Teak Construction Group Limited v Cake Commercial Services Limited

[2024] NZHC 1181

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2023-404-2800

[2024] NZHC 1181

BETWEEN

TEAK CONSTRUCTION GROUP LIMITED

Plaintiff

AND

CAKE COMMERCIAL SERVICES LIMITED

Defendant

Hearing:	6 May 2024
Appearances:	A A Holmes for Plaintiff/Respondent J I Taylor for Defendant/Applicant
Judgment:	13 May 2024

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 13 May 2024 at 3: 30 pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

………………………………….

TEAK CONSTRUCTION GROUP LIMITED v CAKE COMMERCIAL SERVICES LIMITED [2024] NZHC 1181 [13 May 2024]

[1]    Teak Construction Group Limited (Teak) was, or perhaps remains, the head contractor engaged to carry out what was described in the head contract as “watertight remedial works” at an apartment block in Auckland. The principal is the Body Corporate of the apartment block.

[2]    Teak subcontracted works to Cake Commercial Services Limited (Cake) under three separate subcontracts. The first was for steel remediation and is dated July 2017 and the second was for passive fire products from May 2020.

[3]Cake served Teak with a statutory demand on 9 November 2023 seeking

$92,838.89 plus GST described as being retention moneys under those two agreements clamed  to  now be owing  to  Cake and $7,574.75 plus  GST it claims  is due under  a payment scheduled issued by Teak in response to a payment claim.

[4]    Teak has applied to set aside the statutory demand. This judgment concerns an application by Cake for orders for discovery against Teak in anticipation of the hearing of the application to set aside the demand scheduled for 8 August 2024. The application for discovery is opposed.

[5]    In summary, Cake seeks orders requiring Teak to disclose details of its contractual arrangements with the Body Corporate and in particular, a copy of the head contract and details of the payments of retentions by the Body Corporate to Teak. Discovery of a third category of documents was not pursued.

[6]    The subcontract agreements specify 13 documents said to make up the subcontract documents, they being listed in order of precedence. Number (7)  on  that list is the head contract conditions with the subcontract noting: “Will not be supplied – To be perused at TEAK’s office”. Accordingly, the subcontract provides that Cake has a right to peruse the head contract at Teak’s office.

The retentions

[7]    Under the contract for steel work remediation, the retention was five per cent. The subcontract provides at cl 2.8:

Retentions as per HeadContract Conditions As set out below

Retentions to be withheld – As noted on Page 1 of the Sub-Contract Agreement.

It is a condition precedent to practical completion and the first release of retention’s and / or final payment that all documentation required under the contract is supplied in full.

Any delay in the provision of information required that either Practical or Final Completion will cause a breach of contract which damages will be sought from the Subcontractor.

[8]    The reference to, “as noted on page 1” of the subcontract, is to the five per cent already noted.

[9]    The subcontract for the passive fire products has a 10 per cent retention and in respect of retentions and bonds has the same clause as set out in [7] above and in [10] and [11] below.

[10]   Each contract has attached to it, Teaks’ subcontract General Conditions. Clause 7.2 has the following clause in respect of retentions:

7.2Retentions

7.2.1The Contractor shall be entitled to retain from ach progress payment to the Subcontractor a sum amounting to as specified in the Subcontract Specific Conditions.

Retentions Subject to clause 11.1.2 below, such retention monies shall be released to the Subcontractor as follows

-

(a)50% of the accumulated retention monies shall be paid to the Subcontractor one-calendar month after the date of issue of the Certificate of Practical Completion for the Head Contract,

(b)the remaining 50% of the retention monies shall be paid to the Subcontractor on the date which is 5 Working Days after the end of the Defects Notification Period or the date when the Subcontractor has remedied all defects in the Subcontract Works, whichever is the latter.

