Modular home — letter of credit and status of deposit paid

Timothy Bates of Auckland law firm Legal Vision.

Proceedings were issued by Ecotech to set aside a statutory demand that had been issued against it by one of its clients, Mr Baumann (Mr B).

It is important to set out that the statutory purpose of a statutory demand issued pursuant to section 289 of the Companies Act 1993 is to lay an evidentiary foundation for an application to the court to appoint a liquidator under section 241.

Ecotech was concerned to ensure that Mr B could not bring about the liquidation of the company.


Background facts

Ecotech and a related company, Modular Housing Solutions (New Zealand) Ltd, supplied and, if required, installed modular houses.

Modular typically took control of the manufacture/delivery of the modular house to its port in Auckland, whereas Ecotech was concerned with the pick up and delivery of the modular home to the site, including site works and ultimate completion.

However, in this particular instance, Ecotech entered into a contract with Mr B for the supply, delivery and completion of the modular home, including site works.

A deposit of $40,265.29 was paid immediately after execution, and it was agreed that the balance of the contract price would be paid on whatever came earlier — the issue of a Code Compliance Certificate or 60 days from the date of the original Bill of Lading certificate.

It was also agreed that Mr B would provide to Ecotech a Letter of Credit for the amount of $93,952.26, being the balance of the contract price.

Whilst the modular home was being completed in China, Ecotech carried out preparatory works on the site owned by Mr B such that it was ready for the delivery of the house once it arrived in New Zealand.

Issues arose though in terms of the form of the letter of credit to be supplied by Mr B.

According to Ecotech, the modular home was ready to be shipped from the manufacturer in China by November 2015.

However, in order for it to be shipped, Ecotech required a letter of credit from Mr B that was in favour of the Chinese manufacturer in Chinese currency.

The BNZ refused to issue a letter of credit in this form but, in fact, issued a letter of credit in accordance with the contractual terms in favour of Ecotech for the sum of $93,952.26.

It provided for a latest shipping date of December 11, 2015, with an expiry on February 29, 2016.

This form of letter of credit was not accepted by the Chinese manufacturer and, ultimately, the house remained in China and was never delivered to Mr B.

Once the letter of credit expired, Mr B, through his lawyer, sent a letter demanding repayment of the deposit plus compensation for other losses in the sum of $58,822.33.

On the very same day, Mr B issued a statutory demand for the deposit sum only.

There were two issues to be decided by the High Court. First, was there a substantial dispute on the facts as to whether or not Mr B complied with his contractual obligation in relation to the provision of a letter of credit?

The court found there was no substantial dispute in this regard because the contractual obligation was clear and without ambiguity. The letter of credit was to be provided to Ecotech, not the Chinese manufacturer. Furthermore, the contract was well capable of realistic commercial application if complied with as drafted.

On the strength of the letter of credit provided to Ecotech, it, in turn, could have found funding to pay the Chinese manufacturer such that the contract could be performed.

Whilst they chose not to do this, the court felt their failure to do so had not been adequately explained by Ecotech.

The second issue for the court to determine was if Mr B was not in breach of contract, was he simply allowed to make demand for the return of the deposit as if it was a debt due?

The court ruled that there was a remedy for breach of contract via the Contractual Remedies Act 1979 by which Mr B could recover his deposit.

Nevertheless, the statutory demand/liquidation jurisdiction of the High Court was not a route by which a party could recover amounts for a breach of contract alone. The debt had to have the added status of being a debt that was due.

Instead, it found that a claim for return of money on the basis of a total failure of consideration was a claim based on the principle of restitution, which was capable of being used in the context of the statutory demand regime.

The court ultimately ruled that Mr B had a right to seek the return of the deposit as a debt due, which was capable of statutory demand.

Accordingly, the application to set aside this statutory demand was dismissed, and Ecotech was given 10 working days to pay back the deposit otherwise Mr B was entitled to make application to put Ecotech into liquidation.


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 or Building Today to anyone who relies on the information contained in this article.

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