Youssef v Maiden
[2019] NZHC 3471
•20 December 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2018-404-2524
[2019] NZHC 3471
IN THE MATTER OF the Judicial Review Procedure Act 2016 AND
IN THE MATTER OF
the Construction Contracts Act 2002
BETWEEN
AHMED AMIN MAHMOUD YOUSSEF (AS TRUSTEE OF THE JAMESSEF TRUST) AND STEPHYN ST JAMES
Applicants
AND
RICHARD LINTON MAIDEN
First Respondent
BESPOKE DESIGN AND BUILD LIMITED
Second Respondent
Hearing: 1 April 2019
Further submissions received 15 and 17 April 2019
Appearances:
M R Taylor for Applicants
K R Narayanan for Second Respondent
Judgment:
20 December 2019
REASONS FOR JUDGMENT OF PETERS J
This judgment was delivered by Justice Peters on 20 December 2019 at 11.00 am pursuant to r 11.5 of the High Court Rules
Registrar/Deputy Registrar Date: ...................................
YOUSSEF v MAIDEN [2019] NZHC 3471 [20 December 2019]
Introduction
[1] The applicants, Mr Ahmed Youssef and Mr Stephyn St James, seek judicial review of a determination made by the first respondent, Mr Richard Maiden, on 15 October 2018 (“determination”).
[2] Mr Maiden made the determination as adjudicator under the Construction Contracts Act 2002 (“CCA”), in respect of a dispute between the applicants and the second respondent, Bespoke Design Limited (“Bespoke”).
[3] Mr Maiden abides the decision of the Court. Bespoke denies the applicants’ allegations, and opposes the application for review.
[4] On 31 October 2019, I issued a results judgment granting the application and quashing the determination.1 These are my reasons.
Background
[5] The applicants engaged Bespoke to build a house on their site in Mangawhai. The parties entered into the relevant contract on 17 or 18 August 2017 (“contract”). Work commenced in the second half of 2017 and the house was expected to be completed by mid-2018. Differences between the parties arose early in 2018, with matters coming to a head in a series of letters in April 2018.
[6] By email of 3 April 2018, the applicants advised Bespoke they considered it in breach of contract in several respects and that they would not pay for costs they considered resulted from inefficiencies.
[7] On 6 April 2018, Martelli McKegg, acting for Bespoke, notified the applicants that Bespoke was suspending work on site with immediate effect.
[8] By letter dated 9 April 2018, the applicants, by their counsel Mr Taylor, cancelled (or purported to cancel) the contract, on the basis Bespoke had repudiated
1 Youssef v Maiden [2019] NZHC 2815.
the contract or committed a fundamental breach of it, and said they would engage another builder to finish the work.
[9] On 11 April 2018, Bespoke rejected the applicants’ cancellation, and itself cancelled the contract.
Adjudication
[10] On or around 10 August 2018, Bespoke gave the applicants Notice of Adjudication under the CCA. In its Notice of Claim, setting out what it considered to be the issues, Bespoke sought:
(a)$90,106.42, including GST, it said was owed in respect of unpaid invoices;
(b)interest;
(c)lost profit of $61,267.02. Bespoke claimed this sum as the profit it would have derived had it completed the work.
[11] Bespoke then applied to the Royal Institute of Chartered Surveyors (“RICS”) to select a person to act as adjudicator of Bespoke’s claim. On 17 August 2018, RICS nominated Mr Maiden.
[12] On 20 August 2018, the applicants notified Mr Maiden and Bespoke that they would submit their own claim, and would seek Mr Maiden’s appointment as adjudicator in respect of that claim also.
[13] On 4 September 2018, the applicants served their Notice of Adjudication and Notice of Claim/Response to Bespoke’s Notice of Claim. The applicants sought determinations that Bespoke was not entitled to any of the invoiced sums claimed or to lost profit; that Bespoke’s suspension of work on 6 April 2018 had been unlawful; that the applicants’ cancellation of the contract on 9 April 2018 was lawful; and that Bespoke was liable in the sum of $142,868.23 on account of the cost of remedial work and $7,800 to the applicants for losses caused by Bespoke’s alleged delay.
[14] On 10 September 2018, RICS confirmed that Mr Maiden would also act as adjudicator on the applicants’ claim. The disputes were then consolidated and determined together.2
Determination
[15]In his determination, Mr Maiden held:
(a)the applicants’ cancellation on 9 April 2018 was unlawful;
(b)Bespoke’s cancellation was lawful;
(c)each party was indebted to the other but, net, the applicants were required to pay Bespoke $125,685.08, GST inclusive, this sum including lost profit to Bespoke of $44,728.85.
