Custom Street Hotel Limited v Plus Construction NZ Limited [2016] NZHC 2011 (29 August 2016)

Last Updated: 9 September 2016

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2016-404-000219 [2016] NZHC 2011

UNDER	the Arbitration Act 1996
BETWEEN	CUSTOM STREET HOTEL LIMITED Plaintiff
AND	PLUS CONSTRUCTION NZ LIMITED First Defendant PLUS CONSTRUCTION CO LIMITED Second Defendant

Hearing:	3 August 2016
Appearances:	R B Stewart QC, I Rosic and S McMullan for Plaintiff A Barker for Defendants
Judgment:	29 August 2016

_{JUDGMENT OF GILBERT J}

This judgment is delivered by me on 29 August 2016 at 11.30 am pursuant to r 11.5 of the High Court Rules.

..................................................... Registrar / Deputy Registrar

Counsel/Solicitors:

R B Stewart QC, Auckland

Gilbert Walker, Auckland

Andrew Barker, Barrister, Auckland

CUSTOM STREET HOTEL LTD v PLUS CONSTRUCTION NZ LTD [2016] NZHC 2011 [29 August 2016]

Contents

Introduction ..........................................................................................................[1] Background ...........................................................................................................[2] Questions of law..................................................................................................[19]

Question 1 – Did the arbitrator err in holding that Plus’s

breach must be repudiatory in nature before Plus would be

disentitled from terminating? .......................................................................[20]

Question 2 – Did the arbitrator correctly construe clause 14.3.3 of the contract and err in holding that the defendants terminated

in accordance with clause 14.3.3? ................................................................[28]

Question 3 – Did the arbitrator correctly construe clause 14.2.4 of the contract and err in holding that the difference, between a certified cost to complete the contract works and the cost to Custom Street had the contract works been completed by Plus, could not be “properly due under the contract” until the contract

works have been completed?........................................................................[40]

Question 4 – Did the arbitrator err in holding that the damages claimed by Custom Street for breach of contract cannot be “properly due under the contract” until Custom Street’s claim

is admitted or determined as to liability and quantum? ...............................[49]

Question 5 – Did the arbitrator err in holding that Custom Street cannot rely upon the amounts claimed under the indemnity clause

in the contract as amounts “properly due under the contract”?....................[54]

Result ...................................................................................................................[61]

Introduction

[1] This is an appeal on questions of law arising out of an arbitral award of

Hon. Rodney Hansen QC dated 17 November 2015.

Background

[2] The plaintiff, Custom Street Hotel Ltd (Custom Street), entered into a construction contract dated 1 November 2013 with the defendants, a Korean company, Plus Construction Co. Ltd (Plus Korea) and Plus Construction NZ Ltd (Plus NZ) (together, Plus) for the re-development of the Reserve Bank Building on Customs Street, Auckland into a 15 storey hotel. This contract replaced an earlier construction contract entered into in December 2012 between Custom Street and Plus NZ.

[3] The contract price was $14.45 million plus GST subject to any variations or adjustments under the contract. The contract works were to be completed within

52 weeks.

[4] Plus as contractor and ANZ as surety provided a performance bond for 25 per cent of the contract price, $3.6125 million, in favour of Custom Street as beneficiary. The expiry date of the bond was 31 March 2015. The bond was payable:

Upon written demand by the beneficiary stating that the contractor has failed to perform its obligations under the contract documents and accompanied by a certificate issued by the engineer in terms of clause 2, but otherwise without proof or conditions.

[5] Clause 2 of the bond stipulates the requirements of the engineer’s certificate:

2. The engineer’s certificate shall state, in the engineer’s opinion:

(A) That the contractor has failed to perform its obligations under the construction contract; and

(B) That the contractor has been given notice of the failure and has failed to rectify that failure within the time set out in the notice; and

(C) The amount claimed under the bond is properly due under the contract.

[6] Significant problems arose from the outset leading to delays in the construction works. Plus ceased work on 23 July 2014 and has not carried out any work on the site since. On 16 October 2014, Derek Firth, a senior lawyer specialising in construction disputes, delivered an adjudication under the Construction Contracts Act 2002 finding that the original contract programme had been disrupted, mainly because of delays in obtaining the necessary consents. Nevertheless, Mr Firth found that there was a substantial amount of work that Plus could have completed but had not. Mr Firth found that time for completion of the contract works was at large so that Plus was entitled to a reasonable time to complete them.

[7] The last of the consents required for the works was obtained in November 2014. The parties then engaged in discussions with a view to making a fresh start. A new programme of works was proposed and Plus engaged a new management team. Custom Street also sought a new bond because it was clear that the contract works would continue beyond the expiry of the existing bond on

31 March 2015. Prior to the conclusion of these discussions, Plus complained about non-payment of invoices. At about this time, Custom Street raised concerns about health and safety issues posing significant risks to persons working on or entering the site. This led to the engineer suspending all works on-site, except as necessary to address health and safety issues, on 5 February 2015.