[11]   Clause 11.1.2 of Teaks’ Subcontract General Conditions is part of a clause headed “DEFAULT BY SUB-CONTRACTOR” and provides:

11.1.2 To the fullest extent permitted by law, and without prejudice to any other form of recovery, the Contractor may recover costs and expenses to which it is entitled under clause 11.1.1 by deduction from or set-off against payments due to the Subcontractor (including any retention monies).

[12]   As at the date Cake served its statutory it had not received notice of any defective   workmanship   for   which   it   is   alleged   it   was   responsible.    On  14 September 2023, Teak had received a notice to rectify works from the Body Corporate and that was passed on to Cake following the issue of the statutory demand. A further list of defects called an ‘Engineers Defects Work Report’ was provided to Cake on 23 January 2024. Cake says it is not responsible for defects alleged to relate to its workmanship or, in the alternative, no quantification of Teak’s claim in respect of the alleged defects exists to found a set-off or counterclaim in respect of the amount in the demand.

The parties’ positions

[13] Cake highlights that pursuant to cl 7.2.1(a) of the subcontract set out at [10] above, it is entitled to 50 per cent of the retentions one calendar month after the date of practical completion of the head contract.

[14]   As far as Cake understands it, the head contract has been cancelled. Cake says therefore that the pre-condition in its contract with Teak for the release of retentions can never be satisfied. Therefore, Cake says either its contract with Teak has been frustrated in part or there is a need for an implied term concerning the release of the retentions. Clause 7.2.1 of the subcontract has become unworkable.

[15]   While Cake has led evidence as to its understanding that the head contract has been cancelled, Teak has not engaged with that evidence. Mr Holmes, counsel for Teak, would not advise his client’s position in that regard. Mr Holmes submitted that the status of the contract between Teak and the Body Corporate was irrelevant. He made that submission as given the Body Corporate had now made claims against Teak relating to claimed defects with the works, even if it were assumed that the head contract had been cancelled, Teak had valid commercial reasons to hold Cake to its

maintenance obligations under its subcontract. Discovery concerning the status of  the head contract was therefore not required. Mr Holmes submitted that the contract between Teak and Cake had not been cancelled and Teak’s ability to call on Cake to rectify Cake’s workmanship (if such is indeed required) was a thing of value to Teak which it may wish to rely on, for example, in reaching a commercial resolution of the claims notified by the Body Corporate.

[16]   While I appreciate the commerciality of Mr Holmes’ submission, it does not directly address why Cake wants confirmation of the status of the contract. Part of Cake’s  argument depends on the head contract being cancelled.  It is cancellation   of the head contract which Cake says makes performance of the provisions dealing with the release of retentions in the subcontract unworkable. Thus, Cake does not want to be faced at the hearing of the application to set aside the statutory demand with a submission that there is no clear evidence as to the status of the head contract. Such a submission may be difficult for Teak to maintain if it does not address the evidence that the head contract has been cancelled.   However, this should not be     a point over which the parties and the Court should be expending time and resources.

The status of the head contract — is practical completion under the head contract possible?

[17]   As noted, the status of the head contract is opaque. Mr Birchall, the managing director of Teak, in his affidavit in support of the affidavit to set aside the demand, does not refer to the status of the head contract.

[18]   Mr Lesslie, director of Cake, in his affidavit in opposition to the application to set aside the demand and in support of his application for discovery, says:

I understand that the Head Contract is no longer on foot and has been terminated. By whom, I am not entirely sure, however for present purposes it is irrelevant.

[19]   Cake refers to a letter it received from the Body Corporate which appears to be a form letter as it is not personally addressed to Cake and is simply addressed “Dear Sir/Madam” and refers to work at the apartments. That letter, dated 10 October 2022,

nearly one year before the notice to remedy works was issued, says:

You may be aware that Teak are no longer involved in completing works on the building, and we wished to clarify our position.

1.The Body Corporate has no retentions for any works done on the building, they have been released to Teak.

[20]   The letter goes on to refer to the Body Corporate being in the process of completing the project to allow owners to move back in and to obtain a Code Compliance Certificate from the Council.

