JIAN HUA PROPERTY LTD V FREEMONT DESIGN & CONSTRUCTION LTD HC AK CIV 2005-404-5526 [2006] NZHC 77 (16 February 2006)
IN THE HIGH COURT OF NEW ZEALAND
AUCKLAND REGISTRY
CIV 2005-404-5526
UNDER the Companies Act 1993
BETWEEN JIAN HUA PROPERTY LTD
Applicant
AND FREEMONT DESIGN & CONSTRUCTION LTD
Respondent
Hearing: 29 November 2005
Appearances: Ms J A Wickes for applicant
Mr B J Burt for respondent
Judgment: 16 February 2006 at 3.15 pm
INTERIM JUDGMENT OF ASSOCIATE JUDGE DOOGUE
Solicitors: Loo & Koo, PO Box 99687, Newmarket, Auckland
Chapman Tripp, PO Box 2206, Auckland
JIAN HUA PROPERTY LTD V FREEMONT DESIGN & CONSTRUCTION LTD HC AK CIV 2005-404-5526 16 February 2006
Background
[1] The parties entered into a contract for construction works at Ranui on 11 February 2005. The contract document was a substantial one running to some 80 pages. The contract sum was $967,189 plus GST.
[2] The contract appointed Engineering Design Consultants Limited ("EDC") as
engineer. The role of the engineer is defined in the contract as being the principal's
representative, giving directions to the contractor on behalf of the principal and
issuing payment schedules on behalf of the principal (Clause 6.2.1(a) of General
Conditions). The engineer was also to be an independent decision-maker and it was
his role to value the work and issue certificates (Clause 6.2.1(b) of the General
Conditions).
[3] The contract did not run its course. On 7 July 2005 Mr Patrick Harris of
EDC e-mailed the respondent:
Dear Keith, we met with the client Jian Hua yesterday ... with the frustration
we are receiving from the ARC at present it is unlikely that much progress
will be able to be made over the winter months before October. We have
been asked to advise you that the client now wishes to seek a mutually
agreeable ending to the present contract. All work completed and certified
by EDC will be paid for. Could you please provide your view on this
proposal.
[4] On 9 July the respondent replied:
Thanks for this Patrick. Not an ideal situation but it is the client's decision at
the end of the day. We will prepare a final account and advise accordingly.
[5] The following describes the events thereafter. On 16 August 2005 the
respondent issued an invoice dated 31 July 2005 for $214,251.17 comprised
of:
a) $24,202.19 (+ GST) for contract works;
b) $26,216.81 (+ GST) for variations;
c) $44,325.43 (+ GST) for down time due to ARC imposed restrictions
and hold placed on work; and
d) $95,701.05 (+GST) "for loss of profit incurred when the client
instigated termination of the contract".
The due date for payment was 26 August 2005.
[6] On 25 August 2005 Mr Harris, who is an engineer, forwarded to the applicant and respondent his assessment of the respondent's claim with a schedule of prices and explanations of differences. He assessed the amount payable to the respondent at $8468.85. His letter had attached to it a document headed "Progress Certificate" which in its body stated:
Progress Certificate No: 7 for period ended: 30 July 05
[7] That document set out the calculations as to what was owing. It summarised the total value of the work carried out, the retentions that needed to be made, the total net payments that had been made to that point in previous payments and the net amount, which appeared as follows:
Make payment number 7 $7,687.85
960.98 GST
$8,648.83 Including GST
[8] The document also had annexed to it calculations of quantities and prices which fed into the "Progress Certificate" amount which the engineer certified for.
[9] On 16 September 2005 the respondent served the applicant with a statutory
demand for $214,251.17.
[10] On 27 September 2005 the applicant paid the respondent Mr Harris' assessed
amount of $8468.85.
[11] Following payment of that sum the respondent refused to withdraw the
statutory demand and this application was filed on 29 September 2005 by Jian Hua.
[12] At the hearing, considerable discussion centred on the legal effect of the
facsimile dated 25 August 2005.
The application and notice of opposition
[13] The applicant applies to set aside the statutory demand for $214,251.17. The
grounds given are:
1) There is a substantial dispute as to whether or not the debt claimed in
the demand is owing or due; and
2) What appears in the affidavits of Mr Sen (Jason) Xiao and Mr Harris
filed in support of this application.