[8] In the meantime, Plus served a default notice dated 27 January 2015 in respect of two unpaid amounts due under the contract totalling $258,507.62. This notice was given pursuant to cl 14.3 of the general conditions of the contract (NZS 3910:2003). Clause 14.3.3 provides:

If the Principal’s default is not remedied within 10 Working Days after the giving of such notice ... 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.

[9] Custom Street did not remedy the default within 10 working days of service of the notice. The 10 working day period expired at midnight on 11 February 2015. Prematurely, at 5.12 pm on 11 February 2015, Plus sent an email to the engineer

attaching a letter dated 12 February 2015 purporting to require him to suspend the contract works in accordance with cl 14.3.3:

Please note that the period of 10 working days expired yesterday,

11 February 2015, and we have not received payment of either the balance of

Payment Schedule 10 or Payment Schedule 11. On that basis, we require you to suspend the Contract Works in terms of clause 14.3.3 of the contract.

Can you please confirm as a matter of urgency.

[10] The engineer, who was in Shanghai at the time, was uncertain how to proceed because he had already suspended the works due to health and safety concerns. At

9.29 am on 12 February 2015, prior to receiving any formal response from the engineer, Plus gave notice purporting to terminate the contract under cl 14.3.3. Custom Street paid the amounts outstanding under the default notice later that day.

[11] On 20 February 2015, Custom Street issued a notice of default to Plus under cl 14.2.1 of the contract claiming that it had abandoned the contract and persistently, flagrantly or wilfully neglected to carry out its obligations under the contract. This notice was based on a certificate issued by the engineer the previous day under cl 14.2.1(c).

[12] Clause 14.2 of the contract deals with default by the contractor. It relevantly provides:

14.2 Default by the Contractor

14.2.1 The Principal may at its option after giving notice to the Contractor either terminate the contract or resume possession of the Site in the event of:

...

(c) The Engineer certifying in writing to the Principal that in his or her opinion the Contractor has abandoned the contract or is persistently, flagrantly or wilfully neglecting to carry out its obligations under the contract;

and the Contractor’s default has not been remedied within 10

Working Days of receiving the notice.

...

14.2.3 If the Principal elects to resume possession of the Site under the

provisions of 14.2.1... it may:

(a) Forthwith expel the Contractor without terminating the contract or relieving the Contractor from any of its obligations under the contract; and

(b) Complete and remedy defects in any part of the Contract Works remaining to be completed and for that purpose may let contracts for such work or employ any Persons other than the Contractor; and

(c) Take possession of, use and permit other Persons to use Materials, Plant, Temporary Works and other things which are on the Site owned by the Contractor and are necessary for completing and remedying defects in the Contract Works; and

(d) Require the Contractor to arrange within 10 Working Days the assignment to the Principal or its nominee without payment the benefit of any agreement for the supply of Materials or execution of work under the contract.

In any such case the Contractor shall not be entitled to any further payment until the completion of the Contract Works.

14.2.4 On completion of the Contract Works, any Plant, Temporary Works and surplus Materials of which the Principal has taken possession shall be handed back to the Contractor. The Engineer shall enquire into the cost to the Principal of completing the Contract Works and certify accordingly. Should the amount certified exceed the Cost to the Principal had the Contract Works been completed by the Contractor, the difference between the two amounts shall be certified by the Engineer and paid by the Contractor to the Principal. Should the amount certified be less than the cost to the Principal had the Contract Works been completed by the Contractor, the difference between the two amounts shall be paid by the Principal to the Contractor.

14.2.5 If the Principal elects to terminate the contract under 14.2.1 it shall give written notice to the Contractor of its election. The contract shall thereupon be terminated. The Principal may thereupon expel the Contractor from the Site and may take all or any of the further steps in 14.2.3(b), (c) and (d), and may claim damages for the Contractor’s breach of contract. If the Principal completes the Contract Works or arranges for them to be completed then 14.2.4 shall apply, but any amount payable to the Contractor thereunder shall be subject to any damages to which the Principal shall be entitled as a result of the Contractor’s breach...

[13] Plus took no steps under the contract following service of Custom Street’s notice on 20 February 2015, consistent with its position that it had already validly terminated it. Custom Street purported to terminate the contract on 11 March 2015, consistent with its position that Plus had not validly terminated the contract.

Custom Street then initiated the process required to enable it to call on the performance bond.

[14] On 16 March 2015, Plus filed proceedings in this Court seeking an interim injunction to restrain the engineer from issuing the necessary certificate and to restrain Custom Street from claiming under the bond. That proceeding was settled on the basis that the engineer would proceed to consider whether to issue a certificate for the purposes of the bond. If he did so, Custom Street could make demand on the bond and the proceeds would be paid into a solicitor’s trust account pending the arbitrator’s determination of whether the engineer was entitled to issue the certificate and whether Custom Street was entitled to make demand on the bond.

