The fact surrounding this case were as follows:-

• The Greymouth District Council entered into a construction contract whereby Evan Jones Construction Limited (EJCL) agreed to construct an aquatic centre for the Council.
• The Council also entered into a design and contract administration contract with LHT Design Limited (LHT) in respect of the construction of the aquatic centre.  LHT in turn engaged Mr Blain and Kevin O’Connor & Associates Limited (KAL), to independently review parts of the design work for the aquatic centre.
• The essential problem with the aquatic centre related to the deflection levels contravening the building code, and the use of untreated LVL rafters which had a negative consequence for its structural integrity.  Corrosion of the galvanised steel nails was evident.

The Council sued LHT in contract, negligence and under the Fair Trading Act 1986.  It sued Mr Blain and KAL in tort and under the Fair Trading Act.  It also sued Carter Holt Harvey Limited (CHH) for negligent misstatement as regards the instruction relating to the installation and use of the LVL beams, as well as under the Fair Trading Act.  Significantly, no claim was brought as against the EJCL by the Council despite it being the party it directly contracted with to construct the aquatic centre.  It is not clear from the judgment why this was.

LHT, CHH, Mr Blain/KAL brought third party claims as against EJCL based upon the fact that it along with them owed a duty of care to the Council, which made it a joint tortfeasor.  They sought a contribution from EJCL in the event liability was established as against them.

In the High Court, Associate Judge Mathews ruled the law does not recognise a cause of action in negligence against a builder of a commercial building.  He found that the existence of the construction contract as between Council and EJCL was inconsistent with a duty of care being owed by EJCL to the Council in tort.  He also found that the disputes procedure set out in the Construction Contracts Act 2002, was consistent with the fact that all obligations as between EJCL and Council were exclusively governed by the contract.

This was only an interlocutory proceeding so it was not necessary for the Court to decide finally whether in fact in this instance a duty of care was owed by the EJCL to the Council.  The question for it to decide was whether the claim that a duty of care was owed by EJCL to the Council was so clearly untenable, that it could not succeed.

The Court of Appeal considered the following issues were at stake:-

a)    Is it arguable that the law recognises a cause of action in negligence against the builder of a commercial building?

b)    Is it arguable that the terms of the contract between the Council and EJCL are consistent with EJCL owing a duty of care in tort to the Council?

c)    Is the Construction Contracts Act relevant to the existence of a duty of care in tort owed by EJCL to the Council?

The Court of Appeal considered the law on whether a duty of care is owed in respect of commercial construction contracts, as being in an unsettled state.  It also saw similarities between the leaky school cases and this claim, which it considered not a strictly commercial situation.  The authority of Spencer on Byron as regards a duty of care being owed by Council to a commercial property owner in respect of the issuance of a Code Compliance Certificate, also gave some support to a duty of care being recognised in this instance.  The Court concluded it was at least arguable that a duty of care was owed by EJCL to the Council.

The Court of Appeal also found that it would not be inconsistent with the strict terms of the contract for a duty of care to be owed via tort in this instance, and that potentially this duty of care could co-exist with the contractual duties, without unduly extending the liability of EJCL.

It was also decided that the dispute mechanism set out in the Construction Contracts Act 2002 had no relevance in assessing whether a duty of care may co-exist with the contractual obligations, as between EJCL and the Council.

The third party claims were reinstated by the Court of Appeal having been previously struck out by the High Court.

This decision is a further example of the Courts willingness to apply the tortious duty of care to commercial situations.

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.

This was a case about allocating responsibility for defective building work in relation to a major renovation which was carried out during 2002, to a 1920’s two-storey weatherboard home.  Prior to trial, the Plaintiffs’ in this case had come to a settlement with the Council, as well as the roofer and the joinery firm.  The Judge therefore had to consider the liability of the head contractor/builder, who himself had joined a number of third parties to the proceeding.  In this article we briefly discuss two of the more pertinent factors the Court in this case looked at to assess the relative liability of the head contractor versus the other parties involved in construction.

