Search Consulting Limited v Complete Construction Limited
[2016] NZHC 668
•14 April 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-2954 [2016] NZHC 668
BETWEEN SEARCH CONSULTING LIMITED
Applicant
AND
COMPLETE CONSTRUCTION LIMITED
Respondent
Hearing: 11 April 2016 Appearances:
Ms N Tabb for Applicant
Mr L Huang for RespondentJudgment:
14 April 2016
JUDGMENT OF ASSOCIATE JUDGE J P DOOGUE
This judgment was delivered by me on
14.04.16 at 4.30 pm, pursuant to
Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar
Date……………
SEARCH CONSULTING LIMITED v COMPLETE CONSTRUCTION LIMITED [2016] NZHC 668 [14 April
2016]
[1] The parties entered a contract in or about April 2014 pursuant to which the applicant agreed to provide structural design services in regard to two properties which the respondent intended to construct at 44 and 46 Remuremu Street, Long Bay, Auckland. The respondent required those services as part of the construction work that was going to be carried on at those locations. In both of the separate written agreements that were entered into, the respondent agreed to meet the following fee obligations:
Fees and timing of payments
Design phase work to be invoiced using the attached Schedule of Prices, with an estimated fee of $4,656 plus GST. Any additional works to be invoiced on a time/cost basis, of $160 per hour, with mileage charged at
$1.20 per kilometre, and disbursements also charged as applicable for expenses such as plan printing, copying and telephone calls. Goods and
services tax (GST) will be added to the above charges.
[2] The above clause is excerpted from the agreement in respect of 46
Remuremu Street. There was an identical provision in the agreement for 44
Remuremu Street except that the estimated fee in that case was $2,656 plus GST. The two amounts stated in the contracts come to a total of $7312 plus GST.
[3] On 20 March 2014, prior to the execution of the contracts, the applicant emailed the respondent in the following terms:
Our work will be invoiced on a schedule of prices (excluding GST) to cover the design phase. The schedule is attached, and provides an indicative fee up to the Building Consent Application Stage from the drawing provided. The building elements I have allowed to design in the schedule have shown on the marked up plans.
[4] Reference was then made to the fact that the invoiced amount “will vary from the estimate with the number of building elements requiring design changes during the design process”.
[5] The applicant sent to the respondent a further email on 3 April 2014 in which it stated:
Our fees during the construction phase cannot be estimated yet as they will depend on a number of factors such as the Council Building Consent
Conditions, any design variations necessary and the number of sites visits necessary (this in itself depends on more factors such as the contractors methodology and staging of works, site conditions and weather conditions). For very rough budgeting purposes, from previous experience on similar projects our fees during this phase have been at least as much as the design phase.
[6] In due course the applicant invoiced the respondent in the amount of $14,122 including GST. The respondent disputed the amount that it was required to pay.
[7] Although the respondent disputed the amount in the invoices, it was prepared to pay an increase over the amounts in the written contracts to recognise what it claimed were some agreed changes that it had given its consent to. It accepted in other words that the applicant was to a limited extent entitled to an increase over and above the amounts which it had stated would be the cost of its services in the two contracts entered into.
[8] In exchanges of correspondence after the dispute emerged about whether the applicant had charged more than it was entitled to under the contract, the position which the applicant took was that it had not given a firm quote for the work. On the other hand the respondent took the view that the amounts specified in the contracts (with some limited and agreed increases that the parties had expressly discussed) were for a lesser sum than what the applicant was now claiming. The respondent declined to make any further payment. This impasse lead to the applicant issuing a statutory demand which was served on the respondent. The statutory demand was served on 3 June 2015 and the respondent filed an originating application to set it aside on 16 June 2015. The matter was set down for a hearing on 3 July 2015 but for reasons which are not clear to me the present applicant did not appear at the hearing. As a result the application by Complete Construction Limited to set aside the statutory demand was successful and an award for costs was made in favour of Complete Construction Limited in the sum of $5,540.25.
[9] Complete Construction Limited then issued its own statutory demand to recover the costs that had been awarded to it in July 2015. That in turn gave rise to the present originating application being filed. In that application the applicant, Search Consulting Limited, seeks an order setting aside the statutory demand issued
on behalf of Complete Construction Limited dated 25 November 2015. The principle ground given is that:
1. The applicant has a complete set off in that the respondent owes
$9,036.62 to the applicant. The applicant claims that its alleged set off exceeds the amount of the costs order which the respondent had
sought to enforce by serving the statutory demand on it.