[15] On 25 March 2015, the engineer certified that $24,948,392.35 was properly due under both cl 14.2.5 and cl 7.1.1 of the contract. This was the projected additional cost of completing the contract works using another contractor and was based on an estimate that it would cost approximately $42.6 million to complete the works.

[16] Clause 7.1.1 of the contract relevantly provides:

7.1 Indemnity

7.1.1 Except as otherwise provided in the Contract Documents the

Contractor shall indemnify the Principal against:

(a) Any loss suffered by the Principal which may arise out of, or in consequence of the construction of, or remedying defects in the Contract Works.

[17] On 26 March 2015, the engineer issued a certificate under cl 2 of the bond certifying as follows:

(A) That the contractor has failed to perform its obligations under the construction contract, and

(B) That the contractor has been given notice of the failure and has failed to rectify that failure within the time set out in the notice, and

(C) The amount claimed under the bond is properly due under the contract. This amount claimed and certified under the bond is the full guarantee

amount being NZD 3,612,500.

[18] The arbitrator found that the engineer was not entitled to issue the certificate for the purposes of the bond. In particular, the arbitrator found:

(a) The engineer was wrong to certify under cl 2(A) of the bond that Plus had failed to perform its obligations under the contract. This was because Plus validly terminated the contract on 12 February 2015 and therefore could not have been in default when the engineer issued his certificate to this effect one week later, on 19 February 2015.

(b) The engineer was also wrong to certify that the amount claimed as damages of $24,948,392.35 was payable under either cl 14.2.5 or cl 7.1.1 the contract. Any claim by Custom Street for additional costs of completing the works is governed by cl 14.2.4 of the contract and can only be determined after the works have been completed. Clause 7.1.1 does not apply. No amount is currently properly due under the contract. Accordingly, the engineer was wrong to certify under cl 2(C) that the full amount of the bond was properly due under the contract.

Questions of law

[19] Custom Street obtained leave to appeal against the award on the following five questions of law:

(a) Did the arbitrator err in holding that the defendants’ breach must be repudiatory in nature before the defendants would be disentitled from terminating?

(b) Did the arbitrator correctly construe clause 14.3.3 of the contract and err in holding that the defendants terminated in accordance with clause 14.3.3?

(c) Did the arbitrator correctly construe clause 14.2.4 of the contract and err in holding that the difference, between a certified cost to complete the contract works and the cost to Custom Street had the contract works been completed by Plus, could not be “properly due under the contract” until the contract works have been completed?

(d) Did the arbitrator err in holding that the damages claimed by Custom Street for breach of contract cannot be “properly due under the contract” until Custom Street’s claim is admitted or determined as to liability and quantum?

(e) Did the arbitrator err in holding that Custom Street cannot rely upon the amounts claimed under the indemnity clause in the contract as amounts “properly due under the contract”.

Question 1 – Did the arbitrator err in holding that Plus’s breach must be

repudiatory in nature before Plus would be disentitled from terminating?

[20] In its points of defence in the arbitration, Custom Street claimed that Plus’s purported termination of the contract on 12 February 2015 was invalid because: Plus’s email attaching the 12 February 2015 request for the engineer to suspend the works was delivered prematurely, on 11 February 2015, and was therefore invalid; the engineer did not suspend the contract works in response to the request; and a valid termination notice could only be given following such a suspension.

[21] Custom Street did not plead that the termination notice was invalid in any event on the basis that Plus was disentitled from terminating because of its own breaches of the contract. However, this was argued on its behalf in closing submissions and dealt with by the arbitrator in the following key passages in his award:

40. [Custom Street] then argues that, leaving aside the issue of compliance with clause 14.3.3, Plus was denied the right to terminate by its own breaches. Mr Stewart relied on the decision in Ingram v Patcroft Properties Limited where the Supreme Court endorsed the principle that a party seeking to cancel a contract must itself be willing and able to perform its obligations under the contract. The Court held that a lessor who had unlawfully re-entered and excluded the lessee from premises had repudiated the lease and was thereby precluded from cancelling the lease for non- payment of rent. The judgment makes it clear however that the disentitling conduct must be repudiatory in nature. The principle is concisely expressed by Lord Finlay LC in Morris v Baron and Co:

A party to a contract which imposes certain obligations and confers certain rights upon him cannot claim to exercise these rights while repudiating his obligations in material particulars.

41. For [Custom Street] it is said that as at 12 February 2015 Plus was in serious dereliction of its obligations under the contract. Mr Stewart points to the fact that no work under the contract had been undertaken since July

2014; scaffolding had been removed in December 2014; and there had been persistent and serious breaches of health and safety requirements. He

submits that there was no justification for Plus ceasing work and failing to

resume.

