Stead Construction Limited v Chillex Mid Island Limited
[2016] NZHC 594
•5 April 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2015-404-3053 [2016] NZHC 594
UNDER the Companies Act 1993 section 290 IN THE MATTER OF
an application to set aside a statutory demand
BETWEEN
STEAD CONSTRUCTION LIMITED Applicant
AND
CHILLEX MID ISLAND LIMITED Respondent
Hearing: 5 April 2016 Appearances:
J T Burley for the Applicant
J S Cooper for RespondentJudgment:
5 April 2016
ORAL JUDGMENT OF ASSOCIATE JUDGE R M BELL
Solicitors:
Sainsbury Logan Williams (Nathan Gray), Napier, for Applicant
Jones Young (David O Jones), Auckland, for Respondent
Counsel:
J T Burley, Auckland, for Applicant
J S Cooper, Auckland, for Respondent
STEAD CONSTRUCTION LIMITED v CHILLEX MID ISLAND LIMITED [2016] NZHC 594 [5 April 2016]
[1] Stead Construction Ltd applies under s 290 of the Companies Act 1993 to set aside a statutory demand of Chillex Mid Island Ltd of 3 December 2015 requiring payment of the sum of $223,207.63. The ground of the application is under s 290(4)(a) that there is a genuine and substantial dispute as to the debt claimed in the demand.
[2] Chillex Mid Island Ltd was formerly known as Mid Island Mechanical (2010) Ltd. I shall refer to it as MIM. Its claim is based on payment claims it gave to Stead Construction Ltd under the Construction Contracts Act 2002. Its case is that Stead Construction Ltd did not reply in time with payment schedules under the act. It accordingly relies on ss 22 and 23 of the act to say that the sums set out in the payment claims have now fallen due.
[3] Stead Construction Ltd says that there is a substantial dispute. It contests the validity of the payment claims. It says that they are defective on two grounds:
(a) that the construction work was not adequately identified; and
(b)that the payment claims do not relate entirely to construction work under the act. As I will explain later, that ground alleges that MIM is claiming for work that it did not carry out.
Preliminary matters
[4] The application was made within time under s 290 of the Companies Act. In its initial affidavits Stead signalled that it would file evidence from a quantity surveyor to show that MIM had claimed for more than the value of the work actually carried out. An affidavit from a quantity surveyor was filed on 26 January 2016. MIM objected to the affidavit on the grounds that it was out of time and that it was irrelevant. I admit the affidavit.
[5] As to the complaint of the affidavit being out of time, it is necessary to bear in mind that the time for filing applications under s 290 of the Companies Act is
limited to 10 working days after service of the statutory demand. It is not always possible to assemble all the evidence which the applicant may wish to rely on to challenge the statutory demand. In my view it is acceptable to follow the course taken by Stead here, when it signalled that further evidence would be adduced and filed later, even though it was outside the 10 working days.
[6] In this case Stead instructed a quantity surveyor to make a report, to bolster its case as to the value of the work carried out by MIM. It would be unrealistic to expect a quantity surveyor to turn around a completed report within the tight time limits for filing a response to a statutory demand. The affidavit adds to Stead’s case but does not raise any new grounds.
[7] As to the irrelevance objection, the affidavit is relevant to the case for Stead because it contends that the value of the work carried out by MIM can be subject to challenge at this point and the affidavit goes to establish that. Stead will still need to establish its case that the payment claims are defective but, to the extent that it wishes to refer to the value of work carried out, the affidavit is relevant to its case. That does not stand in the way of MIM contending that the evidence is not relevant to the validity of the payment claims.
[8] Stead filed an amended application, enlarging the grounds for challenging the payment claims. There was no objection to the late amendment. Initially, Stead had alleged only that the payment claims were defective as not relating to construction work. The added ground is that the payment claims did not adequately identify the work under s 20(2)(c) of the Construction Contracts Act.
[9] MIM responded with a further affidavit. There was no objection to that affidavit being read.