The Contractual Matrix

The head contractor opposed the Plaintiffs’ claim against him in relation to the joinery on the basis that the Plaintiffs contracted directly with the joinery firm.  It was clear from the evidence presented that the joinery supplied was defective, both in design and fabrication.  The issue however was whether responsibility for the joinery firm lay with the Plaintiffs or the head contractor.

Although the draft contract provided to the Plaintiffs had not been signed, it stipulated that the contractor would organise and present quotations for subcontractors to the Plaintiffs for approval before the subcontract work could commence.  Although the parties generally adopted this practice, in relation to the joinery the contractor had supplied two quotes, but the Plaintiffs decided to obtain a further quote themselves.  The Plaintiffs went on to directly accept this additional quote, and pay a deposit.  The Court was satisfied that the Plaintiffs contracted with the joinery company directly and accordingly found that the Plaintiffs had to accept responsibility for that decision and the defective joinery supplied.  While this would have ordinarily reduced the amount the head contractor would be held liable for, in this case the Plaintiffs had already settled with the joinery firm for an amount in excess of the cost of the replacement joinery, and this had already been credited to the claim against the head contractor.

The Duty of Care of Labour Only Contractors

The head contractor had engaged two labour only contractors, which he had joined as third parties to the proceeding.  The head contractor submitted that as the labour only contractors did approximately one-third of the work, they were responsible for one-third of the defects.  The Judge stated that this argument was simplistic.  Instead, it was necessary to:

• Determine whether they owed a duty of care to the Plaintiffs; and
• Identify whether they actually carried out defective work.

While the Judge accepted that “for present purposes” the labour only contractors may have carried out some of the defective carpentry work, he did not consider that they owed the Plaintiffs a duty of care.  The Judge said that “in determining whether labour only contractors… owed the Carringtons a duty of care, the Court will look to the assumption of responsibility, any special skill the contractor has, or may hold himself out as having, the need for promotion of standards and whether there are other means of protection.  Assumption of responsibility for the task is not sufficient of itself in cases of this nature”.  In respect of both of the labour only contractors, among other things:

• They worked at the direction and under the supervision of the head contractor i.e. were effectively ‘hammer hands’;
• This house was the first time they had worked on a renovation of a weatherboard home, and they did not hold themselves out as having expertise or experience in relation to work on weatherboard houses.  They relied on the head contractor’s experience; and

• They rendered accounts to the head contractor for their time, who then added a margin and charged their time to the Plaintiffs.

It was the head contractor who had directly contracted with the Plaintiffs.  It was his obligation to observe the relevant building codes, regulations and plans and specifications.  That was a non-delegable duty (i.e. one that he could not avoid by engaging sub-contractors).  It followed that the Judge found that the labour only contractors had not assumed any responsibility to the Plaintiffs beyond applying their labour at the direction of the head contractor, and did not owe a duty of care.

Take Home Message

Just because a subcontractor may have carried out defective work, it does not necessarily mean that a Court will find them liable.  It is essential that they also owe a duty of care which will depend on the particular circumstances of case, including the degree of control of the head contractor, the experience of the individual subcontractor and again the contractual relationships of the parties.

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.

TRC Consultants Ltd v Higgs & Anor

This firm has recently been involved in a High Court decision where TRC Consultants Ltd, an audio-visual componentry company, was asked to pay back $55,000 worth of payments received from Southern Lakes Construction Limited (SLC), a company that went into liquidation within months of the payments being made.

The voidable transaction provisions of the Companies Act 1993 allow the liquidators of a liquidated company to claw back payments made out to creditors, within a restricted period of 6 months prior to the liquidation.

This case concerned two payments made by SLC near the end of the construction contract. The first payment was made on 30 September 2005 and the second payment was on 4 October 2005 and amounted in total to $55,000. SLC went into liquidation on or about 23 November 2005.