...

43. In the circumstances, I consider it realistic to look afresh at the conduct of the parties after the last of the adjudicator’s decisions issued in October 2014. It effectively required the parties to start again. With time at large, the parties had to agree a new programme and scope of works. In November the last of the consents issued and the major impediment of which Plus had complained was finally cleared away. The parties then engaged in high level discussions ... and talked about a fresh start. Plus employed a new management team. A new programme of works was proposed. While the dismantling of the scaffolding was a matter of concern, Plus was negotiating to employ a new scaffolder and met with the Engineer for that purpose.

44. On my view of the evidence, the lack of action on site notwithstanding, there was nothing to indicate that Plus was not committed to the Contract, albeit under a revised programme of works.

...

49. While [Custom Street’s] reservations about the ability of Plus to deliver were clearly justified and there were arguable grounds for the Engineer to certify that Plus was in default, I do not think that there is a sufficient basis for me to conclude that Plus had repudiated the contract or evinced an intention to do so. I consider the steps it had taken since October

2014 were sufficient to counter any suggestion that it was not prepared to meet its obligations. [Custom Street] certainly had reason to doubt whether

Plus had the resources, the expertise and the commitment to complete the works but objectively the facts do not establish that it had no serious

intention of doing so. In my view Plus is not prevented from relying on the breach of [Custom Street] to terminate the contract.

50. I conclude that the Engineer was wrong to certify under clause 2(A) of the Bond that Plus had failed to perform its obligations under the Contract. Plus validly terminated the Contract on 12 February 2015 and could not have been in default.

(Footnotes omitted)

[22] Mr Stewart QC submits that the arbitrator erred in law in finding that a party will only be disentitled from terminating a contract if it is in repudiatory breach of it at the time of the purported termination. He submits that the correct position is that a party must itself be ready and willing to perform the substance of the contract at the time it purports to cancel. A party will not be considered to be ready and willing to perform its obligations where its own breach of the contract is sufficiently serious as to entitle the other party to cancel the contract under s 7 of the Contractual Remedies Act 1979.

[23] In Ingram v Patcroft Properties the Supreme Court confirmed that the common law rule requiring that a cancelling party must be ready and willing to

perform the contract in all material respects was to ensure that it could not benefit from its own wrong.¹ The Court also endorsed the Court of Appeal’s judgment in Noble Investments Ltd v Keenan that this rule survived the passage of the Contractual Remedies Act but did not apply where the cancelling party did not so benefit.² The Supreme Court also agreed with the examples given by Glazebrook J, in giving the judgment of the Court in Noble Investments, of circumstances in which a party would be precluded from cancelling because this would enable it to benefit from its own wrong:³

A party could be seen as benefiting from its own wrong if it seeks by cancellation to deprive the other party of the benefit of the contract in circumstances where the other party’s breach is a direct result of breach committed by the party seeking to cancel the contract. ... A party could also be seen as benefiting from its own wrong where it is unable or unwilling to perform its obligations under the contract and seeks to avoid liability for its own breach by cancelling the contract on the basis of the other party’s breach.

[24] More recently, in Kumar v Station Properties Ltd the Supreme Court stated that a party who is in breach of an essential term of a contract is not entitled to enforce its rights of cancellation under the contract.⁴ Arnold J, who gave the reasons for judgment of the majority (Elias CJ, McGrath, Glazebrook and Arnold JJ), said that “[T]his is particularly so where the obligations of the parties are mutually dependent and concurrent, as in contracts for the sale of land”.⁵

[25] It is clear that the circumstances in which a party may be disentitled from cancelling a contract are not limited to those where that party has repudiated the contract; a breach of an essential term or other serious breach entitling the other party to cancel the contract under s 7 of the Contractual Remedies Act could be sufficient. However, such breach will only disentitle the party from cancelling the contract where it would otherwise benefit from its own wrong.

[26] Custom Street could only terminate under the terms of the contract for the breaches it asserted if Plus failed to remedy its default within 10 working days of

¹ _{Ingram v Patcroft Properties [2011] NZSC 49; [2011] 3 NZLR 433 at [40].}

² _{Noble Investments Ltd v Keenan [2006] NZAR 594 (CA).}

³ _{Noble Investments at [47].}

⁴ _{Kumar v Station Properties Ltd [2015] NZSC 34; [2016] 1 NZLR 99 at [94].}

⁵ Ibid.

receiving notice of the engineer’s certificate that Plus had abandoned the contract or was persistently, flagrantly or wilfully neglecting to carry out its obligations under the contract. The engineer did not issue this certificate until 19 February 2015, after Plus’s notice purporting to terminate the contract. Prior to the expiry of the notice based on the engineer’s 19 February 2015 certificate, time for performance by Plus was at large. It follows that the alleged breaches by Plus could only justify cancellation prior to the expiry of the 10 working day notice period if they amounted to a repudiation of the contract by Plus. The arbitrator was therefore correct to confine his attention in this case to whether or not Plus had repudiated the contract and was disentitled to terminate it in consequence. The arbitrator found as a fact that Plus did not repudiate the contract and remained ready and willing to perform it.

