Laywood and Rees v Holmes Construction Wellington Limited [2009] NZCA 35 (25 February 2009)

Last Updated: 4 March 2009

 

IN THE COURT OF APPEAL OF NEW ZEALAND

CA83/2008

[2009] NZCA 35

 

BETWEEN IAN LAYWOOD AND GARY REES
 Appellants

 

AND HOLMES CONSTRUCTION WELLINGTON LIMITED
 Respondent

 

Hearing: 2 October 2008

 

Court: Glazebrook, O'Regan and Arnold JJ

 

Counsel: R B Hucker for Appellant
 D M Hughes and K A Van Houtte for Respondent

 

Judgment: 25 February 2009 at 3 pm

 

JUDGMENT OF THE COURT

 

A The appeal is dismissed.

B We answer the questions on the appeal as set out at [67] below.

C The appellants must pay the respondent costs for a standard appeal on a band A basis,

plus usual disbursements.

REASONS OF THE COURT

(Given by Arnold J)

Background

 

[1] The appellants, Messrs Laywood and Rees, were the directors of a company, Holmes & Willis Trust Company Limited (Willis Trust), which owned a substantial building in Wellington. Willis Trust entered into a construction contract with the respondent, Holmes Construction Wellington Limited (Holmes Construction), for the redevelopment of the building into residential apartments. The appellants entered into a separate contract with Holmes Construction to pay an additional amount for the same work.

 

[2] Difficulties arose during the project. Ultimately Holmes Construction submitted a final claim for payment in terms of the Construction Contracts Act 2002 (the CCA). When payment was not made Holmes Construction referred the matter to adjudication under the CCA.

 

[3] The adjudicator found that Willis Trust was liable to Holmes Construction for $1,324,165.22, and that the appellants were liable to Holmes for $322,387.27. When neither sum was paid, Holmes Construction applied to the District Court under s 73(2) of the CCA for the adjudicator’s determinations to be entered as judgments.

 

[4] The appellants and Willis Trust brought an application for judicial review of the determinations. In conjunction with that application they sought interim orders prohibiting Holmes Construction from enforcing the determinations against them until the application for judicial review was determined. Harrison J granted the interim orders on terms: HC AK CIV-2006-404-809 1 March 2006. Willis Trust was, by a specified date, to pay the amount owing to a stakeholder, to be held pending the determination of the proceeding or further order of the Court. Willis Trust did not make the payment, so the interim order in its favour lapsed. Holmes Construction then proceeded to have judgment entered in the District Court against Willis Trust.

 

[5] However, as the interim order in favour of the appellants remained in force, Holmes Construction withdrew its application for the entry of judgment against them.

 

[6] By a decision dated 25 May 2006, Harrison J dismissed the application for judicial review, apart from correcting a miscalculation in the determination in relation to interest and GST, which reduced the amount payable by the appellants. On 6 June 2006 Holmes Construction applied under s 73(2) to enforce the adjudicator’s determination against the appellants by entry as a judgment. On 27 June 2006 the appellants filed a notice of application that the Holmes Construction application be refused (in effect, a notice of opposition) under s 74(1). Holmes Construction responded by memorandum dated 28 June 2006.

 

[7] Judge Wilson QC granted Holmes Construction’s application on the papers: DC NS CIV-2006-044-1112 5 July 2006. The appellants appealed to the High Court. Asher J dismissed their appeal: [2008] 2 NZLR 493. The Judge later granted the appellants leave to appeal to this Court.

 

Issues on appeal

 

 

[8] The four points on which Asher J granted leave were as follows:

 

(a) Does s 29 of the District Courts Act 1947 apply to limit the jurisdiction of the District court where an application is made under s 73 of the Construction Contracts Act 2002 to enforce an adjudicator’s award as a judgment to entering a judgment in an amount of no more than $200,000.00?

(b) Is a party, having made an application to prevent an adjudicator’s award being entered as a judgment, entitled to the observance of the principles of natural justice, and does the observance of those principles require a hearing to be convened and/or a date of hearing to be allocated by the Court?
(c) Does s 74(2)(a) of the Construction Contracts Act 2002 prevent enquiry into whether amounts found to be payable by an adjudicator have in fact been credited or paid to the party in whose favour the adjudicator’s award was made where such payment or credit arose prior to the adjudicator’s determination being made? and
(d) In holding that the learned District Court Judge failed to consider the ground advanced under s 74(2)(a) of the Construction Contracts Act 2002 at all, was there a breach of natural justice with the result that the District Court judgment was irregularly obtained and ought to have been set aside?


[9] In addition, Associate Judge Faire removed a further point of law to this Court for consideration: HK AK CIV 2006-404-004219 3 March 2008. This arose in the following way. The respondent issued bankruptcy notices against the appellants in relation to the judgments entered against them by Judge Wilson. The appellants applied to set aside the notices. In that context Associate Judge Faire removed the following question of law to this Court, to be heard in conjunction with the appeal against Asher J’s judgment:

 

Whether an order pursuant to s 74 of the Construction Contracts Act 2002 that an adjudicator’s determination be enforced by entry as a judgment of the Court is a final judgment for the purpose of s 19(1)(d) of the Insolvency Act 1967 .

