The starting point for this discussion is the Construction Contracts Act 2002.  Section 80 sets out the usual methods of service such as personal service, last known business address or post.  However section 80(d) opens up the possibility of an alternative method of service as stipulated in the Construction Contract Regulations 2003.  In particular Regulation 9 provides that any document prescribed by the Act can be served by email or other means of electronic communication so long as Regulation 10 is adhered to.

Regulation 9(3) then addresses what must be established to prove service via method of electronic communication, and when service is to have effect.  It records that where the recipient has designated an information system for the purpose of receiving email or other electronic communications, it will be deemed received/served at the time the email or communication enters that information system, or alternatively at the time the email communication comes to the attention of the recipient.  It is to be noted at Regulation 9(4) information system is defined to mean a system for producing, sending, receiving, storing, displaying or otherwise processing emails or other electronic communications.

Regulation 10 states that a document may be sent by email or other electronic communication only if the information contained within the notice/document is readily accessible, and the recipient has consented to being served in that manner.  However Regulation 10(2)(b) goes on to explain that consent may be inferred from a person’s conduct.

Potentially the provisions contained within the Contract and Commercial Law Act 2017 which absorbed the provisions on electronic communications formerly included in the Electronic Transactions Act 2002 (now repealed) are of application, however they add nothing to the position under Regulations 9 and 10 of the Construction Contracts Regulations 2003.

So to summarise, the Construction Contracts Act 2002 and its Regulations contemplate service by way of email.  However service by email must be consented to either expressly or by route of inferred consent through a party’s conduct.  In order to establish service is complete, the email must have entered the recipient party’s designated information system or failing that, be brought to the attention of said recipient.

Is it still problematic proving service by email?

It is apparent though, that Regulation 9(3) creates a potential difficulty in terms of proving service of an email.  Whilst the sender may be able to establish that the email was sent to a specific email address, this is not the same as establishing that the email sent entered the recipient’s designated information system.  In particular there are a whole host of reasons why an email would not ultimately reach the prescribed information system.  By way of example there may be a problem with the host server where emails are not being dispersed or alternatively a virus scan may prevent an email/attachment being delivered.  This list of reasons why an email sent may not reach an intended recipient is not meant to be exhaustive.

Full proof method of service via email. 

It seems to me that in light of the potential difficulty with the interpretation of Regulation 9(3), the sender of a required document under the Construction Contracts Act 2002 is vulnerable to an argument to the effect that the said document was not received in my designated information system.  In order to prevent any possibility of such an argument on service being raised, the full proof method so as to prove service is for the sender to activate the “delivery receipt and “read receipt” tools in its own information system as it sends the email, and to print the confirmations when they arrive.  In this way, the proof requirements of email set out in Regulation 9(3)(a) and (b) are easily met.  It is noted that on some systems though the reader receipt tool can be controlled by the recipient.

It is not surprising therefore some construction contracts expressly require the additional steps (“read receipt” and/or “delivery receipt”) before service is deemed effective.  However these express terms contained in the contract would still be subject to the less specific wording contained in section 80 of the Construction Contracts Act 2002 and Regulations 9 and 10.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

The background

MT HA,jgaard A/S (MTH) designed and installed foundational structures for two windfarms, which failed shortly after the completion of the project. The question posed was whether MTH were liable for this failure.  This was an appeal by E.ON Group (“E.ON”).

The relevant provisions of the Technical Requirements and J101

In May 2006 the appellants, E.ON Group sent documents to MTH, which included Employer’s Requirements, and Technical Requirements (“TR”), and set out the “general description of works and scope of supply, and the key functional requirements”. These included designs which could withstand operational and environmental conditions for a lifetime of 20 years without any aspect having to be replaced.

Subsequent events

MTH completed the construction of the foundation structures for the two wind farms.  This work was completed by February 2009.  However later in 2009 a problem arose with the wind farms’ foundations.  In determining who would pay for the remedial works, MTH argued they had exercised reasonable skill and care and had complied with its contractual obligations so should not bear the costs; E.ON said that MTH had been negligent and had breached the contract. The cost of the remedial work amounted to 26.25m pounds.

Put simply, the reason for the failure of the foundations was the use of grouted connections rather than shear keys, which were not of sufficient strength to manage the structures.  In particular, whilst the TR requirements enabled MTH to make its own decisions on using grouted connections rather than shear keys, it transpired that the strength of the grouted connections had been over estimated in the specific Engineer’s calculation by a factor of about ten, which meant that its strength was substantially over estimated.  It follows that shear keys ought to have been used in the foundations rather than the grouted connections.