[27] The answer to question 1 is “no” based on the facts found by the arbitrator.

Question 2 – Did the arbitrator correctly construe clause 14.3.3 of the contract and err in holding that the defendants terminated in accordance with clause 14.3.3?

[28] It is helpful to set out cl 14.3.3 again because this question turns on its proper interpretation:

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.

[29] Mr Stewart submits that Plus’s right to terminate the contract under cl 14.3.3 can only be exercised after the engineer has suspended the progress of the whole of the contract works under cl 6.7 in accordance with a requirement made by Plus under the clause. He submits that the words “Following such suspension” in the second sentence of the clause would serve no purpose if the contractor was entitled to terminate immediately upon communicating to the engineer that it requires him to suspend the works. He relies on Brown & Doherty Ltd v Whangarei County Council in support of his contention that termination provisions in construction contracts

must be strictly interpreted because of the “drastic and far-reaching consequences”

that may flow to the principal from a contractor’s decision to cancel.⁶

[30] The arbitrator observed that if there is an unremedied default by the principal following expiry of a notice requiring the default to be remedied within 10 working days, the contractor is entitled to “require” the engineer to suspend the whole of the contract works. The engineer is then obliged to give effect to the requirement. The arbitrator found that a failure by the engineer to take this purely formal step could not prevent the contractor from exercising its substantive rights to terminate under cl 14.3.3:

37. The suspension of the Contract Works had become necessary as a consequence of the Principal’s default and the Contractor’s request. The Engineer was then obliged to give effect to the request by giving the necessary instruction to the Contractor. Such an instruction can be seen as little more than a formality. In my view it could not have been intended that the refusal or failure of the Engineer to take the purely formal step of issuing an instruction to suspend would deny the Contractor its substantive rights to terminate under clause 14.3.3. Having required the Engineer to suspend, I consider Plus was entitled to give notice of termination notwithstanding the Engineer’s failure to give the requisite notice of suspension.

[31] I agree with Mr Stewart that if the contract excluded the contractor’s right of termination until the engineer suspended the contract works in accordance with a validly made request under cl 14.3.3, then this requirement could not be ignored or dismissed as a mere formality. In this case, it is arguable that the contractor did not make a valid request for suspension because it was made prematurely. In any event, it is clear that the engineer did not suspend the works in response to any such request. Therefore, if suspension is a necessary precondition to termination, Plus did not validly terminate the contract. However, for the reasons that follow, I have come to the conclusion that this is not the proper interpretation of cl 14.3.3. In my view, this clause does not exclude cancellation rights under s 7 of the Contractual Remedies Act 1979.

[32] NZS 3910:2003 was first published on 11 August 2003. At that time, s 72 of the Construction Contracts Act 2002, which came into force on 1 April 2003,

_{provided that a party who carries out construction work under a construction contract}

⁶ Brown & Doherty Ltd v Whangarei County Council [1988] 1 NZLR 33 (HC) at 36.

has the right to suspend work under that contract in various circumstances, including where a claimed amount is not paid in full by the due date and no payment schedule has been provided by the party claimed to be liable for the payment. This provision was repealed on 1 December 2015 and is now replaced by s 24A of the same Act.

[33] Section 72 of the Act also provided that if the contractor exercised its right of suspension, that would not prejudice its right to exercise any remedies otherwise available to it under the Contractual Remedies Act. This meant that the contractor could suspend without losing any right available under that Act, including the right to cancel.

[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. The process to be followed in suspending the works is also different in that the contractor must require the engineer to suspend the progress of the whole of the contract works under cl 6.7. However, consistent with the position under the Act, if the contractor chooses to take the step of suspending the works under the contract, this will not amount to an affirmation precluding cancellation in reliance on the same breach. This is made clear by the words “Following such suspension the contractor shall be entitled ... to terminate the contract”.

[35] 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:

5. 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.

[36] As Cooke P observed in MacIndoe v Mainzeal Group Ltd in the context of a standard form agreement for sale and purchase of real estate, the existence of

remedies in a clause such as this can stand alongside ordinary remedies under s 7 of the Contractual Remedies Act:⁷

Clause 8 gives various remedies, including the 12 working-day notice after settlement date, which when available will avoid any question as to whether notice has been reasonable; but the existence of these remedies can stand together with the availability also of the ordinary remedies of a vendor (or a purchaser) under s 7 of the Contractual Remedies Act. The cl 8 remedies are additional. There is nothing in the clause inconsistent with s 7, so s 5 does not have the effect of making that clause exclude s 7.

