Security Systems Limited v Smart Controls Limited

[2020] NZHC 41

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2019-404-877

[2020] NZHC 41

BETWEEN

SECURITY SYSTEMS LIMITED

Appellant

AND

SMART CONTROLS LIMITED

Respondent

Hearing:

7 November 2019

Counsel:

L J Turner for Appellant

A M Swan for Respondent

Judgment:

31 January 2020

JUDGMENT OF WHATA J

This judgment was delivered by me on 31 January 2020 at 3.30 pm, pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar Date: ………………………….

Solicitors:           Whaley Garnett, Auckland

Auckland Property Legal Service, Auckland

SECURITY SYSTEMS LIMITED v SMART CONTROLS LIMITED [2020] NZHC 41 [31 January 2020]

[1]    Security Systems Limited (“Security”) contracted with Fletcher Construction Company Limited (Fletcher) to help with an upgrade to their security system at its Penrose premises. Smart Controls Limited (“Smart”) was enlisted by Security to help. Smart provided a quote for the upgrade (“the quote”). However, Smart left the job before it was completed. Proceedings were commenced. Smart claimed it was underpaid by Security, while Security claimed Smart was overpaid. The District Court found in Smart’s favour. This is an appeal against that decision.

Background

[2]    Smart is a supplier and installer of security systems. Security is also a supplier and an installer of security systems. In late 2014, Fletcher decided to upgrade to what it referred to as the “communications backbone” at its premises at 816 Great South Road, Penrose, Auckland (“the Fletcher Campus upgrade”). Subsequently, Security contracted to undertake various works on the Fletcher Campus upgrade on the understanding that Smart and Security would work together on the project with Smart’s role being to supply and install CCTV cameras (“the works”).

[3]    There is a dispute between Smart and Security as to the exact basis upon which the works were undertaken by Smart. It is common ground, however, that Security would arrange, supply and install the access control for the Fletcher Campus upgrade. Smart was to arrange, supply and install the CCTV cameras for the Fletcher Campus upgrade. Smart was to invoice Security at the end of each month or when a major component of the work had been completed. Security would invoice Fletcher for all work carried out by both companies, including any CCTV installation work that had been carried out by Smart. Security would retain 10 per cent of the sum invoiced by Smart, which was to be paid after the completion of the contract.

[4]    In June 2015, Smart submitted a quote to Security for supply and installation of the CCTV cameras at the Fletcher Campus upgrade for $150,490.61, inclusive of GST. The quote identified the componentry to be installed and its price, together with a global labour cost. This quote formed the basis of Security’s tender to Fletcher, which it accepted. On or around late 2015, Smart commenced the CCTV work and,

over the course of the work, rendered 25 invoices to Security, totalling $195,934.46. This included sums for approved variations.

[5]    In December 2016 a dispute arose between Security and Smart about Invoice 177 for a variation approved and paid for by Fletcher. Security subsequently noted to a representative of Fletcher that the varied work in fact included work already under the quote. The representative said that he would look into it. It appears Smart was not happy about, among other things, the way Security handled this matter and in February 2017 the relationship between Security and Smart was terminated.

[6]    By this stage, Security had paid Smart $166,041.41, leaving an unpaid balance of $29,893.05 on invoices submitted. Smart sought payment. Security denied that it owed anything. On the contrary, it claimed it had already overpaid Smart. Lawyers got involved. Smart issued a statutory demand, prematurely. Judge Bell set the demand aside and imposed an increased costs order of $18,673.23.1 The matter then came before the District Court.

The claim and counterclaim

[7]    Smart claimed the balance of $29,893.05, representing sums invoiced which had been approved and paid by Fletcher, together with its collection costs of

$6,078.05. Security counterclaimed for the sum of $23,498.44, which it says was “overpaid” on the Fletcher contract and $837.20 on another contract. The sums overpaid are said to be the amounts paid “for work not completed or supplied by Smart.” The sum of the alleged overpayments is $35,505.40 plus GST. This amount is said to reduce the price payable under the quote to $95,356.00 plus GST. This is then said to result in an overpayment of $23,498.44 plus GST. Security also counterclaimed in respect of the High Court costs order.

[8]    Smart denied the counterclaim, claiming the works were performed on a “charge up” basis based on agreed costs for labour and materials and in respect of only products supplied and work completed whether or not included in the original quote.

