Watts & Hughes Construction Limited v Complete Siteworks Company Limited [2014] NZHC 1797 (31 July 2014)

Last Updated: 6 August 2014

IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY

CIV-2014-485-5124 [2014] NZHC 1797

IN THE MATTER OF	The Companies Act 1993
BETWEEN	WATTS & HUGHES CONSTRUCTION LIMITED Applicant
AND	COMPLETE SITEWORKS COMPANY LIMITED Respondent

Hearing:	16 July 2014
Counsel:	R Kettelwell and R E Catley for Applicant G J Luen for Respondent
Judgment:	31 July 2014

_{RESERVED JUDGMENT OF ASSOCIATE JUDGE SMITH}

[1] The applicant Watts & Hughes Construction Limited (Watts & Hughes) applies to set aside a statutory demand issued by the respondent Complete Siteworks Company Limited (CSC) on 8 April 2014.

Background

[2] Watts & Hughes is the head contractor on a development being constructed at Ferrymead in Christchurch. Part of the development entailed the construction of a supermarket carpark, and CSC is a subcontractor engaged in the construction of the carpark. The project developer is PD Sloan (Sloan), and Watts & Hughes’ head contract is with Sloan.

[3] It is common ground that the subcontract between Watts & Hughes and CSC

_{is governed by NZS 3910:2003 Conditions of Contract for Building and Civil}

WATTS & HUGHES CONSTRUCTION LIMITED v COMPLETE SITEWORKS COMPANY LIMITED [2014] NZHC 1797 [31 July 2014]

Engineering Construction (NZS 3910:2003), and the Master Builders standard form of subcontract agreement (SC1/June 2003) (together the subcontract).

[4] Under the terms of the subcontract, CSC was required to submit payment claims on the 25^th of each month (the Due Date), and Watts & Hughes was to provide payment schedules to CSC within 22 working days after the Due Date. The subcontract provided that if Watts & Hughes did not respond to a payment claim submitted on the Due Date by CSC by providing a payment schedule within that 22 working day period, Watts & Hughes would become liable to pay the amount

claimed in the payment claim. If a payment schedule was provided within the 22 working days, Watts & Hughes would be liable to pay the scheduled amount in the payment schedule, the amount due for payment became payable as a debt due to CSC 22 working days after the Due Date.

[5] It is common ground that the subcontract was subject to the provisions of the

Construction Contracts Act 2002 (CCA).

[6] The following clause in the subcontract addressed the situation where CSC

was late in submitting a monthly payment claim: ¹

b) The Subcontractor shall submit monthly Payment Claims for work carried out...Each Payment Claim shall be submitted so as to be received on the Due Date specified in Schedule 1...Where a Payment Claim is received after the claim Due Date the Contractor may at its sole discretion elect to treat that Payment Claim as having been received (and having been due for receipt) on the next claim Due Date. (emphasis added).

[7] Each payment claim submitted by CSC under cl 5(b) was deemed to be a “payment claim” and the amount specified for payment deemed to be the “claimed amount” for the purposes of the CCA.²

[8] Between July 2013 and January 2014, CSC submitted a total of five payment claims to Watts & Hughes for work carried out by it on the carpark. In four of those cases, CSC failed to submit its payment claims by the Due Date as required by the

_{subcontract (that is, CSC submitted its payment claims after the 25}^th _{day of the}

¹ _{Clause 5(b) of the MasterBuilders standard form of contract.}

² MasterBuilders subcontract form, cl 5(c).

month in which the relevant work was carried out). Under cl 5(b) the effect of that lateness was to give Watts & Hughes the discretion to treat the payment claim as if it had been received on the 25^th of the following month. But Watts & Hughes did not do that with any of those late payment claims. It treated each of them as if each had been submitted on the Due Date.³

[9] Watts & Hughes pointed out to CSC on a number of occasions the potential consequences of CSC’s lateness in submitting its payment claims.