[21]Mr Lesslie says:

17.Since the Head Contract has been terminated, I am confused as to why Teak is maintaining that the retentions are not due and owing. It is plain under clause 7.2.1(a) that 50 per cent of the accumulated retentions will only be paid once a practical completion certificate has been issued.

18.I do not understand how this can ever be achieved when the Head Contract  is  no longer  at  play.   It is  simply not  possible  because  a certificate would need to be issued confirming practical completion has been achieved but under a contract that is no longer in force.

19.In such circumstances, it cannot be the case that Teak are able to hold onto our retentions at their leisure.

20.I am equally concerned by the affidavit of Wayne Leonard Birchall dated 22 November 2023 and the consistent reference to the terms of the Head Contract and how they apply in this instance. My understanding is that the Head Contract has been terminated for some time. Teak would know this.

21.The reference and reliance on the terms of the Head Contract for withholding retentions is at the very least incorrect.

[22]   The next affidavit filed by Teak comes from a solicitor at Kennedys, solicitors, which acts for Teak  on  this  proceeding.  It  does  not  purport  to  be  in  reply  to Mr Lesslie’s affidavit and makes no mention of the status of the head contract.

What must Cake show in order to obtain discovery?

[23]   Mr Taylor, counsel for Cake, accepts there is no presumption that discovery is available in the context of an originating application such as the present one.

[24]Mr Taylor’s para 12 of his submissions states:

While no express provision for discovery in Part 19 applications is found in the High Court Rules, the following principles have been developed by the High Court:1

(a)the document sought must be capable of supporting the applicant’s case or adversely affecting the opponent’s case;

(b)discovery orders should be subject to the proportionality and practicality requirements identified in r 8.2 of the Rules and, as with all orders and the HCRs generally, should accord with the objective of “just, speedy, and inexpensive determination” of disputes (r 1.2, HCR);

(c)while a conservative approach is generally adopted, discovery under a Part 19 application is not restricted or limited to exceptional cases;2 and

(d)discovery will be appropriate in marginal cases where the party makes out an outline case but the Court encounters a genuine difficulty in determining, without documentary evidence which is likely to assist, whether the threshold test is satisfied.

[25]   Mr Holmes submits that the Court has long treated discovery applications in the context of an originating application “[w]ith a reluctance and circumspection”.

[26]   Mr Holmes emphasised that discovery in an originating application will only be considered in exceptional circumstances,3 or in marginal cases where an outline defence is made out “[b]ut the Court encounters genuine difficulty in determining whether or not the defence to the claim or counterclaim does exist”.4 Mr Taylor noted the need for exceptional circumstances was not followed in Commissioner of Inland Revenue v Elementary Solutions Ltd.5

[27]   Even when discovery is appropriate then principles of proportionality indicate that such discovery should be narrow, as seen in Jackson v Grant where discovery was granted in an originating application where the category was narrowly defined and there was no evidence of difficulty in collating such documentation.6

1      These principles are taken from Commissioner of Inland Revenue v Elementary Solutions Ltd

[2017] NZHC 2411 at [37].

2 As Associate Judge Osborne (as he then was) makes explicit at [36].

3      The Grange Ltd v City Sales Ltd (1999) 14 PRNZ 222.

4      Shuttle Petroleum Distribution Ltd v Caltex NZ Ltd (2002) 16 PRNZ 126.

5      Commissioner of Inland Revenue v Elementary Solutions Ltd, above n 1 at [36].

6      Jackson v Grant [2022] NZHC 2113 at [46].

[28]   Cake seeks discovery relating to whether the head contract remains on foot. The application as  drafted  seeks  all  documents  relating  to  the  head  contract.  Mr Taylor’s submissions, in a practical sense, refine that very open category which would at face value capture all documents relating to the entire life of the head contract.

[29]   The short point is, Cake does not understand the basis upon which Teak can retain the retention monies which apparently it has received from the Body Corporate when again, it understands the head contract has come to an end. There is an element of coyness in Teak’s position concerning the status of the head contract.

