Timothy Bates of Auckland law firm Legal Vision evaluates a case that addresses the interplay between the Construction Contracts Act 2002 and the statutory demand process pursuant to section 289 of the Companies Act 1993.
In this month’s article I wish to review a recent High Court decision of Cromi Investments Ltd v CMP Construction Ltd.
It addresses the interplay between the Construction Contracts Act 2002 and the statutory demand process pursuant to section 289 of the Companies Act 1993.
• Cromi was the developer of Nexus Apartments at Vinegar Lane, Ponsonby, Auckland.
It had been in a prolonged debate with its contractor CMP over remedial works, and the release of the second and final tranche of retention monies of $155,274.61 plus GST held by Cromi under the contract.
On the one hand, CMP sought the release of these retentions, and on the other hand Cromi argued that the remedial costs of outstanding defects were valued at more than the amount of the retention monies.
• The contract commenced on May 15, 2015, and it was in the form of NZS 3915:2005 General Conditions of Contract for Building and Civil Engineers Construction as amended by Special Conditions of Contract.
• Clause 12.3 provided that CMP was entitled to recover the second tranche of retention monies upon completion of the remedial works and the issue of a Defects Liability Certificate.
• On February 1, 2018, before CMP issued a Defects Liability Certificate, Cromi issued written notice under clause 11.2.3 of its intention to engage another contractor to complete the remedial work (within and after the expiry of the Period of Defects Liability). A Defects Liability Certificate was never issued.
• On July 3, 2018, CMP served a document called a Final Payment Claim for the retention money of $155,274.61 plus GST (Payment Claim 33). CMP contended this was a valid payment claim.
• In response on July 9, 2018, Cromi re-presented a document titled “Proposed Final Account Certificate”, first presented at a meeting of the parties. Cromi contends this was its final Payment Schedule.
• Against this backdrop, CMP served Cromi with a statutory demand under section 289 of the Companies Act 1993 for $184,631.60.
Payment claim validity
The first of the two key issues for the High Court to determine was whether, in fact, the document CMP served on July 3, 2018 (purporting to be a payment claim) was, in fact, a payment claim.
On this issue, her Honour ruled that it was not. Key in her finding was that this document did not stipulate a due date for payment, which is a requirement pursuant to section 20 of the Construction Contracts Act 2002.
It was argued by CMP applying previous case law, that strict adherence to section 20 was not required, and so long as there was a mechanism for ascertaining when the payment was due, that was sufficient.
However, the court ruled that section 20 had not been complied with in this regard, and nor was there a method for ascertaining the due date for payment.
Accordingly, it was deemed not to be a payment claim, and the “pay now argue later” doctrine was therefore not invoked.
The court was then left to determine whether, in fact, the statutory demand ought to be set aside pursuant to section 290 of the Companies Act 1993 — ie, was there a substantial dispute as to whether or not the debt was owing or due?
The assessment of this came down to whether there was a genuinely arguable case for the cost of incomplete remedial works that exceeded the amount claimed in the demand.
Whilst the High Court was obviously troubled as to the overall genuineness of Cromi’s remedial works claim, it held that it was not possible within the context of a statutory demand proceeding and on the limited material before the court, to determine what remedial work was legitimately in dispute, and what (if any of that work) was not.
The dispute over the remedial work related to more than 20 items, most of which required a technical and potentially expert assessment as to whether or not they were adequately completed.
Ultimately, the court was satisfied that the value of the genuinely disputed items exceeded the amount claimed in the demand. It was set aside by the High Court.
Whilst the court will entertain some slippage from precise adherence to the requirements imposed by section 20 of the Construction Contracts Act 2002 as regards the validity of payment claims, the payer cannot be left with any doubt as to how to comply with the payment claims — in this instance the due date of payment was left in 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 or Building Today to anyone who relies on the information contained in this article.