Templeton Kingsland Limited v Dominion Constructors Limited
[2021] NZHC 2960
•3 November 2021
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2021-404-130
[2021] NZHC 2960
UNDER the Companies Act 1993 IN THE MATTER
of an application to set aside a statutory demand
BETWEEN
TEMPLETON KINGSLAND LIMITED
Applicant
AND
DOMINION CONSTRUCTORS LIMITED
Respondent
Hearing: 12 May 2021 Appearances:
K Kemp and J Morton for the Applicant
G Holm-Hansen and A Eager for the Respondent
Judgment:
3 November 2021
JUDGMENT OF ASSOCIATE JUDGE SUSSOCK
This judgment was delivered by me on 3 November 2021 at 3.30pm pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Solicitors:
Anthony Harper, Auckland Hesketh Henry, Auckland
TEMPLETON KINGSLAND LTD v DOMINION CONSTRUCTORS LTD [2021] NZHC 2960
Introduction
[1] The applicant, Templeton Kingsland Limited (“TKL”), applies to set aside a statutory demand served by the respondent, Dominion Constructors Limited (“Dominion”).
[2]The statutory demand was issued following TKL’s payment of only
$321,934.37 in response to a payment claim of $5,979,906.67 issued by Dominion. The claim was Payment Claim 50 issued under a contract entered into for the construction of an apartment complex in Kingsland, Auckland.
[3] TKL provided a payment schedule by the due date but Dominion submits that it is not valid (either in part or in whole) because:
(a)the Engineer to the Contract failed to value variations submitted by Dominion as required by the contract; and
(b)significant deductions were made against Payment Claim 50 with inadequate and insufficient reasons being stated as required by the Construction Contracts Act (“CCA”).
[4] If no valid payment schedule is provided in response to a payment claim by the due date, the payer (in this case TKL) is liable to pay the full amount claimed in the payment claim. If the payer does not do so, s 23 of the CCA provides that the payee may recover the unpaid portion of the amount claimed in the payment claim as a debt due together with the actual and reasonable costs of recovery.
[5] TKL submits that there is no debt owing because a fully compliant payment schedule was provided and TKL paid the scheduled amount within the time required. Increased or indemnity costs are sought on the basis that issuing the statutory demand in these circumstances is an abuse of process. In TKL’s submission the demand is an attempt to circumvent the contractual process for variations and the dispute resolution provisions in the contract and the CCA.
[6] To succeed in its application to set aside the demand TKL must establish that there is arguably a genuine and substantial dispute as to whether a debt is owing. This depends on the validity of the payment schedule. This in turn depends on whether the grounds on which Dominion says the payment schedule is invalid can be relied on to establish invalidity.
Issues
[7]To determine this application, two issues therefore need to be considered:
(a)Is the Engineer to the Contract required to value variations in the payment schedule for it to be valid under the CCA?
(b)Has TKL complied with s 21(3) of the CCA by sufficiently indicating the reasons for the deductions made?
Factual background
[8] TKL is the owner of 8-14 Kingsland Terrace, Kingsland, Auckland. TKL engaged Dominion to construct an apartment complex at the site, entering into a contract dated 8 August 2017 (“Contract”).
[9] The contract comprises NZS3910:2013 with amendments, special conditions, drawings and specifications, Dominion’s letter of offer and the relevant resource consent.
[10] Mr Brian Fear of WSP was appointed Engineer to the Contract and Mr Conrad Hinchey and Ms Janet Hares of Development Advisory Services Limited (“DASL”) acted as the engineer’s representative and engineer’s assistant respectively. DASL was also appointed project manager. Ms Joanna McDonald of DASL, who filed a comprehensive affidavit in support of TKL’s application, describes herself as having a dual role overseeing the Development Manager and the Project Manager on the project as well as effectively being TKL’s representative on the project. Kingston Partners Limited (“Kingstons”) acted as the project quantity surveyors.
[11]The project was substantial with an initial contract value of $43,459,525.
[12] Dominion issued Payment Claim 50 on 30 November 2020, seeking payment of $5,979,906.67 (including GST). Payment Claim 50 records that prior to that payment claim being issued, $52,605,658.62 had been claimed by Dominion (after retentions) and $47,405,739.78 paid.
[13] On 9 December 2020 the Engineer to the Contract issued a provisional payment schedule as required by the contract.1 The sum provisionally scheduled for TKL to pay was $321,934.37, a significant reduction from the amount of the payment claim. The letter attaching the provisional schedule recorded that the “full details of this draft certification of Progress Payment are as set out in the attached Kingston Partners Ltd Progress Payment Advice No 50 dated 7 December 2020” (“Advice Note”). The Advice Note included a table with a separate row for each item claimed by Dominion and including columns for the amount claimed, the amount scheduled and the reason for any deduction.
[14] On 15 December 2020, the Engineer to the Contract issued the final Payment Schedule 50, confirming the scheduled amount of $321,934.37 and making payment of that amount. The final Payment Schedule attached a new table summarising the reasons for the deductions into 12 categories (“Summary Table”) and again attached a copy of the Advice Note including the table with a separate row for each item claimed.