[14] In its notice of opposition the respondent states that it is opposed to the orders
sought by the applicant on the following grounds:
1. there is no substantial dispute as to whether the debt stated in the demand
is owing or due as:
1.1 the amount claimed was demanded as a payment claim pursuant to
s 20 of the Construction Contracts Act 2002 (the Act);
1.2 no payment schedule was provided by the applicant to the respondent
within the time required pursuant to s 22 of the Act;
1.3 the amount claimed is a debt due by the applicant to the respondent,
pursuant to s 23(2) of the Act; and
1.4 will appear in the affidavits of Keith Douglas Logie and such other
affidavits as may be sworn and filed herein.
This application [sic] is made in reliance on:
s 290 of the Companies Act 1993;
ss 20-23 of the Construction Contracts Act 2002;
rr 244 and 458(1) of the High Court Rules; and
the affidavits to be filed in support of this application [sic].
Principles
[15] I adopt the following statement of principles which is taken from the
judgment of Faire AJ in Italia Motorsport Ltd v European Motors Ltd (High Court,
Hamilton, 18 October 2004, CIV-2004-419-950):
(4) The approach, which the Court takes to applications on each ground,
can be shortly summarised. When considering an application pursuant to
s 290(4)(a) of the Companies Act 1993 the Court is required to determine if
the applicant can show a fairly arguable basis upon which it is not liable for
the amount claimed. Forge Holdings Ltd v Kearney Finance (NZ) Ltd (High
Court, Christchurch, M 149/95, Tipping J, 20 June 1995) at page 2 and
Queen City Residential Ltd v Patterson Co-Partners Architects (No 2)
(1995) 7 NZCLC 260 ,936. That formulation was approved by the Court of
Appeal in United Homes (1988) Ltd v Workman [2001] 3 NZLR 447 , 451- 2.
....
(6) With respect to the Court's power to set aside a statutory demand under
s 290(4)(c) the Court of Appeal examined this question in Commissioner of
Inland Revenue v Chester Trustee Services Ltd [2003] 1 NZLR 395. At 397
Tipping J said:
If the focus is on the justice of the particular case the discretion must always
be exercised on a principled basis and not on some ad hoc perception of
what individual justice might require. All cases involving s 290(4)(c) must in
the end come down to a judgment by the Court as to whether the creditor's
prima facie entitlement is outweighed by some factor or factors making it
plainly unjust for liquidation to ensue.
(7) The following further observations must be made:
a) Whilst mere assertion will not be enough some sort of material short
of proof which backs up the claim that the amount is in dispute is
required: Paramoor Eleven Ltd v Pramb Wong Enterprises Ltd
(High Court, Auckland, M 1460/94, Master Gambrill, 10 April
1995);
b) With respect to s 290(4)(c), the Court has a discretion to set aside a
statutory demand on grounds other than those specified in ss (4)(a)
and (b);
c) I endorse the comments of Wild J in Apple Fields Ltd v Trustees
Executors and Agency Co of NZ Ltd 13 PRNZ 387 , 395. He said:
The legitimate purpose of a statutory demand is to obtain payment of
a debt due.
The arguments as to the claimed amount
[16] The procedure for making and responding to payment claims is set out in ss 19 24
of the Act. The provisions of the Act bind parties to a construction contract, unless it is otherwise stipulated. The applicant submits that it complied with both the provisions of the Act and the contract. The applicant also submits that having received the respondent's claim on 16 August 2005, it complied with the necessary steps in the Act and the contract by giving notice to the respondent that it did not accept the respondent's assessment as to final payment.
[17] The respondent submitted that the applicant failed to take the necessary steps
to resist the claim set out in the invoice for final payment dated 31 July 2005. The
respondent did not accept the applicant's assessment for final payment for two
reasons.
[18] First, the respondent said that the applicant did not respond to the claim for
payment in a way that complied with the requirements of the Construction Contracts
Act 2002. A number of submissions were made under this head but the only one
that I need to consider is based on the contention that the applicant never sent to the
respondent a response to its payment claim which constituted a valid denial of
liability pursuant to the procedure established by the Act. Specifically, such
response as the applicant provided to the payment claim did not amount to a
"payment schedule" within the meaning of s 21.