[37] Under NZS 3910:2003, if the principal fails to remedy its breach prior to the expiry of a 10 working day notice, this would be a breach of an essential term that would normally entitle the contractor to cancel the contract under the Contractual Remedies Act. Indeed, the contractor would normally be put to an election as to whether to cancel the contract in reliance on that breach. If it did not do so, then, in the absence of any provision to the contrary, it would be precluded from later cancelling the contract for that breach because of s 7(5) of the Contractual Remedies Act:

(5) A party shall not be entitled to cancel the contract if, with full knowledge of the repudiation or misrepresentation or breach, he has affirmed the contract.

[38] If the contractor, faced with such a breach, does not wish to pursue the middle ground option of suspension provided under the contract, it would be odd if it could not instead elect to terminate the contract immediately. No useful purpose would be served by requiring the contractor to arrange for the engineer to suspend the works, even if only momentarily, before it could take the next step of cancelling the contract and, in my view, the contract does not require this. I do not consider that cl 14.3.3 excludes an innocent contractor’s right under s 7 of the Contractual Remedies Act to cancel the agreement in the event of the principal breaching an essential term. Clause 14.3.3 merely deals with the manner of exercise of the right of suspension and the consequences of exercising that right. In particular, it makes clear that the contractor retains its right of termination for the breach even if it affirms the contract by exercising its right under the contract to require the works to be suspended. There is nothing in cl 14.3.3 inconsistent with s 7 and those rights are

_{accordingly not excluded.}

⁷ MacIndoe v Mainzeal Group Ltd [1991] 3 NZLR 273(CA) at 281.

[39] Although I arrive at the same result by a different route, I agree with the arbitrator that Plus was entitled to terminate the contract as a result of Custom Street’s failure to make payment within the 10 working day period. The answer to question 2 is “no”, the arbitrator did not err.

Question 3 – Did the arbitrator correctly construe clause 14.2.4 of the contract and err in holding that the difference, between a certified cost to complete the contract works and the cost to Custom Street had the contract works been completed by Plus, could not be “properly due under the contract” until the contract works have been completed?

[40] In its points of defence in the arbitration, Custom Street claimed that it had a contractual right to damages under cl 14.2.5 and there was no requirement in that clause for alternative performance of the contract to be completed before pursuing such a claim.

[41] The arbitrator rejected that contention and held that any claim for damages based on the additional cost of completing the contract works is governed by cl 14.2.4 and that the quantum of such a claim cannot be determined until the contract works have been completed.

[42] Ms Rosic, who presented this part of Custom Street’s argument, acknowledges that cl 14.2.4 applies where the principal terminates the contract and arranges for the contract works to be completed or completes the contract works. Clause 14.2.5 says so expressly. However, she argues that the principal is entitled to the additional cost of completion as soon as it arranges (organises or plans) for the contract works to be completed. She contends that there is nothing in the wording of cls 14.2.4 or 14.2.5 which confines the principal’s entitlement to the additional cost of completion until after the works have been completed. Ms Rosic submits that the opening words of cl 14.2.4 “On completion of the Contract Works” relate solely to the principal’s obligation to return plant, temporary works and surplus materials to the contractor. She argues that the remainder of the clause addresses the separate and unrelated issue of the additional cost of completion and that this is not subject to the same temporal restriction.

[43] Ms Rosic submits that the use of the word “enquire” in cl 14.2.4 suggests that the engineer is required to make an assessment of the costs to complete. She argues that this supports her contention that the exercise can be undertaken before the actual costs of completion are known. She contends that this interpretation is also supported by the use of the words “completing” (as opposed to “completed”) and “cost” which is defined to include prospective costs, not just those that have actually been incurred. Ms Rosic submits that the principal has the right to choose whether to claim under cls 14.2.4 and 14.2.5 for damages calculated on the basis of an assessment of the likely cost of completing the works or wait until the works have been completed and formulate its claim on the basis of the actual costs. Ms Rosic contends that this interpretation is supported by commercial commonsense; the principal should not have to fund the project through to completion and only then be able to recover the additional cost from the defaulting contractor.

[44] Clause 14.2.1 confers two broad options on the principal if the contractor fails to remedy its default within 10 working days of service of the requisite notice, terminate the contract or resume possession of the site. Clauses 14.2.3 and 14.2.4 apply where the principal elects to resume possession of the site. Clause 14.2.5 applies where the principal elects to terminate the contract.