1      Security Systems Ltd v Smart Controls Ltd [2017] NZHC 2465.

Judgment of District Court

[9]The Judge identified the fundamental issue as follows:2

[11] As best as I understood [Security’s] case, it was that several of the unpaid invoices related to work which has been the subject of the quote and therefore were not payable, despite the fact that Fletchers had paid [Security] for all the [Smart’s] invoices. [Security’s] case appeared to be that [Smart] was bound by its quotes and was not entitled to charge for work done and equipment supplied that had been part of its quote. I discussed this at some length with Mr Turner in the course of his submissions. I could not follow how it could be maintained that [Smart] could not claim by way of invoice for work it had carried out and for which it had not been paid when such work was part of the original quote. [Security] was unable to demonstrate how there had been a double payment in respect of invoice 177 in particular (to which I shall return) when payment for the work and materials the subject of that invoice could not be shown to have been paid on invoices submitted earlier and paid.

[10]The Judge also found that the contract was not a lump sum contract. He said:

[13]      In my view, the contract became a “measure and value” contract where – even though a total figure may be included in the contract at the outset, the price is calculated according to a formula and is subject to adjustment in accordance with the formula at the conclusion of the contract. In addition, the price may be adjusted to reflect the actual expenditure in respect of items for which provisional sums, prime cost sums or contingency sums have been allowed for as provided for in other clauses, such as variations, change of circumstances and fluctuation clauses.” Kennedy Grant para 14.04.

[14]      At para 20 of The Laws of New Zealand – Reissue 1 Building and Construction the following is stated:

“Measure and value” or “re measurement” contracts are contracts in which the amount payable to the contractor is determined by measuring the work actually done, and valuing it in accordance with the rates and prices set out in the contract in a bill of quantities or schedule of rates. This approach allows the contractor to be remunerated fairly in circumstances where the quantity or scope of the work is unknown, whilst holding the contractor to the rates initially tendered.

[11]   The Judge said that is in fact what had occurred here. In Invoice 177, Smart invoiced  Security  for  three  cameras  as  a  unit  price  of  $2,415.15,  for  a  total of

$7,245.45. He said there were additional items on that invoice, including a pole mount,  other  equipment,  scaffolding  and  network  cables  and  labelling   totalling

2      Smart Controls Ltd v Security Systems Ltd [2019] NZDC 6725.

$15,037.35. He noted that the Invoice 177 camera cost claimed indicated an increased price from the original quote and that this invoice confirmed that the contract was a “measure and value” one. He noted that in addition to Invoice 177, there were claims in Invoice 067 for $730.25, Invoice 096 for $80.26 and Invoice 178 for $1,380.00. He noted that this part of the plaintiff’s claim totalled $17,227.86, and that Security resisted this on the same basis as Invoice 177. The Judge noted that the total invoiced amount was $195,934.46, of which $166,041.41 was paid, leaving a balance owing of

$29,893.05.3

[12]   He said that Fletcher had withheld retentions of $12,665.19 which, when added to the claim of $17,227.86, equated to the amount claimed. He also noted:

[22] The total invoiced minus the variations  was  $136,682.62,  which meant that $13,807.99 of the original quote had not been invoiced. Clearly that had been taken up in the invoices for the variations, but that demonstrates that the contract was treated on a “measure and value” basis and that the original quoted figure lost relevance as the contract progressed and the 11 variations were ordered by Fletchers.

[13]   The Judge also noted that there were no disputes that all of Smart’s invoices had been paid by Fletcher to Security, but that Security claimed the contract was still subject to audit and that if Fletcher undertook an audit, Security might be ordered to repay the amount of Invoice 177. He also observed, however, that Fletcher had now paid the amount of retentions after the expiration of the specified period of one year, which indicated the entire contract had been checked by Fletcher’s personnel, leading to a release of the retention funds. He said, in those circumstances, he was satisfied that there was no reasonable likelihood of any audit that might result in Security having to repay Invoice 177.

[14]   The Judge rejected Security’s counterclaim on the basis that Fletcher paid all relevant invoices so that the counterclaim was inherently flawed. The Judge rejected the claim in relation to collection costs on the basis that the statutory demand failed in the High Court.