[19] The second main ground is that the applicant's assessment did not deal with
Payment claims for downtime and loss of profits (items (c) and (d) in the payment
claim). EDC stated that it was not its responsibility to determine whether damages
for downtime and loss of profits were in fact payable. The applicant's position is
that these are claims for damages or compensation: that they are not claims in debt
arising out of performance of work out of the contract and therefore they are not
covered by the provisions of the Act. The applicant says that it did give proper
notice declining those claims. The issue is whether the applicant is correct in that
assertion.
[20] In order to assess these arguments I will need to consider the provisions of
the contract and the Act.
The contract and the Construction Contracts Act 2002
[21] Sections 22-24 of the Act govern the procedure for making and responding to
payment claims made by the payee (in this case the respondent) to the payer
(in this case the applicant). A payment claim is usually served on the payer for each
progress payment. A progress payment includes any final payment under the
contract.
[22] The first step in the procedure is that the payee must serve a payment claim
on the payer in accordance with s 20 of the Act. Certain formalities are required.
For example, the claim must be in writing and contain sufficient details to identify
the contract in question: see s 20(2).
[23] The second step is that the payer may serve a "payment schedule" under s 21
on the payee. Certain formalities are required of a payment schedule. If a lesser
amount than the claimed amount is included in the payment schedule then certain
additional requirements must be met. Section 21(3) of the Act provides:
If the scheduled amount is less than the claimed amount, the payment
schedule must indicate--
(a) the manner in which the payer calculated the scheduled amount; and
(b) the payer's reason or reasons for the difference between the scheduled
amount and the claimed amount; and
(c) in a case where the difference is because the payer is withholding
payment on any basis, the payer's reason or reasons for withholding
payment.
[24] There are no prescribed forms in the Act for payment claims or payment
schedules.
[25] Section 22 says, in substance, that a payer becomes liable to pay the claimed
amount if a payee serves a payment claim on it and the payer does not provide a
payment schedule to the payee within the time required by the relevant construction
contract or within 20 working days.
[26] The procedure set out in the contract for the lodging of and response to
claims was more elaborate than that contained in the Act. The steps were:
a) The contractor would submit a progress payment claim.
b) Within seven working days the engineer was required to issue a
certificate in the form of a "Provisional Progress Payment Schedule"
("provisional schedule") to the principal and a duplicate to the
contractor showing:
i) The work to which the contractor's payment claim relates;
ii) The sum certified by the engineer. This sum was the amount
of contractor's payment claim less previous certified payments, less other deductions required by law or contract;
iii) Show how (ii) was calculated; and
iv) Set out reasons for any difference between the sum certified by
the engineer and the contractor's claimed amount.
c) If the work to which the contractor's progress payment claim relates
cannot be verified within seven working days, the engineer shall certify a reasonable estimate of the due amount.
d) Within three working days after the receipt of the engineer's
certificate under b) the principal was to notify the engineer of any
amendments or deductions that he/she required to be made from the
sums certified by the engineer. Again, calculations and reasons were
required.
e) Within two working days of receiving any notice from the principal
under d), and in any event no later than 12 working days after receipt
of the contractor's payment claim, the engineer was to issue a Progress
Payment Schedule. This would contain the information in his original provisional schedule plus any additional "amendments or deductions" not notified under b) with reasons and calculations set out. The engineer is to also provide a Scheduled account (account in c) less/plus new amendments).
f) The engineer would send the original of the Progress Payment
Schedule (that is the final certificate) to the principal and a duplicate
copy to the contractor.
g) The scheduled amount then becomes payable within five working
days of the date of the progress payment schedule.
First issue: Was the engineer's letter of 25 August 2005 to the payee a payment
schedule for the purposes of s 21 of the Act?
[27] As I noted above, the Act does not prescribe forms for payment claims or payment schedules. The Act only requires that a payment schedule complies with the requirements set out in ss 20 and 21. The key is the provision of sufficient information to make clear the manner in which the claimed amount or the scheduled amount has been calculated: Bayley and Kennedy-Grant, A Guide to the Construction Contracts Act, 2003 p65-8.