It was argued by this firm on behalf of TRC that the two payments ought not to be set aside for the following reasons:-

It has not been satisfied that TRC received more towards satisfaction of its debt with SLC than it would otherwise have got in liquidation;

The transaction took place in the ordinary course of business and under this head we argued:-
• (a)these payments were one of a series of payments made pursuant to a contract with regard to the construction and installation of equipment at the request of SLC. The business records established that during the course of the contract, SLC had made regular payments following the receipt of invoices. Some of those payments were up to two months after the invoices had been rendered;
• (b)Although these two payments were not for the full amount claimed in the invoices, this is not uncommon in building contracts where often head contractors retained sums as an inducement to ensure that the sub-contractor completed the contract and to cover any defects or maintenance with regard to work performed by the sub-contractor;

Finally we argued in the alternative, that even if the transactions were voidable, that TRC was entitled to relief under s296(3) of the Companies Act 1993 because:-
• TRC had established it had received the payments in good faith
• TRC had altered its position in the reasonably held belief that payment was validly made and would not be set aside. In support of this TRC had continued to arrange for its sub-contractor to perform work on behalf of its contract with SLC for some months after receipt of these two payments. TRC had incurred considerable expense in continuing work on this project which it would not have incurred had it known about the impecuniosity of SLC. After the last payment made by SLC, it rendered a further account to SLC of $18,991 and $4720.08.
• Finally we submitted that the large delay of 18 months in serving notice upon TRC to pay back the $55,000, made it inequitable to order these monies were paid back.

The Judge held that the payments fell within the meaning of payments made in the ordinary course of business. The Judge was swayed by the evidence to the effect that payments at the end of a contract are often less than is claimed because retentions are held back in order to ensure contractors come back onsite. He also referred to comments in already decided decisions on this point, that the building industry is not characterised by prompt payment and precise accounting.

He further found that even if he was wrong on this point, TRC was entitled to relief under s296(3) of the Companies Act 1993. His key finding on this aspect was that TRC had altered its position. At paragraph 31 he states:-

“There is however, clear evidence that the Plaintiff after receiving these two payments, continued to perform its obligations under the contract with SLC. Furthermore, in performing its obligations, the Plaintiff incurred extra expense including liability for payment of work performed by its subcontractors”

In short, TRC had lost a valuable alternative opportunity in refusing to continue to perform the contract.

While in this instance we managed to achieve a good result for TRC, the case does show the difficulties caused by accepting payments from companies that shortly afterwards go into liquidation. Unless it can be shown that the payments were made in the ordinary course of business or that the position of the party receiving payment has been altered, then that party may have to pay back the sums received.

A recent English case makes interesting reading in this regard. It is the decision of Actionstrength Ltd v International Glass Ltd. The client, St Gobain entered into a contract with International Glass (Inglen) as main contractor for the construction of a float glass factory in Yorkshire, in May 1999. Inglen engaged Actionstrength as its labour sub-contractor in August 1999. Inglen had problems in paying Actionstrength from an early stage in the project. By February 2000 Actionstrength was owed 500k, and having threatened Inglen with removing its workforce, it now proposed to do just that. At this point an emergency meeting was set up between Actionstrength and St Gobain. At this meeting representatives of St Gobain proposed a further source of available funds with which they hoped to reassure Actionstrength of payment. They pointed to a performance bond in the sum of 700k, provided on behalf of Inglen in favour of St Gobain. The suggestion was that this would comprise a fund which could be used to satisfy Actionstrength’s claims. Any comfort offered by this idea was almost entirely illusory. It did not “ring fence” funds for Actionstrength in the event of St Gobain’s own insolvency.

Nevertheless, this assurance gave Actionstrength enough comfort to continue and work for another month. By March 2000, Inglen owed Actionstrength in excess of 1.3 million and it appeared they could not pay. Ingen went into liquidation and Actionstrength attempted to bring an action directly against St Gobain despite the fact that its original contract was with the Ingen rather than the Principal.