[15] On 20 January 2021 Dominion (through its solicitors) served a statutory demand on TKL for $1,419,431.56. The demand attached a table headed “Invalid Deductions” listing only 25 items from the payment claim. The demand is not therefore for the full amount of the difference between the amount claimed under Payment Claim 50 and the amount scheduled by TKL in response.
[16]TKL applied to set aside the statutory demand on 3 February 2021.
1 Cl 12.2.5 of the Contract.
Relevant legal principles for setting aside a statutory demand
[17] Before considering the regime for payment claims and payment schedules under the CCA, it is useful to bear in mind the principles that apply to an application to set aside a statutory demand.
[18] The application is brought pursuant to s 290(4) of the Companies Act 1993 which states:
290 Court may set aside statutory demand
…
(4)The court may grant an application to set aside a statutory demand if it is satisfied that—
(a)there is a substantial dispute whether or not the debt is owing or is due; or
(b)the company appears to have a counterclaim, set-off, or cross- demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c)the demand ought to be set aside on other grounds.
…
[19] The Court of Appeal helpfully confirmed the principles a court should apply when exercising the s 290(4) discretion in Confident Trustee Limited v Garden and Trees Limited.2
[16]The general principles under s 290(4) are well settled:
(a)The onus is on the applicant seeking to set aside the statutory demand to show that there is arguably a genuine and substantial dispute as to the existence of the debt. The Court’s task is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due.
(b)The mere assertion that a dispute exists is not sufficient. Material short of proof is required to support the claim that the debt is disputed.
(c)If such material is available, the dispute should normally be resolved first in ordinary civil proceedings before any statutory demand is issued.
2 Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16].
(d)If a counterclaim, cross-demand or set-off is suggested an applicant must establish that this is reasonably arguable in all the circumstances.
(e)It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise unless such evidence is contrary to the available documents or earlier statements made by the parties.
(footnotes omitted)
[20] These principles need to be considered in terms of the legislative scheme in the CCA.
The CCA regime
[21] The CCA reformed the law relating to construction contracts. The purpose of the new regime is set out in s 3:
3 Purpose
The purpose of this Act is to reform the law relating to construction contracts and, in particular,—
(a)to facilitate regular and timely payments between the parties to a construction contract; and
(b)to provide for the speedy resolution of disputes arising under a construction contract; and
(c)to provide remedies for the recovery of payments under a construction contract.
[22] Section 4 provides an overview of the CCA, referring to ss 19 to 24 as providing a procedure for making payment claims and responding to those payment claims.3 The payment regime requires the issue of payment claims and payment schedules in response, with the requirements for each set out in ss 20 and214 of the CCA.
[23] The parties accept that Payment Claim 50 complies with the requirements for payment claims in s 20.
3 Construction Contracts Act 2002, s 4(e).
[24]Section 21 of the CCA sets out the requirements for a valid payment schedule:
21Payment schedules
(1)A payer may respond to a payment claim by providing a payment schedule to the payee.
(2)A payment schedule must—
(a)be in writing; and
(b)identify the payment claim to which it relates; and
(c)state a scheduled amount.
(3)If the scheduled amount is less than the claimed amount, the payment schedule must indicate—
(a)the manner in which the payer calculated the scheduled amount; and
(b)the payer’s reason or reasons for the difference between the scheduled amount and the claimed amount; and
(c)in a case where the difference is because the payer is withholding payment on any basis, the payer’s reason or reasons for withholding payment.
[25] Section 22 requires the payer to provide a valid payment schedule within the time specified by the contract or the default of 20 working days:
22Liability for paying claimed amount
A payer becomes liable to pay the claimed amount on the due date for payment to which the payment claim relates if –
(a)a payee serves a payment claim on a payer; and
(b)the payer does not provide a payment schedule to the payee within—
(i) the time required by the relevant construction contract; or
(ii) if the contract does not provide for the matter, 20 working days after the payment claim is served.
[26] The consequences of not complying with s 22 are set out in s 23 which provides:
23Consequences of not paying claimed amount where no payment schedule provided
(1) The consequences specified in subsection (2) apply if the payer—
(a)becomes liable to pay the claimed amount to the payee under section 22 as a consequence of failing to provide a payment schedule to the payee within the time allowed by section 22(b); and
(b)fails to pay the whole, or any part, of the claimed amount on or before the due date to which the payment claim relates.
(2)The consequences are that the payee –
(a)may recover from the payer, as a debt due to the payee, in any court –
(i)the unpaid portion of the claimed amount; and
(ii)the actual and reasonable costs of recovery awarded against the payer by that court; and
(b)may serve notice on the payer of the payee’s intention to suspend the carrying out of construction work under the construction contract.
…
(4)In any proceedings for the recovery of a debt under this section, the court must not enter judgment in favour of the payee unless it is satisfied that the circumstances referred to in subsection (1) exist.
[27] In this case the timing of the payment schedule is not in issue. If the payment schedule is valid, it was provided within the required time.
