WILLIS TRUST COMPANY LTD AND ANOR V GREEN AND ANOR HC AK CIV-2006-404-809 [2006] NZHC 571 (25 May 2006)

IN THE HIGH COURT OF NEW ZEALAND

AUCKLAND REGISTRY

CIV-2006-404-809

IN THE MATTER OF the Judicature Amendment Act 1972

BETWEEN WILLIS TRUST COMPANY LTD

First Plaintiff

AND IAN LAYWOOD AND GARY JAMES REES

Second Plaintiffs

AND ROBERT JOHN GREEN

First Defendant

AND HOLMES CONSTRUCTION

WELLINGTON LTD

Second Defendant

Hearing: 16 and 17 March 2006

Appearances: David Carden for Plaintiffs

Sherwyn Williams for Second Defendant

Judgment: 25 May 2006

JUDGMENT OF HARRISON J

In accordance with R540(4) I direct that the Registrar

endorse this judgment with the delivery time of

2.30 p.m. on 25 May 2006

SOLICITORS

Alexander Dorrington (Auckland) for Plaintiffs

Kensington Swan (Wellington) for Second Defendant

COUNSEL

David Carden

WILLIS TRUST COMPANY LTD AND ANOR V GREEN AND ANOR HC AK CIV-2006-404-809 25 May 2006

Table of Contents Paragraph No.

Introduction [1] [4]

Adjudication [5] [9]

Statutory Framework [10] [19]

Judicial Review [20] [23]

Decision

(1) Estoppel [24] [29]

(a) Contracting Out [30] [34]

(b)No Representation or Promise [35] [38]

(d) Inequity [47] [48]

(2) Error of Law [49]

(a) Dispute [50] [57]

(b) Engineer's Payment Schedule [58]

(c)Expiry Date [59] [69]

(d) Costs [70] [72]

(3) Personal Liability [73] [76]

(a) Jurisdiction: Guarantee [77] [79]

(b) Jurisdiction: Service [80] [87]

Charging Order [88] [89]

Conclusion [90] [91]

Introduction

[1] Willis Trust Co Ltd owned an apartment building on Willis Street, Wellington which was formerly the Dental School. Messrs Ian Laywood and Gary Rees are Willis' directors.

They decided to redevelop the property into residential apartments to be known as Augusta Apartments.

[2] Willis engaged Holmes to undertake the necessary demolition and reconstruction work. They entered into a contract at a price of $8,066,450 plus GST. Messrs Laywood and Rees entered into a separate contract with Holmes to pay an additional $250,881 for the same work.

[3] In August 2005 Holmes submitted a final claim to Willis for payment of

$1,283,696 plus GST. Its claim was expressed to be made pursuant to the

Construction Contracts Act 2002. Willis neither paid the claim nor, Holmes alleges,

filed the requisite payment schedule in accordance with the statutory provisions.

Holmes then invoked its right to adjudicate its claim against both Willis and Messrs

Laywood and Rees. In February 2006 the adjudicator, the first defendant, Mr John

Green, issued his determination in Holmes' favour. On 1 March 2006 I made

interim orders subject to conditions.

[4] Willis and Messrs Laywood and Rees have applied to this Court for judicial

review of the adjudicator's decision alleging lack of jurisdiction and numerous errors

of law. They seek orders setting aside the determination and associated relief.

Mr Sherwyn Williams, Holmes' counsel, accepts that the Court has a limited power

of review but denies that the adjudicator erred. The adjudicator has agreed to

abide this decision.

Adjudication

[5] The adjudicator's determination is comprehensive. I shall only refer to those facts

from his summary which are material to Willis' application:

(1) The parties first contracted by an exchange of correspondence in

September 2003 for Holmes to carry out what was described as

Stage 1 of the Augusta Apartments Project to convert 37 apartments.

The Stage 1 work involved partial demolition of the existing building,

excavation, services, isolation and structural engineering. Holmes

commenced work in November 2003;

(2) The parties entered into a formal written agreement on or about

26 March 2004 covering Stage 1 and the remainder of the work

including construction of two additional levels to the building,

additional annexes to the west side and courtyards. The contract

documents included NZS3910. The stated price of $8,066,450 plus

GST was less than the true contract price. Holmes agreed to this

course to assist Willis and Messrs Laywood and Rees with their

funding arrangements. In consideration Messrs Laywood and Rees

agreed personally with Holmes to pay the differential of $250,881;

(3) The originally intended date for completion of the works was

16 November 2004 but the engineer did not certify practical

completion until 9 June 2005. The contract works `were not without

their difficulties'. There were various delays. Holmes first claimed

for a time extension in April 2004. Further extensions were claimed

through until 23 August 2005;

(4) During the course of performance of the contract Holmes made and

Willis paid progress claims on a monthly basis. Initially the engineer

certified payment on most progress claims. As the work progressed,

Holmes claimed almost 300 variations to the contract works. The

engineer did not issue any variation price requests and only around 20

formal variation orders;

(5) Holmes gave notice on 28 February 2005 of its intention to suspend

all work on 30 March 2005. It was dissatisfied with the engineer's

treatment of its progress and variation claims. A meeting followed,

resulting in Willis' agreement to pay Holmes $654,114 less retentions

and plus GST by 8 April 2005 in settlement of a particular progress

claim;

(6) The parties were unable to resolve other issues outstanding between

them, although Willis made another payment of $129,749 including

GST to Holmes in May 2005. Holmes, as noted, made a final

payment claim on 23 August 2005 for $1,283,696 plus GST. On that date Holmes also applied for a further extension of 106 working days,

additional to 40 days earlier granted, to 30 June 2005. The engineer

did not determine this application until 22 November, granting an

extension of 44 days;

(7) The engineer sent a progress payment certificate to Holmes on

20 September in response to its final claim, certifying a nil balance

owing of $0.00. He wrote again to Holmes on 21 October advising

that a final payment schedule was `not able to be issued at this time'.

Holmes filed its adjudication claim on 9 November. Counsel then

submitted extensive memoranda of submissions.

[6] The adjudicator identified six principal issues for determination,

namely (1) whether he had jurisdiction to determine Holmes' claim; (2) whether Willis had

provided a valid payment schedule in response to Holmes' payment claim; (3) if

Willis did not provide a valid payment schedule, what amount is it liable to pay; (4)

if Willis did provide a valid payment schedule, what part or parts of the claimed

amount is it liable to pay; (5) to what extensions of time is Holmes entitled; and (6)

whether Holmes is entitled to the release of Willis' performance bond.