[10] Progress payment claim No. 6 was due to be submitted by CSC on

25 February 2014. Again, it was late. It was received by Watts & Hughes on

28 February 2014. It is common ground that Watts & Hughes, on receipt of payment claim No. 6, was entitled to exercise its discretion to elect to treat the payment claim as having been received on 25 March 2014.

[11] By 27 March 2014, being the date 22 working days after the Due Date for payment claim No. 6, Watts & Hughes had not communicated to CSC any election under cl 5(b). No payment schedule had been provided to CSC, and no payment had been made.

[12] CSC’s director Mr Te Amo gave evidence that in late March 2014, Watts & Hughes purported to remove the “sealing” component of the works from the subcontract, and entered into a new contract for that work with a different subcontractor. His evidence was that no variation of the subcontract had been agreed.

[13] On 3 April 2014, Mr Te Amo became aware of a press release issued by

Watts & Hughes. The press release stated that Watts & Hughes was:

under the belief that agreement had been reached and payments would be secured for Mr Te Amo in [CSC’s] February claim. Watts & Hughes said that it was serving formal legal proceedings on [Sloan].

³ For example, payment claim number 5 was submitted by CSC after the 25 January 2014 Due Date. Watts & Hughes could have elected to treat this payment claim as if it had been received on 25 February 2014, but instead treated the 22 working day period as running from

25 January 2014. The payment schedule and accompanying payment were provided within

22 working days after 25 January 2014.

[14] In Mr Te Amo’s eyes, Watts & Hughes’ press statement was clear confirmation that it had chosen to treat payment claim No. 6 as having been received by the Due Date (as it had done with CSC’s previous claims), so that CSC was entitled to receive a payment schedule and the payment of any scheduled amount, on

27 March.

[15] CSC then instructed its solicitors to serve the statutory demand on

Watts & Hughes. The demand claims a total sum of $306,077.23 including GST.

[16] Watts & Hughes says that it does not owe that sum (or any lesser amount) to

CSC.

[17] Mr Reston, a quantity surveyor employed by Watts & Hughes, stated in his evidence that the engineer under the head contract has taken a different view on an issue which had arisen over the interpretation of CSC’s tendered rates, from that taken by CSC in its payment claims.⁴ There is a substantial dispute over that issue between Watts & Hughes and Sloan.

[18] Watts & Hughes says that its April press statement is irrelevant, as it had already elected to treat payment claim No. 6 as having been received on

25 March 2014. On that basis, no payment schedule or payment would have been due until April 28 2014. Watts & Hughes says that it never intended to make the election alleged by CSC (i.e. to treat payment claim No. 6 as having been received by the February Due Date), and the words of the press statement do not justify any inference that Watts & Hughes made that election. Watts & Hughes contends that the press statement referred only to Watts & Hughes’ dealings with Sloan. It says that the press statement was made in the context of the ongoing issue over the interpretation of the applicable tendered rates, which had been in contention between

_{the parties since November 2013.}

⁴ Briefly, the essence of this argument is whether CSC’s tendered “new construction” rate was applicable to the formation work for parts of the carpark which had previously been paved, or whether that rate was only applicable to previously unpaved areas (Mr Reston’s second affidavit, at [6]).

[19] Watts & Hughes submits that its dealings with Sloan and payment claims made by it on Sloan have no bearing on how it exercised its discretion under cl 5(b). Regardless of what it may have submitted to Sloan, (it says that it requested payment of the disputed sums by way of a variation request under the head contract), Watts & Hughes was not required to respond to CSC until 22 workings days after

25 March 2014.

The application and the notice of opposition

[20] The application simply asserts that there is a substantial dispute as to whether or not the debt is owing or is due.

[21] In its notice of opposition, CSC contends that Watts & Hughes is no longer able to dispute the amount claimed in payment claim No. 6, and is obliged by s 23 of the CCA to pay that amount. It contends that Watts & Hughes elected to treat CSC’s payment No. 6 as having been received by Due Date in February 2014, and it communicated that election to CSC through the press statement, delivered on national television on 3 April 2014.