[28] As set out in the introduction the first issue is whether the Engineer to the Contract is required to value variations in the payment schedule for it to comply with the CCA. It is only if the payment schedule does not comply with the CCA that Dominion can recover the difference owing as a debt due and on that basis issue a statutory demand. I consider below whether it is arguable that there is such a requirement on the Engineer before going on to consider the second issue, the sufficiency of the reasons given for deductions.
Is the Engineer to the Contract required to value variations in the payment schedule for it to comply with the CCA?
[29] It is clearly arguable on the wording of the legislation that the Engineer to the Contract is not required to value variations for the payment schedule to comply with the CCA.
[30] The requirements for payment schedules are set out in s 21 and it is a finite list. The section is not subject to the terms of the contract. By contrast, s 22(b)(i) allows the time by which a payment schedule is required to be provided to be modified by the contract (which in this case the contract did not).
[31] The validity of a payment schedule for the purposes of the CCA in terms of the required form and contents is therefore dependent only on meeting the requirements of s 21 and not on any provisions in the relevant contract.
[32] The s 21 requirements are that the payment schedule is in writing, identifies the payment claim to which it relates and states a scheduled amount (s 21(2)). Where the scheduled amount is less than the amount claimed, s 21(3) requires the payment schedule to indicate the manner in which the scheduled amount has been calculated and the reason or reasons for the difference between the claimed and scheduled amount. If amounts are being withheld for any reason that reason must be set out (although there were no amounts withheld here).
[33] The requirements in s 21 relate to what the payment schedule must include; not who has to issue it (or give reasons or make calculations).
[34] The consequences of not providing a payment schedule that complies with s 21 is that the difference between the amount claimed and the amount paid is recoverable as a debt due under s 23. The courts have described the regime in the CCA as “draconian”, whereby non-compliance with the payment claim and payment schedule requirements results in “sudden death” for the non-compliant party.4
[35] The Engineer to the Contract might be required by the contract to perform certain tasks in relation to the payment schedule but failure to do so is a breach of contract, not a failure to meet the requirements of s 21. Any breach of contract does not invalidate the payment schedule for the purposes of the CCA (as long as it meets the s 21 requirements) and so cannot be relied on to access the debt recovery mechanism in s 23.
4 Marsden Villas Ltd v Wooding Construction Ltd [2007] 1 NZLR 807 (HC) at [17]; CJ Parker Construction Ltd v Ketan [2017] NZCA 3 at [16].
[36] This makes sense as the regime is intended to be straightforward and provide for regular and timely payments. If the Engineer to the Contract were required to perform any of the requirements in s 21 it would add an unnecessary hurdle that would be difficult for payers to prove to ensure validity. As the Court of Appeal said in CJ Parker Construction Limited (in liq) v Ketan “the Act focuses more on procedure than proof”.5
[37] Furthermore, not all construction contracts provide for an Engineer to the Contract and so the requirements for each payment schedule would then depend on the specific requirements of each contract.
[38] In any event there is no evidence that the Engineer had not valued the variations as required by the contract. The values scheduled for 21 out of the 25 variations that are the subject of the statutory demand are $0 but the reason given for the deduction is that entitlement to claim those variations has not yet been established. The contractual provisions in relation to valuing the variations do not apply until there is an entitlement to claim the variation in the first place.
[39] For the first stage of setting aside the statutory demand, TKL only has to establish that it is arguable that there is a substantial dispute that there is no requirement for the Engineer to the Contract to value the variations in a payment schedule for the payment schedule to comply with the CCA. In my view it is clearly arguable that there is no such requirement.
Were the reasons for the deductions made sufficiently indicated?
[40] All 25 of the items listed in the table attached to the statutory demand are variations. The second issue is whether the reasons for the deductions for these variations have been sufficiently indicated for compliance with s 21(3).
Relevant Case Law
[41] Section 21(3)(b) requires the payer to “indicate its reason or reasons” for any difference between the claimed and scheduled amounts.
5 CJ Parker Construction Ltd v Ketan, above n 4, at [16].
[42] The New Zealand courts6 have taken guidance on the requirement to indicate reasons in s 21(3)(b) from the Supreme Court of New South Wales’ decision, Multiplex Construction Pty Ltd v Luikens:7
Section 14(3) of the Act, in requiring a respondent to “indicate” its reasons for withholding payment, does not require that a payment schedule give full particulars of those reasons. The use of the word “indicate” rather than “state”, “specify” or “set out” conveys an impression that some want of precision and particularity is permissible as long as the essence of “the reason” for withholding payment is made known sufficiently to enable the claimant to make a decision whether or not to pursue the claim and to understand the nature of the case it will have to meet in an adjudication.
[43] A payment schedule will therefore comply with s 21(3)(b) if the reasons are sufficient to explain to the payee why the scheduled amount is less than the amount claimed or payment is withheld, and allow the payee to assess whether to accept payment on the reduced basis or progress the matter through the dispute provisions in the contract.