[7] The adjudicator dealt extensively with the threshold subject of jurisdiction,

noting Willis' submission that Holmes claim was premature and that only $102,977

from the final claim was in dispute. Willis contended that the other items claimed

had not been determined by the engineer prior to Holmes commencing the

adjudication process. Thus the adjudication should properly be confined only to

those matters in dispute.

[8] The adjudicator concluded:

42. In the present case, the answer would seem quite straightforward.

All of the matters raised in the adjudication claim (with the

exception of the release of the contractor's bond) were included in

the subject payment claim, that claim was expressly rejected by the

engineer when he issued his certificate indicating a nil amount

payable in relation to Holmes' final claim on 20 September 2005,

and no contrary advice or payment schedule indicating acceptance of

any part of the claim was subsequently provided by [Willis or the

trustee] in terms of the Act and in accordance with the procedures

established under the agreement. Accordingly, by application of the

principles established in the authorities referred to by [Holmes] ..., I

am driven to conclude that those circumstances were, on an objective analysis,

sufficient to establish that Holmes' claim was not admitted, that the claim contested and a dispute had arisen, and thus I had the jurisdiction to make a determination in relation to all matters in that claim save for the issue raised in relation to the release of the contractor's bond.

[9] The arbitrator found for Holmes on all other issues. In particular, Willis was

liable for the full amount of Holmes' claim of $1,283,696 plus GST for failing to pay

on or before 21 October 2005 (paras 43-45); Willis could not claim a set-off for

general damages for delay (para 46); Messrs Laywood and Rees were liable for an

additional sum of $250,881; and both were liable for interest at the contractual rate

compounding monthly and for costs.

Statutory Framework

[10] It is necessary at this stage to refer in some detail to the relevant provisions of

the Construction Contracts Act (all future statutory references will be to it), which

came into force on 1 April 2003. It was plainly remedial, for these express purposes

(s 3):

... to reform the law relating to construction contracts and, in particular,--

(a) to facilitate regular and timely payments between the parties to a

construction contract; and

(b) to provide for the speedy resolution of disputes arising under a

construction contract; and

construction contract.

[11] The definitions of `dispute' as meaning `a dispute or difference that arises

under a construction contract' and `a progress payment' as including `any final payment under the contract' (s 5) are of relevance to this proceeding.

The Act `... applies to every construction contract ... that relates to carrying out construction

work in New Zealand' (s 9) (subject to two very limited and irrelevant exceptions

(s 11)). It expressly prohibits contracting out (s 12); I shall return to this provision

later.

[12] The Act allows the parties to agree on express terms for progress payments

(s 14) and also contains default provisions in the absence of express terms (ss 15-18).

The procedure for making and responding to payment claims is strict (ss 19-24).

The requirements for the timing and contents of a payment claim are express. It

must be in writing; contain sufficient details to identify a contract, the construction

work and the relevant period to which the payment relates; indicate the claimed

amount and the due date for payment and the manner in which the payee calculated

the claimed amount; and state that it is made under the Act (s 22).

[13] The recipient is entitled to respond to a payment claim by providing the

payee with a payment schedule (s 21(1)). Its right, not obligation, presumably

allows for the circumstance of acceptance of the claim. The Act provides that (s 21):

(2) A payment schedule must--

(a) be in writing; and

(b) identify the payment claim to which it relates; and

(3) If the scheduled amount is less than the claimed amount, the payment schedule must indicate--

(a) the manner in which the payer calculated the scheduled

amount; and

(b) the payer's reason or reasons for the difference between the

scheduled amount and the claimed amount; and

withholding payment on any basis, the payer's reason or

reasons for withholding payment.

[14] The Act further provides (s 22) that:

A payer becomes liable to pay the claimed amount on the due date for the

progress payment ... if--

(a) a payee serves a payment claim on a payer; and

(b) the payer does not provide a payment schedule to the payee within--

(i) the time required by the relevant construction contract; or

(ii) if the contract does not provide for the matter, 20 working

days after the payment claim is served.

[15] The consequences of failing to pay a claimed amount where no payment schedule is provided are equally arbitrary. The payee may recover from the payer as a debt due in any Court the unpaid portion of the claimed amount together with the actual and reasonable costs of recovery; it may also serve notice of its intention to suspend any further construction work (s 23(2)).

[16] The absolute effect of the no contracting out provision (s 12) is reinforced by

Part 3. In particular (s 25):

(1) Any party to a construction contract--

(a) has the right to refer a dispute to adjudication; and

(b) may exercise that right even though the dispute is the subject

of proceedings between the same parties in a court or

tribunal.

The only exception to this right is where the parties have agreed to refer disputes

between them to an international arbitration covered by international protocols

(s 25(3)).

[17] The Act acknowledges that the parties to a construction contract are entitled

to submit a dispute to arbitration whether or not the hearing of the reference takes

place concurrently with an adjudication (s 26(1)). However (s 26):

(2) If a party to a construction contract submits a dispute [to arbitration]

while the dispute is the subject of an adjudication, the submission to

[arbitration] does not--

(a) bring to an end the adjudication proceedings; or

(b) otherwise affect the adjudication.

(3) However, an adjudicator must terminate the adjudication

proceedings on a dispute if, before the adjudicator determines the

dispute, that dispute is determined under another dispute resolution

procedure.

(4) Nothing in any other enactment or rule of law or any contract affects

the application of this Part.

Also, nothing in this part of the Act `affects any civil proceedings arising under a

construction contract' (s 27). `Civil proceedings' include `arbitral proceedings'

(s 5). Furthermore, an adjudicator's determination is `binding on the parties' and

`continues to be of full effect' even though one party has applied for judicial review

or any other proceedings relating to the dispute have been commenced (s 60).

[18] The Act provides tight timeframes for selection and appointment of an

adjudicator (ss 28-37). In particular, within five working days of the adjudicator's

appointment, the claimant must refer the dispute in writing (s 36) and the respondent

must serve a written response within five days after receiving the claim (s 37). The

adjudicator is bound to act independently, impartially and in a timely manner and to

comply with the interests of natural justice (s 41). He or she has wide powers for

conducting the adjudication and requiring provision of written submissions and

production of relevant documents (s 42). There are strict constraints on the matters

which the adjudicator may consider (s 45). He or she must determine a dispute no

later than 30 working days after receipt of the respondent's response (s 46).