 

 

[10] Before addressing these issues, we set out the statutory provisions from the CCA that are most significant for present purposes.

 

Statutory provisions

 

[11] The CCA was intended to address problems that had arisen in the construction industry particularly in relation to payments and dispute resolution. Its purpose is set out in s3:

 

3. Purpose

The purpose of this Act is to reform the law relating to construction contracts and, in particular,–

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

(b) to provide for the speedy resolution of disputes arising under a construction contract; and
(c) to provide remedies for the recovery of payments under a construction contract.

 

As Mr Ren says, “the CCA is aimed at solving the cash flow problems common in the construction industry by facilitating quick payments”: “Enforcing Payment Obligations under the Construction Contracts Act 2002 ” [2006] NZBLQ 336 at 337.

 

 

[12] The CCA seeks to achieve its purpose through two processes, one relating to payment claims and the other to adjudication. The latter is at issue in the present case. The CCA establishes an adjudication process which a party to a construction contract has a right to invoke in relation to a dispute under such a contract (s25(1)(a)), subject to an (irrelevant) exception (s 25(3)). This right may be exercised even though the dispute is the subject of proceedings between the same parties in a court or tribunal (s 25(1)(b)). Where the adjudication process has been invoked, that does not preclude the initiation of some other dispute resolution process in relation to the dispute (s 26).

 

[13] Where an amount of money under a construction contract is claimed in an adjudication, the adjudicator must determine whether or not any of the parties is liable to make a payment under the construction contract (s 48(1)(a)) and, if so, the amount payable (s 48(3)). The adjudicator must also determine any questions in dispute about the rights and obligations of the parties under the construction contract (s 48(1)(b)).

 

[14] Where an adjudicator makes a determination under s 48(1)(a) that a party is liable to pay an amount to another, and that other party fails to pay, the CCA provides three remedies – debt recovery proceedings, suspension of work and entry of the adjudicator’s determination as a judgment (ss 58(1) and 59). The latter is the remedy at issue in the present case. It is dealt with principally in ss 73 and 74. Relevantly, they provide:

73. Enforcement of adjudicator’s determination

 

(1) This section applies if an adjudicator determines that a party to the adjudication is liable, or will be liable if certain conditions are met, to pay another party either or both of the following:

(a) an amount of money under the construction contract:

(b) any costs and expenses incurred in the adjudication (including any amount of contribution to the adjudicator’s fees and expenses that the adjudicator has determined is payable by one party but that has been paid by another party).
(2) If this section applies, a plaintiff may apply for the adjudicator’s determination in respect of the matters referred to in subsection (1) to be enforced by entry as a judgment in accordance with this subpart.
(3) The application –

(a) may be made to a District Court; and

(b) must be made in the manner provided by the rules of that court (if any)…

 

  1. Defendant may oppose entry as judgment

 

(1) If the defendant wishes to oppose the application under section 73, the defendant must, within 15 working days after the date on which the defendant is served a copy of the application, apply to the District Court for an order that entry of the adjudicator’s determination as a judgment be refused.

(2) The application for an order referred to in subsection (1) may be made only on the following grounds:

(a) that the amount payable under the adjudicator’s determination has been paid to the plaintiff by the defendant:

(b) that the contract to which the adjudicator’s determination relates is not a construction contract to which this Act applies:
(c) that a condition imposed by the adjudicator in his or her determination has not been met.

(3) If the District Court is satisfied that any of the grounds set out in subsection (2) applies, the District Court must–

(a) refuse the application under section 73 to enforce the adjudicator’s determination by entry as a judgment; and

(b) make an order accordingly.

(4) If the District Court is not satisfied that 1 or more of the grounds set out in subsection (2) applies, the District Court must–

(a) accept the application under section 73 to enforce the adjudicator’s determination by entry as a judgment; and

(b) enter the adjudicator’s determination as a judgment accordingly.

 

[15] Section 77 provides “for the avoidance of doubt” that an adjudicator’s determination entered as a judgment may be enforced by execution in accordance with the District Court Rules 1992.

 

[16] There are further sections of the CCA which are relevant to particular issues. We will deal with those as they arise.

 

Issue 1: District Court’s jurisdiction

 

 

[17] Mr Hucker submitted, on the basis of s 29 of the District Courts Act 1947 , that the District Court did not have jurisdiction to enter judgment under s 73 for more than $200,000. Relevantly, s 29(1) provides that the District Courts “shall have jurisdiction to hear and determine any proceeding where the debt, demand, or damages, or the value of the chattels claimed, is not more than $200,000, whether on balance of account or otherwise”. Sections 73 and 74 of the CCA were, Mr Hucker argued, subject to this limitation on the District Court’s jurisdiction. For Holmes Construction Mr Hughes argued that the District Court’s jurisdiction under ss 73 and 74 is not limited in that way. He submitted that ss 73 and 74 provide a special regime for the enforcement of adjudicators’ determinations under the CCA. He drew support for this submission from the CCA’s legislative history.