Application for judicial review
[16] The applicants then brought this proceeding, seeking judicial review of the determination. Bespoke submitted to me, and I accept, that an application for judicial review has the potential to thwart the purpose of the CCA. In summary, in the first instance an adjudicator’s determination should be implemented, so that money flows in accordance with the determination, with arguments about the correctness or otherwise of the determination to be resolved later, in litigation or mediation. I also accept Bespoke’s submission that the Court will not lightly intervene even if a ground of review is established. I have borne this in mind in deciding that this is a case in which it is necessary to grant relief.3
[17] This brings me to a second point, on which Mr Taylor, counsel for the applicants, relied. Clause 22.5 of the contract provides:
22.5 If a dispute is referred to adjudication under the CCA, the adjudicator’s ruling shall be final and binding between the parties and neither party shall attempt to resolve the dispute by any other method except for judicial review or enforcement of the adjudicator’s ruling.
2 Construction Contracts Act 2002, s 40.
3 Rees v Firth [2011] NZCA 668, [2012] 1 NZLR 408 at [22] and [27].
[18] Given cl 22.5, any general expectation that deficiencies in a determination will be addressed at a later stage is not open in this case. Mr Taylor submits this would favour granting relief and quashing the determination, if any ground of review were made out, as it would be the applicants’ only remedy. I do not accept this submission. As counsel for Bespoke, Ms Narayanan submitted, a party who chooses to contract on such a basis must live with the consequences. So although I have decided to grant relief, I have not been influenced by cl 22.5 of the contract.
Pleadings
[19] I turn now to the pleadings. It is fair to say that the applicants have raised many points under each cause of action, but they can be summarised as follows.
[20] First, there is a claim that Mr Maiden breached statutory duties imposed on a prospective adjudicator. The most significant breach alleged is a failure to disclose a conflict of interest. The applicants also contend Mr Maiden was disqualified from acting on the ground of “apparent bias”.
[21] The second and third causes of action concern the process by which Mr Maiden determined the applicants’ cancellation was unlawful. This is a significant issue because Bespoke was not entitled to lost profit if the cancellation was lawful.
[22] The fourth and fifth causes of action are alleged breaches of natural justice, first as regards Mr Maiden’s calculation of lost profit and then by declining the applicants an opportunity to respond to material in a Bespoke reply.
First cause of action: breach of statutory duty
[23] Sections 34, 35 and 35A CCA concern the steps to take place immediately after an adjudicator is nominated. Section 41 is also relevant, and is of continuing application.
[24] Amongst other things, these provisions require a person nominated as adjudicator to disclose to the parties and the nominating authority “any conflict of interest (financial or otherwise)” and thereafter to refrain from acting until the parties
have confirmed their agreement to him or her doing so (ss 34(3) and 41(d)). If the adjudication process is already underway, the adjudicator is required to resign unless the parties agree otherwise (s 41(e)).
[25] The applicants submit that Mr Maiden had a conflict of interest which he failed to disclose and thus he was precluded from adjudicating the dispute. The applicants also submit the facts giving rise to the conflict are such that Mr Maiden was disqualified from adjudicating because of the appearance of bias.
[26] As quite separate points, the applicants allege that Mr Maiden was ineligible to adjudicate the dispute because he did not have the requisite expertise to determine the legal issues raised in the dispute (s 34(1)), and because he did not serve a notice of acceptance as required by s 35(2).
Relevant statutory provisions
[27]Sections 34, 35 and 41 CCA provide:
34Eligibility criteria for adjudicators
(1)A person is eligible to be an adjudicator … if the person meets the requirements relating to qualifications, expertise, and experience as may be prescribed (if any).
(2)A person is not eligible to be an adjudicator in relation to a construction contract to which the person is a party.
(3)A person—
(a)must disclose to the parties to the adjudication and ... the authorised nominating authority, any conflict of interest (whether financial or otherwise); and
(b)must not act as an adjudicator in that dispute unless all of the parties to the adjudication agree.
35Appointment of adjudicator
(1)A person requested to act as an adjudicator in accordance with section 33 must, within 2 working days of receiving the request, indicate whether he or she is willing and able to act in that capacity.
(2)If the person is willing and able to act as an adjudicator, he or she must serve a notice of acceptance (a notice of acceptance) on the parties to the adjudication and … the authorised nominating authority.
(3)However, if the person has a conflict of interest, he or she must not serve a notice of acceptance under subsection (2) until the parties have confirmed (whether orally or in writing) that they agree to the person acting as an adjudicator.
[…]
(6) A person is appointed as an adjudicator to determine the dispute on serving a notice of acceptance that complies with section 35A.
41 Duties of adjudicator
An adjudicator must—
(a)act independently, impartially, and in a timely manner; and
(b)avoid incurring unnecessary expense; and
(c)comply with the principles of natural justice; and
(d)disclose any conflict of interest to the parties to an adjudication; and
(e)if paragraph (d) applies, resign from office unless those parties agree otherwise.
