Trade Guaranty + Surety Limited v Carterton District Council
[2024] NZHC 47
•1 February 2023
IN THE HIGH COURT OF NEW ZEALAND MASTERTON REGISTRY
I TE KŌTI MATUA O AOTEAROA WHAKAORIORI ROHE
CIV-2023-435-008
[2024] NZHC 47
UNDER the Companies Act 1993 BETWEEN
TRADE GUARANTY + SURETY LIMITED
Applicant
AND
CARTERTON DISTRICT COUNCIL
Respondent
Hearing: 3 November 2023 Appearances:
T Nelson for Applicant
M Holland for Respondent
Judgment:
1 February 2023
JUDGMENT OF ASSOCIATE JUDGE SKELTON
[1] The applicant, Trade Guaranty + Surety Ltd (TGS), applies by originating application to set aside a statutory demand served on it by the respondent, Carterton District Council (Council). The statutory demand requires payment of the sum of
$343,172 (including GST), being payment sought by the Council under a contractor’s performance bond provided by TGS. The Council opposes the application.
Background
[2] TGS is in the business of providing bond and surety instruments, often under construction contracts.
[3] On 22 November 2018, the Council entered into a construction contract with CHB Earthmovers Ltd (CHB) for the construction of a reservoir at the Carterton
TRADE GUARANTY + SURETY LIMITED v CARTERTON DISTRICT COUNCIL [2024] NZHC 47
[1 February 2023]
wastewater treatment plant (Contract). The form of contract is the New Zealand Standard “Conditions of contract for building and civil engineering construction” (NZS 3910:2013). Under the special conditions of the Contract, CHB agreed to provide a contractor’s performance bond for 10 per cent of the tendered sum. On 24 January 2019, TGS provided the contractor’s bond for CHB in the form provided for by sch 3 of NZS 3910:2013 (Bond).
[4] On 29 July 2021, the engineer to the Contract issued a certificate that in his opinion CHB was in default under the Contract. On the same day, the Council served a notice of default on CHB based on the engineer’s certificate, although the notice of default was dated 19 July 2021. On 30 August 2021, the Council gave notice to CHB that it had not remedied its default and the Council would be resuming possession of the construction site under cl 14.2.1 of the Contract on 31 August 2021. CHB disputes the validity of the engineer’s certificate and the notice of default and says that the Council breached the Contract in resuming possession.
[5] On 16 June 2023, the Council wrote to TGS making a demand on the Bond for its full value, $343,172 (including GST). On 1 August 2023, TGS responded stating that it had been advised by CHB that there were still matters in dispute under the Contract, and for payment to be made the Council would need to provide evidence that the outstanding disputes have been determined.
[6] On 4 August 2023, the Council served the statutory demand on TGS. On 10 August 2023, TGS’s solicitors invited the Council to withdraw the demand on the basis that CHB is not liable under the Contract. The Council declined to withdraw the demand.
[7] On 15 August 2023, CHB issued a notice to the engineer triggering the dispute process under the Contract. On 17 August 2023, TGS applied to set aside the statutory demand.
Legal principles – setting aside statutory demand
[8]Section 290 of the Companies Act 1993 states as follows:
290 Court may set aside statutory demand
(1)The court may, on the application of the company, set aside a statutory demand.
(2)The application must be—
(a)made within 10 working days of the date of service of the demand; and
(b)served on the creditor within 10 working days of the date of service of the demand.
(3)No extension of time may be given for making or serving an application to have a statutory demand set aside, but, at the hearing of the application, the court may extend the time for compliance with the 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.
(5)A demand must not be set aside by reason only of a defect or irregularity unless the court considers that substantial injustice would be caused if it were not set aside.
(6)In subsection (5), defect includes a material misstatement of the amount due to the creditor and a material misdescription of the debt referred to in the demand.
(7)An order under this section may be made subject to conditions.
(emphasis added)
[9]In Confident Trustee Ltd v Garden and Trees Ltd, the Court of Appeal held:1
[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 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.
1 Confident Trustee Ltd v Garden and Trees Ltd [2017] NZCA 578 at [16].
(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.
(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.
Contractual matrix
[10] In this section, I set out the relevant terms of the contract dealing with contractor’s bonds, default by the contractor and resuming possession of the site and the relevant terms of the Bond.
[11] Contractor’s bonds are dealt with in cl 3.1 of the Contract and its sub-clauses. Clause 3.1.2 provides that the contractor’s bond shall be:
(a)for the amount stated in the special conditions;
(b)in the form set out in sch 3.
[12]Clause 3.1.6 provides that:
The Contractor’s Bond may not be called up if:
(a)The Contractor has carried out and fulfilled all the obligations of the Contractor under the Contract up to Practical Completion;
(b)The Contractor has paid to the Principal any damages sustained by the Principal for all defaults by the Contractor up to Practical Completion or the termination of the Contract; or
(c)A Practical Completion Certificate has been issued for the whole of the Contract Works in accordance with 10.4.
[13]Clause 3.1.7 provides:
Within 5 Working Days after the Principal’s receipt of the Practical Completion Certificate for the whole of the Contract Works, the Principal shall deliver to the Contractor and to the Contactor’s surety a notice in writing stating that the Contractor and the surety are released from the Contractor’s Bond and shall return the original Contractor’s Bond to the Contractor.
[14]Clause 3.1.8 provides:
Where the Principal contends that the Contractor has failed to perform its obligations under the Contract the Engineer shall make an estimate of the Cost of any remedial or other work outstanding and of any other liability on the part of the Contractor under the Contract Agreement. The Engineer shall notify the Principal and Contractor of the estimate.
[15]Clause 3.1.9 provides:
The Contractor may provide the Principal with a replacement bond in the form set out in Schedule 3, for the amount of the estimate, to ensure performance of the Contractor’s obligations under the Contract. The replacement bond shall be executed by the Contractor and by the surety to the original bond or by anther surety approved by the Principal. Upon receipt of such replacement bond, the Principal shall deliver to the Contractor and to the Contractor’s surety, a notice in writing stating that the Contractor and the surety are released from the original bond.