[44] The legislation is designed to allow for prompt payment for undisputed claims and to provide dispute resolution procedures for disputed claims.8 The payment claim/payment schedule process is fundamental to achieving this objective. It enables the payee to put forward its claim and the payer to give “full and unequivocal notice of all areas of difference or dispute in order to enable [the Contractor] to properly assess its future options”.9
[45] The Court of Appeal has confirmed the Court should use a pragmatic, common sense and contextual approach to whether a payment claim complies with the CCA, with each case falling for determination on its particular facts.10 By extension, the same must apply in respect of a payment schedule as held in Fletcher Construction Co Ltd v Spotless Facility Services (NZ) Ltd (“Spotless”).11
6 Westnorth Labour Hire Ltd v S B Properties Ltd HC Auckland CIV-2006-404-001858,19 December 2006 at [29]; Seating Systems Ltd v Kidson Construction Ltd [2012] NZHC 2217 at [21]; NCB 2000 Ltd v Hurlstone Earthmoving Ltd HC Auckland CIV-2010-404-008096, 23 June 2011 at [49]; CJ Parker Construction Ltd v Ketan, above n 4, at [22] and Fletcher Construction Co Ltd v Spotless Facility Services (NZ) Ltd, [2020] NZHC 1942 at [60].
7 Multiplex Construction Pty Ltd v Luikens [2003] NSWSC 1140 at [78].
8 CJ Parker Construction Ltd v Ketan, above n 4, at [16].
9 Seating Systems Ltd v Kidson Construction Ltd, above n 6, at [28].
10 CJ Parker Construction Ltd v Ketan, above n 4, at [25] and [27].
11 Fletcher Construction Co Ltd v Spotless Facility Services (NZ) Ltd [2020] NZHC 1942 at [54].
[46] In Spotless the High Court considered the sufficiency of reasons in a payment schedule when Spotless sought to suspend works on the construction of the Commercial Bay development pursuant to s 23(2)(b) of the CCA on the basis that Fletcher did not issue a valid payment schedule. Spotless claimed that Fletcher did not comply with the s 21(3) requirements in relation to 46 deductions.
[47] His Honour began by referring to the Court of Appeal’s direction in CJ Parker Construction that a pragmatic, common sense and contextual approach should be adopted and then held:12
The [CCA] does not direct that side calculations and reasons on a line by line basis for each item are required whenever a payer proposes to pay a lesser amount than that claimed by a payee. The requirement is to indicate the reason or reasons for the deduction. How that is done may vary according to the circumstances of the contract and the practice of the parties, provided that the reason or reasons are adequately indicated.
[48] The deductions were broken down into three categories of claim – Original Contract Works, Variations and Contra Charges. Van Bohemen J considered each of these categories separately.
[49] Under the first category, “Original Contract Works”, van Bohemen J found the reasons in relation to two of the pleaded 21 items (out of 320 items) were insufficient and did not meet the requirements of s 21(3). However, given the value of these items was less than four per cent of the total claimed by Spotless in the equivalent section of the payment claim, his Honour held Fletcher had nonetheless substantially complied.13
[50] Under the second category, “Variations”, the amounts withheld without adequate reason made up approximately 26 per cent of Spotless’ claim. His Honour concluded that Fletcher did not therefore substantially comply with the requirements of s 21(3).14
12 At [61].
13 At [80].
14 At [92].
[51] Under the third category, “Contra Charges”, his Honour held that all 12 items failed to indicate the manner in which they were calculated or sufficiently indicate reasons.15
[52] In reaching these conclusions, van Bohemen J considered each of the line entries that Spotless contended were inadequate. In doing so, his Honour made the following observations relevant to variations:
(a)It was “doubtful” whether noting that claims were still under assessment was sufficient to comply with s 21(3): 16
If a payer declines payment because it has not got around to completing its assessment of an item of works, even if the works has been performed, that would undercut the purpose of ensuring cashflow to the payee. For that reason, I do not consider that simply noting that an item of works is under assessment is a reason for the purposes of s 21(3), particularly where a payer declines payment altogether. At a minimum there should be some indication of the purpose of the assessment.
(b)“Depending on the circumstances, references in a payment schedule to notices or other correspondence may be sufficient to indicate those matters if it is clear that the payer and payee share a common understanding about the references”.17
(c)Where documents are relied upon, in order to satisfy the requirements of s 21(3), the documents must give an indication of the basis for and/or calculation of claims.18
[53] In evaluating Fletcher’s payment schedule as a whole, his Honour considered that neither the reasons given for the Variations nor the Contra Charges substantially complied with the CCA. The value of the non-compliant items was approximately
$2,911,600, which was over half of the total value in Fletcher’s payment schedule.
15 At [103].
16 At [88]–[89].
17 At [99].
18 At [102].
The payment schedule was therefore held not to comply with s 21(3) of the Act and to be invalid.19
Were reasons for the deductions made sufficiently indicated in this case?
[54] The question is whether, with reference to the criteria set out in the cases discussed above, it is arguable that Payment Schedule 50 substantially complies with the requirements of s 21(3)(b). If it does, the payment schedule will be valid and Dominion will not be able to rely on s 23 of the CCA to establish that a debt is owing on which it can base its statutory demand.