 

[18] As Asher J noted, the critical question is whether Parliament has, in the CCA, conferred jurisdiction on the District Court to enter judgment in relation to determinations for amounts in excess of $200,000. Sections 5 and 59 of the CCA are relevant to that issue.

 

[19] Section 5 defines “court” to mean the High Court or: a District Court in any proceeding in which the amount claimed or in issue does not exceed the amount to which the jurisdiction of the District Court is limited in civil cases.

 

 

[20] Section 59 deals with the consequences of not complying with an adjudicator’s determination. Section 59(1) and (2) provide:

(1) The consequences specified in subsection (2) apply if a party to the adjudication fails, before the close of the relevant date, to pay the whole or part of the amount determined by an adjudicator.

(2) The consequences are that the party who is owed the amount ( party A ) may do all or any of the following:

(a) recover from the party who is liable to make the payment ( party B ), as a debt due to party A, in any court –

(i) the unpaid portion of the amount; and

(ii) the actual and reasonable costs of recovery awarded against party B by that court:

(b) if party A is a party who carries out construction work under a construction contract, serve notice on party B of party A’s intention to suspend the carrying out of construction work under the contract:
(c) apply for the adjudicator’s determination to be enforced by entry as a judgment in accordance with subpart 2 of Part 4.

 

[21] Where proceedings are taken for the recovery of a debt under s 59(2)(a) the District Court will have jurisdiction only to the limit provided for in s 29 of the District Courts Act . This follows from the use of the words “recover ... in any court” in s 59(2)(a) and the definition of “court” in s 5.

 

[22] However, s 59(2)(c) provides that one of the options available to a party seeking to enforce an adjudicator’s determination is to apply to have it entered as a judgment under subpart 2 of Part 4. That is where ss 73 and 74 are found. The drafting of s 73 is materially different from that of s 59(2)(a). Section 73(3) provides that an application for the entry of an adjudicator’s determination as a judgment:

(a) may be made to a District Court; and

(b) must be made in the manner provided by the rules of that court (if any).

 

[23] Mr Hucker argued that the use of the word “may” was significant as it was “non-directory”. He submitted that the s 73 process was a fast-track alternative to the s 59(2) process, and was subject to the same limitation as to jurisdiction as applied in respect of that process. The fast-track process was applicable only in respect of smaller disputes.

 

[24] We do not accept Mr Hucker’s analysis. We consider that Parliament created a special regime for the enforcement of adjudicators’ determinations in ss 73 and 74 and conferred jurisdiction on the District Court in respect of it. The District Court’s jurisdiction under s 73 is not limited to claims of $200,000 or less. We make six points.

 

[25] First, the CCA was intended to provide for speedy resolution of disputes under construction contracts and to provide remedies for the recovery of payments (s 3(b) and (c)). The interpretation which we favour gives effect to that intention. By contrast, the view urged on us by Mr Hucker would leave a gap in the legislative scheme in relation to determinations in excess of $200,000.

 

[26] Second, s 4 gives an overview of the CCA. Section 4(h) states that “provisions enabling an adjudicator’s determination to be enforced by entry as a judgment on application to a District Court are set out in sections 73 to 78.” This unlimited language, while not decisive, is consistent with the interpretation which we favour.

 

[27] Third, as Asher J noted (at [21]), the original version of what became s 73(2) (clause 50A of the Bill) provided that an application could be made to “any Court of competent jurisdiction”. That wording was changed by Supplementary Order Paper (SOP) to “the District Court”. There is nothing to indicate that Parliament intended by this change to restrict the availability of the s 73 process to smaller claims. Rather, the Explanatory Note to the SOP makes it clear that the change was “intended to ensure consistency with the purpose of the Bill to provide for the speedy resolution of disputes”.

 

[28] Fourth, the use of the word “may” in s 73(3) does not have the significance Mr Hucker attributed to it. It simply authorises the making of an application to the District Court. The language of s 74 reinforces the point that an application for the entry of judgment may be made only to the District Court.

 

[29] Fifth, in at least one other context, the CCA makes it clear that the District Court has jurisdiction even though the amount of the dispute exceeds $200,000. Under s 50 an adjudicator may determine the liability of the owner of a construction site, and approve the issue of a charging order in respect of the site, even though the owner is not a respondent in the adjudication. Where that occurs, the owner has the right to apply to the District Court for a review (s 52). Section 52(2) provides that a District Court has the jurisdiction to hear and determine the review application “despite any limits imposed on District Courts by sections 29 to 34 of the District Courts Act 1947 ”. The District Court’s role on such a review is a substantive one – it must conduct the review as a “hearing de novo of the relevant dispute” (s 54(1)(a)). While there is no similar provision in relation to the s 73 process, s 52(2) makes it clear that Parliament was prepared to relax the jurisdictional limits normally applying to the District Court in the context of the CCA.