Default by contractor
[16]Clause 14.2.1 provides:
The Principal may at its option after giving notice to the Contractor either terminate the Contract or resume possession of the site in the event of:
…
(c) The Engineer certifying in writing to the Principal that in his or her opinion the Contractor has abandoned the Contract or is persistently, flagrantly or wilfully neglecting to carry out its obligations under the Contract,
and the Contractor’s default has not been remedied within 10 Working Days of receiving the notice.
Resuming possession of the site
[17]Clause 14.2.3 provides:
If the Principal elects to resume possession of the site under the provisions of
14.2.1 or 14.2.2 it may:
(a)Forthwith expel the Contractor without terminating the Contract or relieving the Contractor from any of its obligations under the Contract;
(b)Complete and remedy defects in any part of the Contract Works remaining to be completed and for that purpose may let contracts for such work or employ any Persons other than the Contractor;
(c)Take possession of, use, and permit other Persons to use Materials, Plant, Temporary Works, and other things which are on the Site owned by the Contractor and are necessary for completing and remedying defects in the Contract Works; and
…
In any such case the Contactor shall not be entitled to any further payment until the completion of the Contract Works.
[18]Clause 14.2.4 provides:
On completion of the Contract Works, any Plant, Temporary Works, and surplus Materials of which the Principal has taken possession shall be handed back to the Contractor. The Engineer shall enquire into the Cost to the Principal of completing the Contract Works and certify accordingly. If the amount certified exceeds the Cost to the Principal, had the Contract Works been completed by the Contractor, the difference between the two amounts shall be certified by the Engineer and paid by the Contractor to the Principal. If the amount certified is less than the Cost to the Principal, had the Contract Works been completed by the Contractor, the difference between the two amounts shall be paid by the Principal to the Contractor.
The Bond
[19]The terms of the Bond are as follows:
IT IS MADE IN THE FOLLOWING CIRCUMSTANCES:
A.The Contractor has entered into an agreement with Carterton District Council of Carterton (“the Principal”) to carry out and fulfil the obligations imposed on the Contractor (“the Contract”).
B.The Contract requires the Contractor to provide the Principal with security in the form of a bond to ensure performance of the Contractor’s obligations under the Contract.
C.Words and phrases with capital initial letters that are not otherwise defined in this bond shall have the meaning set out in the Contract.
BY THIS DEED
1.THE Contractor and surety are jointly and severally held and bound to the Principal in the sum of $NZ 343,172 and bind themselves, their
successors and assigns jointly and severally for the payment of that sum.
2.THE conditions of this bond are that it should be released if and when:
(a)A Practical Completion Certificate has been issued for the Contract Works in accordance with 10.4 of the General Conditions;
(b)The surety receives a notice from the Principal releasing the Contractor and surety from this bond; or
(c)The surety receives a notice from the Principal confirming that a replacement Contractor’s Bond has been received and accepted and releasing the Contractor and surety from this bond.
3.EXCEPT as provided in clause 2 above this bond shall remain in full force and effect.
4.THE surety shall not be released from any liability under this bond;
(a)By any alteration in the terms of the Contract;
(b)By any alteration in the extent or nature of the Contract Works to be completed, delivered and having defects remedied;
(c)By any allowance of time by the Principal or by the Engineer appointed by the Principal under the Contract; or
(d)By any forbearance or waiver by the Principal or by the Engineer in respect of any of the Contractor’s obligations or in respect of any default on the part of the Contractor.
…
Issues to be determined
[20] Based on the background, contractual matrix and legal principles to be applied, the issues to be determined are:
(a)What is required to make a call on the Bond?
(b)Is there a substantial dispute as to whether the alleged debt is owing or due?
(c)Should the statutory demand be set aside on other grounds?
What is required to make a call on the Bond?
TGS’ position
[21] Mr Nelson, for TGS, submits that the Bond is not payable on demand. He submits that the bond is in the nature of a contract of guarantee, which means that the Council must establish a breach by CHB and resulting loss before it can claim under the Bond. Mr Nelson submits that TGS’s position is supported by two decisions of this Court.
[22] UGL (NZ) Ltd v Trade Indemnity + Surety Ltd concerned the interpretation of a bond that TGS had provided on another project. 2 TGS submits that the bond in that case was materially similar to the Bond, in particular the operative clause of the bond in that case, cl 1, was identical to cl 1 of the Bond. Gilbert J found:3
[13] The bond provided by Trade Indemnity does not require payment on demand following a breach by JB Contractors under the subcontract. It contains no such provision. The bond is in the nature of a contract of guarantee. Trade Indemnity’s obligation in the present circumstances is to pay the damages sustained by UGL in respect of all defaults by JB Contractors up to the date of termination of the contract. UGL must therefore prove breach and loss before it can recover under the bond. …
[23] The other decision relied on by TGS is Richina Pacific Ltd v AAI Ltd.4 TGS submits that Richina Pacific also involved a materially similar bond which was found to be a conditional bond rather than an on-demand bond. The Court found that the bond required proof that the contractor had failed to meet its obligations under the contract documents and the quantum of loss suffered as a result.5 Mr Nelson submits that the factors relied on by the Court in Richina Pacific in concluding that the bond was conditional apply equally in this case. In summary, these factors were:6
(a)There was no express reference to the bond being on demand in the bond or the contract documents, other than in the preamble to the bond
2 UGL (NZ) Ltd v Trade Indemnity + Surety Ltd [2013] NZHC 2623.
3 At [13].
4 Richina Pacific Ltd v AAI Ltd [2017] NZHC 1686. An appeal of this decision on a different issue from the subject issue was dismissed in Richina Pacific Ltd v Samson Corporation Ltd [2018] NZCA 132.