[10] In the notice of opposition which the respondent has filed, the first three grounds are directed towards the question of whether the applicant has a defence to the order for costs. That however is not really in point. The applicant does not assert that the costs award would not otherwise be enforceable. The ground of application in this case is that, notwithstanding that a valid costs order was made, it has a set-off. The respondent in its notice of opposition then goes on to state that it denies that it owes the sum of $9,036.62 and then there appears the key paragraph which reads as follows:
3.6.The applicant has not proven the existence of its set-off as a debt owing by the respondent to it on an earlier occasion before this court.
Equitable set-off
[11] There is no doubt that an equitable set-off can be raised as a ground for establishing that there is a substantial dispute that the debtor actually owes the amount claimed in the statutory demand.1 By its nature, an equitable set-off is concerned with a claim to which the party raising it does not have a legal entitlement. In general terms, the factual situation giving rise to an equitable set-off involves the proponent stating that it has a claim which would be recognised by the
court in appropriate proceedings for that purpose as being a valid one against the opposing party. When that aspect of the definition of an equitable set-off is considered, it will be seen that it is inconsistent with the requirement proposed by the respondent, that before an equitable set-off can be raised it must first of all have been
proved in court proceedings.
1 New Zealand Factors Limited v Farmers Trading Company Limited [1992] 3 NZLR 703.
Discussion
[12] Before embarking upon a discussion of the key matters that are in issue in this application, brief reference is made to the leading authority to be considered when an application has been made pursuant to s 290(4)(b), namely, Covington Railways Ltd v Uni-Accommodation Ltd.2 In that case the Court of Appeal stated:3
Where a company which is the subject of a liquidation application is indisputably in debt to the applicant creditor, it may nonetheless be able to show that it has a claim against the applicant which reduces the net balance owing to the creditor or even off-sets it altogether. Where there are liquidated sums due each way, that is simply an arithmetical exercise. It is more difficult if, on the applicant’s side, there is an indisputable liquidated sum, but the other party’s claim is for an unliquidated sum with liability and/or quantum in dispute. Then, in order to impeach the statutory demand and overcome the presumption in s 287(a) that the company is unable to pay its debts when it has failed to comply with the demand, it must be able to do more than merely assert that there is an available set-off. It must be able to point to evidence before the Court showing that it has a real basis for the claimed set-off and that accordingly, the applicant’s claim to be a creditor is, to the extent of the set-off, seriously in doubt. In the words of Buckley LJ in Biyanston Finance Ltd v De Vries (No 2)[1976] Ch 6378, it must show that there are “clear and persuasive grounds” for the set-off claim. Where this can be done, the party who has issued the statutory demand against the company will be shown to be using the statutory demand and liquidation procedures improperly because there is a “genuine and substantial dispute” about the net amount of the company’s indebtedness (Taxi Trucks Ltd v Nicholson [1989] 2 NZLR 297 (CA), 299). The dispute should then be resolved in the ordinary way – except as to any undisputed balance – rather than upon the hearing of a liquidation application.
[13] In the light of those observations, it falls to the court to consider the central arguments which the respondent puts forward
A substantial dispute?
[14] The first issue that arises is whether or not there is a substantial dispute.
2 Covington Railways Ltd v Uni-Accommodation Ltd [2001] 1 NZLR 272, (2000) 8 NZCLC
264,374 (CA).
3 At [11].
[15] There is a comprehensible basis upon which the applicant brings its claim. It says that it made clear to the respondent before it entered into the contracts that its charges might not be limited to the amounts set out in the contracts. Further, the contracts actually provide for additional charges to be levied over and above those which are stated in the contract.
[16] The question is whether the applicant or the respondent is correct about the question of whether any amount remains outstanding for the professional services that the applicant provided. In order to determine that question, issues of fact and law need to be considered.
[17] The dispute between the parties involves the not unfamiliar situation where two contractors are unable to agree about whether the claimant party gave a fixed price contract to perform services which could not be departed from or whether the figure stated by the claimant was an estimate which was subject to possible increase depending upon factors emerging during the course of the work which would justify that course being taken.
