Breaking Ground - Winter 2023

Changes bring clarity to the retentions regime

Changes to the retentions regime that aim to strengthen and clarify the existing regime come into force on 5 October 2023.

Some of the key changes include the automatic creation of a trust, the ban on "commingling", mandatory reporting, and the introduction of offences. These changes affect principals, head contractors, subcontractors and insolvency practitioners, and reflect the concerns raised in the High Court decision of Bennett v Ebert Construction Ltd [2018] NZHC 2934.

You can read more about the key changes to the regime in an article recently published on our website here.

Amendments to NZS 3910:2013

The much-anticipated redraft of New Zealand's most frequently used standard form construction contract has been released for public consultation this month. The proposed revisions to NZS 3910:2013 aim to respond to changes in legislation and evolving norms within the construction sector.

The key proposed amendments are summarised below.

Overheads terminology: This is a simple terminology change whereby On-Site Overheads has been replaced with Preliminary and General (P&G), and Off-Site Overheads and Profit has been replaced with Margin throughout the Contract. The definitions have remained essentially the same.

Contract price is 'pick and mix': The Contract now allows any combination of contract price mechanisms. For example, one separable portion may be fixed price, while the others may be measure and value.

Target Price introduced: The introduction of Target Price provides a fourth option for the contract price structure, whereby the over-run or under-run will be shared between the Contractor and Principal in accordance with agreed percentages, and up to the cap stated in the Specific Conditions.

Replacement of Engineer's dual role: The Engineer's dual role has been divided into the role of the Contract Administrator and the Independent Certifier. Previously, the Engineer was required to act both for the Principal as its agent, and as an independent body when determining and issuing certificates. It proved practically and psychologically difficult to perform both roles. Under the proposed amendments, there will remain an option to appoint the same individual for both roles, for lower value contracts or for those concerned about an increase in administration costs.

Health and Safety and Environment: The Health and Safety provisions have been updated to align with the Health and Safety at Work Act 2015, and environmental protections have been updated to align with the Resource Management Act 1991 (although this is in the process of being repealed and replaced).

Management Plans and Reporting: The requirements for quality, safety and traffic management plans have been removed in favour of a more general requirement for management plans as agreed between the parties (and specified in the Specific Conditions). The same will apply to status reports.

Indemnity and Liability Limit: The indemnity has been amended to be fault based and there is an option to include a cap on the Contractor's liability.

Variations and Cost Adjustments: Various price adjustments which were previously included in clause 12 (including the final account) are proposed to move to clause 9. Cost fluctuations are proposed to be the default, whereby an adjustment shall be made unless the parties opt out. The final account mechanism requires the Contractor to prepare an Interim and, later, a Final Account.

Extensions of time (EOT): The grounds for an EOT remain the same, however, the mechanism for notifying and assessing EOT claims has changed, including requiring the Independent Certifier to have regard to specific considerations in making the decision.

Disputes: Engineer's Decisions have been reallocated to the Independent Certifier and have been moved to cl 6.4. The step-through process of seeking a review, then a Final Decision (previously a Formal Decision) is retained, in addition to the ability of the parties to seek an expert's review. Section 13 provides for an informal dispute resolution process where senior representatives of each of the parties attempt to resolve the matter before any formal dispute process (ie, mediation, arbitration). There is an unambiguous agreement to refer any disputes to arbitration, and no requirement to follow a specific process prior to doing so.

The public consultation process closes on 30 June 2023. Make sure to have your say here .

Please get in touch with one of our experts if you would like to discuss what these changes may mean for you.

Contributed by: Lisa Rozendaal

New Zealand

Body Corporate 449665 v CMP Construction Ltd [2023] NZHC 449

A recent decision of the High Court considers when a claimant will be regarded as having "late knowledge" of their claim, for limitation purposes.

Background

The Body Corporate for a block of apartments alleged that a waterproofing membrane was installed incorrectly, allowing water into the building and causing the roof terrace to degrade. The work was completed by Aquastop Ltd, who had been engaged by head contractor CMP Construction Ltd (CMP). The Body Corporate said that CMP bore the risk of any loss resulting from its subcontractor's failure to exercise reasonable skill and care in completing the work.

CMP denied any liability and stated that, in any event, the claim was time-barred under the Limitation Act 2010 (Limitation Act). It applied for summary judgment of the claim, or for it to be struck out.