5 At [120].
6 At [115]–[118].
(TGS submits that in the present case the position is stronger, as there is no reference anywhere in the Bond to it being payable on demand);
(b)Clause 2 of the bond made the bond conditional because it provided that it was null and void if stipulated conditions were met;
(c)There is overseas case law to the effect that a bond will be presumed conditional unless there are clear words to the contrary;7
(d)The bond did not use the language of an on-demand bond, such as “to pay immediately on-demand”;8
(e)The bond described the provider as a surety and the terms of the bond provided that the surety was not released from its promise under the bond by variation or forbearance, which is consistent with the bond being a guarantee;9
(f)The bond was not provided in a context where an on-demand bond would be expected, such as where the parties to the underlying contract operate in different jurisdictions or the bond was issued by a bank.10
[24] In both the cases referred to above, the Court relied on the decision of the House of Lords in Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd.11 That case considered a bond in materially the same terms as the bonds in the UGL and Richina Pacific cases. The House of Lords held:12
Bonds in similar form have existed for more than 150 years and have been treated by the parties thereto and by the courts as guarantees. Indeed the current standard I.C.E. Conditions of Contract contain a specimen bond in terms identical to those in the Chambers bond. In the first place the bond itself contains indications that it was intended to be a guarantee. The appellants are
7 See for example IIG Capital LLC v Van Der Merwe [2008] EWCA Civ 542 at [9].
8 Amalgamated Builders Ltd v Kitchener Construction Shed 20/24 Ltd HC Auckland M621-SW01, 16 May 2001.
9 Trade Indemnity Co Ltd v Workington Harbour and Dock Board [1936] 1 All ER 454 (HL) at 17.
10 Quay Park Arena Management Ltd v Great Lakes Reinsurance (UK) PLC [2014] NZHC 2204 at [79]–[84].
11 Trafalgar House Construction (Regions) Ltd v General Surety and Guarantee Co Ltd [1996] AC 199 (HL).
12 At 205–207.
described as “the surety.” There is a provision to the effect that no alteration in the terms of the subcontract should release the surety from liability. In the absence of such provision a surety would normally be released from his obligation by any subsequent material alteration to the contractual provisions agreed between the contractor and subcontractor.
…
In this case the Court of Appeal by determining that the appellants’ liability under the bond arose on the failure of Chambers to complete the contract followed by a demand in good faith for the amount of the damages which they claim to have suffered were effectively treating it as a type of on demand bond.
…
My Lords I have no doubt that the Court of Appeal were in error in concluding that the bond was not a guarantee but was akin to an on demand bond. … Thus in a second action arising out of the bond in the Workington case, Workington Harbour & Dock Board v. Trade Indemnity Co. Ltd. (No.2) [1938] 2 All E.R. 101, 105, Lord Atkin said:
“My Lords, both actions were brought on the money bond.” — That is the first and second actions. — “It is well established that in such an action the plaintiff has to establish damages occasioned by the breach or breaches of the conditions, and, if he succeeds, he recovers judgment on the whole amount of the bond, but can only issue execution for the amount of the damages proved.”
This dictum makes it clear beyond doubt that proof of damage and not mere assertion thereof is required before liability under such a bond arises.
The Council’s position
[25] The Council acknowledges that the Bond is not an on-demand bond. However, Mr Holland, for the Council, submits that two essential elements to interpreting the Bond are the nature of a contractor’s bond as the equivalent of “cash in hand”,13 and that the Court should only be concerned with identifying “certain specified conditions to be met”.14
[26] Mr Holland submits that the Bond is “akin to an unconditional bond”.15 He notes that there is no specified procedure for calling up the Bond, and that the only
13 McVeigh v Chief Executive of the Department of Corrections [2020] NZHC 108 at [31], citing Geraldine Andrews and Richard Millett Law of Guarantees (7th ed, Sweet & Maxwell, London, 2015) at [16-027] (this section discusses injunctive relief in respect of performance bonds issued by a bank); see also the discussion on bonds in the context of construction projects at [16-004].
14 Richina Pacific Ltd v AAI Ltd, above n 4, at [110].
15 Tómas Kennedy-Grant and Michael Weatherall Kennedy-Grant and Weatherall on Construction Law, (online ed, LexisNexis) at [230,460].
conditions are at cl 2 which state when the Bond is to be released. He submits that it is necessary to look to recital B in the Bond to identify when the Bond may be called up. Recital B states that the Bond is to ensure performance of the contractor’s obligations under the Contract. Mr Holland submits that the logical corollary to recital B is that the Bond may be called on if CHB is in breach of contract, and this is the only condition for call. He submits that the test for establishing whether there has been a breach of contract can be no higher than establishing a prima facie breach of contract.
[27] Mr Holland seeks to distinguish the cases relied on by TGS, UGL and Richina Pacific, on the basis that those cases considered bonds which are not “materially similar” to the Bond. He notes that the bond in UGL contained the following provisions which are not present in the Bond:
2. THE condition of this bond is that it shall be null and void if:
(a)The Contractor duly carries out and fulfils all the obligations imposed on the Contractor by the Contract Documents prior to the commencement of the Period of Defects Liability referred to in the Contract Documents; or
(b)The Contractor satisfies and discharges the damages sustained by the Principal in respect of all the faults by the Contractor up to the commencement of the Period of Defects Liability or the termination of the contract; or
(c)The Surety satisfies and discharges up to the amount of the bond the damages sustained by the Principal in respect of all defaults by the Contractor up to the commencement of the Period of Defects Liability or the termination of the contract; or
…
[28] Mr Holland submits that Gilbert J relied on cl 2(c) of the UGL bond to determine both “[t]he bond is in the nature of a guarantee” and “UGL must therefore prove breach and loss before it can recover under the bond”.16
[29] Mr Holland submits that the bond considered in Richina Pacific also contained significant “specified conditions” which are not present in the Bond as follows:17
16 UGL (NZ) Ltd v Trade Indemnity + Surety Ltd, above n 2, at [13].
17 Richina Pacific Ltd v AAI Ltd, above n 4, at [18].
2. THE condition of this bond is that it shall be null and void if:
(a)[Mainzeal] duly carries out and fulfils all the obligations imposed on [it] by the Contract Documents prior to commencement of the period of Defects Liability referred to in the Contract Documents; or
(b)On default by [Mainzeal], such default to be accompanied by a Certificate from the Engineer setting out the default and amount of damages, [Mainzeal] or [Vero/AAI] satisfy and discharge the damages sustained by [Sampson] up to the amount of this bond.