[55] The statutory demand only relates to 25 of the entries in the payment schedule with Dominion reserving its position as to whether the payment schedule could be partially invalid. In Spotless the parties accepted that the whole of the payment schedule was either valid or invalid. I am not required to decide this question for the purposes of this application to set aside the statutory demand but if substantive proceedings are brought it will be an issue that will need to be determined. I proceed on the basis that substantial compliance as a whole is necessary because that appears to be the approach required by the legislation and is the approach adopted in Spotless upon which Dominion relies.
[56] As the cases outline above, the Court is required to use a pragmatic, common sense and contextual approach to whether a payment schedule complies with the Act, taking into account the particular circumstances of the case.
[57] The letter from the Engineer to the Contract to Dominion attaching the Payment Schedule recorded that the full details of “this Certification of Progress Payment are as set out in the attached Kingston Partners Ltd, Progress Payment Advice No 50 dated 9 December 2020” (Advice Note). The Advice Note attached a table headed “Contract Adjustments – Payment Schedule”. This listed each of the Contract Instructions (CIs) or Sundry Variations (DVs) line by line with columns headed “description”, “value agreed”, “value claimed for payment”, “value approved for payment”, “% complete”, “Payment Adjustments”, “Status” and “Comments/Notes”.
19 At [108].
[58] In addition to the Advice Note, a further summary table was attached to the Payment Schedule grouping nearly all of the items for which there were deductions into 12 categories (“Summary Table”) with a “Reason for deduction from current claim” given for each category.
[59] Dominion appeared to suggest that the reasons given in the Advice Note could not be relied upon because it was issued by Kingstons and not the Engineer to the Contract. But as discussed above compliance with s 21 does not depend on who gives the reasons; the payment schedule must simply indicate the reasons for any deductions made.
[60] Furthermore, no issues arise through the attachment of the Advice Note or the Summary Table to the Payment Schedule. These were provided together with the Payment Schedule and clearly provided the details in support of it. The purpose of the CCA is not to allow contractors to recover amounts as debts due through technical arguments rather than genuine difficulties caused by a failure to indicate reasons. It is artificial to suggest that Dominion would not have considered the Advice Notice and Summary Table together with Payment Schedule 50.
[61] I consider each of the items listed in the table attached to the statutory demand and discuss whether the reason for the deduction is sufficiently indicated to satisfy s 21(3). I start with the five items with unique reasons and then consider the twenty items for which the reason given is “Entitlement of variation claim is currently under review”.
[62] Dominion submitted that it was impossible to determine which of “the litany of generic and global reasons applies to any particular line item”. I do not accept this submission as each variation claimed was listed individually in the Advice Note with a separate reason recorded against each entry as discussed in further detail below.
DV 025
[63]This variation is described as “Landscaping Works”. The value claimed is
$650,754.89 and the value recorded as being paid in Payment Schedule 50 is $0.00.
[64]The Advice Note records against DV 025:
Refer to separate communications from DASL.
[65]The Summary Table records:
There is an ongoing dispute between DASL and DCL on this item. DCL have been requested to provide the final quote for the works which they have not yet provided. There is a significant value in the variation which is included under the contract sum. No entitlement has been identified for this variation and as such all is deducted.
[66] There is no question in my view that it is arguable that the statements in the Advice Note and the Summary Table sufficiently indicate the reason for this deduction.
[67] It was submitted on behalf of Dominion that the comment in the Advice Note was not sufficient because it did not refer to the specific DASL correspondence. But as was held in NCB 2000 Ltd v Hurlstone Earth Moving Ltd the payment schedule is not required to be read in isolation.20
[68] Ms McDonald’s affidavit sets out the process that she says had been agreed between the parties for review and approval of the variation claims before they were formally submitted to the Engineer (if at all). A flowchart of this process prepared by Kingstons is annexed to her affidavit.
[69] Correspondence annexed to Ms McDonald’s affidavit appears to confirm Dominion accepted this process with a message sent on 4 December 2020 by Mr Marson from Dominion to Kingstons and the project management team saying: “Please find attached the latest update to the CI tracker as at 4-12-20”. The table attached listed the items claimed in the payment claim individually with various details recorded including a column indicating who was required to take action.
[70] Mr Clarke in his affidavit for Dominion says that in describing this process Ms McDonald suggests that the parties had amended the contractual process for submitting payment claims and schedules. He disputes that this was the case. But as
20 NCB 2000 Ltd v Hurlstone Earth Moving Ltd, above n 6 at [50].
Ms McDonald says in reply to Mr Clarke, her evidence related to the process agreed for determining claims for variations. She did not claim that the contractual process for the submission of payment claims and schedules had been altered. These two processes are quite separate. The evidence of Mr Clarke appears to conflate the two.