[22] If it is successful in resisting the setting aside application, CSC seeks orders under s 291(a) of the Companies Act 1993 (the Act) requiring Watts & Hughes to pay CSC the sum of $306,077.23 together with interest, within three working days from the date of the judgment. It also asks for an order under s 291(a) that, if Watts & Hughes fails to comply with the order under s 291(a), CSC may make an application to put Watts & Hughes into liquidation. CSC also seeks an award of indemnity costs under s 23(2)(b) of the Act.

Legal principles applicable to setting aside applications

[23] Section 290(4) of the Act provides as follows:

The court may grant an application to set aside a statutory demand if it is satisfied that—

(a) there is a substantial dispute whether or not the debt is owing or is due;

or

(b) the company appears to have a counterclaim, set-off, or cross-demand and the amount specified in the demand less the amount of the counterclaim, set-off, or cross-demand is less than the prescribed amount; or

(c) the demand ought to be set aside on other grounds.

[24] The principles applicable to such applications are well established: ⁵

(a) The applicant must show there is arguably a genuine and substantial dispute as to the existence of the debt. The task for the Court is not to resolve the dispute but to determine whether there is a substantial dispute that the debt is due...

(b) The mere assertion that a dispute exists is not sufficient. Material, short of proof, is required to support the claim that the debt is disputed.

(c) If such material is available, the dispute should normally be resolved other than by means of proceedings in the Companies Court.

(d) An applicant must establish that any counterclaim or cross-demand is reasonably arguable in all the circumstances. The obligation is not to prove the actual claim. Such an obligation would amount to the dispute itself being tried on the application.

(e) It is not usually possible to resolve disputed questions of fact on affidavit evidence alone, particularly when issues of credibility arise.

[25] However a conflict in the evidence, on its own, does not necessarily mean that a setting aside application cannot succeed. A court is not required to accept

_{uncritically any or every disputed fact.} ⁶

⁵ Brookers Companies and Securities Law, Vol 1, at [CA290.02(1)], referred to in Greys Avenue Investments Ltd v Harbour Construction Ltd HC Auckland CIV-2009-404-002026, 12 June 2009 at [8].

⁶ Eng Mee Yong v Letchumanan [1980] AC 331 at 341, applied in the context of a setting aside application in Freemont Design and Construction Ltd v W Stevenson and Sons Ltd HC Auckland CIV-2005-404-4807, 20 April 2006 at [8].

Relevant principles under the CCA

[26] It is common ground that the CCA applies to the subcontract.

[27] Under s 14 of the CCA, the parties are free to agree between themselves on a mechanism for determining the number of progress payments under a construction contract, the interval between those payments, the amount of each payment, and the date when each of those payments becomes due. The CCA then goes on at ss 15 to

18 to provide a default regime applicable in the event of the parties failing to agree on a mechanism for determining any of those matters.

[28] The statutory procedure for making and responding to payment claims is set out in ss 19 to 24 of the CCA. The following provisions in this part of the CCA have relevance to the present dispute:

20 Payment claims

(1) A payee may serve a payment claim on the payer for each progress payment,—

(a) if the contract provides for the matter, at the end of the relevant period that is specified in, or is determined in accordance with the terms of, the contract.

21 Payment schedules

(1) A payer may respond to a payment claim by providing a payment schedule to the payee.

(2) A payment schedule must—

(a) be in writing; and

(b) identify the payment claim to which it relates; and

(c) indicate a scheduled amount.

(3) If the scheduled amount is less than the claimed amount, the payment schedule must indicate—

(a) the manner in which the payer calculated the scheduled amount;

and

(b) the payer's reason or reasons for the difference between the scheduled amount and the claimed amount; and

(c) in a case where the difference is because the payer is withholding payment on any basis, the payer's reason or reasons for withholding payment.