[28] Section 35A, referred to in s 35(6), prescribes the form of the notice of acceptance required to be served under s 35(2). Mr Maiden did not serve a notice of acceptance but, had he done so, the form would have required him to state that he accepted appointment and that he met “the eligibility criteria for adjudicators under section 34” CCA.
Evidence as to the relationship between Martelli McKegg and Mr Maiden
[29] The alleged conflict of interest arises because, at the time he was nominated to adjudicate the dispute, Mr Maiden was acting as an expert witness on three “leaky building” proceedings for another client of Martelli McKegg, to which I shall refer as “M Ltd”. Martelli McKegg were acting for M Ltd in all three proceedings.
[30] The facts of the matter were unclear when the point arose at the hearing. Mr Taylor was under the impression there was one piece of litigation in which Mr Maiden was acting as an expert. Given this, I asked for affidavit evidence from Mr Steele, the Martelli McKegg partner responsible for M Ltd’s litigation, to clarify the position. I subsequently received affidavits from Mr Steele and Mr Hardy, the Martelli McKegg partner acting for Bespoke.
[31] I invited Mr Maiden to confirm or supplement Mr Steele’s and Mr Hardy’s affidavit evidence, but he advised he had nothing to add and would not be filing an affidavit. I then received further submissions from counsel.
[32]What follows is a summary of Mr Steele’s and Mr Hardy’s affidavit evidence.
[33] In February 2016, Mr Steele was acting for M Ltd on a leaky building dispute in the High Court concerning “multiple units” in an apartment building in Auckland. Unable to secure the services of his “first choice” of expert witness for M Ltd, Mr Steele suggested Mr Maiden would be a suitable alternative. M Ltd agreed and engaged Mr Maiden. Mr Steele was not in communication with Mr Maiden regarding the proceeding whilst the adjudication concerning Bespoke was ongoing.
[34] In February 2018, so two years later, Mr Steele asked Mr Maiden to act as an expert for M Ltd in a proceeding concerning an apartment building in Queenstown. Mr Maiden agreed to do so. This proceeding settled at a judicial settlement conference in the District Court at Invercargill on 29 August 2018, so in the course of the adjudication in the present case. I do not know whether Mr Maiden was present at the conference, but this statement in his email to the parties on 28 August 2018 suggests he may have been:
I would appreciate a swift response to this email as I am travelling to Invercargill this afternoon for a District Court matter tomorrow and will then not be a position to provide a detailed reply [for some days].
[35] In March 2018, M Ltd instructed Martelli McKegg to ask Mr Maiden whether he would act as an expert on another High Court proceeding, in respect of another apartment building in Auckland. Mr Maiden provided a report to M Ltd on 25 April 2018. Mr Steele states his only communications since with Mr Maiden have been regarding the latter’s attendance at various site inspections.
[36] Mr Steele states that he and Mr Maiden have never discussed this application for judicial review or the parties to it; M Ltd, not Martelli McKegg, pays Mr Maiden’s fees and has the contractual arrangement with him; Mr Steele has no relationship with Mr Maiden outside of the office; Mr Maiden is “one of a limited number of ‘property surveyor’ experts” available to act as an expert witness in a leaky building case; it
made and makes sense for M Ltd to give Mr Maiden repeat instructions because he has become familiar with its products and processes; Mr Steele has engaged Mr Maiden and many others to give expert evidence in leaky building litigation; and Mr Steele has also been involved in cases where Mr Maiden has given expert evidence against the client for whom Mr Steele was acting.
[37] Turning to Mr Hardy, he did not know Mr Steele had briefed Mr Maiden as an expert witness for M Ltd. He and Mr Maiden are each members of the Society of Construction Law. The Society is relatively close-knit and it would be “virtually impossible to find an Auckland-based adjudicator that you had not met socially through the Society”. Mr Hardy has acted in or supervised more than 50 to 60 adjudications, and in many has had a prior association with the adjudicator. For instance, in some cases, the adjudicator was a partner in the same law firm as Mr Hardy “some 15-25 years earlier”.
[38] Mr Taylor did not accept Mr Hardy’s evidence that it would be difficult, if not impossible, to identify an adjudicator with whom counsel or the client had not had a prior professional relationship. By way of example, Mr Taylor submitted numerous lawyers are available to act as adjudicators.
Conflict of interest
[39] The issue I have to decide is whether, as the applicants submit, Mr Maiden had a conflict of interest within the sense of s 34(3)(a) CCA when he was nominated to adjudicate the dispute.
[40] The CCA does not define “conflict of interest” and, with respect to counsel, they did not give any assistance on this significant point.