Limitation

Under section 11 of the Limitation Act, the starting point is that the claim needs to be filed within six years of the act or omission on which the claim is based. However, an exception will apply if the claimant has "late knowledge" of the issue. In that case, the claim can be brought three years after what is known as the late knowledge date.

In this case, the apartments were constructed between January and November 2013. By the time the Body Corporate filed its claim in December 2021, the six-year primary claim period had ended. CMP said that the Body Corporate had sufficient knowledge of the defects in the membrane by 20 August 2018, and that the "late knowledge" period had also passed.

The key issue for determination by the Court was therefore whether the Body Corporate had acquired late knowledge less than three years prior to filing the proceeding (sometime after 6 December 2018). Otherwise, they would be time-barred under the Act from bringing their claim.

Submissions

CMP said that the Body Corporate acquired late knowledge when it discovered the building was having issues with leaks through the membrane, which had occurred in 2018.

The Body Corporate said it did not acquire late knowledge until 18 May 2020, when it received an in depth, independent report that identified the defects causing the leaks, made clear their extent, and indicated that the defects may be attributable to the company that had applied the membrane. The Body Corporate stressed that simply having awareness of some leaks was not sufficient to constitute "late knowledge".

Decision

In the High Court, the Associate Judge found it was reasonably arguable that the earliest possible date the Body Corporate could have acquired late knowledge was when an investigation into the membrane was conducted by a third party in late 2019. The investigation revealed to the Body Corporate that the issue with the membrane was systemic, not simply localised leaks requiring minor repairs. Although the Body Corporate still did not fully understand the defects at that point, it did have sufficient information to constitute constructive knowledge of the issues underlying the claim, which was sufficient for time to start running for limitation purposes.

On that basis, CMP had not established that the Body Corporate was time-barred from bringing its claim, and its applications for summary judgment and strike out were dismissed.

Observations

This case illustrates the orthodox application of the law of limitation. The trigger point for initiation of the late knowledge period will always be very fact-specific, depending upon when the claimant is held to have had sufficient knowledge of a cluster of facts (including all elements of the claim, and that the issue is at least in part attributable to the defendant). In particular, simple knowledge of the existence of some form of defect is unlikely to be enough; it will be necessary to know that the issue is sufficiently serious to justify a claim.

Contributors: Joanna Trezise & Sophie Reedy-Young

Trustees of Buchanan Family Trust v Tasman District Council [2023] NZHC 53

No equitable lien arises in respect of generic products that can be applied to other projects.

Background

The Reeves Family Trust (Trust) contracted with a construction company (FirstBuild) to build a modular house, which involved FirstBuild building the modules in its warehouse and then transporting them to the construction site.

The contract provided that:

legal and equitable ownership of materials brought onto the land was to remain with FirstBuild until all monies were paid under the agreement; and
if either party cancelled the agreement, then the Trust was to pay FirstBuild for all materials delivered and all building work performed up to the date of cancellation.

Plywood and shiplap cladding (both generic materials available from wholesale suppliers) were acquired for the project. It had been specified by the Trust and was not used on any other FirstBuild contract.

After FirstBuild had completed the foundation on the Trust's site, it was put into liquidation. At that point:

the Trust had paid over $500,000 but the value of the works on the Trust's site was under $100,000;
most of the plywood and shiplap cladding that FirstBuild had bought was still stored in its warehouse.

The Trust claimed an equitable lien over the plywood and cladding. The liquidator applied for directions from the Court on this issue.

What is an equitable lien?

An equitable lien recognises that in some circumstances, it is just and conscionable for a party (eg a purchaser) to have a priority interest (over and above other creditors, including secured and preferential creditors) in an asset. In effect, the person entitled to an equitable lien becomes a secured creditor with super priority.

In what circumstances do equitable liens arise?

Where a building is constructed on the principal's site, there is usually no question that the principal owns the partially completed building if a contractor becomes insolvent part way through the project (subject to the principal paying for the works that have been completed to date). However, that is not the case where a modular building is comprised of components manufactured and stored offsite, to be eventually transported and installed at the principal's site.