22 Liability for paying claimed amount

A payer becomes liable to pay the claimed amount on the due date for the progress payment to which the payment claim relates if—

(a) a payee serves a payment claim on a payer; and

(b) the payer does not provide a payment schedule to the payee within—

(i) the time required by the relevant construction contract; or ii) if the contract does not provide for the matter, 20 working

^{days after the payment claim is served.}

23 Consequences of not paying claimed amount where no payment schedule provided

(1) The consequences specified in subsection (2) apply if the payer—

(a) becomes liable to pay the claimed amount to the payee under section 22 as a consequence of failing to provide a payment schedule to the payee within the time allowed by section 22(b); and

(b) fails to pay the whole, or any part, of the claimed amount on or before the due date for the progress payment to which the payment claim relates.

(2) The consequences are that the payee—

(a) may recover from the payer, as a debt due to the payee, in any court,—

(i) the unpaid portion of the claimed amount; and

(ii) the actual and reasonable costs of recovery awarded against the payer by that court; and

(b) may serve notice on the payer of the payee's intention to suspend the carrying out of construction work under the construction contract.

[29] Section 79 of the CCA provides that, in any proceedings for the recovery of a debt under s 23, the Court must not give effect to any counterclaim set-off or cross- demand raised by any party to those proceedings other than a set-off of a liquidated amount if:

(a) judgment has been entered for that amount; or

(b) there is not in fact any dispute between the parties in relation to the claim for that amount.

[30] The expression “proceedings for the recovery of a debt” as used in s 79

includes the issue of a statutory demand.⁷

[31] A party that does not take advantage of the CCA provisions permitting it to challenge a payment claim is required to “pay now, and to argue later”.⁸

[32] The CCA does not permit “pay when paid” clauses in construction contracts.⁹

The issues for determination

[33] In the course of the oral argument, Ms Luen submitted that the result of this application must turn on:

(a) whether Watts & Hughes had any obligation to communicate to CSC its decision to treat the Due Date for receipt of payment claim No. 6 as being 25 March 2014, and if so

(b) was any such communication made?

[34] Ms Luen accepted that if there was no requirement that Watts & Hughes communicate its decision under cl 5(b) to CSC, there would be an arguable case for setting aside the statutory demand.

[35] Mr Kettelwell did not demur from that formulation of the issues, but submitted that CSC’s notice of opposition and its written submissions appeared to put CSC’s case on the basis that there was an active decision by Watts & Hughes to treat the Due Date for payment claim No. 6 as 25 February 2014, which decision was communicated to CSC via the 3 April 2014 press release. Neither party had

_{addressed the interpretation of cl 5(b) on the basis that February 25 would be the}

7. Laywood & Rees v Holmes Construction Wellington Ltd [2009] NZCA 35, [2009] 2 NZLR 243 at [57] – [61].

⁸ _{Greys Avenue Investment Ltd v Harbour Construction Ltd, above n 5, at [34] – [37].}

⁹ Construction Contracts Act 2012, s 13.

“default” Due Date for the receipt of payment claim No. 6, and that the only relevant election for Watts & Hughes to make was whether that Due Date should be deemed to be extended to 25 March 2014.

[36] In the course of his oral submissions Mr Kettelwell accepted that, if Watts & Hughes was under an obligation to communicate to CSC its election to treat the Due Date for the receipt of payment claim No. 6 as 25 March 2014, that election would have to have been communicated before 27 March 2014 (being the date by which Watts & Hughes would have had to provide its payment schedule if the Due Date for receipt of payment claim No. 6 had remained 25 February 2014). In essence, Watts & Hughes’ position was that cl 5(b) did not require it to communicate its election to CSC.

