ACTIVE ENGINEERING SOLUTIONS LIMITED v ARCHER SPRAY PAINTERS (2012) LIMITED [2016] NZHC 2679

ACTIVE ENGINEERING SOLUTIONS LIMITED v ARCHER SPRAY PAINTERS (2012) LIMITED [2016] NZHC 2679 [10 November 2016]IN THE HIGH COURT OF NEW ZEALANDROTORUA REGISTRYCIV 2016-463-000077[2016] NZHC 2679BETWEEN ACTIVE ENGINEERING SOLUTIONSLIMITEDApplicantAND ARCHER SPRAY PAINTERS (2012)LIMITEDRespondentHearing: 9 November 2016Appearances: J P Temm for the ApplicantR O Parmenter for the RespondentJudgment: 10 November 2016ORAL JUDGMENT OF ASSOCIATE JUDGE CHRISTIANSENApplications[1] The applicant, Active Engineering Solutions Limited (Active), has applied to set aside a statutory demand served upon it by the respondent Archer Spray Painters (2012) Limited (Archer). Archer provided industrial equipment painting services to Active. Specifically, it painted the equipment that Active manufactured.Active's claim of an offset[2] Mr Schultz, the director of Active deposes that after Mr Austin purchasedArcher's business in April 2012 Active experienced a significant increase in the number of "paint jobs Archer had completed that required remedial work". MrSchultz says Active was told by its two largest customers to either improve the quality of the painting service or to find a replacement subcontractor. He said he advised Archer of the situation and asked for a response. Later Archer told him they would be shifting to a new painting system and that while this would result in an increased cost to Active it meant Archer was able to offer Active and its customers a comprehensive three year paint system and workmanship warranty.[3] Mr Schultz says it was because of the warranty offered that Active agreed to pay increased costs and to continue to use Archer. Active considered the three year warranty a fundamental term of the parties' contract.[4] Mr Schultz says Active provided Archer with approximately 450 jobs between April 2013 and April 2016 during which Archer has had to undertake a significant amount of work under the warranty. He said it is difficult to give a precise value as to the amount of warranty claims because often Archer would just redo the work without producing invoices.[5] He says Active has an ongoing dispute with Archer over warranty claims and among those warranty work is required on a 40 foot shipping container and a forklift mast. Although Mr Austin has viewed those items and agreed they needed remediation, Mr Schultz says no steps since have been taken to remedy those works. Mr Schultz believes the value of remediation required is at least $10,000.[6] In April 2016 Archer sold its business to a new owner who has told MrSchultz that he will not carryout remediation work under the Archer's warrantyunless he is paid for it.[7] Mr Schultz says he instructed Active's lawyer to request confirmation that the new purchaser of Archer had assumed full remedial warranties as well as an undertaking that Archer would remain solvent until 1 April 2019 (being three years from the sale of the Archer business). Mr Schultz believes the potential remedial liability on Active due to paint preparation and workmanship issues will exceed $50,000.[8] Mr Schultz has provided a summary of jobs and warranty claim costs for the period March 2013 to March 2016. In all there were 607 jobs. Over that period he said there were 14 warranty jobs costing approximately $54,500.[9] Mr Schultz says that as the warranty was for three years, much of the work done by Archer is still within the term of the warranty. He calculates that he expects to get a 2 per cent warranty claim rate on Archer's spray painting work i.e. that hehas a continuing exposure from clients relating to warranty work that will requireArcher's attention. By his calculations there is a potential exposure for furtherclaims amounting to $57,347. It is for this reason that he has instructed his solicitors to pay all but 40 per cent of the statutory demand sum. The remaining sum is claimed as a counterclaim for the warranty work that has not been done and for future work he calculates will be required.Archer's opposition[10] Archer claims in opposition that:(a) There is no substantial dispute about whether or not the debt is owing;(b) Active does not have a counterclaim setoff or cross demand available to it.[11] By his affidavit in opposition Mr Austin deposes, inter alia:(a) Mr Schultz is unhappy that Archer did not sell its business to his interests;(b) That Archer's sale retained Archer's undertaking to repair faultyworkmanship prior to the sale settlement date and because he retainedthe machinery and materials to meet those obligations;(c) Issues relating to the 40 foot container arose due to Active's failure tobuild a roof over it in the two years after Archer had undertaken its work on it;(d) Regarding the forklift mast, the issue involved only $250 of work and that was due to the fault of Active and not of Archer.Active's response[12] In reply Mr Schultz deposed:(a) When Mr Austin purchased Archer in 2012 it was verbally agreed the existing terms of trade between Active and the previous owners of Archer would remain in place.