[30]   If the head contract has been cancelled then s 42 of the Contract and Commercial Law Act 2017 provides that neither party is obliged or entitled to perform it further. How practical completion can ever be achieved by Teak, which is the pre-condition for the release of Cake’s retentions, is not understood by Cake.

[31] Mr Holmes explained that the basis of the Body Corporate’s claim against Teak was based on s 362Q(2) and 362Q(5) of the Building Act 2004 (the Act). Mr Holmes’ point was that whatever the merits of the Body Corporate’s claim, Teak may elect to seek a resolution with Body Corporate for any number of commercial reasons and in doing so may wish to call upon its subcontract rights against Cake. Again, the commerciality of that can be understood but that of itself is not necessarily an answer to the question as to when Cake is now entitled to release of its retentions.

[32]   Whether the contract between Teak and the Body Corporate came to an end on terms that preserved Teak’s maintenance obligations is unknown — Teak does not make such a claim. Nor is it known if the head contract provided for any of its terms to survive cancellation.

The head contract

[33]   I come back to the fact that Cake is entitled to view the head contract in any event. Providing a copy of the head contract is likely to be more convenient to both parties than an inspection and can hardly be described as onerous or disproportionate given the entitlement to inspect. I direct Teak is to provide Cake with a copy of the

Head contract conditions and any other part of the head contract concerning retentions, defects liability periods and/or their status in the event of cancellation.

[34]   Mr Holmes suggested the head contract conditions may contain commercially sensitive information. If counsel cannot agree the terms of any redactions then leave is reserved to apply further.

Documents concerning the status of the head contract

[35]   If the head contract has been cancelled, then having that clarified by discovery will shorten the submissions for the hearing and the hearing itself. Indeed, Mr Taylor submitted that he would be content for Teak to acknowledge that for the purposes of the statutory demand hearing, that the head contract had been cancelled. The reasons for cancellation do not matter to Cake.

[36]   Nor can it be onerous or disproportionate for Teak to have to produce any document recording any terms agreed in relation to the head contract coming to an end. If there are no agreed terms and rather, it was simply one or other of the parties cancelling the agreement, then there will be no such document to disclose and Teak’s ongoing obligations, if any, will be determined by whether there are any terms of the head contract intended to apply in the event of a cancellation.

[37] The form letter from the Body Corporate to Teak could be read as implying Teak not being involved was an agreed position. However, the maintenance demands sent by the Body Corporate do not rely on the head contract, but the Act.

[38]   One can assume that a major renovation contract would have some contractual provisions dealing with how either party may cancel the head contract for breach. However, at the end of the day there is likely to be limited correspondence in respect of the actual communication of cancellation. One or other of the parties will have claimed a right to cancel and given notice of its election to do so. The other party, if not accepting its counterparty’s right to cancel, will either have sought to hold its counterparty to the contract — which does not seem to be the case here — or communicate that its counterparty’s purported cancellation is itself a breach for which it cancels. This will involve a very limited number of documents.

[39]   The object of the High Court Rules 2016 (the Rules) is to secure the just speedy and inexpensive determination of any proceeding or interlocutory application.

[40]   Rule 8.2 of the Rules requires the parties to co-operate in the process of discovery. (I appreciate here that no order for discovery has been made but the purpose of discovery is to ensure that parties are not taken by surprise). Rule 8.2 does not create an entitlement to discovery where none otherwise existed.   However, here     I simply do not understand why Teak resists the limited disclosure that is sought. Having clarity around the status of the head contract, that is, has it been cancelled or not, will again limit the scope of submissions and the length of the hearing and are relevant to Cake’s case.