 

[30] Finally, the role of the District Court under ss 73 and 74 is a restricted one. An application to oppose the entry of judgment may be made only on limited grounds (see s 74(2), discussed in more detail at [39]–[43] below). The District Court is confined to addressing those grounds and must either refuse (s 74(3)) or grant (s 74(4)) the application for the entry of judgment depending on whether the judge is satisfied or not as to the existence of one of the grounds. Two of the grounds (s 74(2)(a) and (c)) are essentially factual. The third (s 74(2)(b)) is a legal question, but one which the District Court must consider in relation to claims that are clearly within its jurisdiction (i.e., for $200,000 or less). The fact that a claim is for an amount greater than $200,000 will, of course, not change the nature of that legal issue. The limited scope for opposition no doubt reflects Parliament’s objective of providing a speedy process. That, and the absence of discretion on the part of the judge, may explain, in part at least, why one court, the District Court, has been given responsibility for the s 73 process.

 

[31] Accordingly, we agree with Asher J that s 73 confers jurisdiction on the District Court to enter all determinations as judgments, whether they relate to amounts below or above $200,000. We note that this is also the view taken in Smellie Progress Payments and Adjudication (2003) at 94.

 

Issue 2: Right to an oral hearing

 

[32] As we have said, the appellants filed a notice of opposition to Holmes Construction’s application for the entry of judgment. Mr Hucker said that as a result Judge Wilson was obliged to hold an oral hearing and to allow the production of evidence and presentation of submissions. He submitted that the appellants had been denied natural justice, contrary to s 27(1) of the New Zealand Bill of Rights Act 1990 (NZBORA).

 

[33] Sections 73 and 74 do not identify the process to be followed when a person opposes an application for the entry of judgment. Further, as Asher J detailed (at [30] – [36]), there is nothing in the relevant District Court Rules or the associated standard form documents which indicates that there must be an oral hearing, as opposed to a hearing on the papers. Asher J rejected Mr Hucker’s argument that there should be an oral hearing because, once judgment was entered by means of the s 73 process, res judicata would apply. The Judge noted that, even though judgment had been entered against a party, that party could pursue his or her claims in relation to the construction project in court, arbitration or mediation: at [41]–[46]. The Judge concluded:

[48] The purpose of the enforcement of the adjudicator’s decision is therefore to provide a speedy mechanism for enforcing the determination and giving the plaintiff cashflow. It would be inconsistent with the streamlined, relatively inexpensive and temporary process created by the [CCA] for there to be a full oral hearing of an application to enforce an adjudicator’s determination, which would inevitably be time-consuming. It is more consistent with the purposes set out in the [CCA] for the District Court’s consideration of an enforcement application to be on the papers only. This does not, after all, deny the defendant a hearing. It does, however, limit the defendant opposing the decision to an expression of that opposition on paper.

 

 

[34] We agree with the Judge that no oral hearing was required in this case. However, we consider that there may be cases where an oral hearing will be required: see [45] below.

 

[35] Clearly Judge Wilson was required to act judicially in considering the applications before him, and to listen fairly to both sides. But that does not mean that he was required to hold an oral hearing. The statutory context in which the Judge’s decision was made is critical. First, as we have already said, the issues that a District Court judge is entitled to consider are limited in scope and specific in nature, and the judge has little or no discretion in terms of granting or refusing an application. Accordingly, there is no reason that the issues cannot be addressed by means of a hearing on the papers, at least in the great majority of cases. As we indicate further below, the adjudication process is not intended to be a process for the final resolution of all issues between the parties. Second, the timeframe for the adjudication process is tight (see ss 36, 37 and 46). This is carried through into the sections dealing with remedies. A person against whom the entry of judgment is sought has only 15 working days after service of the application within which to file his or her notice of opposition containing one or other of the specified grounds (s 74(1)). While by no means decisive, this limited timeframe tells against a requirement for an oral hearing in all cases, given the delay that would inevitably result from such a requirement. As Asher J said, a requirement for an oral hearing in every case would frustrate the statutory objective of providing a speedy enforcement remedy.

 

[36] In the present case, the appellants filed their application in opposition to Holmes Construction’s application for the entry of judgment under s 74(1), within the specified timeframe. The grounds upon which they made their application were as follows:

1. The contract relied upon by the Plaintiff to establish the liability of the Defendants was not a contract to which the Construction Contracts Act 2002 applies;

  1. In the event that it is found that the contract is not one of personal guarantee but is one to which the Construction Contracts Act 2002 does apply the Plaintiff had already been paid for the works covered under the contract with the Defendant during the payment of progress claims;

  2. The Plaintiff has been paid amounts in respect of the work carried out that it ought to have appropriated against the contract with the Defendants and not Willis Trust Company Limited;

  3. Pursuant to section 74 of the Construction Contracts Act 2002 the Court is obligated to refuse the application to enforce the adjudicator’s determination by entry as a judgment;

  4. The amount under the adjudicator’s determination insofar as it relates to the contract relied on with the Defendants has been paid to the Plaintiff by Willis Trust Company Limited; such payments constituting the progress payment made during the course of the Construction Contract;

  5. There is no jurisdiction to enforce the adjudicator’s decision by judgment in light of the factual circumstances relating to the entry into the construction contracts (to the extent there is a construction contract with the Defendants);

  6. An appeal has been lodged with the Court of Appeal from the judgment of Justice Harrison attached to the Plaintiff’s application; and

  7. Upon the grounds set out in Affidavits to be filed in support of this application.


[37] Ground 4 states a conclusion, not a ground and we put it to one side. Ground 8 refers to unspecified grounds set out in affidavits that were not filed before Judge Wilson made his decision and have not been filed since. As we have been provided with no particulars of these additional grounds, nor with any other indication of what the affidavits might have said, we put ground 8 to one side. We should make it clear that we do not accept that reference in a notice of opposition to further unspecified grounds in an unidentified affidavit or affidavits not yet filed places some onus on a judge to delay dealing with an application.