3 At [19].

Issues on appeal

[15]   Mr Turner for Security submits that the Judge was wrong to conclude that the parties undertook the Fletcher project on a “measure and value” basis. He submits that the provision of the work was subject to the quote throughout, with variations agreed with Fletcher for any changes or additions to the work to be performed. He submits that the Judge thus failed to properly consider whether Smart overclaimed for sums for the work subject to the quote that was not completed or supplied by Smart in accordance with the quote.

[16]   Mr Swan supports the Judge’s reasoning. He submits the quote became secondary and was effectively put to one side as the works progressed. He notes that the quote was valid only for one month and that the works did not commence for some months after the quote. He says that Fletcher sought additional or different works on numerous occasions. As such, the contract for works morphed into a measure and value contract, where Smart simply invoiced for the work done and approved by Fletcher. He also says that as Fletcher paid Security all the invoiced sums, Security is obliged to pay Smart the invoiced sums. He also submits there is no evidence that Security did any work not otherwise performed by Smart, so the Judge was correct to reject the counterclaim.

[17]   With the benefit of full argument, Security’s cross claim therefore raises the following key questions on appeal:

(a)Did Smart agree to perform the Fletcher works in accordance with the quote? And, if so;

(b)Did Smart complete all the works in accordance with the quote? And, if not;

(c)Did the failure to complete the works in accordance with the quote cause Security any loss?

(d)Did Security adequately plead this loss?

(e)Was Security liable to pay Smart for all invoiced sums for work approved by Fletcher?

Did Smart agree to perform the Fletcher works in accordance with the quote?

[18]   Both Smart and Security’s claims are premised on the scope of the works to be provided. Security says Smart was required to complete the works specified in the quote, at the quoted prices. This arrangement is said to be a fixed price or lump sum contract. Smart says it was required to perform the works sought and approved by Fletcher during the project. This arrangement is said to be a measure and value contract.

[19]   For my part, this focus on contract categorisation was and is an undue distraction. The central issue is simply whether Smart agreed to perform the works in accordance with the quote.

[20]   The Judge essentially found for Smart on this issue. He had the benefit of assessing the quality of the witness testimony, including the credibility of the respective directors of parties. His conclusion is supported by the evidence of Mr Hares, director of Smart, who said that the agreement with Security contained the following terms:

(a)Security would arrange, supply and install the access control for the Fletcher Campus upgrade;

(b)Smart would arrange, supply and install the CCTV cameras at the Fletcher Campus upgrade in accordance with the security engineer’s instructions;

(c)Smart would invoice Security at the end of each month or when a major component of the work had been completed;

(d)Security would pay Smart’s invoice on the 20th of the month following invoice;

(e)Security would invoice Fletchers for all work carried out by both companies, including any of the CCTV installation work that Smart had carried out; and

(f)Security would retain 10 per cent of the sum invoiced by Smart which was to be paid to Smart at the end of the contract.

[21]   Even so, I am unable to agree with the Judge insofar as he found that Smart was not obliged to perform the Fletcher works in accordance with the quote. The terms of the contractual relationship between Security and Smart are readily discernible from the evidence of objective intention, including pre and post contract behaviour.4 First, Smart admits to the existence of the quote and the reason it was needed, that is the quote provided the basis of Security’s tender for the Fletcher work and for invoicing in respect of that work. In addition, the requirement for a fixed price based on a quote was also made clear to Mr Hares, in pre-tender correspondence, which he acknowledged. Mr Hares also confirmed in evidence in the statutory demand proceedings that his “estimate” for the work was a “quote”, and he assumed that it would be submitted by Security to Fletcher as part of its tender. He also subsequently invoiced in accordance with what he thought was the agreed cost for labour and materials set out in the quote.

[22]   Then, when matters became contentious, Mr Hares produced a spreadsheet for his lawyers regarding the outstanding amount owed by Security. This summarised Smart’s claim. It referred to the “Original quote” ($150,490.61) and the “Money left in job” ($13,807.99), and the “Percentage invoiced from the original quote” (90.8 per cent). It also referred to the amount owing to Smart, inclusive of variations of

$29,893.05. Plainly the “original quote” set the frame for the work to be done, the price for it and the subsequent invoicing.

[23]   Finally, the scope of works only changed during the project by way of a formal variation process. As Mr Bingley explained in his evidence, which was not challenged in cross-examination:

4      Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37, [2008] 1 NZLR 277, at [100].