(b) That when in April 2016 Active was advised of the sale of the Archer business to another, he requested confirmation from Mr Austin that Active's warranty would continue to be on it and was advised by Mr Austin that the warranty work would be honoured "as per the agreement for sale and purchase". However Active's lawyer stated Mr Austin's letter did not provide Active with the comfort requiredthat the three year warranty term would be honoured, because it didnot have a copy of the sale agreement in question.(c) Active's solicitor wrote to Archer's lawyer requesting that any debtsowing by Active would be paid on the condition that a written undertaking was provided by Archer in favour of Active confirming that the three year full service warranty would be honoured. Now andhaving since reviewed the sale agreement he notes it confirms that the new owner would carry out any reasonable remediation work. This he says causes uncertainty because that remediation work was to beprovided at the "vendor's cost and on the basis the parties agreed to costs in advance".[13] Mr Schultz deposes that usually a purchaser assumes all of the vendor'sfuture warranty claims with direct recourse to the vendor and that there is normally no term that the vendor must agree all costs in advance.[14] Mr Schultz says the new owner has advised him that it would not carry out any remediation jobs unless they were approved by Archer. Further, that Mr Austin had confirmed Archer would not carry out any further remediation jobs for Active and Mr Schultz knows, he says, that Archer would not honour its service warranty to Active.[15] Mr Schultz disputes Mr Austin's claims regarding what occurred to the 40 foot container and the forklift mast.[16] Mr Schultz's concern is that Mr Austin guaranteed the three year warrantywould be honoured by Archer and that Active has an enforceable warranty term in place. He is concerned that Active will continue to be presented with warranty claims by its clients, involving work done by Archer, and that Active will have no recourse whatsoever to remediate those issues other than to incur new costs from another contractor.Active's submissions[17] Mr Temm for the applicant submits:(a) The contractual agreement between the parties is such that the debt claimed in the statutory demand is not due and therefore the requirements of s 289(2)(a) of the Act are not met; and(b) Section 290(4)(a) of the Act applies in that there is a substantial dispute as to whether the claimed debt is owing;(c) Section 290(4)(b) of the Act applies because there is a substantial setoff that can be quantified and a further set off arising from theaffidavit evidence that requires consideration and reduces the statutorydemand amount substantially;(d) Section 290(4)(c) of the Act applies in that there are other reasons for the demand to be set aside, namely:(i) there is a lengthy background;(ii) the full sum claimed has been paid into trust;(iii) no insolvency of the Active actually exists; and(iv) to allow the matter to be resolved by dispute resolution means independent of the Court.[18] Mr Temm submits the statutory demand was issued for the purpose of alleged debt recovery and that there is no suggestion Active is insolvent or unable to pay its debts. He says the parties have a long running commercial relationship which has been subject to a warranty throughout and whereby all payments made by Active are contingent upon a workmanship warranty being operative for three years after completion.[19] Archer's present purpose, he says, is to seek to vary the existing contractualarrangement by seeking payment in full for all work but without providing ongoing warranty consideration. He submits Archer seeks to obtain payment in full for all existing work and to avoid further workmanship warranties on which the payment is conditionally made. This, Mr Temm submits represents a fundamental variation of the contractual arrangements between the parties.[20] Therefore, Mr Temm submits:(a) No debt is now due by Active in the absence of a workmanship warranty.(b) Including the 40 foot container and the forklift mast there are two other matters which, in total provide items requiring set off against any amount claimed to be due.(c) A sum twice the amount indicated as set offs, has been paid into trust as security until the work has is done or an agreement is reached.(d) Active is not insolvent and the issue of a statutory demand is not a legitimate step towards liquidation; rather this is a dispute arising from the sale of the Archer business and a refusal to provide a written ongoing workmanship warranty upon which payments are contingent.[21] It is Active's position that its payment obligations were conditional upon athree year workmanship warranty being in place and if there was no warranty in place those payments are not due until the end of the warranty period.Considerations[22] A warranty is a temporary limited guarantee. It follows that when there has been a breach of a warranty/guarantee, the affected party may pursue a remedy based on a breach of contract.