[41]   The documents sought by Cake are capable of supporting its case. The Court will encounter difficulty in determining without the discovery whether the head contract has been cancelled and what the terms of the head contract were in relation to practical completion maintenance obligations and retention issues absent discovery and given Teak has so far not given evidence on those points. Cake wants this information to primarily demonstrate that, as I said earlier, the provisions in its subcontract with Teak as to the release of the retentions are unworkable. Mr Holmes’ commercial submission that Teak may want to achieve a resolution with the Body Corporate in respect of the maintenance issues claimed, is understandable but irrespective of the maintenance issues, under Cake’s subcontract it was entitled to release of 50 per cent  of  the  retentions  one  month  after  practical  completion.  Mr Holmes sought to rely on cl 11.1.2 to say that Teak’s ability to have recourse to the retentions is wider than set out in cl 7 — that is true, but cl 11.1.2 says:

11.1.2 To the fullest extent permitted by law, and without prejudice to any other form of recovery, the Contractor may recover costs and expenses to which it is entitled under clause 11.1.1 by deduction from or set-off against payments due to the Subcontractor (including any retention monies).

[42]   There is no evidence of any costs or expenses having been incurred by Teak and so it is hard to see how cl 11.1.2 can presently be relevant.

[43] A further category of documents sought by Cake are documents relating to the payment of retentions to Teak from the Body Corporate. How the historical return of retentions by the Body Corporate to Teak is relevant to the present dispute concerning the retentions as between Teak and Cake is unclear. The maintenance claims by the Body Corporate have only recently been made. As noted, they are not made pursuant to the terms of the head contract but pursuant to the Act.

[44]Mr Taylor’s para (36) submitted on this issue:

The lion’s share of the Debt relates to the retentions. Without discovery of this material, CCSL [Cake] will be unfairly unable to properly assess Teak’s application to set aside. It is clear on the evidence that the Principal has released its retentions to Teak. Communications about this are likely to shed light on the issue and, in counsel’s submission, strongly support CCSL’s [Cake’s] position that Teak must, in turn, release its Retentions to CCSL [Cake]. (footnotes omitted)

[45]   I consider Mr Taylor’s submission at [44] too general to bring documents relating to the Body Corporate’s prior release of retentions to Teak within the range of permitted discovery in an originating application. It has not been sufficiently linked to the core arguments that Cake wish to run.

Decision

[46]   I am satisfied that in the unusual circumstances of this case, limited discovery is appropriate.

[47]   Disclosure is to be given of any document recording the terms upon which the head contract was terminated. If such documents exist, discovery is limited to any document actually recording those terms and not the negotiations leading to that final agreement. It is the final agreement that is important, not the pre-amble — if there are no such agreed terms then obviously no discovery on this point is possible.

[48]   It is hard to see how there can be more than a handful of documents on this point if they exist.

[49]The head contract conditions are to be discovered as directed at [33].

[50] This is not a situation where Teak’s lawyers will have to “[r]eview documents, list and draft and advise on the affidavit”. Teak knows exactly what documents it has on the above narrow issues. It is not providing general discovery in respect of those matters, only the particular documents I have described. The required discovery is focused and relevant to the matters Cake wants to argue. This is not a case of discovery being sought to resolve a conflict on the evidence — such would almost never be appropriate in an application to set aside a statutory demand given such applications are focused on determining whether there is a genuine dispute. Discovery is required here because Teak has not provided evidence on the areas where discovery has been ordered and, as I have said, such is relevant and proportionate. As set out in the extract from Mr Lesslie’s evidence at [21] above, with Teak referring to the terms of the head contract but not producing it, it can hardly complain of a call for the head contract to be produced.

Costs

Cake has had incomplete success and Mr Taylor accepted that the application as drawn was at least in part overly broad. That said, my initial reaction is that Cake should have costs on a 2B basis plus disbursements as fixed by the Registrar, but reduced by 25 per cent to reflect the partial success and the initially overly broad cast of the application. However, if counsel wish to be heard on costs then costs memoranda should be filed within 10 working days (not more than five pages). If no costs memoranda is filed then my initial reaction as to costs shall become the final order.

Associate Judge Lester

Solicitors:

Kennedys Solicitors, Auckland (Plaintiff) Wynn Williams, Christchurch (Respondent)