The parties thereafter got on with the works which commenced later in 2015. Fletchers did seek numerous variations to the fixed price work originally specified. All variation work was required to show on the invoices provided to SSL the “VO” (variance order) or “CI” (contract instruction) number relating to the work requested, outside the originally quoted job. In one case SCL claimed for work that was not an approved variation, namely invoice 67 which was for $730.25. SSL did not pay this as it was not an approved variation. However a number of other variation claims were made by SCL and paid.

[24]   I am satisfied therefore that Smart entered into a contract with Security to supply the works in accordance with the quote. The effect of this, however, if any, still depends on the extent to which Smart failed to perform the works in accordance with the quote and, if it did, whether Security suffered any contractual loss.

[25]   I turn then to examine whether Smart failed to complete all the works in accordance with the quote.

Did Smart complete all the works in accordance with the quote?

[26]   There are no findings by the Judge about whether Smart performed all the works set out  in  the  quote.  I  must  therefore  review  the  evidence  about  this.  Mr Bingley identified the following items as not having been performed pursuant to the quote:

(a)Page 1 – line 2 – quoted for 31 I25’s – only supplied 24. Credit of

$6,184.50 required.

(b)Page 2 – line 1 – MX2 wire PLUS – none supplied – credit of

$1,224.00.

(c)Page 2 – line 2 – Cherry picker – quoted three supplied two – credit of

$600.00.

(d)Page 2 – line 3 – Edgecore ECS2000-26P – none supplied – credit of

$897.00.

(e)Page 2 – line 4 0 Edgecore ECS2000-18P – none supplied – credit of

$1,890.00.

(f)Page 2 – line 6 – CAT6 cable – 1200 metres supplied and charged at

$2.50 instead of $1.57 – 3800 metres not supplied and labour to install cable at a rate of .02hr per metre 72 hours – credit of $16,202.00.

(g)Page 3 – line 1 – MXD15DI – quoted two – only one supplied – credit of $2,550.00.

(h)Page 3 – line 3 – MXD14DOPTWHMH quoted two – none supplied – credit of $728.00.

(i)Page 4 – line 2 – Raytech illuminator – quoted 5 – none supplied – credit of $3,887.50.

(j)Page 4 – line 3 – Raytech lens – quoted 5 – none supplied – credit of

$330.00.

(k)Page 4 – line 4 – Socomoc UPS – quoted 3 – none supplied – credit of

$1,478.40.

(l)Page 4 – line 6 – Socomoc – 650va – quoted 7 – none supplied – credit of $1,092.00.

(m)Based on Smart invoicing 174, 176 and 157 – 14 cameras installed at the Pavilion, the labour Smart charged to supply and install these 14 cameras was 137 hours. This works out at 9.78 hours per camera. Adopting just 9 hours per camera (which Mr Bingley says is in Smart’s favour), and with 8 cameras still to install as per the Smart quote, a credit is required of 72 hours at $120.00 making a credit of $8,640.00.

[27]   This evidence mirrors the pleaded counterclaim. Smart denies it in its defence to the claim. But there is no evidence to the effect that the identified works were, in fact, performed by Smart. On the contrary, Smart’s case is essentially that the quote was overtaken by events and subsequent instructions. Accordingly, I am satisfied the identified works were not performed by Smart. I turn then to examine whether this “failure” to complete the works in accordance with the quote caused Security any loss.

Did the failure to complete the works in accordance with the quote cause Security any loss?

[28]   As noted, Security counterclaimed that Smart was “overpaid” because the amount invoiced for specified works exceeded the quoted sum for the same works. This overpayment claim was based on the proposition that Smart charged for 90 per cent of the quote, while completing only 73 per cent of the quoted works. This percentage analysis of the work completed against the quote is not disputed. Prima facie, therefore, Security is entitled to enforce the quoted price, including by way of counterclaim in respect of the exceedance.

[29]   But that is not the full picture. Smart rendered its invoices for its work and those invoices to Security were passed onto Fletcher’s for approval. They were then approved by Fletchers, including Invoice 177.

[30]   Fletchers also subsequently paid the retentions. To that extent, Fletcher accepted any exceedance of the quoted sum and there is now no realistic prospect that Security will be required to reimburse Fletcher for this overpayment or any other payment. Thus, overpayment is a misnomer in this context. Save in respect of any costs incurred by Security to complete works not done, it will not be out of pocket for the exceedance. Nor was it pleaded or suggested in evidence or otherwise that Security was contractually entitled to any exceedance if paid by Fletcher.