[37] In the alternative, Mr Kettelwell and Ms Catley submitted that if a communication of an election under cl 5(b) was required, the fact of the non- payment and failure to provide a payment schedule by 27 March 2014, coupled with the earlier timely provision of payment schedules by Watts & Hughes and its warnings to CSC of the possible consequences of submitting late payment claims, were sufficient in themselves to constitute communication of an election to treat the Due Date for receipt of payment claim No. 6 as 27 March 2014.

Discussion

Did Watts & Hughes have an obligation to communicate any election under cl 5(b)

to CSC?

[38] Neither counsel was able to refer me to any decision in which this issue under cl 5(b) of the Master Builders standard form of subcontract has been considered by a court. I accordingly approach the question as one of interpretation of the clause in the context of the subcontract, and the background circumstances, including (in particular) the provisions of the CCA.

[39] The decision faced by Watts & Hughes was whether to treat payment claim No. 6 as not having been received until the next Due Date (25 March 2014). If it did not make that election, the effect of the relevant provisions of the subcontract was

that the Due Date would remain 25 February 2014, with the consequence that Watts & Hughes had to provide its payment schedule and make any payment in accordance with that schedule by 27 March 2014. Ms Luen submitted that the two courses of action which Watts & Hughes might have taken were inconsistent with each other. Either payment claim No. 6 was to be treated as having been submitted “in time” or it was not.

[40] Ms Luen submitted that an election consists of two elements. First, the making of an unequivocal choice and, second, the communication of that choice to the other party. Both elements must be satisfied before the election is made.¹⁰

[41] Jansen v Whangamata Homes Ltd was a case involving a claim for specific performance, where the Jansens contended that Whangamata Homes had lost the right to terminate the relevant agreement because they had earlier elected to affirm. In the High Court, Randerson J quoted the following statement:¹¹

Where A in dealing with B is faced with inconsistent courses of action which affect B’s rights or obligations and knowing that the two courses of action are inconsistent and that he or she has the right to choose between them, A then makes an unequivocal choice between them and communicates that choice to B, A is prevented from afterwards resorting to the course of action which he has deliberately rejected and communicated to B his intention of rejecting. The election binds A immediately it is communicated to B and is not based on proof of detrimental reliance. It is binding at the point of communication because the underlying rationale of the doctrine is that parties to an ongoing legal relationship are entitled to know where they stand. B must be entitled to rely on A’s deliberate choice with confidence.

[42] Randerson J went on to observe in Jansen: ¹²

The doctrine of election is most commonly relied upon in the contractual context where there has been a breach entitling the innocent party to treat it as a repudiation in nature and to cancel the contract in consequence. However, a party may also be found to have made a binding election where he or she becomes entitled to exercise a right conferred by the contract as distinct from the general law...

¹⁰ _{Jansen v Whangamata Homes Ltd [2006] 2 NZLR 300 (CA).}

¹¹ Jansen v Whangamata Homes Ltd HC Hamilton CIV-2003-419-1511 at [24]. Piers Feltham, Daniel Hochberg and Tom Leech, Spencer Bower on the Law Relating to Estoppel by Representation (4th ed, Bloomsbury Professional, London, 2004) at 359.

¹² Jansen v Whangamata Homes Ltd, above n 11, at [25].

An election may take the form of a deliberate and conscious act by the electing party or may be imputed by the law treating the electing party as having exercised an election irrespective of actual intention...

[43] Randerson J’s analysis of the concept of election was accepted by the Court of Appeal.¹³

[44] In Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India

(The Kanchenjunga), Goff L J said this in respect of the concept of election: ¹⁴

Election itself is a concept which may be relevant in more than one context. In the present case, we are concerned with an election which may arise in the context of a binding contract...in which one party becomes entitled, either under the terms of the contract or by the general law, to exercise a right, and he has to decide whether or not to do so. His decision being a matter of choice for him, is called in law an election. Characteristically, this state of affairs arises where the other party has repudiated the contract or has otherwise committed a breach of the contract which entitles the innocent party to bring it to an end...but this is not necessarily so...in all cases, [the party having the right to elect] has in the end to make his election, not as a matter of obligation, but in the sense that, if he does not do so the time may come where the law takes the decision out of his hands, either by holding him to have elected not to exercise the right which has become available to him or by sometimes holding him to have elected it.

