevents PPR from raising a set-off to impeach the statutory demand. Even if the amounts claimed by Gartshore were due under the construction contract, which I do not accept to be the case, there is no clause in the construction contract which prevents PPR from raising a set-off. Clause 12.2 of the construction contract requires PPR to pay amounts due “without deduction”, but as properly conceded by Mr Beech, that does not preclude PPR from raising a set-off. Therefore, the statutory demand may be set aside if PPR meets the statutory test in s 290(4) of the Companies Act.
[78] PPR engaged Maynard Marks to carry out a comprehensive building survey in June 2022, not long after the practical completion payment and first finance instalment fell due on 31 May 2022. Mr Mcilraith’s report details 34 defects, and produces numerous photographs to support the existence of defects. Mr Mcilraith also produces various trade literature to support his opinions.
[79] Some of the defects can fairly be characterised as aesthetic, others are potentially more significant, including the substitution of the specified kitchen wall linings for an inferior product, and the addition of timber feature panels and heavy light fittings to the suspended ceiling.
[80] It is common ground that Gartshore substituted the specified kitchen wall linings for a different product, and the fire rating of the substituted product is in issue. Mr Mcilraith does not say that the wall linings do not meet the fire rating required by the fire report that was part of the building consent process. Rather, he questions whether the linings comply, and he calls for a report from a fire engineer with a CPEng qualification.
[81] Mr Gartshore produced a letter from Paul Dempsey of Acceptable Solutions Fire Design to Christchurch City Council dated 21 November 2022, which concludes that the substituted product complies with the requirements of the fire report. Mr Dempsey has not provided an affidavit. Mr Dempsey’s stated credentials are NZCD(Arch) and AIFireE. In reply, Mr Mcilraith opines that Mr Dempsey lacks the qualifications to provide the assurance given, and Mr Mcilraith refers to specific technical requirements that may not have been met, therefore challenging Mr Dempsey’s conclusion.
[82] It is not possible to resolve this conflict in a summary hearing. If Mr Mcilraith’s concerns prove well founded, then it will be necessary to remove the existing kitchen, replace the wall linings and re-install the kitchen. That will inevitably lead to closure of the restaurant during the remedial work, and significant costs.
[83] If Mr Dempsey’s view proves to be correct, then the extent of the remedial work to the wall linings is uncertain. Mr Mcilraith has opined that the installation of the wall linings is defective irrespective of fire-rating, and remedial work would still entail removal of at least some of the wall linings.
[84] The photographs taken by Mr Mcilraith indicate that decorative timber feature panels have been fixed to the suspended ceiling, together with what appear to be substantial light fittings. Mr Mcilraith questions whether the suspended ceiling can handle the additional load. Mr Mcilraith says that this is an issue for a registered engineer. Mr Mcilraith opines that in any event the fixings of the timber panels and the light fittings are inadequate and require remediation even if the suspended ceiling is capable of supporting the extra weight.
[85] Gartshore has not adduced any independent expert evidence and relies on the assertion by Mr Gartshore that all of the defects are minor and can be repaired for
$2,442.50. For PPR, Mr Watson assesses the cost of the remedial work to be
$212,856.16 including GST. Mr Watson identifies the cost of replacing the wall linings in the kitchen to be $29,052 plus GST, and the cost of replacing the ceilings to be $28,840 plus GST. If all of that work is unnecessary, then it might reduce his overall estimate by $57,892 plus GST, reducing the overall estimate to $146,280.36 including GST. It is possible that some of the work is required, so the range is approximately
$146,000 to $212,000 including GST.
[86] In addition, there is Mr Kuok’s evidence that PPR has already incurred costs of $78,659.35. The evidence produced is not entirely satisfactory. Mr Kuok has produced an invoice from Terry Bennett to PPR for “General Handyman and Maintenance Work Done for Period March 2022 – July 2022” for $20,355. No specifics of the work undertaken are given. Mr Kuok does not produce any other invoices to support the figure of $78,659.35, and instead produces what he says is a screen shot from PPR’s Xero accounting software, which records further contractor payments of $58,304.35. No specifics are given.
[87] Finally, PPR takes issue with the variations claimed by Gartshore, arguing that Gartshore has not allowed PPR any credit for items that it paid suppliers and subcontractors for directly. The only substantiation put forward is an invoice from Staybrite Stainless Fabricators, for $29,039.80 including GST, which Mr Kuok says PPR paid direct thereby entitling PPR to a credit against the variations charged by Gartshore.
[88] I am satisfied that Mr Kouk’s evidence regarding the payment made directly to Staybrite Stainless Fabricators and the payment of $20,355 to Terry Bennett, together with the evidence of Mr Mcilraith, is sufficient to raise a genuine and substantial dispute as to whether there is any debt owed by PPR to Gartshore, on the basis that PPR has a set-off that exceeds the debt. On that basis, the statutory demand should be set aside.
Result
[89] The statutory demand issued by the respondent for the sum of $244,671.11 dated 29 September 2022 is set aside.
[90] The respondent shall pay the applicant’s costs on the application to set aside the demand on a 2B basis, together with disbursements as is fixed by the Registrar.
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Associate Judge Brittain
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