[10] Under the Construction Contracts Amendment Act 2015, there were a number of amendments to the principal Act which took effect on 1 December 2015. The payment claims in this case were issued before that date. I will apply the version of the Construction Contracts Act in force before 1 December 2015.
Background
[11] Stead Construction Ltd had the head contract to redevelop the Murupara
School. MIM had the sub-contract for mechanical services. Its tender price was
$839,309.00 plus GST. Stead issued a work order on 21 February 2015. This was a lump sum contract. The work was to be carried out in two stages. The first stage work was identified as mechanical services for the boiler room and blocks C and E at the school. The second stage was blocks A, B and D. The documentation for the contract entered into in February 2015 does not, however, stipulate that the work was to be carried out in those two stages. The first stage of the work was completed during 2015. It appears from the evidence that the physical works were completed in or about September of that year.
[12] In August 2015 Stead requested MIM to provide a breakdown of the contract price between work to be carried out in the first stage and that for the second stage. In an email on 27 August 2015 MIM gave that breakdown. It allocated $518,445 to stage 1 and $320,864 to stage 2. For Stead, that allocation of costs has significance, although it accepts that the provision of that breakdown did not by itself change the parties’ contract.
[13] In November 2015 Stead and MIM agreed that MIM would not carry out the second stage, ie Blocks A, B and D. The correspondence shows that the parties agreed that the abandonment of stage 2 would be without prejudice to both parties’ positions under the contract up to the abandonment. MIM’s letter said it was without prejudice to right to be paid for work already completed. The background to the agreement not to do the stage 2 work was that differences had arisen between the parties during the first stage and they were not able to bridge those differences in November 2015.
The payment claims
[14] During Stage 1, MIM served a number of payment claims under s 20 of the Construction Contracts Act. In this case, its statutory demand is based on three of those payment claims – nos. 4, 5 and 6. The first of them (4) dated 21 July 2015 is
for $251,763.13 inclusive of GST. The second claim (5) is dated 25 August 2015, just before Stead requested MIM to provide a breakdown of costs between stage 1 and stage 2. That payment claim was for $177,565.61 inclusive of GST. The next claim (6), dated 25 September 2015, is for $15,084.15. Stead paid MIM
$121,071.01 on 2 September 2015 and $99,345.54 on 6 October 2015. When those two payments are taken into account, the shortfall is $223,207.63, the amount in the statutory demand.
[15] MIM issued three payment claims before the claim of 21 July 2015. Those claims were all paid in full. MIM issued a further payment claim in November 2015, and then amended it at the end of that month. It also issued another claim in January
2016. It has not relied on the claims made in November 2015 and January 2016.
[16] In response to payment claims 4, 5 and 6, Stead issued payment schedules. It accepts that those payment schedules were not within time under s 21(2) (b) of the Construction Contracts Act. Accordingly the case for MIM is that because Stead did not give payment schedules within time, the unpaid amounts of the payment claims have become due and payable under ss 22 and 23 of the Construction Contracts Act.
[17] To resist that, Stead challenges the validity of the payment claims. It points out that under MIM’s breakdown of costs supplied on 27 August 2015 the value of the work for stage 1 was $518,445 plus GST. On my rough calculations, the total value of MIM’s payment claims nos. 1-7 (excluding no.8 and taking into account the revised payment claim no.7) amount to $686,000 exclusive of GST. The quantity surveyor engaged by Stead has calculated the value of the work carried out by MIM for stage 1 at some $477,615 rather than the contract value of $518,045. Stead’s case is basically this: the payment claims 4, 5 and 6, must be flawed because the amount claimed is clearly excessive. Either MIM did not do all the work for which it was claiming payment; or, if it did work for which it is claiming payment, it should not have done it. That complaint is that MIM has claimed for stage 2 work and the time for doing the stage 2 work had not started. Further Stead says that MIM did not clearly identify in its payment claims that it was charging for work under stage 2 when it was submitting claims during stage 1.
