Contractor

Kensington Swan commentary: harsh lesson with non-payment

 

A Civil Contractors NZ member has just endured an 18-month struggle chasing just over $1 million owed it by a developer of a lifestyle subdivision. This article is a sanitised version of the contractor’s extraordinary story, edited by CCNZ executive officer Malcolm Abernethy and CCNZ’s solicitors Kensington Swan (Stuart Robertson). For reasons of confidentiality under the Arbitration Act 1996, the names of the parties cannot be disclosed.

It is not unusual for disputes to arise and payments not made at all or not on time, however, this dispute arose due to no fault of the contractor. The contractor experienced delays from the outset for which it claimed extensions of time. These were granted by the engineer in decisions under the contract (NZS3910). Nevertheless the legitimacy of the extensions of time granted and value of payment required were met in this case by the developer simply saying “I disagree” and then withholding payments.

The contractor wanted to cease work until payment was made, but first took advice. As the contract was absent a clause allowing it to suspend work for non-payment, the contractor was bound to continue working. The solution, which our contractor pursued, was to structure its payment claims under the Construction Contracts Act 2002 (CCA). The developer failed to respond within time and/or sufficiently with complying payment schedules. The CCNZ member then had a statutory right to give notice of suspension (and if not paid, suspend) and to pursue the $1 million as a debt due. As the contract works were all but finished, the former gave the contractor no benefit. The contractor pursued its debt due.

In doing so the contractor was well aware that the likelihood of eventually getting paid by the developer was slim indeed. But its directors had already endured many sleepless nights and borrowed heavily to cover the debt. It was a matter of principle for the developer to pay.

There are two aspects to this sad affair that need to be highlighted. The first is the legal system that effectively allows a developer to avoid payments by transferring money from one company to another during the legal proceedings. The second is ensuring that the contractor completes ‘due diligence’ on the client and his or her associated companies.

Continuing the background of this dispute…

Payments were not made and so the contractor sought payment by issuing statutory demands on the developer. The developer applied to the High Court to set them aside, and the long drawn out legal proceedings commenced.

The developer also ‘retaliated’ by instigating arbitration proceedings.

The delays in the High Court were extraordinary, given the purpose of the CCA is to facilitate regular and timely payments and remedies to recover payments. To put this into context, from when the statutory demands were issued to when the court decision was released took six months. The time between the hearing and the decision took up three of those months. An unusually long time.

The developer immediately appealed that decision to the Court of Appeal.

A hearing was held promptly and decision issued, all within three months. A stark contrast to the High Court process. Nonetheless it had now been nine months to be told the same story – you are entitled to your $1 million. In fact it had been more than 12 months since the work was performed. The Court of Appeal went further and stated that while the parties could arbitrate their dispute (it was already underway), the developer must pay in the meantime. Armed with this decision the contractor went to the arbitrator. We pause to highlight another extraordinary event. Solvency of the developer was a key issue raised with the arbitrator. Such was its prominence that the arbitrator directed that a related, solvent company of the developer pay his fees.

Our CCNZ member sought a stay of the arbitration until the developer paid the debt, as per the Court of Appeal’s decision. The arbitrator declined to do so. The contractor was left with the prospect of expensive and delaying steps of seeking leave of the High Court to appeal, and if successful then appealing the arbitrator’s decision.

But never fear, having received the Court of Appeal’s decision the statutory demand debt was back in the High Court as the developer was now facing liquidation. But, the developer swore an affidavit saying it would have loads of money from the sale of the sections, to settle within a couple of months, to cover the contractor’s alleged debt. Its solicitor was handling the transactions and undertook to hold the surplus in its trust account. At this point the contractor’s case had been through three High Court Associate Judges, and again the court showed leniency to the developer. The director was to file an affidavit in three months’ time showing the exact surplus from the sales.

Three months passed and the developer advised the court that its financier (a second tier funder) had, through a cross guarantee arrangement with other companies of the developer, taken all the surplus sale funds.

A determined developer will always find a way of hiding money from the courts. After over 18 months of pursuing a debt of over $1 million owed to the contractor, the contractor’s experience was that the legal system is left severely wanting. With the assistance of its solicitors, the contractor settled the claims with the developer for a fraction of the debt, only leaving it with a minuscule amount after paying its heavily discounted legal costs.

The developer continued the development, seamlessly undertaking the next stage using the money not paid to offload as many of the costs including the land purchase costs from the disputed development. The money simply disappeared into other entities owned by the developer and its friendly financier.

What then are the lessons from this unfortunate saga? There are several.

During the course of this dispute the contractor and legal team looked for records of the developer and its director/shareholder and started to ask questions as to its integrity and financial status. Searching the NZ Companies Office is a good place to start. Check for other companies (past and present) where the director or shareholder is the same. What this revealed was a string of companies over the last few years placed into liquidation by the developer. In all, they owed the IRD in excess of $2 million.

Find out who really owns the construction site. This can be found at Land Information New Zealand, but you would need someone (a legal executive or solicitor) with a licence to get this information. It is very cheap. You can then easily discover the mortgagee’s details. The company details of the mortgagee were also very telling. This in turn allows you to search other assets (land) secured by the same mortgagee/financier.

Finally, Google provides a wealth of information, even if its veracity may be less than 100 percent accurate. You should quickly get a feel for the creditworthiness of your potential client.

All of this was available to the contractor prior to tendering for or contracting with the developer. It should have been one of the first exercises undertaken when assessing the risk of contracting with the developer. While a generalisation, developers of subdivisions are structuring their affairs and projects just as they did prior to the GFC. Contractors are falling into the same traps as they did before the GFC.

Early and correct use of the CCA is important.

While here the claims for payment were submitted again as CCA claims, using the CCA payment claim procedures from day one, and correctly every time, is essential. A notice of intention to suspend could have been issued earlier, even one month earlier would have been enough, to create substantial leverage and lessen the likelihood of non-payment.

If you are unsure of the developer’s ability to pay, or you already know what the developer is like, then require an alternative payment structure. Either a tripartite agreement with the financier to ensure direct payment on the Engineer’s Certificates, or the money held by an independent third party (an escrow agent) and similarly paid out on the Engineer’s Certificates.

Ensure your contract clearly defines who is responsible for obtaining council approvals and consents, and that they are to be in place before starting work. Act promptly with written notification of any variations or delay events. Ensure that they are fully developed and included in your payment claims.

Ensure your payment claims are expressed ‘Less previously paid’, not ‘Less previously certified’. With the former, if the developer does not pay the full certified sum, your next payment claim does nothing to recoup it. Using the latter wording means in the next payment claim you go for all outstanding amounts.

The contractor is battered and bruised, but like any CCNZ member with a few years under their belt, they are incredibly resilient. By telling their story (albeit a sanitised version) they hope lessons can be learnt by all contractors.

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