[Emphasis added.]
[30] In summary, Mr Holland submits that the Bond is not on-demand but calling up the bond is subject to a bare condition that CHB is prima facie in breach of contract. He submits that the “materially similar” bonds relied on by TGS are not similar at all and there is no authority for the proposition that any bond which is not on demand must require both proven breach and loss.
Discussion
[31] As referred to in Trafalgar House, UGL and Richina Pacific, the Bond contains indications that it is in the nature of a contract of guarantee. TGS is referred to as “the surety”. Clause 4 of the Bond contains provisions to the effect that no alteration in the terms of the Contract and no allowance of time or forbearance or waiver will release the surety from liability.18 Recital B indicates that the Bond is a contract to answer for default or breach by CHB in the performance of its obligations under the Contract.19
[32] The Bond itself does not contain the specific conditions referred to and relied on in by the Court in UGL and Richina Pacific set out at [27] and [29] above. However, cl 3.1.6 of the Contract provides that the Bond may not be called up if:
(a)The Contractor has carried out and fulfilled all the obligations of the Contractor under the Contract up to Practical Completion;
(b)The Contractor has paid to the Principal any damages sustained by the Principal for all defaults by the Contractor up to Practical Completion or the termination of the Contract; or
18 See A Forbes and S Lennon Laws of New Zealand Guarantees and Indemnities (online ed) at [213]–[221] and [224]–[228].
19 See Property Law Act 2007, s 27(4).
…
[33] The Bond is a schedule to the Contract. In my view, the Bond should be construed together with the Contract to determine the nature and extent of the obligations being assumed.20 In Arrow International (NZ) Ltd v NZ Project 29 Ltd, this Court considered a contractor’s performance bond provided under NZS 3910:2013 in the context of an interim injunction. 21 Cooke J found that the “meaning of the terms of the Bond is, to my mind, influenced by the terms of the Contract as the two instruments are intended to work together.” 22
[34] When the Bond is read together with the Contract, I consider that cl 3.1.6(a) and (b) of the Contract operate as conditions on the calling up of the Bond by TGS. As with the bonds considered in Trafalgar House, UGL and Richina Pacific, these conditions require the Council to prove that CHB has failed to carry out and fulfil all its obligations under the Contract up to practical completion, and that TGS has suffered damages as a result of the breach which have not been paid by the contractor. Otherwise, the Council would be able to make a call on the Bond even if it had not suffered any loss as a result of the breach.
[35] Mr Holland submits that several parts of the Contract support the Council’s position that it is only required to establish a prima facie breach of contract. First, he submits that cls 3.1.8 and 3.1.9 provide for the provision of a replacement bond. He notes that all that is required is for the principal to “contend” the contractor has failed to perform its obligations and for the engineer to provide an estimate of the cost of any remedial or other work. The contractor may then provide a replacement bond for the amount of the estimate. However, while these provisions provide that the contractor may provide a replacement bond on the basis of the engineer’s estimate of the cost of any outstanding remedial or other work, the provisions do not provide for what is required for the principal to call up the Bond or replacement bond.
20 Nicholas Dennys and Robert Clay (eds) Hudson’s Building and Engineering Contracts (14th ed, Sweet and Maxwell, London, 2020) at [10-074].
21 Arrow International (NZ) Ltd v NZ Project 29 Ltd [2019] NZHC 1326.
22 At [35].
[36] Second, Mr Holland submits that, while the engineer has power under cl 14.2.1(c) to certify default, there is otherwise no power to certify breach of contract by the contractor, and any contention by TGS that the engineer must certify breach in order for the Council to make a call on the Bond relies on creating a power which is not in the Contract nor the Bond. However, Mr Nelson made it clear in his submissions that TGS is not asserting that it is a condition of calling up the Bond that the engineer must certify breach or default by CHB. Mr Nelson notes that there are cases where the standard form contract and/or the form of bond has been amended to provide for an engineer’s certificate as a requirement for making a call under the bond.23 He submits that this sets a lower rather than higher bar for calling up the bond.
[37] Third, Mr Holland submits that the Bond is released when practical completion is certified under cl 10.4 of the contract. He contends that it would be a “commercial absurdity” if the Bond could be frustrated by the contractor initiating the dispute resolution process under s 13 of the Contract which is likely to run on longer than the date of issue of the practical completion certificate when the Bond must be released. He submits that there is no provision in the Contract for the Bond to be maintained while dispute resolution is concluded. He also submits that a “commercial absurdity” would arise if the quantum of the claim under the Bond had to be certified under cl 14.2.4 of the Contract before the Bond could be called. He submits that certification of the cost of completion of the contract works under cl 14.2.4 does not occur until the contract works are completed,24 and that is when the practical completion certificate will be issued releasing the Bond.
[38] Clause 2(a) of the Bond and cl 3.1.6(c) of the Contract refer to a practical completion certificate being issued for the contract works in accordance with cl 10.4 of the Contract. It is not clear that this can occur where the principal has resumed possession of the site and completed the works. For example, the process under cl 10.4.2 is triggered by the contractor (CHB) notifying the engineer when the works are believed to qualify for the issue of a practical completion certificate. CHB is not in a position to give this notice as it is expelled from the site and the contract works
23 See, for example Arrow International (NZ) Ltd v NZ Project 29 Ltd, above n 21.
24 Custom Street Hotel Ltd v Plus Construction NZ Ltd [2016] NZHC 2011; and Custom Street Hotel Ltd v Plus Construction NZ Ltd [2018] NZCA 36, [2018] 3 NZLR 34 at [40]–[45].