The meaning of design warranty of 20 years. 

The question for the Court was whether, in light of the design warranty, MTH was in breach of contract, despite the fact that it had complied with the design specification.  When the natural meaning of the design warranty was considered, it involved MTH guaranteeing that the foundations would have a lifetime of 20 years.  

In deciding this question, the Court had to apply ordinary principles of contractual interpretation to the provisions of the particular contract and its commercial context. Several cases were discussed.

The Courts generally give effect to the requirement that a work is produced to the requested standard on the basis that even if the customer has specified the design, it is the contractor who will take the risk if he agreed to comply with a specific design which would make it incapable of meeting the performance criteria to which he agreed.  If the design specification was not able to meet the design performance criteria, MTH would be liable for the failure to comply with the required criteria, as it needed to identify the improvements needed to meet the design performance criteria.

The Court said that it is no excuse to say a contract was poorly drafted, the intention of the parties can be construed from the interpretation of the language, and the relevant factual matrix.  In this case, when interpreting the design warranty, it uses natural words as to the 20-year design life of the works, and imposes a clear duty on MTH. Further, it is difficult to argue that a contractual provision should not be given its natural meaning.

In addition, the Supreme Court ruled that where a contract imposes two different standards/requirements, rather than the Court concluding that they are inconsistent, the Court ought to impose the more rigorous standard upon the contracting party.

In conclusion then, this English decision says it is not enough for a contractor to slavishly follow a design specification, and if due consideration is not given by a contractor as to whether the design specification will meet the design performance criteria, then the contractor will be liable for the works not reaching the said performance criteria.  This decision (whilst English) will still be highly persuasive authority for any NZ Court charged with deciding upon this issue.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Introduction/Summary

Straw Homes Limited (S) was employed to build a home for Mr Jefferson and Ms Wilson (J). There were delays and cost overruns in the work completed by S, which J refused to pay for. J purported to cancel the contract, employing other contractors to complete the works.

S brought a claim for its unpaid invoices and J subsequently made a counterclaim against S and its principal (the second respondent, Mr Neill), alleging negligence. J claimed that this was a fixed fee contract and sought damages for the costs of completing the new house.

The District Court found this was not a fixed fee contract. It found that S was negligent in failing to advise J of the cost implications of building a larger house but found that J had not suffered any loss, and therefore dismissed the claim.

The Facts

On 30 September 2008, J signed a building contract with S. The contract price was not stated, there was no description of the contract works, and there was no completion date. J had limited funds to spend on the new build, and had set themselves an upper limit of $600,000 to complete the build.  S was made aware of this.

J engaged an architect who drew up plans for them, one design having a floor area of 414m2, and the other design having a floor area of 375m2. The size of the upstairs area and the overall design was not settled when Mr Neill obtained prices for the estimate he provided to J.

An estimate of the house given by S was $646,060.53 excluding GST for a house with the floor area of 278m2 and recorded that this was “a price estimate for the [appellants’] home”.  A second version of this estimate was prepared which included the use of the words “this is a fixed price estimate of $646,060.63 etc”, which J requested be inserted into a copy of the signed contract as the “contract price”.  No other changes were made to the copy of the contract.  It continued to describe the contract as “managed labour only”, no other plans or description of work was attached to the contract. It was this version of the contract that was supplied to J’s Bank.

Following the granting of consent, work commenced in May 2009. During the building process, many changes were made to the design of the house, as suggested by Mr Neill and agreed by J.

In February 2010, J enquired as to the total costs required to finish the project. S responded saying that there was still approximately $100,000 required to finish the build, excluding GST, electrical work and installation of the kitchen. The relationship between J and S quickly deteriorated because of concerns surrounding the cost of the build, and the increasing number of unpaid invoices.

The District Court proceeding

S issued proceedings against J to recover the unpaid balance of their invoices, being $149,218.62.

J counterclaimed for a total of $190,728.26, being the cost they incurred with another contractor in completing the build after cancelling the contract with S, less the balance owing if the contract had a fixed price.  They alleged breach of contract, negligence, breach of Consumer Guarantees Act 1993, misrepresentation and breach of section 9 of the Fair Trading Act 1986 (misleading and deceptive conduct). J further claimed personally against Mr Neill (the second respondent) for negligence and misleading and deceptive conduct.