[71] In addition to the evidence of the general process for determining variations, Ms McDonald annexes to her affidavit the specific correspondence relating to this variation, including a message from Ms McDonald on 17 November 2020 asking to discuss this variation the following day and saying that she was unclear as to what Dominion’s position was, with a without prejudice part of the message redacted. Mr Clarke from Dominion responded on 21 December 2020, after Payment Schedule 50 had been issued. Part of Mr Clarke’s message has again been redacted.
[72] Mr Clarke does not refer to DV 025 or the correspondence in relation to it specifically in his affidavit. But in the table attached to Mr Marson’s message on 4 December 2020 referred to above, it was recorded that Dominion was required to take action in relation to DV 025 and in the “Client Comment” column it has the same comment as in the Advice Note: “Refer to separate communications from DASL”. If Dominion was concerned that they did not know what correspondence was being referred to, one would have expected it to have been raised in this earlier correspondence.
[73] As was held in Spotless, “depending on the circumstances, references in a payment schedule to notices or other correspondence may be sufficient to indicate those matters if it is clear that the payer and payee share a common understanding about the references”.21
[74] It is clearly arguable that Dominion was aware of the relevant correspondence in relation to this variation, making the reason indicated sufficient to comply with s 21(3)(b).
21 Fletcher Construction Co Ltd v Spotless Facility Services (NZ) Ltd, above n 11, at [99].
DV 031
[75] The description of this variation is “Seismic Support for ceilings”. The value claimed is $235,094.63 and the value recorded as being paid in Payment Schedule 50 is $0.00.
[76]The Advice Note records against DV 031:
Dominion requested to review entitlement concerns of variation claim (refer to response dated 16.09.20).
[77] The Summary Table grouped this variation in with a number of others against which the following comment was recorded:
These variations have variously been reviewed and required more information or clarification, or entitlement is subject to review. The discussions are ongoing between DCL, the project QS and the project management team. Some have part payments on account for portions agreed while others require full review. DCL are aware and agree with the status of these variations. Deductions have been made against these variaions (sic) based on being not fully resolved.
[78] There is a clear argument that the reason in the Advice Note sufficiently indicates the reason for the deduction. The comment in the Summary Table directs Dominion to the discussions that had been ongoing between Dominion, the project quantity surveyor (Kingstons) and the project management team
[79] The status of those discussions is accepted by Mr Marson of Dominion in his 4 December 2020 correspondence referred to above, with the table attached to Mr Marson’s message recording in relation to DV 031, “partial” in the column describing whether supporting information has been provided and again that it was Dominion that was required to take action. The table has columns headed “DCL comments 4.12.20” which is empty for this item, “DCL comments 29.11.20” which says “Under review with Colin” (presumably Mr Colin Whyte from Dominion) and “DCL comments as at 24/11/20” where it states “Dominion to respond by 29th Nov”. The comment in the “Client Comments” column is the same as in the Advice Notice: “Dominion requested to review entitlement concerns”.
[80] The correspondence annexed to Ms McDonald’s affidavit shows that Dominion responded to the 16 September 2020 correspondence referred to in the Advice Note on 7 December 2020, after the payment claim was issued but before the payment schedule was sent.
[81] It is submitted on behalf of Dominion that this was an invalid deduction as the reason given for the deduction was wrong because Dominion had responded to the correspondence referred to. Dominion therefore submits the reason could not be described as sufficiently indicated for the purposes of s 21(3).
[82] The reason must simply “indicate” to Dominion why the scheduled amount is less than the amount claimed or payment is withheld and allow Dominion to assess whether to accept payment on the reduced basis or progress the matter through the dispute provisions in the contract. If Dominion considers that they have answered the request for further information then Dominion is able to raise that and if necessary seek a review by the Engineer.
[83] The regime brought in by the CCA does not create a system whereby the payment schedule becomes invalid if an incorrect reason is given. The payer is required to indicate to the payee why a deduction is being made in respect of that item sufficiently to allow the payee to know what steps to take in response.
[84]It is clearly arguable that a sufficient reason was indicated for this deduction.
DV 049
[85] The description of this variation is “Tender to Construction changes. (Electrical)”. The value claimed is $134,714.01 and the value recorded in the payment schedule is $0.00.
[86]The Advice Note records against DV 049:
Dominion to provide associated drawings before variation claim can be assessed. (Refer to response dated 14.09.20).
[87] The Summary Table grouped this variation in with the same category as for the previous variation, directing Dominion to discussions between the parties.
[88] The table attached to Mr Marson’s message dated 4 December 2020 recorded against this item that action was required by Dominion and in the column headed “DCI comment 4.12.20” says “Aconex DOMVarcor 430” referring to variation correspondence on the Aconex project management tool. Ms McDonald annexes this correspondence to her affidavit. It shows that Dominion sent a message responding to the message dated 14 September 2020 referred to in the Advice Note together with copies of the relevant drawings. Dominion’s message was after Payment Claim 50 had been issued but before Payment Schedule 50 had been provided.
[89] Dominion’s reason for submitting that this item was an invalid deduction appears again to have been because Dominion considered that the reason given for the deduction was wrong. As I said above s 21 does not require the reason for the deduction to be correct; a reason is simply required to be indicated.