[19] An adjudicator's determination that money is to be paid is enforceable by a

number of means. The party entitled to payment may recover the amount as a debt

due in any Court (s 59), serve notice of intention to suspend the carrying out of

construction work, and apply for the adjudicator's determination to be enforced by

entry as a judgment in the District Court (s 73). The judgment may be enforced by

execution in accordance with the District Courts Rules (s 77). In any proceedings

for the recovery of a debt (s 79):

... the court must not give effect to any counterclaim, set-off, or cross-

demand raised by any party to those proceedings other than a setoff of a

liquidated amount if--

(a) judgment has been entered for that amount; or

(b) there is not in fact any dispute between the parties in relation to the

claim for that amount.

Judicial Review

[20] The Construction Contracts Act was enacted following a series of high profile

financial collapses in the construction industry in the 1980s and 1990s, causing substantial and widespread losses. I accept Mr Williams' informed explanation that the statute was designed to protect a contractor through a mechanism for ensuring the benefit of cashflow for work done on a project, thereby transferring financial risk to the developer. The scheme of the Act is to provide interim or provisional relief while the parties work through other, more formal, dispute resolution procedures. This is because, as Mr Williams observed, an adjudicator cannot be expected to come to grips with the whole range of potential

arguments, whether legal or factual, within the tight timeframes provided by the Act

to achieve the objective of cashflow. The parties retain their rights to refer disputes

to arbitration or litigation for final or binding determination.

[21] Mr Williams accepted that an adjudicator is exercising a statutory power of

decision when performing his or her functions under the Act. The adjudicator's

decisions are thus subject to judicial review. However, by reference to English and

Australian authorities he submitted that the High Court's power on review is strictly

circumscribed. In summary, he said, the trend of authority is that errors of law, fact

or procedure by an arbitrator in making a decision are insufficient to set aside the

determination, for the reason that the procedure is designed to be prompt and efficient without finally determining a party's rights (Carillion Construction Ltd v

Devonport Royal Dockyard [2005] EWHC 778 , Jackson J at para 80); the only errors

amenable to judicial review are those going to jurisdiction.

[22] I question but do not need to decide whether Mr Williams' restrictive submission is correct. As noted, the adjudicator was exercising a statutory power of decision (s 3 Judicature Amendment Act 1972). The jurisdiction to interfere on review relates to the adjudicator's exercise of that power (s 4) and normally includes what is traditionally understood to constitute a question of law in the nature of statutory misconstruction (Joseph: Constitutional and Administrative Law (2nd Ed, 2001) at para 21.4.2).

[23] Mr Williams' pragmatic submission that a right to interfere for pure error of

law (that is, statutory misconstruction) would place this Court in an appellate

position, slowing down and frustrating the whole purpose of the Act, may be

inconsistent with its express recognition of the right to review without effecting the

adjudication process (s 60). There may be an issue of whether or not a decision is

amenable to review for error of law by reference to particular or general factors (see

Peters v Davison [1999] 2 NZLR 164 (CA) at 184-185). In the absence of

developed arguments from counsel I intend to proceed on the assumption, without

deciding the point, that this Court has a right to review for error of law.

Decision

(1) Estoppel

[24] Willis' second cause of action raises affirmative and alternative claims of

estoppel and waiver against Holmes but its counsel, Mr David Carden, accorded it

primacy in argument. He relied principally on two documents. One was Holmes'

letter dated 23 August 2005 enclosing its final payment claim. It is necessary to

recite its terms in full:

We are pleased to enclose our final account for the above project. As

required by section 12.4 of the General Conditions of Contract this account

has been endorsed as being our final payment claim. For the avoidance of

doubt this letter forms part of our final payment claim...

The agreement signed on 6 April 2005, following our meeting at Kensington

Swan that day, provided for us to meet in Auckland within a week to

endeavour to resolve as many as possible of the outstanding issues between

us as to variations, extensions of time and general damages for delay. We

did meet, but most issues remain unresolved. The agreement went on to

provide that any matters not so resolved would be referred to arbitration, on

the terms so set out.

Our final payment claim sets out the outstanding issues as far as we are

concerned. You will note that we have recorded the approval status of each

item, based on the information presently available to us from our meeting,

the Engineer's payment schedules, and contract correspondence. We are

hopeful that you will be prepared to agree to and pay many of our claims.

Any which are not paid by the due date for payment shown in our final

payment claim we will regard as still in dispute. These will be referred to

Mr Dean as arbitrator in terms of our agreement.

This is not intended to relieve either the Engineer or Willis from their

respective obligations under the contract in relation to the final account and

our final payment claim.

[25] The second document was the agreement to which Holmes' letter referred. It

was signed by the parties on 6 April 2005 and materially provided:

The parties agree that they will meet in Auckland within one week of the

date of this agreement to endeavour to resolve as many as possible of the

outstanding issues between them as to variations, extensions of time and

general damages for delay. Any matters not so resolved will be referred to

arbitration in accordance with clause 13.4 of the General Conditions, the

arbitration to be on the following basis...

[26] Willis did not reply to Holmes' letter. The only written communication was

from the engineer who wrote on 20 September as follows:

Please find enclosed Progress Payment Certificate no. 21 on the above

Contract dated 20 September 2005 in the amount of $00. This certificate has

been issued to comply with the requirements of the Construction Contracts

Act after receipt of legal advice on the matter.

Your Final Payment Claim is being reviewed and processed in accordance

with clauses 12.4, 12.5 and 12.6 of the general conditions of contract

NZS3910.

In accordance with clause 12.5.4 of the Contract I advise that a Final

Payment Schedule is not able to be issued at this time. The contract of

variation claims and extension of time claims made in the Final Account and

Final Payment Claim are currently under review by the client's advisors and

no payments or decisions in respect of that claim are able to be made at this

time.

To assist in this process the client has engaged the services of additional

consultants (consultant programmer and quantity surveyor) to support the

existing consultants. This has been done to ensure that a thorough and

comprehensive review of your submission is completed. This process is

ongoing.

Although the Contract does not identify any ultimate time for the review of

your claim to be completed and allows for a reasonable time, it is intended at

this stage to try and have the full review and decisions made some time in

November. This will be dependent on any ongoing negotiations that are

required and any supporting information that is requested to allow the review

to be completed.

