This article was written by Stuart Robertson and Sam McCutcheon. Stuart is a partner and Sam is a solicitor in Kensington Swan’s construction team. The content of this article is not legal advice.
In last month’s edition (October) we looked at Custom Street Hotel Limited v Plus Construction Limited  NZHC 2011 and a contractor’s right to suspend under section 72 of the Construction Contracts Act 2002 (CCA).
Continuing our review of Custom Street, this month we shift our focus to termination under clause 14.3.3 of NZS 3910:2003 (for default by the principal) and the interaction of this clause with the provisions of the Contractual Remedies Act 1979 (CRA).
Summary of events
Custom Street was the principal under a NZS 3910:2003 contract with Plus, the contractor. Plus was experiencing significant delays in its work and had ceased work completely by 23 July 2014. A series of disputes was referred by Plus to adjudication under the CCA. The result of one determination was to render ‘time at large’, meaning Plus had a reasonable time to complete the contract works.
The engineer subsequently certified that Plus had either abandoned the contract or was persistently, flagrantly or wilfully neglecting to carry out its contractual obligations. Plus did not remedy these defaults and Custom Street moved to terminate the contract. Before Custom Street could terminate, Plus issued a notice of default under clause 14.3.3 asserting Custom Street was in default by failing to pay amounts owing to Plus. Before the 10 working days under clause 14.3.3 had expired, Plus issued a notice requiring the engineer to suspend the whole of the contract works. Before the engineer had ordered a suspension, Plus purported to terminate the contract.
Plus proceeded to arbitration, the resultant award being appealed to the High Court. One of the questions before the Court was whether Plus had validly terminated the contract under 14.3.3. In finding that Plus had validly terminated the contract the court relied not on 14.3.3, but on the provisions of the CRA.
Freedom of contract
‘Freedom of contract’ is a fundamental principle of contract and commercial law. Parties can enter into any contractual arrangements they wish; and providing those arrangements have been freely entered into the courts will not interfere with them.
There are of course exceptions where the courts are required to step in. Examples of this include implying terms where an essential term is lacking; setting aside a contract where it has been entered into under a disability or duress; and rectifying a mistake in a contract where that mistake is obvious to both parties.
In addition, the law may also impose necessary rights or obligations where the parties have failed to address these in their contract. Examples of this include the default payment provisions under the CCA, or the right to terminate a contract under the CRA. In both of these examples the terms are only imposed if the parties have failed to cover them in their contract. The Acts do not override the parties’ agreements and are not imposed as an alternative; in this sense the law is preserving freedom of contract.
Contractual Remedies Act
The CRA provides that in certain circumstances a party may terminate a contract where there has been a misrepresentation, repudiation (intention to breach a contract) or breach of contract. The provisions of the CRA only apply if the parties have not otherwise expressly included a remedy for such issues in their contract:
Remedy provided in contract: If a contract expressly provides for a remedy in respect of misrepresentation or repudiation or breach of contract or makes express provision for any of the other matters to which sections 6 to 10 relate, those sections shall have effect subject to that provision.
The need for the contractual provision to be ‘express’ is not to be read narrowly. The courts have held that it is often a question of fact as to whether the contractual provisions sufficiently cover the default so as to exclude the CRA.
Notwithstanding this position, just because a contract contains an express provision covering breach and provides for damages and/or termination does not mean that the remainder of the remedies in the CRA do not apply. They continue to apply ‘subject to’ the contractual provision. Often the contractual and statutory remedies can stand together, as was the case in MacIndoe v Mainzeal Group Ltd.
The overriding consideration under the CRA is the freedom of the parties to contract for their own procedures and remedies for misrepresentation, repudiation or breach.
Clause 14.3.3, NZS 3910:2003
Standards New Zealand and the committee’s forbearers (going back to the 1906’s ub NZSS 623:1964) spent countless hours developing a specific right to terminate following certain breaches.
This right is contained in 14.3.3 (which is unchanged in 3910:2013):
14.3.3 If the Principal’s default is not remedied within 10 Working Days after the giving of such notice under 14.3.1 or 14.3.2 the Contractor may require the Engineer to suspend the progress of the whole of the Contract Works under 6.7. Following such suspension the Contractor shall be entitled without prejudice to any other rights and remedies to terminate the contract by giving notice in writing to the Principal.
The process for termination under 14.3.3 is therefore:
- The principal defaults in one of the ways listed in clauses 14.3.1 or 14.3.2 (which includes failing to pay amounts due under a payment schedule).
- The contractor serves a written notice of default giving the principal 10 working days to remedy the default.
- If the default is not remedied within that time period the contractor may, from the eleventh working day, request that the engineer suspend the whole of the contract works.
d. ‘Following such suspension’, and without prejudice to your other rights, you are entitled to terminate the contract.
Clause 14.3.3 covers certain breaches of the contract listed in clauses 14.3.1 or 14.3.2 (including non-payment). As these breaches are specifically provided for under the contract, the provisions of the CRA should not apply to them. Arguably, if a default is not covered by clauses 14.3.1 or 14.3.2 the contractor would be able to use the provisions of the CRA in order to terminate.
Regarding the present case, Custom Street failed to pay the amount due under a payment schedule and Plus relied on clause 14.3.1(b) when attempting to terminate. Because NZS 3910 provides for termination where a party fails to pay, the provisions of the CRA are not imported for this breach.
The judgment: Contractual Remedies Act
The Court held that despite the contract providing for termination under clause 14.3.3, cancellation was also available under the CRA. The Court stated:
 While cl 14.3.3 modifies rights that the contractor would otherwise have under the Construction Contracts Act, it does not purport to limit the contractor’s rights under the Contractual Remedies Act, including the right to cancel for breach of an essential term or for a repudiatory breach. Section 5 of the Contractual Remedies Act does not apply. (Emphasis added.)
The Court is saying that if the parties wish to exclude the CRA provisions they must expressly state that the CRA does not apply.
This is not what the CRA requires. Section 5 of the CRA only requires the contract to expressly provide for the misrepresentation, repudiation or breach. The parties are not required to specifically exclude or limit the CRA in the wording of the contract (this happens automatically as a result of section 5).
In Custom Street the parties had agreed that where the principal breaches the contract by failing to pay, the provisions of 14.3 would apply. The contract therefore provides for the breach and the default provisions in the CRA are not required.
In finding that the CRA provisions can exist in addition to the contractual provisions, the Court is allowing parties to ignore their agreed bargain and choose whether they wish to rely on the contractual provisions or the CRA in order to terminate. This goes directly against the wording and purpose of the CRA and the ability of parties to make their own bargains.
The adage ‘hard cases make bad law’ comes to mind. In achieving the desired outcome, the clear wording of Clause 14.3.3, developed over decades, has been overridden. Despite the parties expressly agreeing on the consequence for failing to pay, the judgment in Custom Street purports to sweep that away. If this judgment is followed it would be sufficient for a party to ignore the agreed contractual position and nevertheless rely on the default CRA provisions to terminate. We are of the view that the Court is wrong on this point.
While a District Court will be bound by this decision it is only persuasive in the High Court. If you are the contractor under a NZS 3910 contract, we recommend that you do not rely on the CRA to terminate for breach of contract where that breach is provided for in the contract.
There is no indication yet whether this judgment will be appealed to the Court of Appeal.
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