The District Court held that S was entitled to recover the unpaid invoices and that Mr Neill was negligent in one aspect as to price escalation, but no loss could be proven as a result of his negligence.

Issue 1: was this a fixed price contract

The High Court decision

The Court held the words ‘contract price’ could not be read in isolation, and the contractual matrix as a whole needed to be examined. The question was ‘what a reasonable and properly informed third party would consider the words of the contract to mean’, otherwise known as the ‘objective intention’ test.

In assessing what a reasonable and properly informed third party would consider the intended words to mean, the High Court concluded that the words ‘contract price’ meant an estimate. A reasonable third party would be aware that S/Mr Neill was not in a position to provide a fixed price. Further, if the parties had agreed to a fixed price, J would have been expected to protest the moment the price exceeded the ‘contract price’. Instead, J was concerned with the number of hours that were still left to complete the build rather than the price still to be paid.

Therefore, the District Court did not err in their decision.

Issue 2: had the appellants proven loss caused by negligence

The negligence claim

On appeal, it is apparent that neither J nor S was challenging the District Court finding that S owed J a duty of care to provide accurate cost estimates before the work was commenced or variation work was undertaken so that J was given the opportunity to make decisions so as to remain within their financial limits.

Whilst J argued that the District Court finding that J had suffered no loss was wrong, the High Court agreed with the District Court.  It said it was incumbent upon J to establish to the balance of probabilities that it had suffered a loss as a result of breach of the duty.  Whilst evidence was given that the building works had cost more than J had anticipated, the simple fact was that J had received the benefit of these building works in the substantial completion of their house.  No evidence was adduced that the works paid for, were not worth the value that was paid for them.  Whilst there was a last minute attempt to introduce this type of evidence, it was not allowed.

Result

The appeal to the High Court was dismissed. This decision establishes that if a party to a construction contract wishes to succeed in an argument that it is a fixed price contract, clear and unequivocal language must be used.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Background

The applicant, Lot 8 Investment Limited (Lot 8) applied to the High Court to have RPS Construction Limited (RPS’) statutory demand set aside, which claimed an amount of $54,067.07, in relation to the first and second payment claims issued by RPS.

RPS was contracted to do building work for Lot 8. RPS completed work between 28 November 2016 and 31 December 2016. RPS issued their first payment claim on 1 January 2017 for $48,034.58, and its second payment claim on 7 February 2017 for $32,494.24 (which was before the first payment claim was due, being 9 February 2017). The first payment claim was incorrectly required to be paid by 30 January 2017 but because the parties had not made a prior agreement as to the due date, the Construction Contracts Act 2002 (CCA) required that payment be made within 20 working days, being 9 February 2017.

The parties building contract was terminated on 31 January 2017.

The purpose of the CCA was recorded in the judgment as being to ensure that payees’ payment obligations are complied with, except for good reason properly authorised by the Act. A payment claim is to be paid in full unless a valid payment schedule is issued in response within 20 working days. The schedule is required to contain a sufficient explanation of why the payer is paying less than invoiced.

The payment schedules

On 9 February 2017, Lot 8 provided a single payment schedule in response to both of RPS’ payment claims (1 and 2). The payment schedule was issued within the correct amount of time as required by the Act, being within 20 working days from the date that the first payment claim was issued, and provided reasons for Lot 8’s payment of $34,796.63.

On 6 March 2017, Lot 8 emailed RPS with a second payment schedule in relation to the second payment claim which supported its first payment schedule. The latter payment schedule identified a recent discovery of boxing and foundation work which was incorrectly located and would need removing/replacing.

Submissions

RPS argued that Lot 8’s single payment schedule referred to both payment claims 1 and 2, stating that the Act requires a payment schedule to relate to only one claim. Because Lot 8’s single payment schedule referred to two payment claims, it was impossible for RPS to determine what amount was being paid by Lot 8 in relation to each payment claim.

Lot 8 in response submitted that the payment schedule was compliant because it was in writing, identified the payment claims to which it related, and indicated the amount for which it accepted liability. The email that the schedule was sent with further identified Lot 8’s complaints concerning defective work, poor workmanship and overcharging of RPS. 

The Court looked at the purpose of the CCA, being to prevent claims of poor workmanship without reason. Therefore, unless the payment schedule is compliant with section 21, liability for payment cannot be avoided. These rules were created for the purpose of protecting payees, and ensuring prompt and proper payment.