[41] I have considered whether the close-knit nature of the construction industry, as reported by Mr Hardy, requires some reading down of the provision, but I do not think it does. Section s 34(3) refers to “any conflict of interest (financial or otherwise)” and s 41(d) likewise “any conflict of interest”. After disclosure, the person nominated must refrain from acting as adjudicator or serving a notice of acceptance, or resign if he or she has already embarked on the process unless all parties agree otherwise
(ss 34(3)(b), 35(3) and 41(e)). A party who does not agree is not required to say why. The failure to agree is sufficient on its own. These provisions suggest that what constitutes a conflict of interest within the sense of these provisions is not to be confined.
Discussion
[42] I accept the applicants’ submission that Mr Maiden had a conflict of interest within s 34(3)(a) which he was required to disclose, that his failure to do so precluded him from accepting appointment and that his determination must be quashed as a result.
[43]These are my reasons.
[44] There would be no objection in principle to Mr Maiden acting as an adjudicator, and at the same time acting as an expert witness for M Ltd in litigation, if M Ltd was represented by different solicitors. It is the relationship with Martelli McKegg as M Ltd’s legal advisers that gives rise to the issue in this case. Although M Ltd pays Mr Maiden’s fees, and has the formal engagement with him, M Ltd first engaged Mr Maiden on Martelli McKegg’s recommendation or suggestion. Moreover, Martelli McKegg approached Mr Maiden subsequently, in respect of the second and third matters. So Mr Maiden’s engagement and the fees he has earnt, have derived from Martelli McKegg.
[45] There are two other matters I take into account, which is not to say the absence of either would affect the position but they are present in this case. The first is the proceedings concern, or have concerned, three apartment buildings involving many units. This is in contrast to, say, one proceeding concerning a single leaky dwelling. The second is that a party, its legal advisers and expert witness(es) invariably develop a working relationship as litigation progresses. For instance, they need to confer on the issues on which the expert’s evidence or advice is required, work together on the expert’s brief(s) of evidence, review the evidence in opposition and so on. Mr Steele’s evidence that M Ltd has given, and will continue to give, Mr Maiden repeat instructions is not a surprise. As Mr Steele says, this is to be expected.
[46] These matters combined lead me to conclude that Mr Maiden had a conflict of interest within the sense of s 34(3)(a) CCA, which he was bound to disclose but did not.
[47] Lastly, before I leave this topic and go onto the next, I wish to make it clear that whether a person has a disqualifying conflict of interest, or is disqualified from acting for some other reason is determined objectively. There is no suggestion whatsoever that Mr Maiden in fact favoured Bespoke in any way.
Apparent bias
[48] It is common ground between the parties that an adjudicator might be disqualified from adjudicating a dispute on the ground of apparent bias. I am satisfied counsel are correct in this, given ss 41(a) and (c) CCA, and s 27(1) New Zealand Bill of Rights Act 1990, which provides:
27 Right to justice
(1)Every person has the right to the observance of the principles of natural justice by any tribunal or other public authority which has the power to make a determination in respect of that person’s rights, obligations, or interests protected or recognised by law.
[49] The applicants contend Mr Maiden was disqualified for the same reasons he had a conflict of interest. Bespoke does not accept this of course.
[50] Ms Narayanan submits that whether Mr Maiden was disqualified is to be determined in accordance with the test established Saxmere Co v Wool Board Disestablishment Co (No 1), so I shall proceed on that basis.4
[51] In Saxmere (No 1), the Supreme Court was required to determine whether a Judge of the Court of Appeal had been disqualified from sitting on the case in question, because he and counsel for the Wool Board were longstanding and close friends and had joint business interests. The Court said that, subject to qualifications relating to waiver or necessity, a Judge is disqualified “if a fair-minded lay observer might reasonably apprehend that the judge might not bring an impartial mind to the
4 Saxmere Co v Wool Board Disestablishment Co (No 1) [2009] NZSC 72, [2010] 1 NZLR 35.
resolution of the question the judge is required to decide”.5 This assessment is to be made as follows:
[4]... Two steps are required:
(a)First, the identification of what it is said might lead a judge to decide a case other than on its legal and factual merits; and
(b)Secondly, there must be “an articulation of the logical connection between the matter and the feared deviation from the course of deciding the case on its merits”.
[52] As to the first step, the applicants say Mr Maiden might have failed to adjudicate the dispute solely on its merits because, acting in a different capacity, he had a relationship with Martelli McKegg who were representing a party to the adjudication, namely Bespoke.
[53] As to the second step, the applicants identify the logical connection as a (subconscious) wish by Mr Maiden to maintain, and possibly enhance, his relationship with Martelli McKegg and from which he derived income. These matters lead the applicants to fear Mr Maiden might have subconsciously favoured Bespoke, as Martelli McKegg’s client.