[23] In our present case there is little evidence of a warranty. Reference to it wasmade by Mr Schultz when referring to Mr Austin's purchase of the Archer's businessin or about April 2012. There followed, Mr Schultz says, a "sharp spike" in thenumber of jobs requiring remedial work. It was in that context and following advice from Active that Archer agreed to provide a new painting system. Mr Schultz stated:While this would result in increased cost to [Active] it meant that Archer were then able to offer [Active] and its customers a comprehensive three- year paint system and workmanship warranty.[24] It was on the basis of "the comprehensive warranty offered by Archer" thatActive agreed to pay the increased costs. Mr Schultz stated "[Active] would not have continued to use the services provided by Archer but for the confidenceprovided by this three year warranty".[25] Mr Schultz refers to the three year working period to April 2016 and thatthere had been a "significant amount of work under this warranty".[26] Mr Schultz makes no reference to any contractual document, but rather to the arrangement for repairs to be done.[27] Issues arose with Mr Austin's on sale of the business in April 2016. In thatevent Active sought written assurances for what it says was a continuation of the previous contractual arrangement.[28] Mr Austin says little on the subject of whether or not there was an alleged three year warranty. It is not to be implied therefore that he conceded Mr Shultz'claims. Clearly he does not agree with those. In Archer's agreement for sale andpurchase of its business dated 1 April 2016 was there reference in writing to service warranties. Clause 25 of the sale agreement provided:25. SERVICE WARRANTIES25.1 In the event the Purchaser receives any claims from customers for defective services supplied to those customers by the Vendor after the Possession date the Purchaser shall notify the Vendor of any such claims and the parties shall consult on how these customer claims are to be best resolved. The Vendor acknowledges that the customers of the business must be preserved for the benefit of the Purchaser and the Vendor will act reasonably in respect of all warranty claims.25.2 In the event that remedial works are required in respect of any claimthe Purchaser shall carry out the work at the Vendor's cost on the basis thatthe costs shall be estimated and agreed in advance between the Purchaser and the Vendor in which case the Purchaser shall invoice the Vendors for any remedial work agreed to the be carried out. Each invoice must be supported with a detailed breakdown of the cost of labour and materials incurred by the Purchaser along with an analysis of any significant variances form the pre agree cost estimates.[29] It is clear from those that Archer agrees it will meet the cost of any repair work that Archer and the purchaser agree should be carried out. By that arrangementArcher acknowledges that the customers of the business must be preserved for the benefit of the purchaser and that Archer will act reasonably in respect of all warranty claims.[30] Mr Parmenter submits it is a bridge too far to assert a contractual term to the effect that the payment for services depends on the existence of a specific warranty/guarantee; that there would need to be a specific contractual term to that effect and there is not.[31] Indeed that appears to be the case.[32] There are issues about claims of there being a warranty in place in the terms submitted by Active. If there is no warranty then there is no basis for claims to withhold repair payments due to Archer. If there is a warranty in place and it is alleged this has been breached then the Court may set aside a statutory demand if there is a substantial dispute about whether or not a debt is owing or there appears to be a counterclaim, set off or cross demand of a sufficient sum, (s 290(4) CompaniesAct 1993).[33] In this case Active has calculated its retention sum of $40,000 by reference to warranty work that has not been done, and also for certain warranty work it is thought may need to be done – i.e. in an indeterminate amount. In that regard Active appears to rely upon s 290(4)(c) whereby the Court may agree that a statutory demand ought to be set aside on other grounds.[34] Our courts have expressed unease concerning un-quantified counterclaims or set offs particularly when s 290(4)(b) requires set off claims to be no less than the amount for which the statutory demand seeks payment. It is noted by the Court inAlfex Doors and Windows Limited v Alutech Windows and Doors Limited1, the Courtof Appeal held that an un-quantified claim for liquidated damages would notgenerally meet the accepted threshold of a "fairly arguable basis".1 (2001) 16 PRNZ 963.[35] Routinely in cases like the present one, the Court is asked to rule on anapplicant's claim of there being a substantial dispute regarding whether the debt isdue or not.