[27] Mr Carden submitted that Holmes' 23 August letter amounted to either its waiver of or election not to rely upon its statutory right to require a payment schedule (ss 20-22) or an agreement that its statutory rights would be superseded by the arbitration process. He submitted that Willis acted to its detriment accordingly; instead of focusing on its statutory obligation to provide a payment schedule it prepared in greater detail for the arbitration process. He noted that Holmes' claim contained extensive schedules and appendices, including a consultant's report of 48 pages in support of each item within the claim.

[28] Mr Carden submitted that Willis has satisfied the requisite criteria for an estoppel in that (1) on both 6 April 2005 and 23 August 2005 Holmes made clear and unambiguous representations or promises that it would agree to submit any disputes between the parties to arbitration, rather than adjudication under the Act; (2) Willis relied on those representations or promises to its detriment so that it would be inequitable to allow Holmes to go back on its word; and (3) any relief granted must be what is necessary to remove the inequity

and only so far as is necessary to avoid the detriment (Burrows Finn & Todd: The Law of Contract in New Zealand, 2nd Ed., pp140-145).

[29] Mr Carden submitted that Holmes is consequently estopped from denying that (1) it is not entitled to or has no requirement for a payment schedule in response to its final payment claim; (2) it does not have any legal entitlement to have its adjudication claim based on the final payment claim determined by an adjudication under the Construction Contracts Act; and (3) it has no right of enforcement of any determination that may come from such an adjudication claim including this determination.

(a) Contracting Out

[30] In my judgment Willis' pleas of estoppel or waiver must fail on a number of alternative grounds. First, I agree with Mr Williams that the provisions of the Act

applied to Holmes' final claim notwithstanding the parties' 6 April agreement to refer

disputes to arbitration and Holmes' offer to the same effect in its 23 August letter. The statutory prohibition on contracting out is unambiguous (s 12):

No contracting out of Act

This Act has effect despite any provision to the contrary in any agreement or

contract.

[31] This section is reinforced by subsequent provisions governing the relationship between adjudicative and other dispute resolution procedures. The Act allows the processes to run concurrently, even though they deal with the same dispute. But, unless the dispute is earlier decided by the arbitral process, the adjudication takes precedence (s 26), although when making an award the arbitrator must take into account any moneys paid in accordance with an adjudicator's determination.

[32] Nevertheless, Mr Carden submitted that the events giving rise to the estoppel

or waiver arguments against Holmes did not amount to a contracting out. However,

his submission is predicated squarely upon the existence of the 6 April agreement

and the terms of Holmes' 23 August letter. The agreement was to meet for the

purpose of resolving issues then outstanding between the parties, and to refer any

unresolved issues to arbitration in accordance with clause 13.4 of the contract. The

right to refer a dispute to arbitration arises expressly if either of the parties is

dissatisfied with a decision by the engineer under clause 13.2.4 or if the engineer

does not give a decision within the prescribed period.

[33] The 6 April agreement extended the existing contractual right to refer to any

unresolved issues following the parties' meeting. It did not, of course, oblige the

parties to refer Holmes' final claim, which would not be issued for some months in

the future, to arbitration. Holmes' 23 August letter proposed to take that step if

Willis did not pay any or all of its final claim.

[34] If Mr Carden is correct that the two documents amount to an agreement to

refer Holmes final claim to arbitration, thereby estopping it from enforcing its

statutory rights to claim payment, the agreement can only amount to a contractual

provision to oust the statute's application. It would neither have relieved Willis from

its statutory obligation to provide a payment schedule within the prescribed time nor

barred Holmes from submitting its claim to adjudication. Mr Carden's argument,

however expressed, relies upon an unanswered offer to refer a dispute for arbitral

determination in accordance with an existing agreement. S12 subordinates the effect

of an arbitration provision where a claim is made under the Act. As a result, the

statute prevails notwithstanding an agreement to arbitrate.

(b) No Representation or Promise

[35] Second, I am not satisfied that Holmes' 23 August letter constituted an unequivocal representation or promise that it did not require Willis to comply with its statutory obligation to provide a payment schedule.

[36] Holmes' letter itself formed part of its final payment claim. It recited the

6 April 2005 agreement and subsequent events. It explained the final claim as representing the outstanding issues from Holmes' perspective, and expressed the hope that Willis would be prepared to agree to and pay its claims. However, any "not paid by the due date for payment [shown the] claim" would be regarded as still in dispute; they would be referred to the arbitrator "in terms of [the] agreement".

The letter concluded with Holmes' confirmation that the letter would not relieve

either the engineer or Willis "... from their respective obligations under the contract

in relation to the final account and our final payment claim".

[37] The contract provided that, where the contractor intended the final payment

claim to be a payment claim under the Act, it shall make a statement to that effect

(12.4.1(e)). In compliance with this obligation Holmes' final payment claim, also

dated 23 August, stated: "This is a Payment Claim under the Construction Contracts

Act 2002". It required payment within 10 working days after provision of the

engineer's provisional payment schedule (12.5.5), pending the issue of a final

certificate (12.5.8). It specified that Holmes had no outstanding claim against Willis

except as contained therein and except for any item which had been referred to arbitration.

[38] In my judgment the letter and claim when read together extinguish any scope

for arguing that Holmes' correspondence amounted to an estopping representation or

statement. The letter reserved Holmes' rights by stating that its arbitration proposal

was not to relieve Willis and the engineer from their obligations under the contract

relating to the final payment claim. The contract required Holmes to state that the

claim was made under the Act, thereby expressly incorporating the relevant statutory

provisions. Holmes complied. Accordingly, upon receipt of the notice on or about

24 August, time began to run for Willis to comply with the strict time provisions for

providing a payment schedule.

[39] Third, there is no evidence that Willis acted to its detriment in reliance upon

Holmes' letter. In support Mr Carden referred to Mr Laywood's statement that:

At that stage I expected that what would happen is that we would process the

claim and take the appropriate time needed to do that comprehensively and

then any outstanding issues would be referred to Mr Dean to resolve by

arbitration. Had we known that Holmes expected to proceed with formal

adjudication and to enforce rights under the Construction Contracts

Act, we would have taken other steps. These would have included the

issue of Willis' own notice of adjudication for its general damages claim

(which at that stage was yet to be quantified but which I knew would be

substantial). Willis would have considered its rights to call on the performance

bond, and it would have commenced the arbitration process so

that it could come to the prompt conclusion that the agreement called for.