The Court then examined section 21 together with Loveridge Ltd v Watts & Hughes Construction Ltd, which implies that there should only be one payment schedule responding to each payment claim because of the confusion that would arise if this position were not complied with.

Findings

The Court held that section 21 does not prevent someone from using a single payment schedule to answer two payment claims so long it is delivered within the requisite time frame for responding, and it clearly identifies the work and cost issues affecting both payment claims. This is to ensure that the scope of any deduction claims are clearly shown and can be understood. Lot 8 was required to have responded to RPS’ first payment claim on 9 February 2017. It received RPS’ second payment claim on 7 February 2017. Because Lot 8 received the second payment claim within the initial 20 working days, it was allowed to issue a single payment schedule in response to both claims so long as it complied with section 21.

Lot 8’s payment schedule clearly referred to each payment claim separately, including its calculation of the valuation of works completed by RPS. The schedule provided sufficient details and reasons in response to the payment claim.

The Court further noted that a payment schedule is not required to provide a line-by-line assessment, or to link each aspect of challenge to an analysis of charges made, or to literally comply with section 21.

Accordingly the Court ruled that the payment schedule did comply with section 21 such that the amount sought in the statutory demand was not a debt due by operation of section 23 of the CCA, but rather a disputed amount. The statutory demand was therefore set aside.     

Postscript

This case is High Court authority recording that you can use one payment schedule for 2 payment claims so long as you  comply with the requirements of section 21 of the CCA.  

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Background/Dispute

Floorman Waikato Limited (F) was engaged by Mr McRae (M) to sand and coat his floors. F said that different options and pricing for flooring were discussed and said that he could not determine which option was best until he had seen the condition of the floor (solvent based polyurethane costing $5,535 and water based polyurethane costing $6,150). M said that the different options and prices were not explained to him, and he was told that it would cost him no more than $5,500. On this basis, M told F to go ahead with the work.

On completion, F and M inspected the floors, and although he did not communicate it at the time, M was dissatisfied with the overall quality of the job.

Shortly after the final inspection, M received an invoice for the total amount of $7,072.50 ($6,150.00 plus GST of $922.50). At the back of the invoice, information regarding payment claims and payment schedules were attached, which M did not read. There was further dispute surrounding whether/when F and M had contact after the invoice was issued. F’s solicitors demanded payment for which M replied saying that he would pay a portion of the invoice as he was dissatisfied with the quality of work.

District Court

In the District Court, Judge Ingram declined the application for summary judgment on two bases: that M had a defence to the claim as it was arguable that there was no contract between F and M; and further, that there were concerns surrounding the application of the Construction Contracts Act 2002 (CCA). Judge Ingram commented that the work undertaken by F, namely sanding and polishing was not a construction job and therefore did not fall within the ambit of the CCA.

Submissions

F raised three issues to determine on appeal, namely:

1. Is it reasonably arguable that there was no construction contract?
2. Whether floor sanding is within the jurisdiction of the CCA?
3. Is it appropriate for the court to exercise discretion to decline entering summary judgment if there is no defence to the Acts ‘pay now, argue later’ statutory regime?

Evaluation

Did the Judge err in finding that there was no concluded contract?

The High Court held that since both the parties had agreed for the work to be carried out, a contract existed between them. This was affirmed through M instructing and engaging F to undertake the work.  Although the price for the work was not decided at the time the contract was entered into, this made no difference in determining whether there was a contract between the parties, as the price would depend on the material chosen thereafter.

Did the Act apply to the work in question?

The High Court agreed with F that the CCA did apply to the works undertaken by F.   There was nothing in the CCA to suggest that it only applied to jobs of new work, or to jobs over a certain worth, or to jobs involving professional tradespeople.

Did Mr McRae have another defence to the claim?

M submitted a variety of other defences to the claim, including that F’s payment claim was not sufficiently itemised in terms of differentiating between the different materials used and labour costs. Section 20 of the CCA requires a payment claim to indicate the manner in which the payee calculated the claimed amount. In this case, F had calculated the invoice amount based on m2, which constituted an adequate calculation method.

Another issue raised by M was that he was never told that the payment schedule must be in writing. F’s payment claim contained all of the necessary information along with the words ‘please refer to the attached notice, (form 1 of the Construction Contracts Regulation 2003)’. M acknowledged that he did not read the notice. If he had, he would have seen the requirements of a payment schedule.