[18] This type of dispute has been productive of a number of decisions from New Zealand courts, a few of which warrant brief mention. In one of these cases, J and J C Abrams Ltd v Ancliffe, the claimed contractual amount was reduced to make allowance for alleged damages suffered by the other contracting party as a result of
negligence arising from a careless estimate.4 Another aspect of the estimate/fixed
sum bifurcation which has been mentioned in the authorities includes the alleged failures of the contracting party to keep the other side informed of the extent by which accumulating charges were likely to exceed the estimated sum. These disputes can give rise to the question of what remedy, if any, should be made available to the party who relied upon the estimate.5 Another decision where the issue was examined was the decision of Randerson J in Brocklehurst v P I Vidovich Builders Ltd.6 That case concerned an appeal from the District Court and Randerson
J summarised the position in these terms:7
4 J and J C Abrams Ltd v Ancliffe [1981] 1 NZLR 244 (CA).
5 McFarlane v Dickson Marine (Refits) Limited [2013] NZHC 647 at [45].
6 Brocklehurst v P I Vidovich Builders Ltd HC Auckland CIV-2007-404-3526, 23 October 2007.
7 At [23] – [25].
[23] In respect of these case, the Judge concluded at [23]:
With respect, however, these authorities do not in my view collectively develop any new stream of doctrine. Upon analysis all appear to me to be cases where on the facts the estimate concerned has been able to be construed as a contractual term in one way or another, or has been actionable upon the basis that it was made negligently in circumstances where there was a duty of care.
[24] I have reviewed the authorities relied upon by Mr Rooney, all of which were before the Judge in the District Court. In my view, the Judge’s characterisation of these cases is substantially correct. The issue of implied terms is discussed in substantial detail in Burrows, Finn & Todd Law of Contract in New Zealand (3ed 2007) at 6.3.3. While the five point test for the implication of terms laid down in BP Refinery (Westernport) Pty Ltd v Shire of Hastings (1977) 16 ALR 363, 376 is often relied upon, it is not necessarily a universal test for the implication of terms: see the discussion by the Court of Appeal in McNeill v Gould (2002) 4 NZ ConvC 193,557 at [25] to [27]. In particular classes of contract, terms may be “implied by law”. An example is the standard implied term that work undertaken under a construction contract will be carried out in a proper and workmanlike manner. Any implied term is, of course, subject to any express term in the contract.
[25] But I am not persuaded that the implied term relied upon by the owners in the present case is one invariably or usually to be implied by law in the class of contract where an estimate is given prior to the commencement of the work. In my view, the intention of the parties is still the yardstick for an implied term of the kind suggested here: see Burrows, Finn & Todd at 184. It remains a matter for the Court’s assessment of the actual or presumed intention of the parties in all the circumstances of the case. The essential issue in the “estimates” cases is whether the parties intended the estimate to have contractual significance.
[19] A brief review of the authorities which I have noted in this judgment would indicate that in a context such as present, the type of issues that can typically arise include whether the contracting party entered into a contractual engagement that his/her charges would not exceed a fixed amount; whether that term was to be implied into the contract; whether there was a permitted range by which the charges might be increased over the contractual amount; and whether there is any possible claim in negligence for not taking sufficient care in providing the estimate or in keeping the other party to the contract informed of the extent of the charges that are accumulating under the contract in a timeous way.
[20] Significantly, at the time when the applicant sent the contract agreements to the respondent it also made comments about the extent of its fees. In an email on 3
April 2014, before the contracts were apparently signed, the principal of the applicant noted:
Our fees during the construction phase cannot be estimated yet as they will depend on a number of factors such as the Council Building Consent Conditions, any design variations necessary and the number of sites visits necessary (this in itself depends on more factors such as the contractors methodology and staging of works, site conditions and weather conditions). For very rough budgeting purposes, from previous experience on similar projects our fees during this phase have been at least as much as the design phase.
[21] There is therefore a discernible dispute between the parties which would need to be considered carefully by the court in the light of all of the evidence including the pre-contractual emails from the applicant. It is difficult to understand how the parties or their advisors could ever have imagined that there was no dispute and therefore that the situation was one in which it was acceptable to issue a statutory demand, or alternatively, that any dispute between the parties was of such limited dimensions that the Companies Court would be able to resolve the matter.
[22] It is also necessary to consider the issue of whether there is at least a reasonably arguable factual basis for the dispute which the applicant relies upon in bringing its application. I have little doubt that there is such a dispute. It is of course a separate question from which side is correct on questions of fact. There is no doubt that the applicant made a claim for the amounts that it had invoiced to the respondent and that the respondent has declined to pay. The applicant justifies its position on the ground that while it provided an assessment of what the work would cost when it entered into the contract, it specifically made reference to the fact that the amount that might ultimately be payable would only be known after aspects of the development work were clarified.
