Leaky buildings, remediation contract cost escalation, and building defects

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Timothy Bates and Bodene Robertson-Wright of Auckland law firm Tim Bates & Co consider how the Body Corporate of an apartment block manages to prevent judgment being executed until such time as its counterclaim for defective works is heard.

In this month’s article, we review the High Court decision of Hellaby Resource Services Ltd v Body Corporate 197281 (2020) NZHC 2131, in which the second plaintiff, TBS Remcon Ltd sought leave to apply for summary judgment against the defendant, the Body Corporate.

There are a number of issues considered in this case. However, in this article, just the summary judgment and Construction Contracts Act 2002 issues will be discussed.

Background

The property concerned is an apartment block with 99 apartments built in the early 2000s. In 2008, weather damage issues were discovered which instigated a building investigation that estimated $1,346,100 worth of repair work.

Subsequently, an investigation by Maynard Marks saw this estimate increase to more than $8 million.

The Body Corporate entered a construction contract with TBS for the repair work which said it would cost “$7,590,272.58 or such greater or lesser sum as shall become payable…”

The contract was described as “lump sum with a portion of cost reimbursement items”. 

TBS found the damage was even worse than previously identified once work commenced, which led to variations to the contract which were agreed to be paid for on a “cost plus agreed margin” basis.

Ultimately, this dramatically escalated the costs of the remediation work.

In June 2018, a guaranteed maximum price was agreed upon between the Body Corporate and TBS, of $35 million excluding GST — which was nearly five times the indicative figure provided for in the contract.

The Body Corporate then refused to pay the final $2.8 million of the guaranteed price, claiming that despite obtaining Code Compliance Certificates, certain areas were incomplete, defective and non-compliant with the Building Code.

Payment claim under the Construction Contracts Act 2002

TBS was sold to Hellaby, who was assigned all contractual rights against the Body Corporate under the construction contract, including the right to sue for the unpaid balance.

Hellaby demanded that the Body Corporate pay the unpaid balance of $2,826,299.65.

These monies were not paid and, thereafter, Hellaby issued proceedings to recover the debt, and sought summary judgment.

The application for summary judgment was dismissed on the basis that the assignment was not effective due to the Body Corporate not giving its consent to the assignment as required under the construction contract.

In July 2020, Hellaby joined TBS as a second plaintiff, and again sought the payment of the debt. Following this, TBS applied for summary judgment of the debt, and said that the payment schedules issued between November 2017 and July 2019 gave rise to the claimed debt.

The Body Corporate admitted that TBS issued the payment claims for the unpaid balance, and that the Body Corporate did not amend the provisional payment schedules issued by Maynard Marks as engineer.

The Body Corporate denied that the issuing of these payment schedules in respect of the payment claims give rise to a statutory debt under s 24 of the Construction Contracts Act 2002, and further said that the amount owing to TBS was uncertain due to its counterclaims.

TBS’s application for summary judgment

The legal principles governing a summary judgment application are well established, and state that the court may give judgment against a defendant if the plaintiff satisfies the court that the defendant has no arguable defence to a cause of action in the statement of claim.

The court has some discretion — however, this should only be invoked to avoid oppression or injustice to the defendant under certain circumstances.

TBS submitted that the Body Corporate had no arguable defence to its application for summary judgment because the amount claimed was a debt due and payable according to s 24 of the CCA.

The Body Corporate opposed the summary judgment on the basis it had an arguable defence on the merits, there were serious policy and natural justice reasons weighing against summary justice, that summary judgment would not finally determine the substantive dispute, and that ordering summary judgment would be oppressive and unjust.

Associate Judge Gardiner stated that neither of the Body Corporate’s arguments established an arguable defence in the context of the CCA, for if a payer does not provide a payment schedule within the time required by that construction contract, the payer is liable to pay the claimed amount.

It was not accepted that the Body Corporate’s allegations provided an arguable defence to TBS’s claim to the debt, as these allegations were pleaded as a counterclaim against TBS, not a defence or abatement.

Generally, the existence of a counterclaim alone does not foreclose summary judgment, and Associate Judge Gardiner concluded that the Body Corporate had no arguable defence to TBS’s claim to the debt.

Further to this, Associate Judge Gardiner discussed the case law on the exercise of residual discretion, and stated that the circumstances of this case did not justify exercising the residual discretion to decline summary judgment.

Ultimately, summary judgment was entered against the Body Corporate. However, the execution of the judgment is stayed until the counterclaim of the Body Corporate can be determined.

So, ultimately, the Body Corporate probably achieved its objective whereby there was no execution against the judgment until the Body Corporate’s claim is decided upon.

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co or Building Today to anyone who relies on the information in this article.

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