[28] Although compliance with the requirements is essential, it is unlikely that
"technical quibbles" that a payment claim or a payment schedule has not complied
with Act will receive much of the court's attention:
Smellie, Progress Payments and Adjudication 2003, p31-32. The Court of Appeal in George Developments Ltd v Canam Construction Limited (CA 244/04, 12 April 2005), stated at para [43] that "technical quibbles should not be allowed to vitiate a payment claim that
substantively complies with the requirements of the Act." However, there must be
substantial compliance with the requirements of s 23 of the Construction Act if the
payer is to avoid the consequences set out in s 23 of the Act.
[29] A payment schedule is a notice to the payee that the payer does not accept
part of the payee's claim. If a payer does not serve a payment schedule, then by
default, the payee may enforce the payment of the amount claimed "as a debt". If
that situation arises, a payer is limited in the matters that it can thereafter raise in
opposition to a claim for the resulting debt. It seems likely that a payer can resist a
claim in debt on the grounds that there never was a contract between the parties at
least that seems to be implicit in the judgment of Salem Ltd v Topp End Homes Ltd
(CA 169/05 27 September 2005). Also, pursuant to s 79 of the Act, a payer has very
limited entitlements to set-off liquidated amounts that are owed to it by the payee.
[30] If the payer does not issue a document that can be reasonably viewed as a
statement addressed to the payee that the payer does not accept liability for part of
the claimed amounts, then the payer will not be protected from the enforcement
provisions contained in the Act. The payee should not have to guess at the payer's
intentions. A reasonable degree of certainty is required if the mechanisms contained
in the Act are to accomplish the Act's objectives.
[31] In this case the communication which the payer relies upon is a document,
the primary addressee of which was the payer and not the payee. The document did
not describe itself as a "payment schedule".
[32] The document was conditional in some respects. For example, the engineer
did not seem to come to a final view as to the extent of the earthworks and
recommended that an earthworks "as built" survey be conducted for that
purpose.
[33] There is also the relevant background circumstance which was the payments
approval mechanism adopted in the contract. That contemplated that in two
intermediate stages, over and above the two-stage process contemplated in sub-part 3
of Part 2 of the Act. That is, the contract contemplated that the next step after the
receipt of a payment claim would be the engineer issuing a provisional schedule to
the principal with a duplicate to the contractor. Thereafter, the principal had the
right to require any amendments that must be made to the items in the provisional
schedule. If the payer had required additional amendments or deductions the
engineer would issue a progress payment schedule to the contractor reflecting the
amounts the engineer provisionally certified for in the provisional schedule as
modified by any amendments or deductions that the principal required.
[34] The significance of the engineer's document has to be seen against the
background that the contractual procedure for processing claims was rather more
elaborate than the procedure set out in the Act. The letter that the engineer sent to
the applicant on 25 August 2005 could well be viewed as satisfying the first step in
the contractual procedure. That step as I have said envisages that the engineer will
notify the principal of what sums the engineer believes are to be paid. That
notification though is directed to the principal. The respondent was entitled to take
the view that it was a notice complying with 12.2.1 of the contract and that it was
preliminary to the "progress payment schedule" envisaged by 12.2.4 which might be
expected at a later date. If that is correct, it was not a "scheduled amount" as
defined in s 19 of the Act. The term "scheduled amount" is defined in s 19 in the
following terms:
Scheduled amount means an amount of progress payment specified in a
payment schedule that the payer proposes to pay to the payee in response to
a payment claim.
[35] The engineer's letter of 25 August 2005 does not clearly amount to a statement of the amount that "the payer proposes to pay to the payee". That letter is a preliminary communication between the engineer and the payer. An objective reading of the document would not convey to the payee that this was the statement by the payer of the amount that it proposed to pay. For that reason, it is not reasonably arguable that the payer in this case has complied with the requirements of the Act.
Second issue: Did the purported payment schedule not comply because it did
not refer to the loss of profits and downtime claims?
[36] I understand that Mr Burt's next submission is that the letter of 25 August 2005 did not meet the requirements for a payment schedule as it did not certify payment to the contractor for its "downtime claim" of $44,325.43 and "loss of profit" of $95,701.05.
[37] Mr Burt drew to my attention to this passage in the engineer's letter to the
applicant:
The contractor's claim includes damages for downtime and loss of profit
which we trust that you will review and seek a resolution on with legal
advice if necessary. We are not going to negotiate a settlement on these
matters given the opposing views of Principal and Contractor. EDC will
provide impartial input if you wish to pursue an informal disputes resolution
process.