[36] Counsel will agree that to succeed a company must show there are "clear and persuasive grounds" to support the claim.[37] In the present case and save for specific references to a 40 foot container and a forklift mast complaints otherwise of defective workmanship are of a general and unspecified nature.[38] With regard to the specific items Mr Schultz noted that repair costs would be at least $10,000, he said "I am awaiting detailed quotes to undertake the work".[39] The Court has received nothing since by way of detailed quotes for this work.There is no evidence other than Mr Schultz's estimate to indicate what was wrongwith the container or the work carried out on it.[40] Further, and as Mr Parmenter comments, the validity of the specific claim seems to lose support when it is considered that Active did nothing about those specific claims until it became aware Archer had sold its business.[41] By a reply affidavit Mr Schultz has made reference to two new claims. TheCourt agrees with Mr Parmenter's analysis concerning those because in relation toone of them the claim arose more than three years after the repair work was done. Aquestion arises concerning the other matter which relies on a quote dated 20 June2016. Mr Parmenter questions why reference was not made to this item in MrSchultz's original affidavit.[42] The Court accepts Mr Parmenter's submission that none of those claims are"clear and persuasive grounds" for the establishment of a set off.Summary[43] Archer has served a statutory demand to recover the amount claimed to be owed for unpaid invoices for painting work undertaken to Active. Active provided engineering services to others. It complains that some of those painting works required repair and that is why it does not accept that Archer's claim for unpaidinvoices should be met. Active claims it should not have to pay for those repair works which still remained to be done.[44] Active asserts Archer is bound by a three year repair warranty not only in respect of repair works it has identified as requiring attention but for works it calculates may require attention in the future.[45] Claims of a three year warranty are not proved by reference to documents orwritten concession but rather by Active's perception of an agreement that existed before the Archer business was sold in April 2016 and because it says Archer hasrefused to commit itself to warranty obligations following its sale of its business atthat time.[46] It is clear there was no written warranty agreement much less that it contained any right to withhold payment of Archer's invoices for three years beyondthat date painting work was carried out.[47] It is not challenged that Archer's claim is due save for assertions of a three year warranty applying. Active's application to set aside relies upon set off claims which rely upon claims that Archer is bound by a three year repair warranty, which in turn relies upon the assertion that until the warranty period expires Active is entitled to withhold an amount equal to the cost that Active calculates will meet the costs of repairs not only for work unrepaired but for work that may arise in the next three years.[48] As earlier noted Active's perception of a warranty contract is not supported by reference to written contract. Clearly Active's concern is about recourse to repair works being undertaken without the costs of those being repaid, since the Archerbusiness was sold in April 2016. In that regard it appears clear that the vendorwarranties provided by Archer's sale of its business ensured an ongoing obligation to bear responsibility for pre-sale repair obligations.[49] Active's position is that it is solvent and therefore that Archer's statutory demand is misplaced. On the other hand s 290(4) provides options for reasons for setting aside a statutory demand. The primary focus of Active's setting aside application is that it has an offset available to meet the demand.[50] This Court's clear view is that claims of an offset are unsupportedcontractually or by other argument. In short there is clearly insufficient evidence ofa substantial dispute of Archer's claim, as there clearly is insufficient evidence of theexistence of a warranty in terms now relied on.Result[51] In the Court's view none of the grounds available under s 290(4) has beensufficiently proved to provide an arguable case in support of a claim of set off. Further, the Court considers there is no reason to reduce the sum claimed by the statutory demand in order to provide Active any reason to expect any deduction or discount on account of prospective repair costs being incurred.[52] The application to set aside the statutory demand is dismissed.[53] The date for compliance with the statutory demand is extended until 4:00pm, 18 November 2016 to meet the payment claimed.[54] Active is ordered to pay Archer's costs upon this application on a 2B basistogether with disbursements as approved by the Registrar. If counsel cannot agree upon those costs then they are to file memoranda. A decision upon those will issue in due course.Associate Judge Christiansen