Points of interest
- A High Court decision illustrates the limits of the “pay now, argue later” principle under the Construction Contracts Act
- Further clarification from the Supreme Court of the limits of liquidators to claw back payments
- An interesting point emerging from the Nautilus leaky building case
“Pay now, argue later” principle may not be engaged where a good arguable case to review adjudicator's decision
A recent High Court decision illustrates the limits of the “pay now, argue later” principle under the Construction Contracts Act 2002.
A construction company had obtained a determination that its payment claim was valid and that the defendant had not provided a payment schedule (as required by the Act). That finding rendered the amount of the claim a debt due, which was capable of supporting a statutory demand. The construction company applied to put the client in liquidation. The client argued before the High Court that it intended to seek a judicial review of the determination on the basis that the payment claim failed to comply with the obligation to “identify the construction work” for which it was made, because it included the dates and hours of work and the names of contractors, but failed to identify particular work performed.
The Court held that if there was no valid payment claim, the client could have no obligation to provide a payment schedule, and the adjudicator’s determination (based as it was on the defendant’s failure to provide such a schedule) could not stand. The liquidation proceedings were stayed to allow the judicial review to proceed. The Court discussed the “pay now, argue later” principle on which the Act is based:
- The purpose of the Act is to facilitate regular and timely payments between parties to a construction contract - cash flow being the “very life blood” of the building industry.
- A determination under the Act provides a mechanism by which payment of disputed amounts can be promptly required and enforced.
- If a valid payment claim has been made, the payer is able separately to contest that the payment was owing (for example, because the work was defective or the payee overcharged) and, if the payer’s position is upheld, the payee will be required to pay back the money received.
- If there was no valid payment claim, the “pay now, argue later” principle could not apply, and the Court would not be constrained in its approach to whether to stay the liquidation.
- It is unlikely that errors of fact by adjudicators will give rise to a successful application for judicial review. Here the issue was an alleged error of law.
- In considering whether to relieve a payer from their “pay now” obligations, the Courts take into account whether the payee will be able to pay if their challenge to the validity of the claim is unsuccessful.
- A failure to include a description of the construction work carried out in a payment claim provides a “reasonable argument” that the claim is invalid.
Bussell Construction Ltd v Manchester Industrial Holdings Ltd  NZHC 858
“Peak Indebtedness Rule” not part of New Zealand’s insolvency regime
In a ruling that spells good news for suppliers of trade credit, the Court of Appeal has confirmed that the “peak indebtedness rule” (which applies in Australia) is not part of the law of New Zealand. Under section 292 of the Companies Act 1993 (which deals with insolvent transactions), where parties are engaged in a “continuing business relationship” a series of transactions will be treated as a single transaction where they are integral to that relationship (for example, where the parties operate a running account between themselves and the level of indebtedness fluctuates from time to time).
The “peak indebtedness rule” allows a liquidator, in a case in which parties operated a running account, to select any point within the statutorily specified period – typically the point of peak indebtedness - and treat that as the start of their ‘continuing business relationship‘. Only payments made after that point would be considered in calculating the preference received by the creditor.
The Court rejected the application of the rule in New Zealand, holding that it was inconsistent with the wording of the Act. A liquidator will only be entitled to claim the net difference of payments between the parties as an insolvent transaction, and all payments that fall within the specified period are to be taken into account.
“The effect of the section, taken on its face, is to require all payments and transactions within the continuing business relationship to be netted off against one another ... The statutory wording does not permit a liquidator to disregard some of those transactions. There is no basis on which the liquidator can commence with only the first payment, and disregard the first supply of goods. The plain meaning of “all transactions” is just that.”
The Court noted that Parliament took the decision to treat separately the group of creditors who provide credit and goods on running account, which is seen as having distinct commercial benefits.
Timberworld Ltd v Levin  NZCA 111
Nautilus owners who purchased with knowledge of the defects entitled to maintain claims
An interesting aspect of the high-profile leaky building claim concerning the Nautilus building in Orewa beach, is that some of the plaintiffs had purchased their units with knowledge of the defects, and had taken assignments from the vendors of the right to pursue claims against the Auckland Council and others. The Council argued that the assignments were void as against public policy, because they contravened the rules against “maintenance and champerty”. These rules prevent disinterested parties from assisting or encouraging litigation (for example, by paying litigation costs) where they have no interest in the case and no justification for interfering in it.
The High Court disagreed, holding that:
- where the assignment of a cause of action is incidental to the assignment of a property right, no issue of maintenance or champerty arises;
- where an assignee has a genuine commercial interest in the enforcement of a claim, the assignment will not offend the rule unless there is something objectionable about the terms of the assignment;
- where a plaintiff is primarily acquiring property rights (in that case, the acquisition of a unit in the complex) and the assigned causes of action were incidental to those rights, no issue would arise.
The Court noted that, by purchasing their units, the plaintiffs had accepted the obligation to contribute their share of any repair costs, and by taking assignment of the vendor’s cause of action they were obtaining protection against those costs. The plaintiffs were not buying their units to acquire a cause of action, and they were entitled to remain part of the claim.
Body Corporate 326421 v Auckland Council & Ors  NZHC 862
Expert determination - the need to finish the job
The High Court has held that, where parties to a dispute had agreed to have all aspects of their dispute determined by a building expert, they were contractually precluded from going to Court to seek summary judgment if the expert failed finally to resolve all matters in dispute. The Court disagreed with the expert’s assessment that, following issuance of his substantive determinations (which omitted to deal with one of the issues in dispute between the parties), he was unable to reopen those determinations. The matter was referred back to the expert so that he could reach a final determination on the outstanding issue.
Marquis Property Developments Ltd v Lorenzen & Ors  NZHC 694
Government announces targeted approach to earthquake-prone buildings
On 10 May, Building and Housing Minister Dr Nick Smith announced the Government's new proposals for targeting its approach to assessing and strengthening earthquake-prone buildings. The most significant changes to the policy contained in the Building (Earthquake-prone Buildings) Amendment Bill include:
- Dividing the country into a variety of zones based on earthquake risk, and varying the timetable for assessment and strengthening of buildings in those zones relative to that risk;
- Prioritising education buildings (school and university buildings regularly occupied by 20 people or more) and emergency buildings (such as hospitals) for strengthening, and excluding farm buildings, retaining walls, monuments and other buildings which pose less of a danger to life;
- Reducing the number of buildings that require assessment; and
- Introducing measures to encourage early upgrades.
The Select Committee is considering the Bill and will report back to Parliament in July. A copy of the Bill can be found here.
IN THE NEWS
Preliminary Draft Residential Red Zone Offer Recovery Plan open for public comment
Following the Supreme Court’s Quake Outcast decision (discussed in our April Construction and Projects Disputes Update here), the Canterbury Earthquake Recovery Minister, Gerry Brownlee, announced a process for public comment on the appropriate approach for the Government to take in revisiting its offers to owners of properties in the red zone covered by the Supreme Court’s decision (vacant, commercial and uninsured properties). The Chief Executive of CERA was asked to prepare a revised Recovery Plan. The Preliminary Draft of the Recovery Plan was made available for public comment and over 800 submissions were received. The Minister is expected to make his decision on the Draft Recovery Plan by 31 July 2015.
This publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance on any statement contained in this publication without first obtaining specific professional advice.