[38] Mr Burt said that if the engineer's letter were a payment schedule, it would
be required to include a response to the respondent's claim for loss of profits and
downtime. He said the letter simply did not deal with the respondent's loss of
profits and downtime claims and instead left those issues to the applicant. He said
the letter therefore failed to indicate a total amount that the applicant proposed
to pay to the respondent. For that reason, he said, the entire amount of the payment claim
became due and owing because of the operation of s 25 of the Act.
[39] Before considering this issue further it is necessary to consider the
circumstances in which the parties ended their involvement with each other.
[40] As I have already mentioned, the evidence is that on 7 July 2005 the
engineer, Mr Harris, sent the e-mail to the contractor, which I have already referred
to in paragraph [3]. In it he recorded that he had met with Jian Hua on 6 July 2005.
It will be helpful to set out the text of that e-mail again:
With the frustration we are receiving from the ARC at present it is unlikely
that much progress will be able to be made over the winter months before
October. We have been asked to advise you that the client now wishes to
seek a mutually agreeable ending to the present contract. All work
completed and certified by EDC will be paid for. Could you please provide
your view on this proposal.
[41] The reply two days later, again by e-mail was sent by Mr Keith Logie of the
respondent:
Thanks for this Patrick. Not an ideal situation but it is the client's decision
at the end of the day. We will prepare a final account and advise accordingly.
[42] Following that e-mail the respondent sent the invoice for $214,251.17.
[43] Ms Wickes for the applicant submitted that what occurred here was a mutual
agreement between the parties to terminate the contract. She said that the applicant
did not breach or repudiate the contract and accordingly no damages flowed. She
said that the contractor's invoice included items which can only be explained as a
claim for damages. She said these items were not contract claims which the
contractor was entitled to issue payment claims for.
[44] Section 3(c) says that one of the objects of the Act is to provide remedies:
"for recovery of payments under a construction contract."
[45] Sub-part 3 of Part 2 of the Act refers to "claimed amounts". The expression
"claimed amount" appears in ss 20 to 24. It is defined in s 19 as:
claimed amount means an amount of progress payment specified in a
payment claim that the payee claims to be due for construction work carried out
[46] Section 16 establishes the right to progress payments. That term is defined
in s 5 as follows:
progress payment--
(a) means a payment for construction work carried out under a
construction contract that is in the nature of an instalment (whether or not of
equal value) of the contract price for the contract (other than an amount that
is, or is in the nature of, a deposit under the contract); and
(b) includes any final payment under the contract
[47] Section 17 of the Act also makes it clear that payments are linked with work
actually carried out.
[48] Here, the "loss of profits" claim is not something that the respondent is
entitled to under the contract. Nor is the claim for downtime. These claims are not
debts owed under the contract. They are the respondent's estimates of the loss it has
suffered because it is no longer possible to carry out the work under the contract.
[49] It may be that the payee can claim for loss of expected profits and greater
than expected expenditure incurred under the contract by way of damages or relief
under s 9 of the Contractual Remedies Act 1979. But in my view the payer cannot
invoke the payments regime under the Act to recover what are effectively claims for
damages or compensation.
[50] If that analysis is correct, the claims are not covered by the procedure in Part
2. Therefore, the claims are not of a type that ought to have been included in a
payment schedule. If that is so, there was no obligation on the part of the applicant
to respond to them.
[51] On this point, it follows that the applicant has a fairly arguable case.
Result
[52] I am not prepared to set aside in its entirety the statutory notice that the
respondent served on the applicant. My intention is that the respondent should be
able to proceed to enforce the claims that it has against the applicant with the
exception of the figures for downtime and loss of profit. With those items excluded,
I assess the balance payable as being $56,054.82, including GST. I understand
that there should be deducted from this amount the sum of $8,468.85 which the applicant
has paid. If that is correct, the amount owing is $48,252.53. These figures have not been the subject of express submissions from the parties, but I believe them to be approximately
correct. If they are, the applicant has no basis for setting aside the statutory demand. However, I will allow the parties a period of seven days from date of delivery of this interim judgment to file any memorandum they may wish to in order to correct any substantial misunderstanding on my part concerning the resulting balance that is payable by the applicant based on the general thrust of my judgment. Thereafter I will issue a final judgment in the proceeding.
J P Doogue
Associate Judge