[23] The substantial dispute before the court would be to consider what the correct interpretation is of the parties’ contracts and in particular, whether there was any entitlement to charge amounts over and above those which were stated in the contract documents. The second point would involve the court inquiring into any facts which it might be necessary for the applicant to establish to make out its entitlement to claim for the additional amounts. It is impossible for the court to deal
substantially with the latter dispute in the context of an originating application to set aside the statutory demand. No doubt contentions would be put forward for the respondent that the extent of the work that had to be done by the applicant would have been obvious right from the outset and that there was no relevant change of circumstances which subsequently gave rise to an entitlement on the part of the applicant to charge more. In that context, the fact that the respondent conceded that it owed at least some additional sum over and above the amounts explicitly stated in the contract could well be viewed as having significance. That is to say, it is implicit in the stance that the respondent has taken that it accepts that the arrangement was not a fixed price one and that the applicant would be contractually authorised to exceed those amounts in appropriate circumstances. The argument is less about whether deviations from the contract price are permitted, but about the permissible extent of same.
Paragraph 3.6 of the notice of opposition
[24] Mr Huang put forward the contention that once the dispute emerged, the applicant ought to have taken steps to have the dispute referred to the Disputes Tribunal or the District Court. I agree that that would have been a sensible course. However Mr Huang also said the fact that the applicants did not take that step could be taken into account in assessing whether there is a real basis for the claimed set-off. He said that a party in the position of the applicant must do more than simply assert a set off: there must be some substantial grounds provided for it. As well, the conduct of a party claiming such a set-off needs to be examined and if a party does not take steps to prosecute the alleged counterclaim or set-off then the court may draw the inference that the claim is not a genuine one. That at least was the effect of the submissions which Mr Huang made on this point.
[25] Counsel for the respondent, Mr Huang, explained the significance of [3.6] as being that after the invoices were received in August 2014 and were not paid, the applicant engaged a debt collection firm to take up the matter and it was to that organisation that the respondent wrote setting out its position so far as the increased costs were concerned.
[26] The sequence of events was that on 30 January 2015 the applicant provided an explanation as to the divergence between the amounts charged under the contract and the amounts that were actually invoiced. In his email to the respondent of the above date, Mr Search amongst other things said that an explanation had already been provided about this point to the respondent. He said that the additional engineering design costs were principally incurred for bridging each house over the storm water and waste water lines, for some truss design, and cantilevered chimney design. There are other matters referred to in the email which it is not necessary to set out in this judgment other than to say that they expanded upon the explanation given.
[27] In any event, no resolution proved possible and on 29 April 2015 the applicant engaged a debt collection firm. That firm wrote to the respondent on 29
April 2015. On the same day, the respondent sent an email to the debt collection firm which explained which items the respondent accepted as being proper additional charges and which were not. The respondent proposed to pay an additional $3120 to settle the dispute. That offer was not accepted and payment of the additional amounts which appear to have been admitted was never made. Thereafter matters took their course with the statutory demand being issued to the respondent on 29 May 2015.
[28] In this context, while I agree that Mr Huang’s submission is partly correct, I am unable to accept that by not taking proceedings in the District Court or the Disputes Tribunal an inference arises that the claim of the applicant was not a genuine one.
[29] I do not accept the submission that the delay on the part of the applicant in attempting to enforce the debt gives rise to a reasonable inference that it did not have a proper and substantial claim to bring against the respondent.
Relationship between claim and counterclaim/set-off
[30] The next question is whether the applicant is arguably entitled to set-off the amount of its claim against that of the respondent. If it is so entitled, then it is not a debtor of the respondent.
[31] I am satisfied that it can. The subject matter of the counterclaim/equitable set-off is closely connected with the subject matter of the contract.
[32] There is no ground for supposing that the claim which the applicant brings is not bona fide. That is not to say that the applicant’s claim will necessarily prevail, but it does not give the appearance of being artificial or contrived for the purpose of defeating the claim which the respondent has brought to enforce the costs order made in its favour.
Conclusion
[33] For the foregoing reasons I conclude that the statutory demand ought to be set aside and there will be an order accordingly. The respondent as the unsuccessful party is to pay costs on a 2B basis.
[34] The parties in this case have each adopted an intransigent position. It would have been preferable if they had taken steps to have the underlying dispute resolved by means other than serving mutual statutory demands which was never going to achieve a final or satisfactory result.
Costs
[35] The parties were agreed that costs should be awarded against the unsuccessful party.
[36] Mr Huang for the respondent agreed that costs would on a 2B basis.
[37] Ms Tabb for the applicant asserted that costs should be awarded on a solicitor/client basis. I am unable to accept that that submission is correct. Ms Tabb points to the fact that she wrote to the solicitors for the respondent suggesting a negotiated settlement. This in my view is not a sufficient ground to justify an order for indemnity costs under r 14.6 of the High Court Rules. My conclusion is that costs should be awarded on a 2B basis together with disbursements to be fixed by the Registrar. The respondent will accordingly pay costs on that basis.
J.P. Doogue
Associate Judge
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