 

[38] This leaves six grounds, which may be summarised under four heads:

(a) The contract at issue was not a “construction contract” (ground 1).

(b) The appellants had already paid Holmes Construction for the work during the course of the contract (grounds 2, 3 and 5).
(c) There was no jurisdiction under s 73 given the factual circumstances surrounding the entry into the contract (ground 6).
(d) The appellants had lodged an appeal against Harrison J’s judgment (ground 7).

 

[39] As we noted above, s 74(2) provides only three bases on which the appellants could oppose Holmes Construction’s application. The first was that the amount payable under the adjudicator’s determination had been paid (s 74(2)(a)). Asher J held that s 74(2)(a) referred to payments made since the adjudicator’s award: at [52]. We agree with that view. It is reinforced by the statutory prohibition on a person against whom a determination has been made raising a counter-claim, set-off or cross demand in opposition to an application for the entry of judgment. Section 79 provides that “in any proceedings for the recovery of a debt ... under s 59”, a court must not give effect to any counter-claim, set-off or cross-demand, except where there is a set-off for a liquidated sum in respect of which either judgment has been entered or there is no dispute that it is payable. As we have said, s 59(2)(c) identifies the s 73 process as a remedy available to a person in whose favour a determination under s 48(1)(a) has been made. Accordingly, the phrase “any proceedings for the recovery of a debt ... under s 59” in s 79 must include an application under s 73 (see Volcanic Investments Limited v Dempsey & Wood Civil Contractors Limited (2005) 18 PRNZ 97 at [19] (HC) and Smellie at 99 and following).

 

[40] In the present case there is no dispute that the amount which the adjudicator ordered the appellants to pay has not been paid. While grounds 2, 3 and 5 of the appellants’ notice refer to payments to Holmes Construction, it is clear from the way they are framed and from Mr Hucker’s submissions that they relate to payments made prior to the determination. In particular, what is alleged is that certain payments made by Willis Trust were misallocated, in that they were not intended to discharge the obligations of Willis Trust to Holmes Construction but rather were intended to meet the appellants’ obligations to Holmes Construction. To the extent that such payments were relevant, they should have been raised with the adjudicator during the adjudication, perhaps made the subject of adjudication themselves or pursued in separate proceedings: see Volcanic Investments at [34].

 

[41] The second permissible ground is that the contract at issue was not a construction contract (s 74(2)(b)). But Harrison J held in the review proceedings that the contract between Holmes Construction and the appellants was a construction contract: at [79]. As Judge Wilson rightly said, he was bound by that finding: at [7]. The fact that Harrison J’s decision was under appeal does not affect that. In any event, that appeal was subsequently abandoned.

 

[42] The final permissible ground for objection is that a condition imposed by the adjudicator in the determination has not been met (s 74(2)(c)). No such issue arises in the present case, however.

 

[43] It follows from this analysis that ground 6 (the challenge to jurisdiction) was not a valid ground of opposition, although it may have been relevant in the context of the appellants’ judicial review application. In any event, the “factual circumstances” relied upon were not identified or described.

 

[44] We conclude that the District Court Judge was not required to hold an oral hearing in the present case. Considering the grounds raised in the notice of opposition against the permitted grounds in s 74(2), the Judge was obliged (by virtue of s 74(4)) to reject the appellants’ notice and enter the determination as a judgment. This was because the payments referred to in the notice were pre-determination payments and therefore not relevant under s 74(2)(a), the Judge was bound by the High Court’s finding that there was a construction contract (s 74(2)(b)) and there were no conditions attached to the determination (s 74(2)(c)). There was no breach of s 27(1) of NZBORA.

 

[45] However, we do not want to suggest that a District Court judge will never be required to hold an oral hearing where a notice of opposition is filed under s 74. There may be exceptional cases where, in order to address one or other of the permitted grounds of opposition, a judge should hold such a hearing. An example is where there is a dispute as to whether payment has been made since the determination, which cannot be resolved on the affidavits.

 

Issue 3: Relevance of payments made prior to determination

 

[46] It follows from what we have already said (at [39] above) that we consider that s 74(2)(a) refers to payments made after the date of the determination and not to payments made earlier. An adjudicator’s award is not intended to be a final determination of all issues between the disputing parties. Rather, it attempts to provide a speedy mechanism by which a person providing construction services can obtain payment and ensure some cashflow before final resolution of all issues between the parties. As the Finance and Expenditure Committee said when reporting to the House on the Construction Contracts Bill (at 1):

The bill establishes a quick and inexpensive adjudication process to aid in the resolution of disputes. The adjudicator’s decision is binding but not final.