[45] Mr Kettelwell and Ms Catley referred to the judgment of Associate Judge Abbott in North Holdings Development Ltd v Yong Bog Kim.¹⁵ In that case, the Associate Judge summarised the relevant principles relating to the doctrine of election in the following terms:¹⁶

a) The doctrine of election can arise when a party to a contract becomes entitled to exercise a right conferred by the contract, such as a right to terminate the contract.

b) The doctrine applies where the party has a right to choose between inconsistent causes of action. The election consists of making an unequivocal choice and communicating that choice to the other party to

_{the contract.}

¹³ _{Jansen v Whangamata Homes Ltd , above n 10, at [18].}

¹⁴ Motor Oil Hellas (Corinth) Refineries SA v Shipping Corporation of India (The Kanchenjunga)

_{[1990] 1 Lloyd’s Rep 391 (HL).}

¹⁵ _{North Holdings Development Ltd v Kim HC Auckland CIV-2010-404-4261, 16 August 2011.}

¹⁶ At [37].

c) An election may take the form of a deliberate and conscious act by the electing party or may be imputed by the law treating the electing party as having exercised an election (irrespective of actual intention).

d) An election to affirm a contract may be evidenced by words, acts, or even silence. Those matters must establish that the electing party has committed irrevocably to one of the inconsistent causes of action. If the contract is more equivocal and less decisive than this, it will not amount to affirmation – it may be that party is keeping his or her options open.

e) Whether a party has elected to affirm a contract is a question of fact, which may be inferred from all of the acts of that party.

f) The electing party is entitled to reasonable time to consider its position and the merits of each alternative course.

g) Once made the election is irreversible.

h) After the election is made, it is not open to the party affirming to rescind the contract on the basis of matters in his knowledge at the time of the affirmation.

i) A party with a right to terminate, who fails to make a positive election, runs the risk of losing that right (on the basis that, judged objectively, the lapse of time may furnish evidence of a determination to affirm). When the lapse of time is great it may be treated as conclusive evidence of a determination to affirm.

[46] That summary of the relevant principles was accepted as correct by Ms Luen.

[47] For present purposes, paragraphs (b), (c) and (i) of that summary appear to be the most important: communication of the decision is an essential part of a valid election, an election may in some cases be imputed by law, irrespective of the electing party’s actual intention, and a party who enjoys a right of election runs the risk of losing that right if it is not exercised in a timely way.

[48] Ms Luen submits that Watts & Hughes did not make an election to treat the payment claim No. 6 as late, because it never communicated any such election to CSC. In her submission, that failure to communicate is fatal to any argument that Watts & Hughes exercised its discretion under cl 5(b) to treat payment claim No. 6 as having been received on 25 March 2014. Mr Kettelwell and Ms Catley submitted that, on the correct interpretation of the subcontract, Watts & Hughes had no obligation to communicate its decision under cl 5(b). Alternatively, they submit that the issue is arguable, and that in itself provides a sufficient ground for the court to set aside the statutory demand.

[49] Both parties accepted that the principles discussed above relating to election are applicable in this case, and that the only relevant right of election was Watts & Hughes’ right to elect that the Due Date for payment claim No. 6 would be

25 March 2014.

[50] In my view, the question of whether CSC was entitled to receive a payment schedule and payment in response to payment claim No. 6 by 27 March 2014, or by

28 April 2014 (being the date 22 working days after 25 March 2014), was a matter

which clearly affected CSC’s rights under the subcontract.

[51] I am unable to accept Watts & Hughes submission that no communication of its election was required. First, cl 5(b) did not automatically deem a late progress claim to have been received on the next monthly date for submission of payment claims. Drafting a provision having that effect would have been easy enough, but the authors of the standard form of subcontract did not word the clause that way. Instead, the clause gives the contractor the option to alter the rule which would otherwise apply.