[54] As I have said, the issue is whether a fair-minded lay observer might reasonably apprehend the adjudicator might not bring an impartial mind to the resolution of the question the adjudicator is required to decide. This observer is intelligent, objective, neither unduly sensitive or suspicious nor complacent about what may influence an adjudicator’s decision, and not a lawyer but reasonably informed about the workings of the adjudication system, and knows the issues in the case.6
[55] As Bespoke submits, in this case, the reasonable observer would have (in no particular order) the information in the affidavits of Mr Steele and Mr Hardy; know that a third-party nominating authority had selected Mr Maiden to adjudicate the dispute; that an adjudicator is required to adjudicate in accordance with s 41 CCA, and therefore act independently and impartially and comply with the principles of natural
5 At [3], [37], [89] and [127].
6 At [97]–[98].
justice; that an expert witness in litigation proceedings is required to comply with the Code of Conduct for Expert Witnesses and so, amongst other things, has an overriding duty to assist the Court impartially on relevant matters within his or her area of expertise; and also not act as an advocate for the party. I also consider the observer would understand the matters in [45] above .
[56] In my view, the fair-minded lay observer would consider the following matters particularly significant. First, the nature of the professional relationship that will generally exist between a party’s legal adviser and expert witness. The second is that Mr Maiden had several instructions from M Ltd, all originating from Martelli McKegg. The third is that an expert witness is paid for the services and advice he or she provides. It is to be remembered that it was a disparity in financial contributions to the Judge’s and counsel’s joint venture vehicle which caused the Supreme Court to recall its judgment in Saxmere (No 1).7 In recalling its judgment, the Court described
$37,125 as “well above the level at which a direct or indirect indebtedness from Judge to counsel should be regarded as so minimal as to be immaterial, thus giving rise to no concern”.8
[57] Unfortunately, I do not have any information from Mr Maiden that might well be relevant to this issue. For instance, the income earnt from the expert work for M Ltd (or any other Martelli McKegg client there may be — I do not know) may be de minimis in the scheme of Mr Maiden’s professional work. However, on the information that I do have, I am satisfied a fair-minded lay observer might reasonably apprehend Mr Maiden might not have brought an impartial mind to the determination, and that he was disqualified accordingly. In those circumstances, the only proper course is to quash the determination.
Eligibility criteria/notice of acceptance
[58] I referred above to the applicants’ submission that Mr Maiden was also in breach of the statutory provisions because he did not meet the eligibility criteria required by s 34(1). In particular, the applicants allege Mr Maiden was ineligible as
7 Saxmere Co v Wool Board Disestablishment Co (No 2) [2009] NZSC 122, [2010] 1 NZLR.
8 At [17].
he did not have the required expertise to determine the legal issues that arose. There is nothing in this point. The applicants knew Mr Maiden was an expert surveyor when they sought his appointment. It is not open to them now to contend Mr Maiden was ineligible because he required legal expertise.
[59] Nor does anything turn on Mr Maiden’s failure to serve a notice of acceptance per se. A notice of acceptance informs the parties the adjudicator accepts appointment and its service sets time running against a claimant (see s 35(6)). In this case, the applicants knew Mr Maiden had accepted appointment, knew time was running and they made no objection to the failure to serve.
Second and third causes of action: failure to have regard to relevant considerations, errors of law and failure to give adequate reasons
[60] The issue of the applicants’ entitlement to cancel the contract on 9 April 2018 was important as it affected Bespoke’s entitlement to lost profit, this being a substantial part of Bespoke’s claim.
[61] Mr Maiden determined the applicants’ cancellation was unlawful, principally because he determined Bespoke’s suspension of work was not a repudiation of its obligations under the contract.
[62] In their second cause of action, the applicants allege Mr Maiden failed to have regard to relevant considerations and made errors of law in coming to these conclusions. In their third cause of action, they allege Mr Maiden failed to give adequate reasons for his decisions.
Relevant correspondence between the parties
[63] To address the applicants’ case on these matters, it is necessary to refer first to the relevant correspondence.
[64] On 3 April 2018, the applicants advised Bespoke they considered it in breach of contract in several respects, including what they said was Bespoke’s refusal to install joinery, this being a “client supply” item under the contract. The applicants
asked Bespoke to remedy this and the other specified omissions or defaults. The applicants also advised they did:
... not intend to pay for labour and hireage (including and not restricted to scaffolding) costs associated with work carried out inefficiently and unproductively.
and put Bespoke on notice they would seek to recover “all losses as a result of your delay”.
[65] On 6 April 2018, Martelli McKegg wrote to the applicants on Bespoke’s behalf, saying:
Notice of Suspension of Works - 133 Robert Hastie Drive, Mangawhai Heads
[…]
... you notified Bespoke that you do not intend to pay Bespoke for any further labour and hireage costs it incurs on your behalf that you consider have been carried out in an inefficient and unproductive matter. This infers a breach of clause 6.6 of the Contract, which states that [you] will pay Bespoke’s invoices by or on the due date for payment.