 

Issue 4: Effect of Judge’s finding that District Court Judge had failed to consider s 74(2)(a)

 

[47] Asher J accepted that Judge Wilson had failed to address the payments issue in his judgment, but held that this did not undermine the Judge’s conclusion that the determination should be entered as a judgment because pre-determination payments were irrelevant: at [13] and [52] – [53].

 

[48] We agree with the Judge’s analysis. Judge Wilson did overlook the payment argument, but it could not assist the appellants in any event. Accordingly there has been no material breach of the obligation to act fairly and hear both sides. Despite that, it would of course have been preferable had Judge Wilson specifically explained why the alleged payments alleged were irrelevant.

 

Issue 5: Finality of judgment for purposes of s 19(1)(d) of the Insolvency Act 1967

 

[49] Section 19(1)(d) of the Insolvency Act 1967 (which governs this case – see s 444 of the Insolvency Act 2006 ) provides:

  1. Acts of bankruptcy

(1) A debtor commits an act of bankruptcy in each of the following cases:

 

(d) If a creditor has obtained a final judgment or final order against the debtor for any amount, and execution thereon not having been stayed, the debtor has served on him in New Zealand ... a bankruptcy notice under this Act, and he does not, within 14 days after the service of the notice in a case where the service is effected in New Zealand ... either comply with the requirements of the notice or satisfy the Court that he has a counter-claim, set-off or cross demand which equals or exceeds the amount of the judgment debt or sum ordered to be paid, and which he could not set up in the action in which the judgment was obtained, or the proceedings in which the order was obtained.

 

 

[50] Mr Hucker argued, by reference to various (mainly United Kingdom) authorities, that there was no final judgment for the purposes of s 19(1)(d) in the present case. He said:

... for there to be a final judgment ... there must be a final determination of the parties’ rights (that is not provisional and/or defeasible) and an opportunity to raise any cross-claim and/or set-off in reaching the judgment must have been available. In short there must be an issue estoppel and/or cause of action estoppel created. The judgment and/or order must not be provisional and/or defeasible in itself.

Mr Hucker submitted that an adjudicator’s determination entered as a judgment simply created “a provisional judgment for the purposes of cashflow”.

 

 

[51] By contrast, Mr Hughes submitted that the adjudication was a final determination in respect of the payment claim to which it related, but did not determine the rights of the parties under the construction contract as a whole. He relied in particular on Cavanah v Advance Earthmoving & Haulage Pty Ltd [2008] FMCA 427, a decision of the Federal Magistrates Court. That case concerned the Queensland equivalent of the CCA, the Building and Construction Industry Payments Act 2004, which, like the CCA, was modelled on the New South Wales legislation. As a result of an adjudication under the Act the applicants were required to pay the respondent a sum of money. When they did not pay, the respondent converted the adjudicator’s determination into an enforceable judgment in accordance with the statutory procedure. When that judgment was not met, the respondent issued bankruptcy notices against the applicants. The question for the Court was whether the bankruptcy notices should be set aside on the ground that the respondent’s judgment was not a “final” judgment in terms of the equivalent of s 19(1)(d). The Magistrate held, on the basis of the statutory scheme, that it was a final judgment.

 

[52] In the present case, the adjudicator’s determination was made under s 48(1)(a). However, while the adjudicator’s determination under s 48(1)(a) was binding on the parties (see s 60 of the CCA), it was not final in the sense that it did not finally resolve all aspects of the dispute between them. The CCA adopts a “pay now, argue later” philosophy, so that determinations are in a sense temporary and incomplete. So:

(a) Sections 25 and 26 of the CCA recognise that, despite the reference of a matter to adjudication, other dispute resolution processes (such as court action, arbitration or mediation) may be pursued, although they do not automatically bring the adjudication to an end. The adjudication process must terminate only if some other dispute resolution process determines the dispute before the adjudicator reaches a determination (s 26(3)).

(b) Adjudicators’ determinations about the rights and obligations of the parties under a construction contract in terms of s 48(1)(b) or s 48(2) are not enforceable in the same way as determinations for the payment of money under s 48(1)(a). This is so even where those matters are addressed in a determination dealing with a monetary claim: see ss 58(2) and (3). Where an adjudicator determines a question in dispute about the rights and obligations of the parties and a party fails to comply fully with the determination, the other party may bring court proceedings to enforce his or her rights. But while the court must have regard to the adjudicator’s determination, it is not bound by it: s 61.

(c) While there may be an opportunity in some cases for a party who wishes to raise a counterclaim, set-off or cross demand to do so in the course of an adjudication (for example, when serving the written response to the adjudication claim under s 37), this will not always be possible. That, together with the prohibition in s 79 on raising a counterclaim, set-off or cross-demand in proceedings for the recovery of a debt under s 59, also means that an adjudicator’s determination may not finally resolve the full dispute between the parties.