[90] If instead the reason indicated was that supporting information had only just been provided and entitlement was still being assessed then the full amount claimed would still have been deducted and Dominion would have been in the same position. It is clearly arguable that Dominion had sufficient information from the reason given with which to assess what steps to take in relation to this item. A failure to update a comment to reflect recent correspondence cannot be a basis for invalidating a payment schedule.
CI 138
[91] The description for this variation is “Passive fire protection”. The value claimed is $133,806.66 and the value recorded in the payment schedule as being paid is $87,945.00.
[92]The Advice Note recorded against CI 138:
Dominion requested to provide justification of $104,946.09 additional expenditure. (Refer to response date 27.11.20).
[93]The Summary Table records against CI 138:
DCL have been informed that allowances made at the time of tender have not been deducted from the variation price submitted as outlined in email from Anthony Cooper 08 July 2020. Part payment has been made for this variation less the difference disagreed. DCL have not responded to the above mail and the deduction is made again this month.
[94] In my view it is clearly arguable that these sufficiently indicate the reason for the deduction made.
[95] Counsel for Dominion submitted this reason was invalid because Dominion had provided justification prior to the payment schedule being issued.
[96] Ms McDonald annexes a chain of correspondence to her affidavit including the message dated 27 November 2020 referred to in the Advice Note asking Dominion to “please provide invoices from The Passive Fire Co. to substantiate the additional
$104,946.09 being claimed”. The correspondence attached to the affidavit shows that Mr Marson responds to this request and sends copies of invoices on 1 December 2020.
[97] Again, Dominion’s submissions in relation to the sufficiency of the reasons given for this variation rely on the failure to update the reason to reflect the recent correspondence. In my view this does not affect the sufficiency of the reason indicated because the need for reasons is to allow the payee to decide on the steps to take in response.
[98] It is clearly arguable that the reason set out for CI 138 in either the Advice Note or the Summary Table is sufficient.
CI 433
[99] The description for this variation is “Seismic joint flashing detail”. The value claimed is $1,769.45 with the value recorded in the payment schedule as being paid of $0.00.
[100]The Advice Note recorded against CI 433:
Variation Claim currently under review.
[101]The Summary Table did not refer to CI 433.
[102] In the table attached to Mr Marson from Dominion’s message on 4 December 2020, the entry in relation to this item records that it was submitted on 20 November 2020, that all supporting information had been submitted and that DASL was required to take action. A further column noted the Aconex reference, “Aconex DOMVarcor 395”.
[103] Dominion submits that the reason given for this variation was similar to the reason given in Spotless that an item was “under assessment” and that was held in Spotless to be insufficient for compliance with s 21(3). But where the variation had been submitted on 20 November 2020, only 10 days before the payment schedule, and the variation was recorded in the table updated by Mr Marson with the same comment it is clearly arguable that this reason is sufficient.
[104] I record that in any event, the amount claimed in respect of this variation is only $1,769.45 so a failure to comply with s 21(3) in relation to this item may not be sufficient to invalidate the Payment Schedule, unless there were a number of other items for which sufficient reasons were not indicated.
DV 040, DV 046, DV 051, DV 055, DV 056, DV 058, DV 059, DV 063, CI 322, CI 337,
CI 346, CI 349, CI 350, CI 351, CI 353, CI 369, CI 370, CI 390, CI 430, CI 450
[105] The total claimed in respect of the remaining 20 variations relied on by Dominion was $367,060.80. The scheduled amount that TKL agreed to pay was $0 in every case except for DV 040 where TKL agreed to pay $5,000 and DV 046 where
$10,823.88 was agreed, for a combined deduction of $351,236.92 for these variations.
[106]The Advice Note recorded against all 20 of these variations:
Entitlement of variation claim under review.
[107]The Summary Table grouped 18 of these variations (all except CI 390 and CI
450) with a number of others against which the following comment was recorded:
These variations have variously been reviewed and required more information or clarification, or entitlement is subject to review. The discussions are ongoing between DCL, the project QS and the project management team. Some have part payments on account for portions agreed while others require full review. DCL are aware and agree with the status of these variations. Deductions have been made against these variaions (sic) based on being not fully resolved.
[108]CI 390 and CI 450 were not included in the Summary Table.
[109] The letter from the Engineer further recorded that Dominion had sought the Engineer’s determination over one variation in this group, CI 337, and that “the Principal’s Agent has added an intention to have the Entitlement List closed out ahead of the next drawdown”.
[110] The contract provides for a variation process in clause 9 which includes at clause 9.2.4 that the Engineer shall either confirm or disallow a variation within one month of receipt of a notice of variation or as soon as practicable thereafter. A decision on whether there is an entitlement to a variation claimed is therefore made pursuant to this clause.
[111] Dominion criticises the process that appears to have been adopted for determining entitlement to variations because it only involves the Engineer if agreement cannot be reached between the Principal (or its agents) and Dominion.