are being completed by a new contractor under a separate contract. Under cl 10.4.5, prior to the engineer issuing the practical completion certificate, the contractor is required to provide any producer statements and as-built drawings and operation and maintenance manuals required by the special conditions. This may be problematic where the contract works have not been completed by the contractor. Any practical completion certificate issued under the separate contract with the new contractor would not be a practical completion certificate for the contract works issued in accordance with cl 10.4 of the Contract.25
[39] Even if a practical completion certificate for the contract works can be issued in accordance with cl 10.4 of the Contract, it seems that the Contract and Bond may provide for the Bond to remain on foot or for a replacement bond to be provided after the issue of the practical completion certificate.26 This may be the effect of cls 3.1.7-3.1.9 of the Contract and cl 2(a)–(c) of the Bond. Clause 3.1.7 indicates that the Bond is not released on issue of the practical completion certificate, but only once the principal gives notice (within five working days) that the contractor and surety are released. Under cl 3.1.8, if the principal contends that the contractor has not performed its obligations, the engineer shall make an estimate of the cost of any remedial work or other outstanding work to be completed at that stage and notify the principal and contractor of that estimate. The contractor may then provide a replacement bond for the amount of the estimate under cl 3.1.9 (which the contractor would presumably do if the estimate were less than the amount of the Bond) and the Bond is then released. If no replacement bond is provided, it seems that the Bond may remain on foot.27
[40] However, even if the correct interpretation of the Contract and the Bond is that there is no provision for the Bond to remain on foot or for a replacement bond to be provided after issue of the practical completion certificate in accordance with cl 10.4, it seems to me that this simply reflects the balance of risks under the standard form
25 See De Vere Hotels Ltd v Aegon Insurance Co (UK) Ltd [1997] EWHC 354 (Technology, 5 December 1997) at [24]–[29]; City of Glasgow District Council v Excess Insurance Co Ltd [1986] S.L.T. 585 (OH); and Wayne Courtney, O’Donovan and Phillips: The Modern Contract of Guarantee (English ed, 4th ed, Sweet & Maxwell, Great Britain, 2020) at [13-085] at fn 257.
26 I note that any replacement bond in the form set out in sch 3 to the Contract would need to be amended to provide for the fact that the practical completion certificate had already been issued.
27 The Contract would need to be interpreted such that, in this situation, the Bond could still be called up notwithstanding cl 3.1.6(c).
contract. The parties would be aware when they enter into the standard form contract that the contractor’s performance bond will be released on the issue of the practical completion certificate for the contract works, and therefore the security is unlikely to be in place to cover any additional costs of completion certified under cl 14.2.4 where the principal has resumed possession of the site. Up to the issue of the practical completion certificate, the principal may call up the bond in respect of any undisputed breach for which it can prove loss. When a dispute arises, the principal can refer the dispute to adjudication under the Construction Contracts Act 2002 and/or to the engineer for a formal decision under cl 13.2.4 of the contract, and the matter may then be referred to arbitration for final determination.28
[41] Another issue is that where the principal resumes possession of the site and arranges for a new contractor to complete the works and remedy any defects under cl 14.2.3(b), the principal is not entitled to recover any additional costs of completion of the works until the works have been completed and the engineer has certified the cost of completion under cl 14.2.4. In Custom Street Hotel Ltd v Plus Construction NZ Ltd, the Court of Appeal held that cl 14.2.4 provides for a “wash-up, ex post completion of the works” and that certification by the engineer of the costs of completion, and recovery by the principal of any additional costs of completion, only occurs after completion of the works.29 If the Council’s interpretation of the Bond was correct, and the Bond could be called up simply on the basis of a prima facie breach, then the contractual scheme under cls 14.2.3 and 14.2.4 would be undermined. Prior to the contractor having any contractual liability to pay any amount under cl 14.2.4, the principal could make a claim under the bond for additional costs of completion and recover an amount from the contractor and/or the surety up to the amount of the bond.
[42] It is of course open to the parties to negotiate amendments to the standard form contract by special conditions and/or to amend the form of bond in sch 3. For example, in Arrow, the construction contract based on NZS 3910:2013 was amended to provide for provisional assessment of amounts that may become due from the contractor to the
28 Albeit that the practical completion certificate may be issued in accordance with cl 10.4 prior to the outcome of the arbitration proceedings, and the bond released.
29 Custom Street Hotel Ltd v Plus Construction NZ Ltd [2018] NZCA 36, [2018] 3 NZLR 34 at [40]– [45].
principal following the principal resuming possession of the site or terminating the contract in advance of certification on completion of the contract works under cl 14.2.4.30 The principal was entitled to immediately recover the amount of the provisional assessment from the contractor and/or make a call on the bond. The form of bond was amended to provide that any demand by the principal on the surety under the bond had to be accompanied by a certificate from the engineer certifying that the contractor was in default and that the sum demanded was reasonable in the opinion of the engineer. The form of bond was also amended to provide that the surety would not be released from any liability under the bond because of any dispute between the principal and the contractor. The Court held that:31
The commercial purpose of [the amendments] is to avoid Project 29 [the principal] being disadvantaged by not being able to have access to the Bond simply because Arrow [the contractor], or a liquidator of Arrow, says the amounts are disputed. …
[43] However, no such amendments were made to the standard form contract or form of bond in this case.
Conclusion
[44] For the reasons set out above, I find that the proper interpretation of the Bond is that it is a conditional bond in the nature of a contract of guarantee. To make a call on the Bond the Council is required to prove that CHB breached its obligations under the Contract and the quantum of the loss it has suffered as a result of the breach, at least up to the amount of the call.
Is there a substantial dispute as to whether the alleged debt is owing or due?
[45] The Council says that when it resumed possession of site CHB was not only prima facie in breach but substantially in breach of cl 5.6 of the Contract (Care of the works and Site) for alleged damage to the works, and cl 10 of the Contract (Time for Completion) for delay in completing the works. As I understand the Council’s position, the debt claimed under the statutory demand is based on the cost of repair of alleged damage to the works and liquidated damages for delayed completion.
30 Arrow International (NZ) Ltd v NZ Project 29 Ltd, above n 21.
31 At [38].
[46] Before considering these alleged breaches, it is also relevant to consider whether there is a substantial dispute between the parties regarding the Council resuming possession of the site on 31 August 2021.
[47] The Council contends that it was entitled to resume possession of the site and has not repudiated the Contract. It says that CHB has not sought to cancel the Contract as a result of any alleged repudiation and would now be disentitled from doing so.