[18] Again, before going into the validity of the payment claims, MIM responds broadly to those complaints as follows. It says that when it was working on stage 1, it was also doing work towards stage 2. In particular, it purchased materials, plant to be installed as part of stage 2, in the expectation that it would also do stage 2. It says that it was not required to separate out the costs incurred for the work they did for stage 2 from stage 1 work in the payment claims. It says that there is no contractual provision requiring claims for payment for stage 1 and stage 2 to be made separately.
Contestability of payment claims
[19] It is appropriate to recognise the purpose of the “pay now/argue later” regime under the Construction Contracts Act. The dictum of Asher J in Marsden Villas Ltd v Wooding Construction Ltd1 has been cited a number of times and has recently been endorsed by the Court of Appeal in SOL Trustees Ltd v Giles Civil Ltd:2
[17] The Act therefore has a focus on a payment procedure, the results that arise from the observance or non-observance of that procedure, and the quick resolution of disputes. The processes that it sets up are designed to sidestep immediate engagement on the substantive issues such as set-off for poor workmanship which were in the past so often used as tools for unscrupulous principals and head contractors to delay payments. As far as the principal is concerned, the regime set up is “sudden death”. Should the principal not follow the correct procedure, it can be obliged to pay in the interim what is claimed, whatever the merits. In that way if a principal does not act in accordance with the quick procedures of the Act, that principal, rather than the contractor and sub-contractors, will have to bear the consequences of delay in terms of cash flow.
[20] Payment claims are in their nature contestable. In that sense they have some similarity to a pleading in a court case. The payee sets out in a payment claim what it contends should be paid for work it alleges that it has carried out. The payment claim must, of course, meet the requirements of s 20(2) of the Construction Contracts Act. The fact that claims may be contestable does not by itself invalidate a payment claim. To the extent that claims made in a payment claim are contestable, the payer can deal with the matter by submitting a payment schedule under s 21. It follows from Asher J’s dictum in Marsden Villas Ltd v Wooding Construction Ltd
that it is important not to allow the substantive merits of a dispute between the
1 Marsden Villas Ltd v Wooding Construction Ltd [2007] 1 NZLR 807 (HC) at [17].
2 SOL Trustees Ltd v Giles Civil Ltd [2015] NZCA 539, [2015] 2 NZLR 482 (CA) at [25].
parties to be injected into the formal requirements for a payment claim. If that were allowed, a proceeding based on non-compliance with a payment claim, instead of being the relatively straightforward procedure that it customarily is, would become embroiled in arguments as to the substantive merits of the dispute between the parties. This case illustrates that aspect.
[21] Stead contends that there was not adequate identification of construction work in the payment claims because they do not adequately distinguish between work carried out for stage 1 and work for stage 2. It contends that MIM is not entitled to recover for stage 2 work while it was working on stage 1. Alternatively, it says that by reason of the valuation work carried out by the quantity surveyor, the charges are excessive. It says that it was misled in not being alerted to the fact that there were charges made for stage 2 work.
[22] The contestability of a payment claim can go to these issues:
(a) the payee has made an excessive claim because of excessive hours claimed for or for excessive materials claimed for – that is a measurement dispute;
(b)the claim is excessive because the work goes beyond what is set out in plans and specifications; and
(c) it is excessive because the rates claimed are above the contract rates or because the payments sought go over the contract price.
These contestable matters can be fairly met by a payment schedule. In complaining that stage 2 work has not been separately identified in the payment claims, Stead is raising a contestable issue.