[45] Clause 14.2.3 provides that the contractor is not entitled to any further payment until completion of the contract works. It also entitles the principal to expel the contractor from the site without terminating the contract or relieving the contractor from any of its obligations under it (subclause (a)). The principal may complete the contract works (subclause (b)), take possession of and use materials, plant and temporary works owned by the contractor for the purpose of completing the works (subclause (c)) and require assignment of agreements for the supply of materials or execution of work under the contract (subclause (d)).

[46] Clause 14.2.4 provides that upon completion of the contract works, any plant, temporary works and surplus materials are to be handed back to the contractor. The engineer is to enquire into the cost to the principal of completing the contract works and certify accordingly. If the amount is greater than the cost would have been had the contractor completed the works, this amount shall be paid by the contractor to the

principal. If the amount certified is less, the difference shall be paid by the principal to the contractor. Because cl 14.2.3 suspends the contractor’s right to receive any further payment until the contract works have been completed, it is clear that the engineer’s enquiry and the payment adjustment directed by cl 14.2.4 is to occur after the works have been completed. In my view, the temporal restriction “following completion of the contract works” applies to all aspects of cl 14.2.4.

[47] As noted, cl 14.2.5 applies where the principal elects to terminate the contract rather than resume possession of the site. In that case, the principal is also entitled to expel the contractor from the site and take all or any of the steps referred to in cl 14.2.3 (b) to (d). It may also claim damages for the contractor’s breach of contract. However, if the principal completes the contract works itself (under cl 14.2.3(b)) or arranges for the works to be completed by someone else, then cl 14.2.4 applies. The same exercise is undertaken but any payment that would otherwise be due to the contractor on completion of the contract works shall be subject to any damages to which the principal is entitled as a result of the contractor’s breach, including any liquidated damages for late completion.

[48] I respectfully agree with the arbitrator’s interpretation of cl 14.2.4. Where the principal elects to complete the contract works or arrange for another to do so, a wash-up based on the engineer’s enquiry and certification is to occur once the contract works have been completed, taking into account the actual costs. Clause 14.2.4 does not allow for the contractor to claim damages based on an assessment of the projected costs to complete the contract works. It anticipates an enquiry into the actual costs of completing the contract works to determine whether payment is due by the principal to the contractor or vice versa. The contractor is not entitled to any further payment until after the contract works have been completed (cl 14.2.3) and it is therefore clear that this exercise can only be undertaken after that time. The answer to question 3 is “no”, the arbitrator did not err.

Question 4 – Did the arbitrator err in holding that the damages claimed by Custom Street for breach of contract cannot be “properly due under the contract” until Custom Street’s claim is admitted or determined as to liability and quantum?

[49] The arbitrator found that any claim for the additional cost of alternative performance must be brought under cl 14.2.4 and can only be assessed after the contract works have been completed. Further, even if a claim for damages is available based on a forecast of the likely increased costs of completing the works, such damages would not be “properly due” until either the contractor admits the claim or it is determined by adjudication.

[50] Ms Rosic submits that the amount assessed by the engineer, purportedly in terms of cl 14.2.4, as the projected additional cost of completing the contract works, is an amount “properly due under the contract” for the purposes of cl 2(C) of the bond. She argues that the arbitrator’s finding to the contrary leads to an uncommercial result and would substantially defeat the purpose of the bond. This is because, by the time any such claim could be determined by adjudication, the bond would have long since expired. She submits that the parties cannot have intended such a result. Ms Rosic also notes that cl 14.2.4 creates a payment obligation upon certification.

[51] However, this submission begs the question as to when certification can be made under the clause. For the reasons given in answer to question 3, the engineer’s enquiry and certification under cl 14.2.4 can only occur after the contract works have been completed.

[52] The question as to whether an amount is “properly due” under the contract is not informed by considering the terms of the bond. Other types of claim against the contractor under the contract could lead to amounts becoming properly due under the contract triggering a potential claim under the bond. The fact that a claim for the additional cost of completing the contract works under cl 14.2.4 may not be determined until after the expiry of the bond, thereby potentially limiting the value of the security it provides, cannot have any bearing on the proper interpretation of the construction contract.

[53] I respectfully agree with the arbitrator’s analysis and conclusion on this issue. The answer to question 4 is “no”, the arbitrator did not err.

Question 5 – Did the arbitrator err in holding that Custom Street cannot rely upon the amounts claimed under the indemnity clause in the contract as amounts “properly due under the contract”?