[My emphasis]

[40] However, for the reasons just given, Holmes' claim gave unequivocal notice of its intention to enforce its statutory rights. Furthermore, Willis failed to respond

to Holmes' proposal to refer any disputed claims to arbitration. There was no

answer to the contractor's letter until the engineer certified on 20 September that

nothing was owing. It is appropriate to treat that document as Willis' response

through its agent. The certificate contained this notation:

This Payment Certificate is to be considered a Payment Schedule issued

under ss 21 and 22 Construction Contracts Act. Final Payment Claim

currently being reviewed under clause 12 of NZS3910 and no payment value

has been determined at this time as part of that process.

[41] With respect, the engineer's statement was a nonsense. It attempted to clothe the certificate with an artificial legal status. I reject Mr Carden's submission that the

document complied with Willis' statutory requirements (s 21(3)). It was

meaningless. It apparently treated the sum of $0.00 as Willis' `scheduled amount'

(s 21(2)(c)) that is the amount of the progress payment specified in the schedule

that Willis proposes to pay to Holmes in response to the payment claim (s 19). But

there is nothing on its face to relate this figure to Willis' claim for $1,283,696. The

calculations make no sense, being the net sum due after claiming a final account

value of $9,989,392 less payments received to date of $8,705,696.

[42] The certificate fails to indicate the manner in which Willis calculated the

scheduled amount and its reasons for assessing a difference between the scheduled

amount and the claimed amount (s 21(3)(a) and (b)). The document did not even

acknowledge Holmes' claim or attempt to answer it. It did nothing to inform or appraise

Holmes of the issues, or identify the nature or parameters of areas of difference. It simply did not engage the contractor's claim.

[43] The real significance of the engineer's reference to ss 21 and 22 is its

acknowledgement that Willis was then treating Holmes' claim as made within the

statutory framework, and that was purporting to respond accordingly.

[44] Mr Laywood says that Willis would have taken other steps if it had known of

Holmes' intention to proceed with formal adjudication and enforcement of its

Statutory rights. He identified inclusion of Willis' own notice of adjudication for its

general damages claim, consideration of its rights to call on the performance bond,

and commencement of the arbitration process.

[45] To deal with those points in reverse order, Willis took no steps to secure a

reference to arbitration on disputed issues despite Holmes' proposal; it has still to

take any steps in that respect. Willis was entitled to exercise its rights at any time to

call on Holmes' performance bond; it took that step, in fact, in the adjudication

proceeding. Willis could have referred its claim for general damages for

adjudication if and whenever it wished, regardless of Holmes' letter or its subsequent

reference to adjudication.

[46] In this respect I note that Willis did not quantify its claim for general

damages of $1,020,469 for the contractor's delay in completion of the works until its

recital in the engineer's further certificate issued on 22 November 2005. That

document also purported to be a payment schedule (ss 21 and 22) in response to

Holmes' final payment claim made on 23 August, to set off a net sum of $1,000,724

against Willis' final liability to Holmes. Again, apart from being months out of time,

the certificate is not what it purports to be in law.

(d) Inequity

[47] Fourth and finally, I reject Mr Carden's submission that it would be inequitable to deny Willis declaratory relief effectively setting aside the determination. Mr Carden submitted that the adjudicator failed to deal with the issue of estoppel at all. With

respect, this is hardly surprising, given that Willis itself failed to raise the issue before the adjudicator or, perhaps more importantly, to seek injunctive relief restraining him from taking any steps to determine Holmes' claim. Assuming it had a right to argue estoppel

or waiver which might be sufficient to oust the adjudicator's jurisdiction, Willis sat on its legal rights and did not raise the issue until it applied to this Court for interim orders seeking to restrain Holmes from executing its judgment.

[48] Accordingly, I dismiss Willis' second or alternative cause of action seeking

declaratory relief based upon arguments of estoppel or waiver.

(2) Error of Law

[49] Willis' first cause of action, but secondary in terms of Mr Carden's substantive argument, is that the adjudicator's determination was wrong as a result of

four errors of law. I shall deal with each separately.

(a) Dispute

[50] First, Mr Carden submitted the adjudicator erred in finding that there was a dispute between the parties which could properly be the subject of an adjudication under the Act when at the times of Willis' payment certificate dated 20 September 2005 (issued

through the engineer), notice of adjudication dated 28 October 2005 or adjudication claim dated 9 November 2005, the engineer had not issued either a defects liability certificate or the provisional final payment schedule (clause 12.5.1).

He said the engineer had issued a statement of reasons for his inability to issue or otherwise deal with a final payment schedule. The payment claim had not been processed in terms of the contract so as to lead to a dispute between Holmes and Willis.

[51] Mr Carden raised this argument to establish an error of law; Mr Williams

submitted, as I have earlier noted, that an error of this nature was not amenable to

judicial review. On analysis, the argument is properly one of jurisdiction. The adjudicator had no power to determine Holmes' claim if there was no dispute. I shall proceed on that basis (ss 28(1) and 38(1)).

[52] The Act, rather unhelpfully, defines a dispute as "a dispute or difference that

arises under a construction contract" (s 5). In the construction context, though, it normally

arises where one party makes a claim for payment and the other fails to accept liability or refuses to make payment within the requisite period, with or without reasons. Each party holds an opposing viewpoint which continues unless and until resolution. Whether or not

a dispute exists is of an intensely factual nature.

[53] Mr Carden repeated before me a submission he made to the adjudicator. He

said that only $102,977 of the final payment claim was in dispute. The engineer had

not determined the other items claimed prior to commencement of the adjudication.

He relied upon the fact that the engineer had been reviewing the various items claimed by Holmes since issuing his certificate on 20 September 2005. A dispute would only arise once the engineer ruled on the claim and Willis rejected it in clear language.

[54] With respect, I disagree. Mr Williams did not rely on this point but it seems

that Holmes was entitled to judgment for the amount of its final claim before and

without invoking the adjudication process. I construe the relevant provisions as

entitling Holmes to apply directly to the High Court for summary judgment (ss 22-

24). All the contractor had to establish was that Willis had failed, first, to provide a

payment schedule within the statutory period (s 23(1)) and, second, to pay the whole

or any part of the claim on or before due date (s 23(4)). On my assessment, that date

would have expired on or about 21 October at the latest. Satisfaction of this evidential threshold would have been simple and uncomplicated. Proof of the

existence of a dispute was unnecessary to establish liability.

