Legal Comment

Right to suspend left dangling

Stuart Robertson
Stuart Robertson
Sam McCutcheon
Sam McCutcheon

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.

 

This is the first of two articles that will look at the case of Custom Street, which was an appeal from an arbitral award. In this article we look at the Court’s decision that the five working day notice period prior to a CCA suspension under section 72 can be amended to a longer period in your contract. Next month’s article will address the right to terminate as a result of a principal’s default under clause 14.3.3.

It is rare that the New Zealand courts consider the provisions of NZS 3910. Given adjudication under the Construction Contracts Act 2002 (‘CCA’) and the arbitration agreement within section 13 of NZS 3910, there is very little opportunity for disputes under our most popular standard form contract to come before the courts.

However, the recent High Court case of Custom Street Hotel Limited v Plus Construction Limited [2016] NZHC 2011 provides some judicial comment on NZS 3910 which could have a big impact on contractors.

Background

Custom Street was the principal in a construction contract with the contractors, Plus Construction Co. Limited and Plus Construction NZ Limited (referred to as ‘Plus’). The form of contract was NZS 3910:2003. Plus was experiencing significant delays in its work and by 23 July 2014 had ceased work completely.

A series of disputes were 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 certified that Plus had either abandoned the contract or was persistently, flagrantly or wilfully neglecting to carry out its obligations under the contract. 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.

Section 72 – Suspension of work

When you have a statutory debt under the CCA (also called a debt due) one of your remedies is to suspend the contract works pursuant to section 72. A statutory debt occurs under the CCA when either:

  1. the payor has not issued a payment schedule in time;
  2. the payor has issued a payment schedule in time, but has failed to pay the scheduled amount in time; or
  3. a party has failed to pay a sum of money awarded in an adjudication in the time due.

The process to suspend under section 72 requires that the contractor first serve a notice of intention to suspend, on five working days’ notice. If the debt due is not paid within the five working days, then the contractor is entitled to suspend the contract works from the sixth working day.

If the contract is suspended under section 72, the contractor is not in breach of the contract, and will not be liable for any loss or damage suffered by the principal. Separately the contractor will be entitled to an extension of time to the due date for completion and may be entitled to time related costs. All other rights under the contract are also retained including any right to terminate.

Finally, section 12 of the CCA states: This Act has effect despite any provision to the contrary in any agreement or contract.

This makes it clear that there are certain baseline rights and obligations (such as the right to suspend under section 72) that cannot be amended by the parties.

Clause 14.3.3, NZS 3910:2003

NZS 3910 provides an additional right to suspend for principal default under clause 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.

This provision is identical in both NZS 3910:2003 and NZS 3910:2013. The process to suspend under clause 14.3 is as follows:

  1. 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, among others).
  2. The contractor serves a written notice of default giving the principal 10 working days to remedy the default.
  3. 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.
  4. Following such suspension’, and without prejudice to your other rights, you are entitled to terminate the contract.

The contractual right to suspend under NZS 3910 is fundamentally different from the right under section 72. First off, the grounds to request a suspension under 14.3 are broader and include more than just failure to pay. Secondly, the 14.3 process provides the contractor with a right to terminate if the default is not remedied. This right of termination does not exist under section 72.

The judgment – section 72

The Court starts from the incorrect position that the provisions of the CCA are imported into every construction contract. This is not the case. The only place in which the CCA imposes terms into a construction contract is where the parties have failed to record in their contract one or more of the matters dealing with payment in section 14. To the extent one or more is missing, sections 16 to 18 apply to ‘fill the void’.

So long as the parties do not attempt to contract out of the CCA (section 12) the construction contract can cover a multitude of other areas not covered by the CCA.

While obiter (not strictly binding), the following statements in the judgment, and the manner in which they are expressed, have the potential to cause a great deal of confusion:

[34] Clause 14.3.3 modifies the contractor’s statutory right of suspension following non-payment, deferring the right until a 10 working day notice has expired unremedied.

[35] While cl 14.3.3 modifies rights that the contractor would otherwise have under the Construction Contracts Act…

These comments state that the contractor’s right to suspend under section 72 can be modified by the provisions of the construction contract and that the parties can extend the five working days’ notice period under section 72 through their contract. This would equate to contracting out of the CCA.

Section 12 is clear that there is no contracting out of the CCA. It is simply not open to the parties or the Court to amend the five working day period to suspend under section 72 and the statements above that clause 14.3.3 amends this position to 10 working days are not correct.

What clause 14.3.3 does do is provide the contractor with an additional (contractual) right to suspend, but only after providing 10 working days’ notice under the contract, and only for the matters in clause 14.3.1 and 14.3.2. This right to suspend is additional to any rights available under the CCA and does not take away the contractor’s right to suspend on five working days’ notice under section 72.

From a reading of the judgment it is clear that section 12 was not adequately, if at all, drawn to the Court’s attention.

If the Court’s statements were to be followed this would significantly weaken contractor’s rights by making the contractor’s statutory right to suspend subject to any timeframes in the contract.

There are numerous examples in tripartite agreements, which involve the principal’s bank, or in alliance and PPP agreements, where the contractual notice period prior to suspension can be set at 60 or even 90 days. The statements in Custom Street could lead parties to the incorrect view that a CCA suspension must wait that 60 or 90 day notice period.

A clause like 14.3.3 cannot amend the five working days in section 72. At best it can provide a contractual right that is in addition to the contractor’s rights provided by the CCA.

There is no indication yet whether Custom Street will appeal this judgment to the Court of Appeal.

• End note: As of 1 December 2015 Section 72 of the CCA was repealed and moved to new section 24A of the CCA; its contents are the same.

Kensington Swan regularly provides comment on the construction industry on its blog Site Visit.

Check out www.nzconstructionblog.com to stay up to date.

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