Bespoke considers that this action effectively precludes it from continuing the Building Work and performing its obligations under the Contract. It cannot incur further credit on your behalf with no promise of payment.
Unfortunately, due to your actions, Bespoke has no choice but to suspend
work pursuant to clause 19.2 of the building contract.
Suspension of works takes effect immediately, and all costs and expenses incurred because of the suspension and (assuming the default is remedied) recommencement of work are chargeable as a variation.
[...]
Bespoke confirms that it is ready, willing and able to continue its work at the property as soon as the issue is remediated.
(emphasis in original)
[66] On 9 April 2018, Mr Taylor wrote to Martelli McKegg stating that Bespoke did not have grounds to suspend work, that the suspension was unlawful and amounted to a fundamental breach and/or repudiation, and that the applicants cancelled the contract pursuant to cl 20.2(a) and (c) of the contract and ss 36 and 37 Contract and
Commercial Law Act 2017 (“CCLA”). Mr Taylor also advised the applicants would engage another builder to complete the work.
[67] Nothing turns on cl 20.2(a) and (c) of the contract because they were not emphasised in submissions before me or to Mr Maiden as far as I can ascertain. However, ss 36 and 37 CCLA provide:
36Party may cancel contract if another party repudiates it
(1)A party to a contract may cancel the contract if, by words or conduct, another party (B) repudiates the contract by making it clear that B does not intend to—
(a)perform B’s obligations under the contract; or
(b)complete the performance of B’s obligations under the contract.
(2)This section is subject to the rest of this subpart.
37Party may cancel contract if induced to enter into it by misrepresentation or if term is or will be breached
(1)A party to a contract may cancel it if— […]
(b)a term in the contract is breached by another party to the contract;
[…]
(2)If subsection (1)… (b) … applies, a party may exercise the right to cancel the contract if, and only if,—
(a)the parties have expressly or impliedly agreed that … the performance of the term is essential to the cancelling party; or
(b)the effect of the … breach of the contract is …—
(i)substantially to reduce the benefit of the contract to the cancelling party; or
(ii)substantially to increase the burden of the cancelling party under the contract; or
(iii)in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.
[…]
[68] On 11 April 2018, Martelli McKegg replied that Bespoke was entitled to suspend work, denied the suspension constituted a repudiation or a breach of an essential term, cited the applicants’ action in engaging another builder as a separate act of repudiation and fundamental breach, and advised that Bespoke elected to cancel the contract.
Discussion
[69] In determining whether the applicants were entitled to cancel the contract under ss 36 or 37 CCLA, it was necessary to decide, first, whether Bespoke was in breach of contract for failing to install the applicants’ joinery; secondly, whether Bespoke was entitled to suspend work; and then, thirdly, and in light of the two previous decisions, whether the applicants were entitled to cancel the contract under ss 36 or 37 CCLA.
[70] As to the joinery, Mr Maiden appears to have accepted Bespoke was bound to install the joinery and had failed or refused to do so. However, he also considered the applicants bore at least some responsibility for this as they had not liaised with Bespoke as to the time of installation (see [58] to [63] and [92] of the determination). I do not consider there can be any criticism of Mr Maiden’s assessment of this issue and I shall say no more about it.
[71] The propriety of the suspension was a more substantial issue. Bespoke’s power to suspend work was contained in cl 19.2 of the contract. Mr Maiden did not refer to cl 19.2, which is a significant omission. Clause 19.2 provides:
19.2 If at any time the Owner fails to pay any sum owed to the Builder in full by the due date, or any act, omission or default by the Owner effectively precludes the Builder from continuing the Building Work or performing or complying with the Builder’s obligations under this Contract, then without prejudice to the Builder’s other rights and remedies, the Builder may suspend the Building Work immediately after serving on the Owner a written notice specifying the payment default or the act, omission or default upon which the suspension of the Building Work is based …
[72] Accordingly, Bespoke had power to suspend under cl 19.2 only if the applicants failed to pay a sum owed in full by the due date or if the applicants did any
act (etc) effectively precluding Bespoke from continuing the work or performing its obligations. In either case Bespoke could only suspend if it had first served notice specifying the payment default or act (etc) on which the suspension was based.
[73] In its notice, Bespoke said it was suspending the work because of the applicants’ advice of 3 April 21018, that they “did not intend to pay Bespoke for any further labour and hireage costs ... you consider have been carried out in an inefficient and unproductive manner”. The notice of suspension said this was an act that “effectively precludes [Bespoke] from continuing the Building Work and performing its obligations under the Contract”.