Identification of work under s 20(2)(c)
[23] I regard the claims as adequately identifying the work under s 20(2)(c). As Ms Cooper pointed out, the particular claims follow a familiar format, one which passed muster with the Court of Appeal in George Developments Ltd v Canam
Construction Ltd.3 The payment claims are itemised. There is a break down into different aspects of the work under typical headings such as underfloor heating, air conditioning units and main plant. For each item there is a percentage claimed for the amount of the work completed. The quoted value for each item is given and the percentage is applied against the quoted value to give the amount claimed under that head. For example, in the case of the payment claim for 21 July 2015 there is a claim for 80 per cent for design and drawings, whereas the claim for labour is for
45 per cent. That would indicate to Stead that MIM contended that the work for design and drawings for the job was 80 per cent complete even though labour was only 45 per cent complete. That would be consistent with design and drawing work being carried out ahead of the actual work on site. The payment claim also gives breakdown details for variations. That approach reflects the application of s 17 of the Construction Contracts Act which stipulates how the amount of a progress payment is to be calculated. Items of work are identified and the percentages of work completed are stated, with reference to the quoted value so as to show a net sum claimed. Progress payments have been made cumulatively so that work already carried out to date is included in the claim.
[24] The point that Stead takes is that a later payment claim, the first version of progress claim 7, has a separate identification of work for stages 1 and 2. That separate identification simply records the breakdown of the values of stage 1 and stage 2. In all other respects there is no material difference in formatting and identification of work between payment claim 7 and payment claims 4, 5 and 6. In short, I regard the payment claims as meeting the requirement to identify the construction work under s 20(2)(c) of the Act.
[25] I accept that the purchase of the materials for stage 2 has been claimed for. That would be apparent from reading item “CO2 air-conditioning units and main plant” in progress claim 6 for 25 September 2015. That amount is stated as “100%” complete. This was a lump sum contract. It is only the later agreement of November
2015 that led to stage 2 being abandoned. That abandonment did not stand in the
way of MIM before then claiming in payment claims for work it contended it had
3 George Developments Ltd v Canam Construction Ltd [2006] 1 NZLR 177 (CA) at [41]-[54].
carried out, even if that work related to stage 2. It may be contestable, but the identification was adequate and it was open to Stead to contest it.
[26] Stead has put its payment schedules in evidence, although accepting that they were out of time. Those payment schedules show that MIM’s payment claims have been read and Stead has assessed which parts should be paid and which parts should be challenged. The payment schedules show grounds for resisting payment to the extent that they have been challenged. The fact that Stead was able to prepare payment schedules in response goes to show adequate identification.
Payment claims not for construction work
[27] Stead says that the payment claims are not for construction work. Its submission is that MIM claimed for work that it had not carried out. There is no dispute that a payment claim can only be made for work that has been carried out and cannot be made for work that has still to be carried out. Stead has not shown a reasonably arguable case that MIM has claimed for work that it did not carry out. It is important to bear in mind that there can be contestability over claims as to the extent of the work carried out.
[28] MIM has claimed as to the value of the work it carried out during stage 1 and part of its claim is for work towards stage 2. The fact that it has carried out work towards stage 2 does not mean that that is not construction work carried out during a contract for which it is entitled to make a claim. The question becomes one of measurement. Has it over-claimed for the work it has carried out? As soon as a measurement issue is raised, the matter becomes one of contestability rather than validity of the progress claim. I cannot accept that there is any reasonable argument available to Stead that MIM has made a claim for matters that do not constitute construction work which it claims to have carried out.
Outcome
[29] Overall I am satisfied that Stead does not have a reasonably arguable case to contest the validity of the payment claims 4, 5 and 6. As the payment claims are
valid, Stead does not have a reasonable basis on which to contest its liability to pay the claims to the extent that they are unpaid.
[30] Accordingly I uphold the statutory demand for the sum of $223,207.63. Under s 291(1) of the Companies Act I order Stead Construction Ltd to pay MIM
$223,207.63 by 19 April 2016. If that sum is not paid in full, MIM may apply to have Stead Construction Ltd put into liquidation.
[31] Ms Cooper seeks costs on a category 2 basis. She has provided a written schedule of costs. Mr Burley has not had adequate time to consider it. For step 11 there is a claim for two memoranda. .4 is appropriate for one memorandum, but .2 is appropriate for the second. The claim should be adjusted accordingly. I leave counsel to confer to see if they can agree costs. If there are any differences, memoranda may be filed, but I trust that counsel will be able to resolve the matter themselves.
………………………............
Associate Judge R M Bell
0