[55] However, Holmes elected to follow the path of adjudication, and establish the

Jurisdictional precondition of a dispute. Mr Laywood's evidence proves its existence

beyond doubt. In the passage I have earlier recited he said that one of the steps

Willis would have taken in response to Holmes' final claim on 23 August was to

issue its own counterclaim amounting to $1,020,469. The engineer's letter to

Holmes on 22 November 2005 records that Willis had instructed him "to deduct the

sum of $1,020,469 from [the certified sum]". It constituted a counterclaim for

Holmes' delay in completing the works.

[56] Plainly, on Mr Laywood's own admission, Willis did not intend to pay

Holmes' final claim from the date of receipt. On 20 September the engineer wrote to

advise that the contractor's claim was under review; that is, it was not then accepted.

Mr Laywood confirms Willis' intention throughout to set off whatever sum was

certified by the engineer against its own counterclaim for general damages. This

state of affairs is unequivocal evidence that liability for the final payment was in

dispute. Willis never intended to pay. The point is beyond argument.

[57] Mr Carden attempted to justify his submission by detailed reference to the

engineer's obligations under the contract. However, I repeat that the statute is

unequivocal in according absolute precedence to its own terms; it has "effect despite

any provision to the contrary in any agreement or contract". The time given to an

engineer to issue a defects liability certificate or provisional final payment schedule

is irrelevant.

(b) Engineer's Payment Schedule

[58] Second, Mr Carden submitted that the determination was wrong in finding that the engineer's 20 September letter and/or the progress payment certificate accompanying it was not a payment schedule (ss 21 and 22). I have already dealt with this issue in the context of Willis' estoppel claim.

[59] Third, Mr Carden submitted that the adjudicator erred in finding that the time

for Willis' provision of a payment schedule to Holmes under the statute as required

by the contract had expired. He submitted that, on a proper interpretation of the

contract, the engineer was only required to issue, first, a provisional final payment

schedule "as soon as reasonably practicable" and, second, a final payment schedule

more than one month after receipt of the final payment claim if statements of reasons

and further explanatory statements were issued. Accordingly, the time for the

payment schedule as provided in the contract had not elapsed either when Holmes

gave notice of adjudication on 28 October 2005 or an adjudication claim on 9 November 2005.

[60] The adjudicator's findings on this issue are as follows:

36. Under [s 22], a payer becomes liable to pay the claimed amount on

the due date for any payment claim if the payer does not provide a

payment schedule to the payee within the time required by the

contract, or, if the contract does not provide for the matter, 20

working days after the payment claim is served.

37. In the present case, clause 12.5 of the general conditions did provide

for a specific time by which a payment schedule was to be provided

by Willis Trust following a final claim by Holmes, and moreover,

clause 12.5.4 provided a specific mechanism to apply in the

particular circumstances of Holmes' final claim.

38. Under clause 12.5.4 ... the engineer was required to issue a

`provisional payment schedule' within one month of receipt of the

final payment claim if he was not able to issue a Final Payment

Schedule. In that stated circumstance, the further processes under

clause 12.2.1 and 12.2.7 apply. Clearly if no time limit was placed

on the obligation of Willis Trust to provide a payment schedule,

payment in relation to the final claim could be delayed indefinitely,

the mechanism for determining the date when the payment became

due would be deemed inadequate and the default provisions of

s 22(b)(ii) would apply. In short, unjustified and unconscionable

delay on the part of a principal in reviewing and approving final

claims is a thing of the past as the purpose of the Act would be

emasculated by any contractual provision that sought to delay a

contractor's entitlement to timely payments and speedy resolution of

disputes arising under a construction contract.

[61] Mr Carden developed a detailed argument to support this proposition.

However, I mean no disrespect to him in observing that the point is purely one of

contractual interpretation. Mr Williams conceded that the contract provided a time

by which Willis was to provide a payment schedule to Holmes; the engineer was

bound to issue a provisional final payment schedule to Willis with a duplicate to

Holmes `... as soon as practicable after receipt of ...' Willis' final payment claim

and the issue of a defects liability certificate (clause 12.5.1). In the event that

provision of this schedule was delayed by more than one month after the engineer's

receipt, he was bound immediately to issue a statement or statements of his

reasons why it could not be issued or otherwise dealt with in accordance with the contract.

When making this explanatory statement, the engineer was obliged to issue a

provisio nal progress payment schedule to Willis for all amounts due under the

contract which can reasonably be certified then (clause 12.5.4).

[62] As noted, Holmes served its final payment claim on 23 August 2005. The

engineer did not issue a final payment schedule within the next month. Accordingly,

he was bound to issue a provisional progress payment schedule immediately. Again

he defaulted. Neither the engineer nor Willis took any steps thereafter. Mr Williams

submitted that, on a liberal construction, the final date for submission of a schedule

expired on 7 October.

[63] Mr Carden went to careful lengths to justify the engineer's explanation of the

reasons for his delay in issuing a final payment schedule in the terms set out

in his 20 September letter. However, with respect, that is all beside the point. Once that

one month delay occurred, the engineer was bound to issue a provisional progress

payment schedule. That was his certificate issued on the same date which purported

to comply with ss 21 and 22. It is, as I have said, unequivocal evidence of the

engineer's recognition that the provisional progress payment schedule prepared on

Willis' behalf had to comply with the statutory requirements. The status which he

attributed to the document, whether provisional or final, was irrelevant. It had to

satisfy the statutory provisions (s 21(2) and (3)). I have already held that it did not.

[64] Mr Carden submitted that the adjudicator confused requirements for progress

and final payment claims. With respect, he did not. I repeat yet again that the Act

applies; it expressly defines a progress payment as including a final payment under

the contract. Mr Carden criticised the practice of contractors using the adjudication

process to claim final payments. However, this practice is both legally correct and

completely in accord with the purpose and spirit of the Act.