[74] The applicants’ submission to Mr Maiden was that this statement could not be a ground for suspension because they were entitled under cl 6.6 of the contract to dispute any invoice if they saw fit. Clause 6.6 provides:
6.6The Owner must pay the invoiced amount in full within 5 Working Days of the invoice being delivered or sent to the Owner or such other time as is stated in Part E of the Schedule. If the Owner does not consider that all or any part of the invoiced amount is payable, the Owner must, within 5 Working Days after the invoice was delivered or sent to the Owner:
a)reply in writing to the Builder stating the amount that the Owner considers payable (the undisputed amount), and specifying the reasons why any part of the invoiced amount is disputed, and the method in which the disputed amount has been calculated; and
b)pay the undisputed amount.
[75] Accordingly, the applicants’ submission to Mr Maiden was that Bespoke had no valid ground for suspension of the work and so the suspension was unlawful.
[76] Similarly, the applicants challenged the statement in Martelli McKegg’s letter of 6 April 2018, that Bespoke was “ready, willing and able to continue its work ... as soon as the issue is remediated”. The applicants’ submission was there was no “issue” to be “remediated” because of the contractual right to which I have just referred, and thus Bespoke’s statement was tantamount to requiring the applicants to forego their contractual right before there would be a resumption of work.
[77] In response to these submissions, Bespoke’s case was that it was entitled to suspend for the reason it gave, but if not, a separate ground of suspension existed, namely what Bespoke said was the applicants’ failure to pay part or all of two recent invoices rendered to them. Bespoke also submitted that the very nature of a suspension is that it is temporary, and that, in addition, it had expressed its readiness to resume work. In those circumstances, Bespoke submitted the suspension was lawful but, in any event, did not entitle the applicants to cancel.
Determination of this issue
[78] My reading of the determination is that Mr Maiden did not consider the applicants’ 3 April letter gave Bespoke a ground to suspend work. Rather, he said the letter constituted “a shot across the bows for Bespoke” (at [35]) and, at [52], “a warning to Bespoke not to be inefficient or unproductive”.
[79] This then brought Mr Maiden to the issue of whether Bespoke’s suspension was lawful. He did not determine the issue expressly, but I think he must be taken to have accepted it was unlawful, because he turned his attention to whether the suspension was a repudiation under s 36 CCLA.9 Mr Maiden found it was not.
[80]In reaching this conclusion, Mr Maiden:
(a)referred to Bespoke’s statement that it was ready and willing to proceed (at [39]);
(b)said at [56]:
Suspension (whether lawful or not) … is not an indication that the party serving the Notice is not going to continue with the work, it is an instrument available to a party to get an issue resolved. Any time lost (on both sides) and associated cost is something that can be resolved later;
(c)and said at [84] that Bespoke’s suspension:
... was a reasonable action. Bespoke were faced with a probable claim
... so suspending the work to resolve the issues before the problem
9 Mr Maiden did not consider the position under s 37 CCLA.
escalated was, in my view, a reasonable approach and not, as claimed by the Owners, a repudiatory act.
[81] The statements at [56] and [84] overlook that suspension was not generally available but only permissible for a default etc coming within cl 19.2 of the contract. In addition, Bespoke’s statement was not that it was ready, willing and able to continue work. Bespoke had said it was ready and willing to continue, subject to “the issue” being “remediated”. I have already referred to the applicants’ contention on this point in [76] above.
[82] Aside from these matters, it is not apparent on the face of the determination that Mr Maiden had regard to information both parties put before him as to when a party’s actions constitute a repudiation or a breach of an essential term, so as to entitle the innocent party to cancel. This information included relevant excerpts from Kennedy-Grant on Construction Law, an English text Hudson’s Building and Engineering Contracts, and Wesiack v D&R Constructions (Aust) Pty Ltd which the applicants contended was on “all fours” and which Bespoke distinguished.10 At [90] of the determination, Mr Maiden referred to Kennedy-Grant but not the part which addressed when a party might be entitled to cancel.
[83] Overall, I am satisfied Mr Maiden’s consideration of whether the applicants were entitled to cancel fell short of what was required. Whilst acknowledging the leeway that must be allowed to an adjudicator, Mr Maiden could not fairly determine this issue without regard to cl 19.2 and the circumstances in which it confers a power to suspend; the parties’ contractual rights; and the information the parties had provided as to the application of ss 36 and 37 CCLA. Arguments that parties make, particularly on important issues, must be sufficiently considered and answered in the determination.11
[84] Given this conclusion, it is unnecessary for me to consider the third cause of action and the sufficiency or otherwise of Mr Maiden’s reasons.
10 Thomas Kennedy-Grant on Construction Law (2nd ed, LexisNexis, Wellington, 2012); Nicholas Dennys, Mark Raeside and Robert Clay (eds) Hudson’s Building and Engineering Contracts (12th ed, Sweet & Maxwell, London 2010); Wesiack v D&R Constructions (Aust) Pty Ltd [2016] NSWCA 353.