Did the judge err in exercising his discretion not to award summary judgment?

The High Court considered that Judge Ingram was plainly wrong by taking irrelevant matters into account, namely that the CCA should not apply to residential renovations. This view was contrary to the legislative intention which provides that the CCA applies to both residential and commercial construction contracts.

The purpose of the CCA is to ensure that people who perform construction works are not frustrated in recovering payment for their work done. It provides that where a claim is issued and no steps are taken by the party from whom the payment is sought, the payment claim amount is recoverable as a debt due and owing.

Result

The appeal was allowed, and judgment was granted in favour of F in the sum of $6872.50 plus District Court costs.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

Factual background

This was an application for summary judgment by the Plaintiff, Service Painting and Building Co Pty Limited (SPB), claiming the sum of $140,618.77, from the Defendant, Pacific International Hotel Management School Limited (PIH).

In 2003, a contract was entered into between SPB and PIH for painting work to be carried out over 12 years from 2004-2015. The work carried out in year one equated to 70-80% of the total value of the work ($660,000 plus GST). However this amount was not paid in year one but spread evenly across the 12 years of the contract. Accordingly, it was very much a “front loaded” contract in terms of services rendered. In 2009 the contract was renewed. The renewed contract included a $236,802 amount for existing agreement termination costs from the 2003 contract as well as additional payments. Again, the payments were to be spread over the life of the contract. The total of all payments to be made under the 2009 contract was $329,602. Problems arose with SPB’s performance of the contract in August 2012. No maintenance work was carried out by SPB in 2013/2014 and PIH made no payments during those years.

The dispute

In 2015, SPB received an email from PIH attaching a termination of contract letter that it had sent in 2013. The 2013 letter listed the reasons for termination, including poor quality of workmanship, and breach of its contractual obligations. SPB denied receiving this letter in 2013, and asserted it had tried to contact PIH to organise completion of works. It subsequently invoiced for the sum of $117,005.90. This invoice formed the basis of the summary judgment proceedings.

PIH’s notice of opposition and statement of defence

PIH’s position was generally that the ongoing maintenance painting services were an integral part of the consideration for the 2009 contract. PIH raised several affirmative defences with respect to SPB’s claim:

• PIH were entitled to cancel the contract where a “fundamental breach” of contract had occurred;
• There was an implied term in both contracts that maintenance services would be provided over the Christmas period; and
• The 2009 contract expressly provided for set off in the event that SPB’s painting services were terminated;
• There was a number of factual disputes making it unsuitable for summary judgment.

Fundamental breach.

PIH said that SPB’s fundamental breaches were (1) failing to provide ongoing maintenance services; and (2) failing to provide services to an acceptable standard. Therefore, any breach, no matter how minor, would amount to repudiation by SPB, immediately extinguishing all its contractual rights and obligations. Associate Judge Bell said that the expression “fundamental breach” contained within the contract could not be interpreted in a way which would result in SPB receiving nothing for their completed work.

Associate Judge Bell also found that the parties could not terminate the contract without any warning of the party’s intention – 14 days’ notice was to be been given so that the breach could be remedied. PIH had not given appropriate notice, so the 2013 cancellation was not valid.

For completeness sake, he then considered the position of section 7(5) of the Contractual Remedies Act 1979 which states: “a party shall not … cancel the contract if … he has affirmed the contract.”  He found that PIH was aware of the unsatisfactory work by SPB, and elected to proceed with the contract, thus affirming it and losing its right to cancel.

Did SPD breach an implied term of the 2009 contract to complete maintenance painting over the Christmas period?

Associate Judge Bell accepted that there was an implied term in the contract, which provided that painting was to be completed over the Christmas break. Although there was an implied term, there was no actual loss caused to PIH from this breach. PIH could not show any actual costs that they had incurred by having to remedy this breach.

The School’s claim to set off the contract price.

PIH submitted ‘termination’ of the contract entitled them to set off of the entire contract price. This was rejected by Associate Judge Bell. The contract made it clear that the parties could only cancel some parts of the Contract Services – ‘partial termination’ used in the contract indicated that set off would be proportionate to ‘the reduction in Contract Services’.

Associate Judge Bell accepted that PIH could not claim set off because they had willingly paid the invoices, but added that they were entitled to set off any loss suffered as a result of poor workmanship. The only evidence and calculation of loss which could be quantified was the loss of the 160 hours owed to PIH.