[65] Mr Carden is correct that by the time a final payment is claimed the contract

has reached practical completion and final issues of liability remain to be

determined, including as in this case extensions of time and counterclaims for

damages for delay. However, the statute entitles the contractor to prompt settlement

of its final payment claim in these circumstances. Other issues are to be determined

in accordance with the agreed mechanisms for dispute resolution, either by mediation or arbitration. This regime is consistent with the statutory regime of

interim measures designed to secure prompt payment and transfer financial

risk from the contractor to the principal. Parliament would not have been unfamiliar with the

practice favoured by some developers of using threats of set offs or counterclaims,

whether justified or not, to keep contractors indefinitely out of their money or to

force them into accepting final payments in amounts substantially less than their

contractual entitlements.

[66] Mr Carden also complained about the unfairness of the payment claims

procedure. He submitted that a contractor `can take as long as it wishes to prepare a

claim' under s 20. That is, with respect, incorrect. This contract obliged Holmes to

submit a final account of all claims in relation to the contract to the engineer within

two months after expiry of the period of defects liability or such further time as the

engineer may reasonably allow (clause 12.4.1).

[67] Mr Carden also relied upon the engineer's failure to issue a defects Liability certificate; consequently, he said, one of the pre-conditions for commencement of

time to run for Wills' provision of a final payment certificate had not occurred. With

respect, this submission misconstrues the contract. The issue or otherwise of a

defects liability certificate is irrelevant to statutory liability. Holmes was entitled to

submit its final payment claim `not later than two months after the expiry of the

period of defects liability (clause 12.4.1)'. That period commenced on the date of

practical completion, which the engineer certified for 9 June 2005, and expired three

months later, on 9 September 2005. Holmes' right to submit its final account

expired two months later, on 9 November 2005, but it was entitled to take that step

earlier if it wished.

[68] The issue of a defects liability certificate was relevant to the separate

question of the engineer's obligation to issue a payment schedule (clause 12.5.1).

The engineer was bound to issue a defects liability certificate on 9 September 2005

(clause 11.1.1 and 11.3.1(a)), providing Holmes had remedied any minor omissions

or defects (clause 11.3.1(b)). Willis did not allege any failure to remedy minor

omissions. Accordingly, Holmes was entitled as of right to a defects liability

certificate on 9 September 2005. Willis cannot set up the engineer's default in

complying with a mandatory duty as a basis for arguing that he was excused from his

liability to issue a final payment schedule.

[69] In any event, the issue or non issue of a certificate is irrelevant. What

Is relevant is the issue of the final schedule; if it was delayed for more than a month

after receipt (irrespective of whether or not a certificate has been issued), the

engineer had to issue his provisional payment schedule (clause 12.5.4). I repeat that

he has failed to do so.

(d) Costs

[70] Fourth, Mr Carden submitted that the adjudicator erred in making an order

for costs. I can deal with this submission shortly. Holmes' legal and other

professional fees incurred in the proceeding amounted to $171,053.66 (inclusive of

GST). The adjudicator ordered Willis to pay $96,000 and Messrs Laywood and

Rees jointly to pay $24,000, a total of $120,000.

[71] Holmes claimed a substantial contribution towards its actual costs and

expenses on the ground that it had incurred them to an unnecessary level because of

Willis' conduct of its defence (para 66). The adjudicator recited his statutory power

to determine and fix costs if he was satisfied that Willis had caused them `... to be

incurred unnecessarily by ... allegations or objections ... that are without substantial

merit' (s 56(1)(b)). He was aware that he had a limited jurisdiction to award costs

which he should exercise judicially and not capriciously (paras 68-69). He was

satisfied that Willis' allegations or objections were without substantial merit. He

awarded costs accordingly (paras 70-73).

[72] Mr Carden submitted that there was no evidence to support the adjudicator's

finding. However, I am satisfied that there was an ample evidential basis for it. This

view is confirmed by my own conclusions on the arguments advanced by Willis in

support of this application for review.

(3) Personal Liability

[73] Mr Carden submitted that the adjudicator had no jurisdiction to determine

Holmes' claim against Messrs Laywood and Rees on the grounds that: the agreement

between Holmes on the one hand and Messrs Laywood and Rees on the other dated

9 September 2004 is not a construction contract; that Holmes' final payment claim

was not directed to Messrs Laywood and Rees; that the engineer's letter and

accompanying progress payment certificate dated 20 September 2005 was on Willis'

behalf, not for Messrs Laywood and Rees; that Willis' notice of adjudication dated

28 October 2005 wrongly names Messrs Laywood and Rees as respondents and does

not include any direct allegation against them; and that Holmes' request to select an

adjudicator wrongly refers to them as respondents.

[74] Alternatively, Mr Carden submitted that, if the adjudicator correctly

determined that Holmes on the one part and Messrs Laywood and Rees on the other

were parties to a construction contract, any work omitted from the scope of the

contract should be first deducted from the liability of Messrs Laywood

and Rees thereafter. Finally, he said, if Messrs Laywood and Rees were liable, this liability is limited to $250,881.

[75] The contractual document between Holmes and Messrs Laywood and Rees

was entered into on 9 September 2004 in these terms:

TO Holmes Construction & Development Ltd

We, Ian Laywood and Gary James Rees in consideration of you at our

request agreeing to split payment of the contract sum for the main building

and rooftop apartments of Augusta Apartments at Willis Street, Wellington

into:

(a) Contract One (to be met by Willis Trust Ltd) a contract price of

$6,978,060; and

(b) Contract Two (to be met by us jointly) a contract price of $250,881.

HEREBY PERSONALLY GUARANTEE PAYMENT (and bind ourselves and our

executors and assigns) of Contract Two above to be made to you during the

period of fulfilment of Contract One. Upon clearance of the sum of

$250,881 paid on the personal cheque account of either Ian Laywood or

Gary Rees intended in payment of Contract Two, Holmes Construction &

Development Ltd will unconditionally and irrevocably release Ian Laywood

and Gary Rees in respect of any further obligation or liability under this

guarantee.

[76] The adjudicator recorded that it was common ground that Holmes executed

the principal contract recording a price lower than the tender price to assist Willis

with its funding arrangements; and that Messrs Laywood and Rees personally

guaranteed payment of the difference of $250,881 plus GST (para 47). He accepted

Holmes' argument that the parties intended there would be two construction

contracts; Contract One, which embodied the principal obligations of the parties and

Contract Two which was the collateral contract entered into between Holmes and

Messrs Laywood and Rees. He concluded that Messrs Laywood and Rees were

jointly liable as contracting parties, and that the existence of a guarantee was

irrelevant. Accordingly, he dismissed an argument for Messrs Laywood and Rees

that the Act does not apply to a construction contract to the extent that it contains

provisions whereby a party undertakes to guarantee payment of money, and that

the adjudicator did not have jurisdiction accordingly (paras 48-53).