[48] As I understand CHB’s position, it contends that the Council breached the Contract in resuming possession of the site and therefore wrongly or invalidly resumed possession. However, I do not understand CHB to be contending at this stage that the Council repudiated the Contract or that CHB has, or is entitled to, cancel the Contract.
[49] Therefore, although there is no current issue between the parties about repudiation by the Council, there is an issue as to whether the Council breached the Contract when it resumed possession.
[50] The Council relies on the certification of default given by the engineer on 29 July 2021 under cl 14.2.1(c) of the Contract to underpin its notice of default and resumption of possession of the site. The Council contends that this certificate is final and binding and cannot now be questioned or challenged by CHB because it did not give notice to the engineer questioning or challenging the certificate within three months of it being issued under cl 13.1.1 of the Contract. However, it seems to me to be arguable that the certificate was questioned or challenged by CHB through the letter from its lawyer to the Council and the engineer dated 1 September 2021. This letter disputed that there had been any default by CHB and called into the question the validity of the engineer’s certificate and the Council’s notice of default.
[51] A significant issue raised in the 1 September 2021 letter is that, on 9 August 2021, seven working days into the 10 working day period allowed under cl 14.2.1, the engineer issued Notice to Contractor (NTC) 122 which set out the specific actions which CHB was required to undertake including information it was to provide to remedy the alleged default. The engineer stated that the actions were required to be completed by 12 August 2021 (the expiry of the 10-working day period). CHB
endeavoured to provide the information sought by 12 August 2021. On 19 August 2021, the engineer issued NTC-124 seeking clarification of the information provided by CHB and further details. Subsequently, on 30 August 2021, the Council purported to resume possession of the site on the basis that CHB had failed to remedy the default by 12 August 2021. The Council considered that CHB had provided the “bare minimum of information” required to be provided by 12 August 2021 to remedy the default, and this was insufficient. In my view, it is arguable that the Council has not complied with the notice procedure under cl 14.2.1 in that it has effectively only given CHB three working days to remedy the default.32 Strict compliance with such notice provisions is required.33
[52] Further, even if the Council complied with the procedure under cl 14.2.1, there is an issue between CHB and the Council as to whether CHB complied with the actions required to be undertaken to remedy the default in NTC-122 and provided sufficient information by the relevant date. CHB says that it did. It is apparent from the evidence that the engineer raised issues with the information provided, including an amended programme and methodology for completion of the works. However, as submitted by Mr Nelson, the issues around whether CHB complied with NTC-122 are intensely factual and cannot be resolved in the context of an application to set aside a statutory demand.
[53] I find that there is a genuine and substantial dispute between the Council and CHB as to whether the Council validly resumed possession of the site.
Damage to geomembrane liner
[54] The Council contends that there has been damage to the geomembrane liner for three storage ponds which are part of the project and that CHB is liable for the cost of remedying that damage under cl 5.6 of the Contract.
[55]Clause 5.6.1 of the general conditions of the Contract provides that:
32 As noted in the 1 September 2021 letter, even if the 10 working days is taken as commencing on 9 August 2021, New Zealand was put into lockdown level 4 from 11.59 pm on 17 August 2021 until 11.59 pm on 31 August 2021, so the 10 working days would not have expired by 30 August 2021.
33 See Brown & Doherty Ltd v Whangarei County Council [1988] 1 NZLR 33 (HC) at 36.
The Contractor shall be responsible for the care of the Contract Works or any Separable Portion and all Plant from the time it obtains possession of the Site until the relevant time of Practical Completion. …
[56]Clause 5.6.5 provides:
Except where loss or damage has the effect of terminating the Contract by frustration, if any loss or damage occurs to the Contract Works or Materials or the Site while the Contractor is responsible under 5.6.1, 5.6.2, 5.6.3 or 5.6.4, the Contractor shall:
…
(c)Repair the loss or damage to the extent needed for completion of the Contract Works and for meeting the Contractor’s obligations under Section 11. Such repair of loss or damage shall be carried out without additional payment by the Principal unless provided for under 7.1.3 or 9.5, or caused by an excepted risk as defined in 5.6.6. To the extent the necessity to repair such loss or damage arises from an excepted risk, the repair shall be treated as a Variation.
[57]Under cl 5.6.6, “excepted risks” include:34
…
(e)Any fault, defect, error, or omission in the design of the Contract Works, for which the Contractor is not responsible under the Contract;
…
(h) Any act or omission of the Principal or of the Engineer or their assistants or of any other Person for whose acts or omissions the Principal is as between itself and the Contractor responsible.
[58] The Council says that, on 24 June 2021, it identified damage to the geomembrane liner, the cause of the damage and how CHB was to remediate it. The Council says that the remediation method was discussed and agreed on site with Justin Neville, the director of CHB. It contends that CHB failed to repair the geomembrane liner and continued to damage it by its activities on the site.
34 Clause 7.1.3 of the Contract also provides that the principal shall indemnify the contractor against any loss suffered by the contractor or liability incurred by it in respect of matters in paragraphs (a), (b), and (c) of cl 7.1.2. Clause 7.1.2 (c) refers to “[a]ny act or omission of the Principal or of the Engineer, or his or her assistants, or of any other Persons for whose acts or omissions the Principal is as between it and the Contractor responsible.”
[59] The Council says that, after it resumed possession of the site, it obtained a report on the damage to the geomembrane liner from Tonkin & Taylor Ltd. This report identified four options for remediation or replacement and, on the basis of this report, the Council formed a plan for remedial action.
[60] The Council contends that, whether CHB caused the damage or not, it was obliged to repair the damage to the liner under cl 5.6.5(c) and failed to do so. Therefore, CHB is in breach of its obligations under cl 5.6 of the Contract.