11 Canam Construction (1955) Ltd v LaHatte [2010] 1 NZLR 848 (HC) at [59].
Fourth cause of action: breach of natural justice — lost profit
[85] Having determined that Bespoke was entitled to cancel the contract, Mr Maiden then turned to the quantum of Bespoke’s claim for lost profit. The applicants allege Mr Maiden breached the principles of natural justice in his resolution of this claim, and that he also breached s 45 CCA, to which I refer below.
[86] In its notice of claim, Bespoke sought an award of lost profit of $61,267.02. Bespoke later explained this sum represented its 10 per cent margin on what it anticipated was the cost of the outstanding work to be completed at the time of cancellation.
[87] In response, the applicants submitted to Mr Maiden that Bespoke’s lost profit could not be calculated for several reasons, including the nature of the contract (cost reimbursement plus margin), and the clear possibility the applicants would have reduced the scope of works, as the applicants considered themselves entitled to do.
[88] Mr Maiden did not refer to these arguments in the adjudication but nor did he accept Bespoke’s quantum of $61,267.02, considering the sum was “not explained” (at [145]). Rather, Mr Maiden proceeded to make his own calculation of the lost profit Bespoke would have earned had it completed the contract. In doing so, and for some reason not apparent to me, Mr Maiden calculated Bespoke would have made a profit of 8.63 per cent on the work he calculated remained outstanding at the time of cancellation. From this Mr Maiden derived a sum for lost profit of $44,728.85, including GST.
[89] Mr Maiden did not refer his calculation to the parties for their consideration. The applicants contend Mr Maiden was obliged to do so as a matter of natural justice.12 Had Mr Maiden done so, the applicants submit they would have challenged the calculation for the reasons referred to in [87] above and also because “margin” is not equivalent to “profit”.
12 Construction Contracts Act 2002, s 41(c).
[90] The applicants also submit that, in making his own calculation as he did, Mr Maiden breached s 45 CCA in that brought his own expert opinion to bear on a matter in issue. Section 45 CCA provides:
45 Adjudicator’s determination: matters to be considered
In determining a dispute, an adjudicator must consider only the following matters:
(a)the provisions of this Act:
(b)the provisions of the construction contract to which the dispute relates:
(c)the adjudication claim … and the claimant’s written reply (if any) … together with all submissions (including relevant documentation) that have been made by the claimant:
(d)the respondent’s response (if any) … and the respondent’s rejoinder (if any) … together with all submissions (including relevant documentation) that have been made by the respondent:
(e)the report of the experts appointed to advise on specific issues (if any):
(f)the results of any inspection carried out by the adjudicator:
(g)any other matters that the adjudicator reasonably considers to be relevant.
[91] Bespoke’s submits that Mr Maiden’s calculation was precisely the sort of matter an adjudicator is entitled to make, having considered and rejected the claim before him.
[92] I am not persuaded there was any breach of s 45 CCA. The matter was not fully argued before me but there is some force in the submission for Bespoke to which I have just referred. More importantly, even if Mr Maiden was required to refer his calculation to the parties, I would not grant relief to the applicants on such a matter. If Bespoke was entitled to cancel the contract, it was entitled to a measure of lost profit. That sum may have been less than the sum Mr Maiden calculated, but this is not the sort of issue for which the Court will generally grant relief. It is the type of issue that the CCA anticipates will be resolved in the fullness of time and, as I have said, a party who contracts on the basis the determination is final must live with the consequences.
Fifth cause of action: breach of natural justice — rejoinder
[93] The applicants contend there was a further breach of natural justice in the following respect.
[94] On 1 October 2018, Bespoke filed a rejoinder to a reply filed by the applicants. The applicants contend Bespoke’s rejoinder was not confined to addressing matters in their reply and contained fresh allegations. The applicants requested an opportunity to respond to the rejoinder, which Mr Maiden declined. The applicants contend this was a further breach of natural justice.
[95] I do not consider there is any merit in this complaint. As far as I can ascertain, none of the so-called fresh allegations are reflected in the determination so nothing turns on the issue.
Relief
[96]I am satisfied that:
(a)Mr Maiden had a conflict of interest which he did not disclose, and was precluded from accepting appointment as adjudicator absent disclosure and the parties’ agreement;
(b)On the evidence before me, Mr Maiden was disqualified from adjudicating the dispute because a fair-minded lay observer might reasonably apprehend that he might not bring an impartial mind to the resolution of the dispute; and
(c)Mr Maiden failed to take into account relevant matters and made errors of law in determining that the applicants’ cancellation of 9 April 2018 was unlawful.
[97] I am satisfied the only proper response to these omissions, particularly those referred to in (a) and (b), is to quash determination in its entirety.
Result
[98]I quash the adjudicator’s determination of 15 October 2018.
Costs
[99] I make no order as to costs at present. The parties may submit memoranda if they are unable to agree.
Peters J
Solicitors: Maria Taylor, Auckland
Martelli McKegg, Auckland
Counsel: M R Taylor, Auckland
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