In weighing up the interests/arguments on both sides, Associate Judge Bell concluded that PIH were entitled to set off $13,800 being the cost of uncompleted work (the 160 hours owed).

Conclusion

Associate Judge Bell found in favour of SPB and awarded damages of $118,646.80, after deducting the set off amount.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

The final details of the new retention regime have been revealed by route of the Regulatory Systems (Commercial Matters) Amendment Bill.  This passed its third reading on 24 March 2017 and should receive royal assent making it law on or about 31 March 2017.

Key aspects to the retention regime brought in by the Construction Contracts Amendment Act 2015 and this soon to be passed Act are as follows:-

• It will only apply to construction contracts entered into before 31 March 2017 unless renewed after that date;
• It will only apply to commercial construction contracts, and by this it is meant that it will not apply to construction contracts entered into with residential occupiers;
• No minimum amount has been specified such that the regime applies to any amount withheld or payment arrangement that acts as a retention;
• Retention money must be held on trust in the form of cash or other liquid assets that are readily converted into cash;
• Alternatively a complying financial instrument can be used for example bond or guarantee or a combination of liquid assets and complying financial instrument;
• A complying financial instrument must be issued by a licensed insurer or registered bank;
• It must be issued in favour of, or endorsed with the interest of, the payee, require the issuer to pay retention money to the payee if the payer fails to pay when contractually due, and the payer is responsible for ensuring premiums are paid and up to date;
• The retention money need not be paid into a separate bank account and can be mixed with other funds;
• Proper accounting records must be kept of all transactions relating to retentions;
• The trust status of retention funds only ends when the retentions are paid out, the payee gives up its claim, or when the money otherwise is no longer payable under the contract or by law;
• Retention money held on trust is not available for payment of the payer’s debts and cannot be taken by a receiver of liquidator;
• Retention money can only be used by the payer to remedy defects in the payee’s performance of its contractual obligation;
• Retention money can be invested but is at the risk of the payer, and subject to the Trustee Act 1956;
• The financial obligation of administering a trust remains with the payer;
• Where a payer is late in making payment of retentions it will automatically be liable for interest at the contractual interest rate;
• Any term in a construction contract which make payment conditional upon anything other than the completion of the payee’s contractual obligations, or makes the retention release date later than the completion of the contractual obligations, or requires the payee to contribute to the cost of administering the trust, is void;
• Construction contracts that include milestone payments are most likely caught by the retentions regime.
• In the usual principal/head contractor/subcontractor scenario, it is most likely that retentions held up-stream by the principal will not satisfy the head contractor’s retention obligations for sub-contractors.  Specific provision of retentions on trust, must be made by head contractor for sub-contractor.

The most likely outcome from the introduction of the new retention regime is that we are likely to see less use of the retention regime so that construction parties can avoid costly compliance.  It is likely that most building contracts, (unless made with residential occupiers), or sub contract agreements, will need some adjustments/amendments to reflect the changes brought in.

The application of the new retention regime will impose challenges for the industry.  It is difficult to see exactly how these will play out, but inevitably one by-product of avoiding the difficulties created by collapses such as that of Hartner Construction, is going to be increased costs of construction.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

In the High Court, the summary judgment failed because the Court did not consider a valid payment claim had been served on the Respondents.  Woolford J found that there was no agreement as to the construction price and value of the progress payments.  Applying section 17(4) of the CCA, he said that the value of the construction work and any variation was calculated with regard to the reasonable value of the work.  He held that the purported payment claim did not meet the requirements for a payment claim under section 20 as it did not properly address the reasonable value of the work, and did not enable the Respondents to respond effectively.

The principal issue brought on appeal to the Court of Appeal was whether the purported payment claim met the requirements for a valid payment claim under section 20 of the Act.

In addressing the critical issue, the Court made some general comments upon the statutory scheme under the CCA.  At paragraph 16 the Court recorded the following:-

“It is sufficient for the purposes of this case to note that the Act focuses more on procedure than on proof, and that it establishes a draconian “sudden death” regime if its payment procedures are not complied with.  The scheme of the Act is to entitle a payee to prompt payment where the amount claimed is not disputed and to provide resolution procedures for disputed claims.”

The Respondents resisted summary judgment on the basis that the purported payment claim did not indicate the manner in which the payee calculated the claimed amount.  They said that several parts of the purported payment claim did not make sense, and it remained unclear how the amount claimed was calculated.