 

 

[53] But that does not mean that an adjudicator’s determination under s 48(1)(a) which has been entered as a judgment is incapable of enforcement. As we noted earlier, s 77 recognises that such a judgment may be enforced through the execution processes provided for in the District Court Rules. Section 79 of the District Courts Act 1947 identifies several enforcement possibilities, for example garnishee proceedings. Equally relevant are the CCA’s provisions for the making and enforcement of charging orders (see ss 29, 49, 76 and 78, which, like s 77, is a “for the avoidance of doubt” provision). While there is no similar “for the avoidance of doubt” provision in relation to the Insolvency Act , we consider that the same principle applies. Accordingly we consider that a judgment entered under s 74 is final judgment for the purposes of s 19(1)(d).

 

[54] Under s 19(1)(d) a debtor is entitled to have a bankruptcy notice set aside if he or she can satisfy the court that he or she has a counterclaim, set-off or cross demand which equals or exceeds the amount of the judgment debt which could not be raised in the proceedings giving rise to the judgment. As we note above, while there will be cases in which such a claim can be raised in the context of an adjudication, there will be instances where that is not possible, for example, where the matters giving rise to the claim occur after the events with which the adjudicator was concerned. Equally, it may not be possible to have the claim resolved in separate proceedings before there is an application for the entry of a determination as a judgment. In these circumstances, because of s 79 of the CCA the claim could not be raised in the context of the s 73 process. The question is whether it may be raised in the context of s 19(1)(d).

 

[55] Randerson J addressed a similar issue in Volcanic Investments concerning the relationship between the s 73 process and the winding up provisions in the Companies Act 1993 . Dempsey & Wood obtained a determination from an adjudicator under the CCA that Volcanic was liable to pay it a specified amount under a construction contract by a specified date. Volcanic did not pay the amount by the due date. Accordingly, Dempsey & Wood issued a statutory demand for payment to Volcanic under s 289 of the Companies Act . Volcanic responded by applying for an order under s 290 of the Companies Act setting aside the demand. While Volcanic raised various grounds, it emerged in argument that the principal ground was that Volcanic claimed a set-off for losses said to have resulted from delay by Dempsey & Wood in carrying out the work, losses which Volcanic was seeking to recover in District Court proceedings. Volcanic’s application was made in reliance on s 290(4), which provides:

The Court may grant an application to set aside a statutory demand if it is satisfied that–

(a) There is a substantial dispute whether or not the debt is owing or is due; or

(b) The company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or
(c) The amount ought to be set aside on other grounds.

 

[56] In opposing Volcanic’s application to set aside the demand, Dempsey & Wood relied on s 79 of the CCA.

 

[57] Randerson J held that the words “proceedings for the recovery of a debt” in s 79 include the issue of a statutory demand and the institution of winding up proceedings: at [20]. The language of s 79 was plain – a court was prohibited from giving effect to any counterclaim, set-off or cross demand, except in limited circumstances: at [21]. Section 79 prevailed over s 290(4)(b) of the Companies Act : at [26]–[35]. Randerson J ordered Volcanic to pay the amount of the statutory demand within 14 days. In default of payment, Dempsey & Wood could apply to put Volcanic into liquidation: at [38].

 

[58] The approach taken in Volcanic has been adopted subsequently: 10 Gilmour Ltd v Tracer Interiors and Construction Ltd HC WG CIV 2005-485-2009 6 December 2005, Sci Development & Construction Ltd v NZ Built Ltd HC AK CIV 2005-404-3656 23 December 2005, Freemont Design & Construction Ltd v Nature’s View Joinery Ltd t/a Nebulite Waikato HC HAM CIV 419-269 26 July 2006 and Kizer Buildings Ltd v OEC Construction Ltd HC WN CIV 2006-485-2287 16 November 2006.

 

[59] In the article referred to at [11] above, Mr Ren argues that the decision is wrong, on the basis that the steps contemplated under the Companies Act do not fall within debt recovery proceedings under ss 23, 24 or 59 of the CCA within the meaning of s 79: at 353–354. As a consequence, s 79 does not override s 290(4), and a company against whom a demand has been made on the basis of an unsatisfied judgment resulting from the s 73 process may have it set aside if it satisfies the court that it has a counterclaim, set-off or cross-demand.

 

[60] Mr Ren’s analysis was adopted by Associate Judge Doogue in Silverpoint International Ltd v Wedding Earthmovers Ltd HC AK CIV 2007-404-104 30 May 2007. The Associate Judge said that the statutory demand procedure was not a proceeding for the recovery of a debt: at [77]. He said that the primary object of liquidation proceedings was “the collection and distribution of the assets among unsecured creditors after payment of preferential debts”: at [79]. The Associate Judge went on to say:

 

[83] My conclusion is that while liquidation proceedings are de facto used to exert pressure on [a] company to pay their debts, the end in view, and the objective of, such a proceeding is not a “proceeding for the recovery of a debt”. Therefore [a] preliminary step leading up to those proceedings, the issue of a statutory demand, cannot itself be a “proceeding” within the meaning of s 79.