[52] It may be that the means of dealing with late submission of payment claims which was adopted in cl 5(b) was chosen with one eye on section 3(a) of the CCA, which prescribes as one of the purposes of the CCA the facilitation of “regular and timely payments between the parties to a construction contract”.¹⁷ If a payment

_{claim is received, say, one day late, and the contractor is easily able to assess it and}

¹⁷ Construction Contracts Act 2002, s 3(a).

include an appropriate corresponding claim in its own claim to the head contractor, the contractor will not normally be prejudiced by the fact that the subcontractor’s claim was submitted one day late. Giving the right of election to the contractor in that situation provides sensible flexibility to deal with a minor default by the subcontractor in a way which ensures that the objective of the CCA of facilitating

“regular and timely payments” is not frustrated.¹⁸

[53] A significant problem with Watts & Hughes’ argument is that, in the absence of any choice, or “election”, by Watts & Hughes under cl 5(b), the contract (and indeed the CCA) provide for particular consequences on particular subsequent dates. Specifically, the consequence of a contractor’s failure to respond to a payment claim by providing a payment schedule within the 22 working days referred to cl 5(g) is that the contractor immediately becomes liable to pay the amount in the payment

claim.¹⁹

[54] To similar effect, cl 5(i) of the Standard Form of Subcontract provides that the amount due for payment becomes payable, and a debt due to the subcontractor,

22 workings days after the Due Date.

[55] Those provisions effectively mirror the statutory regime in ss 22, 23(1) and (2)(a)(i) of the CCA. In circumstances where both the contract and the CCA provide for a specific consequence in the event of there being no election under cl 5(b), it seems improbable to me that the parties would have intended that Watts & Hughes’ would not need to communicate its election to CSC.

[56] Alternatively, this may be one of those situations of the kind referred to by Goff LJ in Motor Oil Hellas, where [the party with the right to elect] has in the end to make its election, not as a matter of obligation, but in the sense that, if he does not do so, the time may come when the law takes the decision out of his hands “by holding him to have elected not to exercise the right which has become available to

_him”.

¹⁸ Although a defaulting subcontractor will of course be accepting the risk that the contractor may make an election under cl 5(b), in which case the subcontractor will not be paid until a month later than would otherwise have been the case.

¹⁹ Standard Form of Subcontract, cl 5(h).

[57] Both the structure of the relevant provisions in the Standard Form of Subcontract and the provisions of ss 22 and 23 of the CCA persuade me that the contractor had to make its election under cl 5(b) before the date for provision by it of the payment schedule, and that it had to make that election known to the subcontractor. The subcontractor was entitled to know where it stood on that date - was there a debt due to it which was immediately enforceable or not?

[58] In summary:

(a) Clause 5(b) conferred on Watts & Hughes a right of election on a matter which affected CSC’s rights (the right to receive a payment schedule and payment of any scheduled amount by 27 March 2014).

(b) In such circumstances it is improbable that the framers of the Standard Form of Subcontract, and therefore the parties in this case, intended that on the date on which the payment schedule and payment of the scheduled amount were due, the subcontractor would be left wondering if the contractor owed it any money or not. In my view any interpretation which admitted of that possibility is unlikely to have been intended.

[59] I conclude that Watts & Hughes was required to communicate to CSC any decision made by it to treat the Due Date for payment claim No. 6 to have been 25

March 2014.

Did Watts & Hughes communicate a clause 5(b) election to CSC?

[60] In my view it did not. It is common ground that there was no email, correspondence, telephone call or any other communication from Watts & Hughes to CSC notifying CSC of any cl 5(b) election to treat the Due Date for the receipt of payment claim No. 6 as 25 March 2014. The only submission Watts & Hughes could make was that the non-payment on 27 March 2014, considered in light of the previous warnings CSC had been given about late submission of payment claims, sufficiently operated to communicate Watts & Hughes’ election to CSC.