[112] But clause 9.2.4 does not prevent the parties agreeing to a preliminary process before the variation claims are referred to the Engineer. Any failure to agree can then be referred to the Engineer for decision with escalation through the dispute resolution procedure if necessary.
[113] Resolution of entitlement to variations will often require the involvement of the Principal. The special conditions of contract between TKL and Dominion for example specifically provided for variations arising as a result of the requirements of the Principal with new clause 9.1.6 providing that:
The Engineer will order a variation to the Contract Works to the extent that there is a change to the Drawings Specifications or other requirements of the Principal after the date of the Contract.
[114] Furthermore, the payment regime allows the Principal to make deductions from the payment schedule even where the Engineer does not agree (cl 12.2.4). It is useful for the principal or its agents to be involved in attempting to agree entitlement to variations so that clause 12.2.4 does not need to be relied upon.
[115] As discussed above, the correspondence from Mr Marson on behalf of Dominion to DASL and Kingstons updating the table of contract adjustments suggests that Dominion did agree to the preliminary process.
[116] Whether Dominion agreed to the process or not, however, Dominion would have a right under the contract to seek a review from the Engineer or a formal decision under clause 13.2.4 if necessary, including if Dominion considered there was a delay in reaching a decision on entitlement. Formal decisions of the Engineer must be given within 20 working days of receiving notice in writing from the contractor. If the Engineer does not comply with this timeframe or the contractor does not accept the formal decision made, then rights to go to mediation or arbitration follow.
[117] Furthermore, as an alternative, a contractor can take any dispute over non- payment of an amount claimed in a payment claim to adjudication as provided for in the CCA. Adjudication can run concurrently with the dispute resolution procedure under the contract. Ms McDonald’s affidavit records that Dominion has proceeded with adjudication in this case although her evidence does not go into detail about which disputes have been referred.
[118] The dispute resolution procedures under the contract and adjudication as provided for in the CCA are the mechanisms for protecting the contractor from delays in determining or disputes in relation to entitlement to variations rather than the payment claim/ payment schedule process. As the Court of Appeal held in CJ Parker Construction Limited (in liq) v Ketan “the scheme of the Act is to allow for prompt payment where the amount claimed is not disputed and to provide dispute resolution procedures for disputed claims.”22
22 CJ Parker Construction Limited (in liq) v Ketan, above n 4, at [16].
[119] In my view it is clearly arguable therefore that the reason given in the Advice Note in relation to these 20 variations sufficiently indicates the reason for the deductions. The reason is clear – entitlement to the variation claimed has not yet been established.
[120] As recorded in the cover letter sent by the Engineer with the payment schedule, one of these variations had already been referred to the Engineer by Dominion for review. It is clearly arguable that the reason is indicated sufficiently to allow Dominion to refer any of the others to the Engineer for review and then escalate matters through the dispute resolution procedures if necessary.
[121] Finally, I record that if I am wrong and the reason given for these 20 claims does not sufficiently indicate the reason for the deduction, there would remain a question of whether s 21(3) had been substantially complied with in any event. The total deduction for these 20 claims is $351,236.92 out of a total sum claimed for Payment Claim 50 of $5,970,906.67. This amounts to only 5.9 per cent of the amount claimed in the payment claim. I do not need to reach a final view and so I refrain from doing so but in Spotless there was held to be substantial compliance where 4 per cent by value of the contract instructions did not indicate sufficient reasons for deduction.
Result
[122] I have found that it is clearly arguable that there is a substantial dispute whether the Engineer to the Contract is required to value variations for a payment schedule to be valid under the CCA and whether Payment Schedule 50 sufficiently indicated the reasons for deductions in relation to the 25 variations relied on by Dominion. I therefore grant TKL’s application to set aside the statutory demand served by Dominion as it is clearly arguable that there is a substantial dispute as to the validity of the payment schedule and consequently whether there is a debt owing.
Costs
[123] As recorded at the outset, TKL seeks increased or indemnity costs on the basis that serving a statutory demand in the circumstances is an abuse of process. TKL submits that Dominion is attempting to use the summary provisions of the CCA to
obtain payment on account of its claimed but not yet determined variations, thereby circumventing its contractual obligations to substantiate its variation claims, the dispute resolution provisions in the contract and the adjudication provisions of the CCA.
[124] Dominion disputes this and submits in response that the fact that it did not demand payment of the full amount that remained unpaid in relation to Payment Claim 50 demonstrates that Dominion was taking a responsible approach.
[125] I am not in a position to determine costs without hearing further from the parties. My preliminary view is that increased costs may be appropriate in circumstances where in my view there was a clear process in place between the parties to determine variations, which Dominion appears to have been participating in.
[126] Furthermore, the payment schedule was provided together with the Advice Notice which went through the items claimed on a line by line basis with a reason given for every single item together with the amount that TKL agreed to pay. In most cases that amount was $0 but that was because entitlement to the variation claim was still under review.
[127] I ask the parties to confer and only if costs are unable to be agreed file memoranda, on behalf of TKL within 20 working days of this decision and on behalf of Dominion within a further 10 working days.
Associate Judge Sussock
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