[54] The arbitrator found that the indemnity in cl 7.1.1 could not be relied on by Custom Street to circumvent the process agreed under cl 14.2.4 and convert a damages claim for the forecast additional cost of completion into an amount properly due under the contract. The arbitrator contrasted the wording of cl 7.1.1 with the indemnity considered by the Victorian Court of Appeal in Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd upon which Custom Street placed considerable

reliance:⁸

[103] The wording of clause 7.1.1 is materially different from the indemnity clause in Sugar Australia. First, the introductory words of limitation “Except as otherwise provided...” appear to exclude rights of recovery that otherwise arise under the Contract. Second, the terms of the indemnity itself are directed to losses and liability of a consequential nature

– those “arising out of” or “the consequence of” construction works or of

remedial works and of injuries to person or damage to property sustained in the course of carrying out such works. The language is apt to cover claims by and liability to third parties as distinct from losses directly incurred for which the Contract provides a direct right of recovery. It is much more targeted in its terms than the indemnity in Sugar Australia. Third, clause

7.1.1 refers to “losses suffered”. That conforms to the essential character of an indemnity which is to make good losses that have actually occurred. Here, there is an expectation of loss, but none will be incurred until alternative performance takes place.

[104] Finally, as Mr Barker submitted, if clause 7.1.1 were to be interpreted as conferring an all-embracing right to recover in respect of every loss or liability incurred there would be no need to resort to the tailored remedies provided under the Contract. It would render otiose much of the Contract. In the event of breach the Principal could simply side-step the dispute resolution procedures and claim a right to indemnity. It seems much more likely that clause 7.1.1 was intended to provide a distinct right of recovery for a category of loss or liability that is not sufficiently provided for elsewhere in the Contract.

[105] In my view clause 7.1.1 cannot be invoked to establish a right to recover the losses claimed by [Custom Street] but even if it could, until such time as the relevant losses have been sustained, it would not give rise to an amount properly due under the Contract in terms of clause 2(C) of the Bond.

⁸ Sugar Australia Pty Ltd v Lend Lease Services Pty Ltd [2015] VSCA 98.

[55] Mr Stewart submits that the arbitrator’s reasoning is flawed and his conclusion is an error. He submits that Custom Street’s loss, being the additional cost of completion, became properly due under the indemnity “as soon as Plus defaulted in terms of cl 14.2.1(c), leading Custom Street to assume liability for completion of the project and any costs associated with it”.

[56] I cannot accept this submission. A default under cl 14.2.1(c), where the engineer certifies that in his opinion the contractor has abandoned the contract or is persistently, flagrantly or wilfully neglecting to carry out its obligations under the contract, cannot immediately give rise to a liability by the contractor for any additional costs of completion. At that point, the contract remains on foot and there cannot be any additional costs of completion by alternative means. The liability for such additional costs cannot arise, “as soon as Plus defaulted in terms of cl 14.2.1(c)”. The prospect of additional costs of completion does not arise until expiry of a 10 working day notice without the default being remedied and Custom Street then electing to terminate the contract.

[57] The engineer did not issue his certificate under cl 14.2.1(c) until 19 February

2015. The arbitrator found that Plus had validly terminated the contract for non- payment, on 12 February 2015. Plus was therefore relieved of its obligation to perform the contract at that time. However, even if Plus’s termination was invalid and the contract was instead terminated by Custom Street on 11 March 2015, that did not give rise to Custom Street incurring a “liability for completion of the project and any costs associated with it” as contended by Mr Stewart. Following termination, Custom Street was relieved of its obligations under the contract. It had no obligation to complete the works and therefore had no “liability” for any associated costs. However, if it chose to complete the works, it had a right to claim any additional costs under cl 14.2.4.

[58] Mr Stewart submits that cl 7.1.1 is a broad indemnity and applies except where the contract makes specific provision for some other form of indemnity. He referred to the other indemnity provisions in the contract: cl 5.12, which provides that the contractor shall indemnify the principal for any infringement of patents, registered designs, trademarks or copyright and royalties; cl 7.1.3, requiring the

principal to indemnify the contractor for various matters including interference with the rights of third parties as the unavoidable result of carrying out the contract works; and cl 4.2.3, which requires subcontracts to include provisions requiring the subcontractor to indemnify the contractor for various liabilities, including those for which the contractor has indemnified the principal.

[59] While the indemnity can be read in this way, the critical issue is what it covers. Custom Street relies on subclause (a) which refers to “Any loss suffered by the Principal which may arise out of, or in consequence of the construction of, or remedying of defects in the Contract Works”. This refers to the contractor’s work in carrying out the construction of the contract works or remedying defects in them. Self-evidently, the clause cannot cover losses arising out the construction of the contract works by a replacement contractor or remedying defects caused by such a contractor. Further, any additional costs of completing the works using an alternative contractor do not come within this indemnity provision. Such costs do not arise out of either the construction of the contract works or the remedying of defects in those works; rather, they arise out of the failure to carry out such works.

[60] The answer to question 5 is “no”, the arbitrator did not err. I respectfully agree with him that the damages Custom Street seeks to claim for the additional costs of completion must be determined under cl 14.2.4 and are not covered by the indemnity.

Result

[61] The appeal is dismissed.

_{[62] The defendants are entitled to costs on a 2B basis.}

M A Gilbert J