In a series of recent decisions concerning failed modular housing companies (Maginness & Booth v Tiny Town Projects Ltd (in liq) [2023] NZHC 494 and Francis v Gross [2023] NZHC 1107), the High Court has held that purchasers of "tiny homes" and "pods" have an equitable lien over their partially completed modular building(s), to the extent of the money paid by them. While the title in the incomplete building had not passed to the purchaser, the purchaser had an equitable lien over it because the buildings were identifiable to each separate contract and could not sensibly have been sold to anybody else.

With reference to these decisions, Anderson J held that no equitable lien arises for the plywood and cladding notwithstanding that the products were ordered for the Trust, on the basis that they were generic and so could have easily been applied to another construction project (in contrast to the partially completed tiny homes and pods in the previous cases).

Observation

Dalton is the latest in a line of New Zealand cases to confirm that an equitable lien may (in principle) come to the rescue for purchasers of bespoke items where the manufacturer becomes insolvent before the items are delivered. Whether a lien arises will depend on how bespoke or generic an item is – which requires a level of subjective assessment.

This uncertainty no doubt creates difficulty for both insolvency practitioners (who will likely need to continue to seek directions from the Court) and lenders to manufacturers of bespoke goods (who will need to assess the risk to their security interest).

Contributors:
Michelle Mau and Angela Yang

England and Wales

Kajima Construction Europe (UK) Ltd v Children’s Ark Partnership Ltd [2023] EWCA Civ 292

The Court of Appeal of England and Wales has upheld the Technology and Construction Court's decision that an alternative dispute resolution clause that lacked sufficient clarity and certainty as to the agreed process was not enforceable. However, the Court also confirmed that sufficiently clear dispute resolution processes can function as conditions precedent to the commencement of proceedings between contracting parties.

Background

In 2004, the Children's Ark Partnership (CAP) entered a head contract with Brighton and Sussex University Hospital NHS Trust (Trust) to finance and build a children's hospital in Brighton. CAP then sub-contracted with Kajima Construction Europe (UK) Ltd (Kajima) for the design and construction of the hospital.

Various clauses in the head contract referred to a particular dispute resolution process. It stated that construction disputes were to be referred to a "Liaison Committee", consisting of representatives from CAP and the Trust, which would convene within 10 days' notice and then make a final and binding resolution on the parties (unless otherwise mutually agreed). The parties were only able to refer disputes to mediation or adjudication, or to file proceedings, after having used the Liaison Committee procedure.

The issues in this case largely arose because the subcontract directly imported the dispute resolution process from the head contract, without providing for representation on the Liaison Committee for Kajima. This meant that, on a literal interpretation of the clause, Kajima could not make submissions to the Committee, or even view Committee documentation such as meeting minutes.

The Dispute

Following the 2017 Grenfell Tower fire, the cladding and fire-stopping elements of the Hospital were inspected. That inspection uncovered certain fire safety defects which required remediation.

In 2021, when their claims in relation to those defects were at risk of becoming time-barred, CAP brought proceedings against Kajima in court. It then applied for a stay of those proceedings so that the parties could attempt to resolve the dispute via the Liaison Committee process. Kajima sought to have CAP's claim struck out, arguing that the Liaison Committee procedure constituted a condition precedent to the commencement of proceedings, leaving CAP unable (and now out of time) to issue proceedings.

When Kajima's strike-out application was rejected by the High Court, it appealed to the Court of Appeal.

The decisions

The Court of Appeal confirmed the findings of the High Court. While the dispute resolution process was clearly expressed as a condition precedent, it lacked sufficient clarity and certainty (with reference to objective criteria) to be enforceable.

Observations

A key takeaway from Kajima is that the same principle of certainty of terms that governs the formation of contracts generally also applies to the enforceability of alternative dispute resolution clauses. If the parties to a contract clearly provide for a specific dispute resolution process, and expressly intend that it be a condition precedent to proceedings (ie, a process that must be used before proceedings can be commenced), the Court will generally seek to uphold this agreement. However, there needs to be specificity as to the parties' key obligations within that process, including in relation to participation, representation, and adherence to outcomes reached.

This aligns with the New Zealand approach to the enforceability of contractual dispute resolution processes, which focuses on whether there is sufficient specificity as to how the parties are to initiate and properly participate in the process. The strong emphasis on certainty in Kajima is likely to be a key characteristic of the New Zealand approach going forward.

Contributed by: Harry Fleming

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Breaking Ground Winter 2023

These articles are intended only to provide a summary of the subject covered. They do not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in these publications without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact one of our experts.