 

[61] We emphasise at this point the distinction between an application to set aside a bankruptcy notice or a statutory demand on the one hand and an adjudication of bankruptcy or order to wind up a company on the other. The question we are asked to resolve concerns the former. In that context, we prefer the view expressed by Randerson J in Volcanic Investments. We find some assistance in the exceptions provided for in s 79. Under that section, a set-off may be taken into account in debt recovery proceedings (including the s 73 process) if it relates to a liquidated amount and either judgment has been entered for that amount or there is no dispute between the parties in relation to the claim for that amount. Absent that, a determination can be entered as a judgment under s 73 and enforcement proceedings taken through the District Court, and any counterclaim, set-off or cross-claim must be pursued through separate proceedings.

 

[62] If that is the position in relation to the enforcement processes available through the District Court, or where there is a charging order under the CCA, there seems in principle to be no reason why it should not apply in respect of a bankruptcy notice under s 19(1)(d) of the Insolvency Act or a statutory demand under the Companies Act . It is true that such processes have an additional dimension to them, in the sense that ultimately they lead to a process which focuses on liquidity and asset worth. It is also true, as Associate Judge Doogue said, that bankruptcy and liquidation proceedings have a broader objective than simply ensuring that a particular creditor is paid. Despite that, bankruptcy notices and statutory demands are, in a practical sense, important enforcement mechanisms, as Randerson J recognised. And in the present case, the debt which Holmes Construction seeks to recover has the force of a court judgment behind it. This is not a case where a creditor has sought to use bankruptcy or liquidation proceedings to recover a small amount from a person or company which can plainly afford to pay it.

 

[63] If the contrary view were to be adopted, the efficacy of the s 73 process would, in our view, be undermined. Parties to construction contracts could refuse to pay an amount ordered by an adjudicator, and resist bankruptcy notices or statutory demands in relation to the debt, on the basis that they had a counterclaim, set-off or cross-demand. The effect of this would simply be to recreate similar problems to those which led to the enactment of the CCA, albeit in a different context.

 

[64] We acknowledge that this approach may produce hardship. A party may have a meritorious counterclaim, set-off or cross-demand and may not raise it in the context of the CCA or by means of separate proceedings. Yet that party may be precluded from raising it in an application to set aside a bankruptcy notice or a statutory demand that follows an unsatisfied judgment issued under s 74. This seems hard. But while the adoption of the alternative view would alleviate this hardship, it would, as we have said, create another hardship – it would keep the party in whose favour the adjudicator had ruled from its entitlement under the CCA, and thereby frustrate its purpose.

 

[65] We emphasise again that we were asked to consider only the first of the two stages referred to at [61] above. It may be that different considerations arise at the point that the court must determine whether it will exercise its discretion to adjudicate a judgment debtor bankrupt or order the liquidation of a company: see AMC Construction Limited v Frews Construction Limited [2008] NZCA 389 at [7]. But that is a point on which we express no opinion.

 

[66] In the result, we consider that, although the dispute between the parties under a construction contract may not be finally resolved when a determination is entered as a judgment, the judgment is “final” for the purpose of s 19(1)(d). Although the statutory context is in some ways different, we agree with this aspect of the decision in Cavanah .

 

Decision

 

 

[67] We answer the questions posed as follows:

 

Question 1:

Does s 29 of the District Courts Act 1947 apply to limit the jurisdiction of the District Court where an application is made under s 73 of the Construction Contracts Act 2002 to enforce an adjudicator’s award as a judgment to entering a judgment in an amount of no more than $200,000.00?

 

Answer:

No.

 

Question 2:

Is a party, having made an application to prevent an adjudicator’s award being entered as a judgment, entitled to the observance of the principles of natural justice, and does the observance of those principles require a hearing to be convened and/or a date of hearing to be allocated by the Court?

 

Answer:

The party is entitled to the observance of the principles of natural justice, but that does not mean he or she is entitled to an oral hearing (as opposed to a hearing on the papers).

 

Question 3:

Does s 74(2)(a) of the Construction Contracts Act 2002 prevent enquiry into whether amounts found to be payable by an adjudicator have in fact been credited or paid to the party in whose favour the adjudicator’s award was made where such payment or credit arose prior to the adjudicator’s determination being made?

 

Answer:

Yes.

 

Question 4:

In holding that the learned District Court Judge failed to consider the ground advanced under s 74(2)(a) of the Construction Contracts Act 2002 at all, was there a breach of natural justice with the result that the District Court judgment was irregularly obtained and ought to have been set aside?

 

Answer:

No.

 

Question 5:

Is an order pursuant to s 74 of the Construction Contracts Act 2002 that an adjudicator’s determination be enforced by entry as a judgment of the Court a final judgment for the purpose of s 19(1)(d) of the Insolvency Act 1967 ?

 

Answer:

Yes.

 

 

Decision

 

[68] It follows that the appeal is dismissed. The appellants must pay the respondent costs for a standard appeal on a band A basis, plus usual disbursements.

 

 

 

Solicitors:
Hucker and Associates, Auckland for Appellant
Kensington Swan, Auckland for Respondent