[31]   Mr Turner, however, submits that Security still had to complete the works not completed by Smart. He contends the cost of those works, which corresponds to the alleged overpayment, is therefore recoverable. However, Mr Swan submitted that this loss was never pleaded and that there is no evidence that Security incurred any actual costs for these works or as to the quantification of any such cost.

[32]   Mr Swan is correct as to the pleadings. It is not pleaded that Security had to complete the works not performed by Smart or that it suffered loss as a consequence of this. I come back to the significance of this below.

[33]   Turning then to the evidence, Mr Bingley does not provide any direct evidence in chief of work having been done by Security. Rather, he identifies the work not

completed by Smart and then calculates that cost of that work, arriving at the sum of

$23,512.68. Under cross-examination, however, Mr Bingley said:

I had to still finish the job, I was still liable to finish the work, I only had – I had no hours left in the job to supply and install all of the rest of the equipment

….

… I had to honour the job, I had to honour the contract…

[34]And further:

SSL had to get another contractor to rectify and complete the work.

[35]When it was put to him that he had not lost money, he responded:

Q.  And it’s  correct also that you haven’t actually paid  money or lost  money by paying it to Smart Controls but rather you have lost your ability, you say, to charge and mark up?

A.    No we lost the ability to charge a mark up and we still had to finish   this $150,000 quote and was a lot more work to be done so I lost money having to employ other subcontractors to finish the contracted work ‘cos I was responsible to Fletchers to finish the work.

Q. Now can you give me the invoices to those please?

A. To?

Q. To the additional work and can you give me the figures please-

A.    That was performed by myself because there was no labour content   left so it was from the state – the time he left and to when the job was actually finished from the original quote.

Q. All right can you tell me – you don’t have an amount? There’s no evidence-

A. I have given an amount and in the evidence if you look in my reconciliation I made an allowance of 72 hours to finish the cameras that he said had not been put in so that’s over and above the original 312 hours, there was another 72 just to fit the cameras that he had not put in.

Q. But up until now you’ve never given that evidence have you?

A. Yes the evidence is in the reconciliation.

[36]   So, I am satisfied that Security had to complete the quoted works. However, I am not clear that what this cost Security and or that it was not paid for these works by Fletcher. This is a major gap in the evidence.

Did Security adequately plead and prove the loss?

[37]   As noted, loss based on non-performance of works subject to the quote was not expressly pleaded. Indeed, there is no clear pleading as to the relevant breach, cancellation in respect of that breach and or the loss incurred as consequence of that it. And it remains unclear exactly what Security did to complete the job, what costs it actually incurred and or whether it was paid for those works by Fletchers.

[38]   I have come to the view therefore that that Security’s loss for non-performance (if any) was not pleaded and or supported by evidence. I also find that it is now too late to invite amended pleadings and still further evidence in respect of this purported loss. To do so at this very late stage, within the context of the present proceedings, would be manifestly unfair to Smart.

Other claims

[39]   The District Court Judge did not address Security’s other claims. They were relatively minor claims. I am satisfied there is sufficient evidence to sustain the claim in relation to the “Railway Station” project and Turnstile rectification ($837.20). The claim to retentions is, however, dismissed. They were paid by Fletchers and should be passed onto Smart.

Was Security liable to pay Smart for all invoiced sums for work approved by Fletcher?

[40]   Yes. Fletcher has sought and approved all the invoiced works, including the invoices subject to claim totalling $17,227.86, namely invoices 177 (for $15,037.35), 067 (for $730.25), 096 (for $80.26) and 178 (for $1380.00). I agree with the Judge that those sums must be paid.

Result

[41]   The Judge erred insofar as he found that Smart was not obliged to carry out the works in accordance with its quote. But Smart’s invoices were approved and paid by Fletcher so that any exceedance from the quoted price was inconsequential. There was, in short, never any overpayment as claimed by Security. Security is, however,

entitled to offset any sum owing to account for the Railway Station and turnstile rectification. For completeness, I accept that Security had to perform at least some of the quoted works not performed by Smart. But the loss associated with this was not pleaded or proven in evidence. Any claim based on that loss is not fairly amenable to resolution within the rubric of this proceeding.

[42]   Save in respect of the Railway and turnstile rectification, the appeal is dismissed. Costs should follow the event on a 2B basis together with disbursements.