[61] I cannot accept that submission. In circumstances where the non-payment was deemed under both the subcontract and the CCA to have a particular consequence, namely that the amount of the payment claim would be a debt owing by Watts & Hughes to CSC, there is no room to infer from the non-provision of the payment schedule any meaning which would have a contrary effect. And even if Watts & Hughes did intend that the non-provision of the payment schedule was to convey the meaning contended for, it did not do so clearly and unequivocally. For all CSC knew, the failure to provide a payment schedule could have been due to inadvertence on the part of Watts & Hughes.

[62] Accordingly, I conclude that Watts & Hughes did not communicate to CSC any election under cl 5(b) in respect of payment claim No. 6. The result of that finding is that the amount of payment claim No. 6 did become due and owing by Watts & Hughes to CSC on 27 March 2014, and Watts & Hughes has no arguable defence to the statutory demand. The application to set aside the statutory demand is accordingly refused.

[63] For completeness, I mention two additional matters. First there was an affidavit provided by Watts & Hughes attesting to the company’s solvency. I do not believe proof of solvency assists Watts & Hughes. As Mallon J noted in Gill Construction Company Ltd v Butler, the statutory demand process should not

normally be able to be avoided by the debtor company proving that it is solvent.²⁰

[64] Secondly, I am of the view that the wording of CSC’s Notice of Opposition, including the ground that “the applicant failed to serve a Payment Schedule in response to the respondent’s Payment Claim No. 6 in time”, was broad enough to cover the argument that Watts & Hughes failed to make any valid election under cl

5(b). The argument that developed at the hearing arose out of the plain wording of

_{the clause, and Watts & Hughes should not have been surprised by it.}

20. Gill Constuction Co Ltd v Bulter [2010] 2 NZLR 229 (HC) at [13], citing AMC Construction Ltd v Frews Contracting Ltd [2008] NZCA 389, (2008) 19 PRNZ 13 at [7].

CSC’s application for orders under section 291 of The Companies Act

[65] As 30 working days have now passed since the last day for compliance with the demand (and there has been no request to extend the time for compliance), evidence of failure to comply with the demand would not now be admissible as evidence that Watts & Hughes is unable to pay its debts in any application CSC might wish to make to put Watts & Hughes into liquidation.²¹ CSC accordingly asks for an order under section 291(1)(a) of the Act that Watts & Hughes pay the debt within a specified period, and that in default of payment, CSC may make an application to put Watts & Hughes into liquidation.

[66] It seems to me that that order is appropriate. If CSC wishes to bring a liquidation claim based on Watts & Hughes’ alleged insolvency it should not have to issue a second statutory demand to provide a foundation for the insolvency claim.

[67] CSC also seeks orders that payment of the amount in the statutory demand be made within three working days of the date this decision, and that Watts & Hughes pay interest on the amount claimed in the demand. In my view seven days is an appropriate period to allow Watts & Hughes to make payment, and there will be an order to that effect. I do not think that there is jurisdiction to make an award of interest in circumstances where interest was not claimed in the statutory demand. However, counsel may file memoranda on that question.

Orders

[68] I make the following orders:

(a) The application to set aside the statutory demand is refused.

(b) Watts & Hughes is to pay CSC the sum of $306,077.23 within seven days of the date of this judgment. If Watts & Hughes defaults in making payment within that period, CSC may make an application to

_{put Watts & Hughes into liquidation.}

²¹ Companies Act 1993, s 288.

(c) Counsel are requested to file memoranda addressing the issues of interest and costs. CSC is to file its memorandum within fourteen days of the date of this judgment. Watts & Hughes may file a reply memorandum within fourteen days of its receipt of CSC’s

_memorandum.

Solicitors:

Sharp Tudhope Lawyers, Tauranga for Applicant

Hesketh Henry, Auckland for Respondent

Associate Judge Smith