It was submitted for the Appellant that a bare statement of the amount claimed making up a total claim meets the requirements of the Act.  However in considering the said submission some analysis was carried out by the Court on what was required by the CCA in a payment schedule, which was required to properly respond to a payment claim.

The Court of Appeal ruled that a pragmatic, common sense and contextual approach ought to be adopted when assessing whether the purported payment claim complied with the section 20(2)(e) of the Act.

At paragraph 26 the Court held as follows:-

“A payment claim must be sufficiently detailed and comprehensible to enable a payer to understand the basis on which the claim is made.  Only then can the payer decide whether to accept it or put the payee on notice of a dispute by providing a payment schedule in response which explains the payer’s reasons for disagreeing with the claim.  This requirement is implicit in the payee’s obligation to provide a claim that indicates “the manner in which the payee calculated the claimed amount” and in the payer’s obligation to respond by giving reasons for the difference between the amount claimed and the amount the payer is prepared to pay.”

The Court went onto rule that in this instance the purported payment claim had parts of it that were incomprehensible, or insufficiently detailed to inform the payer about how it was calculated.  There was no agreed contract price and no agreed formula for calculating the price.  A single unit used for labour charges was insufficiently detailed to be capable of evaluation.  It held the purported payment claim did not satisfy the requirement of indicating the manner in which the payee calculated the claimed amount.  Accordingly the summary judgment application failed.

This Court of Appeal decision is notable for discarding the argument that the Respondent could have obtained clarification by using the framework of the Act.  It simply ruled that a payer who has not been provided with sufficient information to understand the manner in which a claim has been calculated, cannot be required to provide a payment schedule which complies with the Act.

The Court also made the observation at paragraph 27, that where a construction contract does not provide expressly for contract price, labour rates or prices for materials and services, the requirement for establishing compliance with section 20(2)(e), is more onerous.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

It was a decision of Justice Henry and concerned a block of flats located at No. 59 Sarsfield Street, Herne Bay, Auckland.  The architect had contracted to design the 11 flats and supervise construction.  The fixed price quoted to construct these units was a mere $38,910.

Ultimately the flats were constructed, however some defects were identified by the Principal being Olsen.  The key defect identified was the squeaky floor boards on the top storey.  It was alleged by Olsen that the distance between the floor joists on the upper storey exceeded the specifications, the floor joists having been laid at 20 inch centres not 18 inch centres.  Furthermore Olsen claimed that the manner in which the floor had been constructed on the upper level resulted in an irritating squeaky noise, for the tenants below.  As a result of this defect plus some other identified defects, the Architect refused to issue his final certificate which ultimately would have triggered Olsen’s requirement to meet the final invoice rendered by the building company.

It was the building company that brought proceedings against the Principal in the first instance seeking payment of its final invoice.  Olsen in turn issued a counterclaim which represented the estimated cost to remedy the defects, and in response the Builder issued a third party claim against the Architect seeking that he indemnify it for any liability apportioned to it.  In time the Principal brought its own direct claim against the Architect.  It was alleged the Architect was negligent in failing to supervise the construction with reasonable professional skill or permitting the builder to construct the building in a manner that was not proper and workmanlike or according to appropriate standards of good building practice.  There was also a more specific allegation that the Architect had failed to provide for flashings thus allowing water to drip from the upper storey onto the doorways/windows of the flats on the lower floor.  The Court ruled that it was not negligent of the architect to provide flashings in the circumstances.  There was evidence that a design change was made at the request of the Council which had ultimately resulted in this defect.

As regards the upper floor defect, Justice Henry concluded that the Architect was not called upon to design more than a reasonable and functional wooden structure properly constructed with proper materials, based upon the applicable budget.  He had done that and the squeaky floor resulted from either poor materials or poor workmanship.  He went onto find that the Architect could not be held liable for the state of the floor.  Relying upon English authority he said the Architect had no responsibility to advise the builder how it was to carry out its building operations.  The Architect was under no obligation to tell the builder promptly that it was building something incorrectly.  He was well within his contractual rights to draw the squeaky floor boards to the attention of the builder when Olsen discovered it (near the end of the construction contract).  The Architect was not in breach of his duty by failing to discover the cause of the squeaking at the time construction of the upper floor was being completed.  The position may have been different had he ever passed the said work.  The function of the Architect (as agent of the Principal) was to make sure that in the end when the work was completed, the Principal had a building properly constructed, in accordance with the contract, plans, specification, drawings and any supplementary instructions given by the Architect.