[61] In his affidavit evidence, Mr Neville accepts that there was some damage to the geomembrane liner which needed to be repaired, and that CHB was taking steps to address this and to do the repair work. However, CHB does not accept the extent and cause of the damage as claimed by the Council. Mr Neville says that, prior to the Council resuming possession of the site, further investigations were required to determine the extent and cause of the damage (and therefore the appropriate repair), and this required an Electrical Leak Location Survey (ELLS) to be carried out. He says that the experts required to undertake the investigations were overseas in the period prior to the Council resuming possession of the site, and Covid-19 restrictions prevented them from coming to New Zealand at that time. Therefore, CHB could not investigate the issue properly prior to the Council resuming possession of the site and has subsequently been prevented from doing so because it has wrongfully been expelled from the site. Mr Neville also says that if the cause of the damage to the liner was an “excepted risk”, then it may be that a claim could be made under the contract works insurance taken out for the project by the Council.
[62] In his affidavit, Johannes Ferreira, Infrastructure Services Manager for the Council, takes issue with Mr Neville’s evidence. He says that CHB was advised by the engineer around 18 August 2021 that the extent of liner damage and required repair work could be determined independent of ELLS.
[63] Mr Neville also states that extensive information regarding the damage to the geomembrane liner has only been provided for the first time with the Council’s notice of opposition. In particular, he refers to the Tonkin & Taylor report which includes, as an appendix, a laboratory test report from ExcelPlas.
[64] Mr Nelson, counsel for TGS, submits that little weight should be given to the Tonkin & Taylor report and other documents put forward by the Council authored by the engineer, as they are hearsay.
Discussion
[65] It is apparent that some damage to the geomembrane liner was identified prior to the Council resuming possession of the site on 31 August 2021. CHB was required to repair that damage under cl 5.6.5(c) of the Contract. However, there is a conflict of evidence as to whether the extent and cause of the damage could be properly identified at that time and whether further investigations were required by ELLS or otherwise before the appropriate repair work could be determined and undertaken. In my view there is a substantial dispute as to whether CHB failed to comply with its obligations under cl 5.6.5(c) of the Contract prior to the Council resuming possession of the site.
[66] A further issue with the Council’s entitlement to make a call on the Bond in respect of the damage to the geomembrane liner is that, if the cause of the damage is found to be an “excepted risk”, then CHB would not be liable for the repair costs. The Council has, after resuming possession of the site, obtained a report on the cause and extent of the damage to the liner and the appropriate remedial options. That report has only been made available to CHB with the Council’s notice of opposition. CHB does not accept that it caused damage to the liner, or the extent of the damage alleged by the Council. Mr Neville says the information now provided by the Council is highly technical, and it is likely CHB will need to instruct its own independent expert to assess the reports. I consider there is also a substantial dispute in this regard.
[67] Another issue raised by TGS is that, even if CHB is liable for the repair costs, the Council is not contractually entitled to recover any repair costs from CHB until the contract works have been completed and the engineer has certified the quantum of the cost of completion (including any remedial costs) under cl 14.2.4 of the Contract.35 In response to this point, the Council may be arguing that the cost of completion referred to in cl 14.2.4 does not include the cost of completing remedial works. However, in my view, that cannot be correct. When the principal resumes possession of the site, it
35 See discussion above at [41].
may complete and remedy defects in any part of the contract works remaining to be completed and may engage another contractor to do so (cl 14.2.3(b)). The cost of remedying defects must therefore be part of the cost of completing the contract works to be certified in cl 14.2.4.
[68] Mr Ferreira states in his affidavit that he expected practical completion of the works to be certified by the engineer in the week commencing 21 August 2023. However, there is no evidence before the Court that the contract works have been completed or that any practical completion certificate has been issued.
[69] With regard to the cost of completing the works, the engineer has issued an interim assessment of the Council’s cost to complete the works, including the cost of the remedial works, in NTC131 dated 16 June 2023. On 15 August 2023, CHB issued a notice disagreeing with the interim assessment and referring the dispute to the engineer under cl 13.2.1 of the Contract. Subsequently the engineer issued NTC 132 dated 12 September 2023 stating:
… It is agreed that the certification of costs required to be made by the Engineer under clause 14.2.4, should be carried out when the Contract Works have been completed. Payment Schedule 34 is therefore withdrawn and will be re-issued after the works have been completed and the final costs are available. However, we do not consider that clause 14.2.4 precludes an interim provision of information about costs to date which is provided by NTC
131. NTC 131 will therefore stand as it is considered that provision of this information is useful in that it reflects the costs that have been advised to the Engineer by the Principal to date (end April 2023). To be clear, NTC 131 does not constitute a decision, valuation or certificate and the Contractor’s disagreement with the costs set out is noted.
[70] I find that there is a substantial dispute as to the alleged debt for the cost of repair of the geomembrane liner in that there is a substantial dispute as to CHB’s liability for the repair of the liner and as to the quantum of the cost of repair. The Council is not entitled to call up the Bond in respect of the cost of repair at this stage because it has not proved breach and quantum of loss.
Alleged delay in completing the works – liquidated damages
[71] The Council contends that it is entitled to call up the Bond to recover liquidated damages from CHB under the Contract in the sum of approximately $1,012,928
million, based on an expected completion date some 156.8 weeks after the contractual completion date.
[72] After the Council resumed possession of the site, the parties sought recommendations from an independent expert regarding CHB’s extension of time claims. The Council contends that the outcome of that process was that the independent expert recommended CHB was entitled to an additional 92.5 working days extension of time which extended the due date for completion to 6 July 2020. The Council contends that, as at the date the notice of default was served on 29 July 2021, CHB was already liable for liquidated damages in the sum of $357,884. It contends that CHB’s liability for liquidated damages has continued to accrue under cl 10.5.1 of the Contract and will continue to do so until the date of practical completion of the contract works.36
[73] CHB disputes that it is liable for any liquidated damages. Dealing first with the period up to the Council’s resumption of possession, CHB disputes liability on four main grounds.
[74] First, CHB contends that there is an extant claim for wet weather days up to 21 February 2020 which the independent expert referred back to the parties to try and agree. The Council acknowledges that CHB has sought an additional 36.5 working days in respect of this claim but this would only extend the due date for completion to 24 August 2020.