What the parties were attempting to achieve here was no light undertaking. In short a party cannot unilaterally decide that it will redirect sums which it owes contractually to someone who is a stranger to the contract, or if it does so, it does not reduce the original contractual debt. So there was a risk here for St Gobain that they would be held liable for the same amount twice, in entering into such an arrangement.

However the Court interpreted the arrangement as a form of guarantee. The basis of the contract was that in return for Actionstrength’s promise not to terminate its sub-contract with Inglen, for non-payment, as they must have become entitled to do, Saint-Gobain promised to ensure that Actionstrength would be paid. This oral arrangement satisfied all the requirements for a valid contract, however it was a contract of guarantee. As a contract of guarantee it was caught by the United Kingdom Statute of Frauds 1677 which stipulates that contract of guarantees must be in writing and signed by the guarantor. There is a parallel requirement under NZ statute law (Contracts Enforcement Act 1956).

So in short, the subcontractor was unable to enforce the promises made by the Principal, and it was left with a valid claim against the now insolvent Head Contractor.

In conclusion, this case shows the great length parties may go to improve their risk of Head Contractor insolvency. The difficulty with this is that once the construction contract has commenced, it is often too late. This is why those pre-contractual investigations as to the financial risk of contracting parties are very important.

Claim File No 00210.

This claim concerned a property in Wellington that had been purchased in the mid 1980′s. Alterations and additions were carried out to the house in 1987 and 1988. The claim was brought against the Hutt City Council and the Builder.

The assessor had determined that the amount of remedial work required to remedy this leaky building was around $11,000. One of the interesting arguments to be determined related to the personal liability of the Builder. The claim had been brought against the Builder in his own name rather than in the name of his company which had been struck off the register and was no longer trading. It was obviously in the interests of the Claimant to bring an action against the Builder personally as any judgment awarded against the now de-funct company was going to be worthless to the Claimant.

It was contended by the Builder that the Claimant had contracted with his company and that he had no personal liability to the Claimant. The quotations for the building work were given on the letterhead of his company with a GST number. The signed contract documents were in the name of his company, and these were signed by him as Director. Furthermore, all of the Architect’s issued instructions were in the name of the company, bar the last one which was issued in the name of him personally. It was concluded by the Adjudicator that in light of this evidence, a claim could only be brought against the company itself and not the Builder personally.

Claim File No. 0119.

This was a large claim involving the Claimants and 12 respondents. It involved a property in Porirua City. The property that was the subject of this claim was the 5th unit to be built at the address. It was estimated prior to the adjudication that the total cost of the necessary remedial work was $120,924.80.

One of the key issues as the hearing unfolded was what contribution/apportionment of liability could be allocated to the various parties to the adjudication. It was found by the Adjudicator that the party who sold the property to the Claimants was properly described as being Head Contractor/Construction Manager. The Adjudicator also determined that the Porirua City Council could be found liable to the Claimants for the full amount of the remedial works and the $5,000 worth of general damages.

The Adjudicator then had to consider what a fair contribution ought to be between the Council and the Head Contractor.

It was concluded that the Head Contractor must shoulder the main responsibility for the defective construction. The Territorial Authority is essentially supervisory and he concluded that the responsibility should be treated as being significantly less than that of the principal author of the damage. The Adjudicator relied upon the Court of Appeal decision of Mount Albert Borough Council v Johnson as authority for an apportionment of responsibility in the amount of 80% to the Head Contractor and 20% to the Council.

It was also held by the Adjudicator that there was an element of contributory negligence from the Claimants to their own loss. In particular one of the Claimants Mr Mcquade had experience in the construction industry, and it was held that with his experience he should have been alerted to the possible problems. He failed to take any action. The Adjudicator concluded that the Claimants ought to have the damages awarded in their favour reduced by 33%.

In conclusion, some obvious advantages can be seen from a builder contracting in a company name. So long as he is consistent and at all times corresponds in his company’s name, he will avoid attracting personal liability. For all those Builders out there not already contracting via a company, I recommend that you incorporate a company immediately to protect yourself against exposure to personal liability.