I note the judgment remains silent on whether the said duty could have been owed to the Principal, although the judgment is dismissive generally as to any claim existing as between Principal and Architect.

It followed that the Architect was well within its rights to fail to withhold its final certificate pending the defects being remedied.  In conclusion, the Architect was completely exculpated from any liability, whereas the building company was found liable to the Principal for the upper floor defect.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.

• GIL was the developer and head contractor of this house which was constructed in 2002/2003;
• The consent plans detailed a solid plaster house, however the Council approved amended plans showing a cladding change from solid plaster on baton to Insulclad;
• Insulclad was ultimately not used but instead Styroplast was installed;
• Construction commenced in May 2002 but Council was not called to site for an inspection until 18 October 2002.  At this inspection various checks were made as to weathertightness;
• A failed inspection took place on 22 April 2003 at which point the Council issued a field memorandum which noted a number of items requiring attention.  The recheck failed on 5 June 2003;
• A final building recheck was undertaken on 13 November 2003 and it failed for reasons unrelated to the cladding;
• On 16 December 2003 Council sent a letter addressed to the consent-holder at the property address, noting that any type of monolithic cladding without a cavity that had no specific inspections to deal with weathertightness issues would be reviewed on a case by case basis before determining whether a CCC could be issued;
• The property was sold on 24 December 2003 to J Ratcliffe followed by two subsequent sales;
• On 4 March 2004 the Council wrote to Mr Kim and advised that it would not issue a CCC on the house due to its inability to verify compliance with E2 (external moisture);
• Mr and Mrs Lee purchased the property from a friend on December 2004, no LIM was requested;
• Council had not issued a CCC in respect of it for, among other reasons, concerns about weathertightness;
• On or about 3 August 2012 Mr and Mrs Lee became aware that this house was a leaky building.

Whilst Mr and Mrs Lee were successful in the WHT as against the developer GIL, they failed entirely in their claim against the Council.  The issues on appeal upon which I want to focus were as follows:-

(a)  Whether the Council’s inspections and/or inspection process fell short of the standard of reasonable care;

(b)  Whether the Council’s failure to issue a Notice to Rectify (NTR) caused Mr and Mrs Lee’s loss.

(a)  Council inspection process. 

The Court ruled that there was no evidence that the Council ever inspected the cladding, so it was not incumbent upon it to have discovered that an unconsented cladding material had been used, namely the Styroplast.  Having just approved the use of Insulclad, and having required the production of a PS3 (Producer Statement) in respect of its correct install, it was entitled to assume that Insulclad was being installed.

In terms of the allegation that the Council ought to have specifically directed inspections to the installation of the cladding, the Court ruled that acceptance of a producer statement (PS3) was a reasonable step to take in lieu of specific inspections, in terms of satisfying itself that the cladding system specified was in compliance with the Building Code.  This was especially so in this particular instance because the Council had required a PS3 from the installers that carried out the construction works that the installation accorded with manufacturer specifications, together with certification by Plaster Systems being the system manufacturer.

(b)  Did failure to issue NTR cause Mr and Mrs Lee’s loss.

The Court agreed with the WHT finding that the Council breached its mandatory duty to issue a NTR on 4 March 2004, at the time it wrote to Mr Kim stating that it would not be issuing a CCC because of the cladding system used with no cavity.  In short a NTR ought to have been issued contemporaneously.

The more vexed issue was whether this had caused loss to Mr and Mrs Lee.  The Court ruled that the Council was liable for all reasonably foreseeable losses to an injured party caused by the careless breach of its duty to issue a NTR.  Once it was established that the Council negligently omitted to issue a NTR to the builder and current owner back on 4 March 2004, it was liable to Mr and Mrs Lee for any foreseeable losses, namely in this instance purchasing a leaky building without knowledge.

Accordingly, both GIL (Developer) and the Council were found liable to Mr and Mrs Lee albeit it that a contributory negligence deduction of 50% was applied against them for choosing to purchase without a LIM.

To be noted.

On the strength of this decision, expect to see Council always issue a NTR where it declines to issue a CCC, to limit exposure to liability.

NOTE: This article is not intended to be legal advice (nor a substitute for legal advice).  No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.