(a) Jurisdiction: Guarantee

[77] Mr Carden submitted that a contract of guarantee cannot be a `commercial

construction contract', which is defined (s 5) as:

... a contract for carrying out construction work in which none of the parties

is a residential occupier of the premises that are the subject of the contract.

[78] With respect, this argument confuses the legal nature of Contract Two. It

may have described the obligations assumed by Messrs Laywood and Rees as

constituting a personal guarantee of payment of $250,881. But a guarantee is a

contract by A "to answer to another person [B] for the debt, default, or liability of a

third person [B]" (s 2(1)(d) Contracts Enforcement Act 1956). Willis had not

assumed indebtedness or liability to Holmes for this sum of $250,881. So there was

no third party liability for which Messrs Laywood and Rees could answer.

[79] The words "personally guarantee payment" were meaningless.

Messrs Laywood and Rees were not guaranteeing Willis' liability. Instead, by

Their agreement to meet payment of the sum of $250,881 jointly, they were assuming a

direct liability to Holmes. They were principal parties to a commercial construction

contract. The exclusionary terms relating to a guarantee (s 11(d)(ii)) do not apply.

Accordingly, I am satisfied that the adjudicator properly assumed jurisdiction.

(b) Jurisdiction: Service

[80] Mr Carden's alternative argument was of a technical nature. It was not

apparently raised before the adjudicator. He submitted that, because the basis for

liability rests solely on the absence of a payment schedule to Holmes' claim, Messrs

Laywood and Rees cannot be liable if the claim was not addressed to them. He said

that the claim was addressed to Willis; and that Messrs Laywood and Rees were

drawn into the process by Holmes' notice of adjudication and claim. Accordingly,

the directors were compelled to respond. They were not the recipients of a payment

claim for which they had to provide a payment schedule.

[81] There is no doubt that Holmes' payment claim was served on Mr Laywood;

it was addressed to him personally. Furthermore, the adjudicator made a finding of

fact that it was also served on Mr Rees (para 18). That finding is not amenable to

review.

[82] Even if the adjudicator's finding was reviewable, I accept Mr Williams'

submission that there is sufficient proof of service if the Court is satisfied the

document has come to the attention of the relevant party (West City Construction Ltd

v Edney, CIV-2005-404-1066, Auckland Registry, 1 July 2005, Venning J at para

35). Speaking on Mr Rees' behalf as well, Mr Laywood's affidavit advised that they

participated personally in Willis' response dated 23 November 2005 to Holmes'

adjudication claim dated 9 November 2005. In that notice Holmes identified the

issues in dispute including whether or not "the respondent(s) are liable to pay the

claimed amount to the claimant".

[83] Holmes' notice of adjudication dated 28 October 2005 referred specifically to

service of its final payment claim on 23 August, and to its contention that none of the

three respondents provided a payment schedule in response. Contract Two did not

stipulate the time required for a payment schedule. Thus, Messrs Laywood and Rees

had 20 working days for that purpose (s 22(b)(ii)). That date expired on

25 November 2005.

[84] Holmes' claim was submitted to the adjudicator on 28 November

2005. By then time had expired for Messrs Laywood and Rees to provide a payment schedule. However, they did not take any steps in the interim. They were in statutory default on and from 28 November. The arbitrator had jurisdiction to determine Holmes'

claim against them on or after that date on the basis that each had been served and

had failed to supply a payment schedule within the requisite period. Even if the

adjudicator did not have jurisdiction, Holmes would have been entitled to enforce

payment by claiming summary judgment on the basis that the sum of $250,881 was

by then a debt due. I have already given the reasons for that conclusion.

[85] This leaves only Mr Carden's subsidiary submissions. First, he said that

Messrs Laywood and Rees' liability must be limited to the sum of $250,881

specified in Contract Two because it does not provide for liability for GST or

interest. Mr Carden did not apparently take this point before the adjudicator. The

adjudicator in turn simply assumed liability for these amounts. Mr Williams did not

address argument on the point on appeal. I can only assume that it has gone by

default because of its relative financial insignificance.

[86] Mr Carden is correct. In the absence of an express provision the contract

price of $250,881 is assumed to be GST inclusive.

Contract Two does not provide an obligation to pay interest. Accordingly, I make an order setting aside the adjudicator's determination of Messrs Laywood and Rees' liability for GST and interest.

[87] Second, Mr Carden submitted that Messrs Laywood and Rees' liability is

reduced by payments of credits which have been made to Holmes. They are unable

to quantify the amount. In the absence of quantification, the adjudicator was entitled

to determine that they were liable for the full amount of $250,881.

Charging Order

[88] Finally, Mr Carden submitted that the charging orders were invalid in the

absence of reasons. He accepted the adjudicator's jurisdiction to issue a charging

order "in respect of a construction site owned [by Holmes]" (s 29). He also accepted

that the adjudicator was bound to approve the issue of a charging order in respect of

the construction site, record his approval and include sufficient particulars to identify

it (s 49(2)). He accepted that the course for approval had been followed. However,

he submitted that the adjudicator failed to give reasons.

[89] I do not accept that the adjudicator was under a duty to give reasons where he

was directed to make a charging order; the only reason he could give was the

existence of a statutory duty. He said that Holmes' claim for a charging order was

over adjoining land, not the construction site. I do not have any evidence to that

effect but, in any event, such an error, if made, would be one of fact.

Conclusion

[90] For these reasons I dismiss Willis' application for an order setting aside the

findings made in the adjudicator's determination dated 10 February 2006 of Willis'

liability to Holmes. I also dismiss Messrs Laywood and Rees' application to set

aside the findings against them except to make an order setting aside the

adjudicator's findings that Messrs Laywood and Rees are liable to Holmes for GST

and interest on the sum of $250,881.

[91] I order Willis to pay Holmes costs and disbursements (including airfares and

accommodation) according to category 2B on both Willis' interim and substantive

applications. There will be no order for costs relating to the separate application by

Messrs Laywood and Rees.

Rhys Harrison J