[75] Second, CHB contends there are some extension of time claims where further supporting evidence may be provided and those claims have not yet been determined. In particular, CHB refers to an extant claim for wet weather in the period March 2020 to June 2021 which it has quantified in the sum of 109.5 working days. In relation to this claim, the independent expert recommended that “an arbitrator would be left with the impression” that CHB had not demonstrated an entitlement to more than 51 working days. However, CHB contends that it is at least entitled to an additional
36 Clause 14.2.3(a) of the Contract provides that when the principal resumes possession of the site the contractor is not relieved from any of its obligations under the contract, which seems to include the obligation to pay liquidated damages under cl 10.5.1 of the Contract.
51 working days and may be able to establish that it is entitled to more than 51 working days.
[76] Third, CHB contends that, as the contract remains on foot, CHB would be able to claim further extensions of time and variations. For example, CHB contends that it would be entitled to an extension of time for the August 2021 Covid-19 lockdown. In this regard, Mr Holland, submits that CHB is free to make any claims it wishes but it has not done so despite consistently reserving its rights.
[77] Fourth, with regard to the period up to the date that the Council resumed possession of the site, the Council acknowledges that it is liable to pay CHB an additional sum of $379,638.34 (including GST) for variations and extension of time costs. CHB says that this sum should be $492,887 (including GST). In addition, the independent expert’s report indicates that, as a result of the additional extensions of time that the expert recommended CHB was entitled to, there may need to be a consequential adjustment of liquidated damages that have already been deducted by the Council. As noted above, in respect of the period up to 29 July 2021, the Council says that CHB’s maximum liability for liquidated damages is $357,884.
[78] For the reasons set out above, it seems to me that there is a substantial dispute as to CHB’s liability for liquidated damages for the period up to the Council resuming possession of the site.
[79] I now consider CHB’s alleged liability for liquidated damages in the period from the Council’s resumption of possession of the site until completion of the works. For the following reasons, I have reached the view that there is also a substantial dispute as to CHB’s liability for liquidated damages in this period.
[80] First, as discussed above, there is a substantial dispute as to whether the Council validly resumed possession of the site on 31 August 2021. If the Council did not validly resume possession of the site then, as submitted by Mr Nelson, there is an issue as to whether the Council would be entitled to claim any liquidated damages from CHB for the period after 31 August 2021. Issues would arise as to whether CHB
would be entitled to an extension of time for some or all of the relevant period on the basis that it was prevented from completing the works.
[81] Second, even if the Council validly resumed possession of the site on 31 August 2021 and the Council can recover liquidated damages prior to completion of the works, Mr Neville’s evidence is that CHB was “very close” to finishing the contract works. He states that the works were “largely complete” apart from minor repair work which CHB was addressing. Mr Neville says that the scope of works undertaken since August 2021 must have increased beyond what was required under the Contract, but this is denied by Mr Ferreira. Given this conflict of evidence, and that it seems to have taken at least two years for the Council to complete the contract works, there is an issue as to the extent to which CHB should be liable for liquidated damages for this period. Consideration would need to be given to any changes in the scope of works, whether there have been delays by the new contractor which would reduce CHB’s liability for any liquidated damages, and whether CHB should have the benefit of any extensions of time granted to the new contractor, for example, for variations or wet weather. Consideration would also need to be given to whether CHB is entitled to an extension of time or relief for the period required to repair the geomembrane liner if it is determined that the damage was caused by an “excepted risk”, or because of the dispute as to the extent of the damage and/or the scope of the remedial works required to be undertaken.
[82] Overall, I consider that there is a substantial dispute as to the alleged debt for liquidated damages in that there is a substantial dispute as to CHB’s liability for liquidated damages for the relevant periods. In my view, the Council is not entitled to call up the Bond in respect of liquidated damages at this stage because it has not proved any liability for liquidated damages.
Should the demand be set aside on other grounds?
[83] Mr Nelson submits that, if it is found that there is no substantial dispute about the debt claimed, the statutory demand should still be set aside under s 290(4)(c) of the Companies Act on the basis that the dispute resolution process under s 13 of the Contract has been triggered by CHB in relation to the debt claimed and should run its
course through to arbitration. Mr Nelson submits that otherwise there would be a risk of inconsistent findings as between this Court and any arbitrator appointed under the Contract, and this may lead to issue estoppel, and would be inconsistent with arbitration policy.
[84] It seems to me that the issue raised here relates to the test under s 290(4)(a) of the Act and the balancing of competing arbitration and insolvency policies. The issue is what threshold should be applied to set aside a statutory demand in circumstances where an arbitration clause has been invoked in relation to the debt claimed. Should it be necessary for the applicant to show a “substantial” dispute as to the existence of the debt, or may the statutory demand be set aside if the applicant can establish a “dispute” on the basis of a lower threshold such as was adopted by the Supreme Court in the context of a summary judgment application in Zurich Australian Insurance Ltd v Cognition Education Ltd.37 This issue was discussed by the Court of Appeal in Manchester Securities Ltd v Body Corporate 172108.38 The Court of Appeal accepted that the considerations referred to in Zurich apply in the s 290 context. However, in that case the arbitration clause had not been invoked in relation to the debt claimed.39
[85] TGS has not sought to argue that a lower threshold for setting aside the statutory demand should apply in this case. As I have found that there is a substantial dispute in relation to the existence of the debt claimed, I do not need to consider the issue further.
Result
[86] The statutory demand is set aside under s 290(4)(a) of the Companies Act 1993.
[87] My preliminary view is that costs should follow the event and that TGS is entitled to 2B costs. The parties should endeavour to agree costs. However, if the
37 Zurich Australian Insurance Ltd v Cognition Education Ltd [2014] NZSC, [2015] 1 NZLR 383 at [23].
38 Manchester Securities Ltd v Body Corporate 172108 [2018] NZCA 190, [2018] 3 NZLR 455 at [26]–[36].
39 At [31]. See also Suzanne Robertson, “Statutory demands and agreements to arbitrate” (August 2020) Company and Securities Law Bulletin 77.
parties are unable to reach agreement, memoranda may be filed (not exceeding three pages, excluding costs schedules) and costs will be determined on the papers.
Associate Judge Skelton
Solicitors:
D K Law Ltd, Auckland for Applicant Hazelton Law, Wellington for Respondent
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