DOWNER CONSTRUCTION (NZ) LTD V ONE HOBSON STREET LTD (IN LIQUIDATION) HC AK CIV-2007-404-002374

DOWNER CONSTRUCTION (NZ) LTD V ONE HOBSON STREET LTD (IN LIQUIDATION) HC AK CIV- 2007-404-002374 3 August 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2007-404-002374UNDER the Arbitration Act 1996 and the Companies Act 1993 BETWEEN DOWNER CONSTRUCTION (NEW ZEALAND) LIMITED Applicant AND ONE HOBSON STREET LIMITED (IN LIQUIDATION) Respondent Hearing: 27 July 2007 Counsel: G P Blanchard & S L Stead for applicant A W Johnson for respondent Judgment: 3 August 2007 at 4.45pmJUDGMENT OF ASSOCIATE JUDGE D H ABBOTTThis judgment was delivered by me on 3 August 2007 at 4.45p.m. pursuant to Rule 540(4) of the High Court Rules.Registrar/ Deputy RegistrarSolicitors: Kensington Swan, Private Bag 92101, Auckland for applicant Martelli McKegg Wells & Cormack, PO Box 5745, Wellesley St, Auckland for respondent[1] Downer Construction (NZ) Limited ("Downer") and One Hobson Street Limited (in liquidation) ("One Hobson") are parties to a contract for construction of a high-rise hotel and apartment building in Hobson Street, Auckland. The building has been completed but disputes arising out of the contract have not been resolved. Its shareholder has put it into voluntary liquidation, leaving Downer as an unsecured creditor. [2] Although there seems little prospect that Downer will recover any money in the liquidation, it wishes to determine the contract disputes so as to establish the extent of One Hobson's indebtedness before seeking recovery from guarantors. To that end, Downer seeks leave to continue arbitration proceedings commenced prior to liquidation, and to commence further arbitration proceedings in respect of decisions of the contract engineer delivered since liquidation. Downer also seeks extension of time for commencing the further arbitration proceedings and costs. [3] One Hobson opposes the application on the grounds that it does not have assets from which to meet the costs of taking an active part in the arbitration, and that there is a serious question as to sustainability of the claims.Background[4] Downer NZ and One Hobson entered into a contract for construction of the building at 1 Hobson Street on 28 March 2002. The contract included the New Zealand Standard Conditions Of Contract for Building and Civil Engineering Construction (NZS3910:1998) as its general conditions. These general conditions include provisions for determination of contract disputes, including by reference to arbitration. [5] Prior to entering into the construction contract, Downer had also entered into a Deed of Guarantee and Indemnity with various parties including One Hobson's director and shareholder, Mr Henderson, in respect of One Hobson's present and future indebtedness. It is common ground on this application that that guaranteeapplies to any sums payable to Downer by One Hobson under the construction contract. [6] The general conditions of contract provide (clause 6.1) for appointment of a person to act as "Engineer" (the engineer) with defined roles in the administration of the contract (clause 6.2.1): a) As expert to and representative of the Principal, giving directions to the Contractor on behalf of the principal; and b) Independently of either contracting party, fairly and impartially to make the decisions entrusted to him or her under the Contract Documents, to value the work and to issue certificates at due times. [7] The engineer appointed under the contract certified practical completion of the building (save for minor omissions and defects) on 22 December 2003. Downer submitted a final contract claim to the engineer on 9 September 2005 for the sum of $3,532,000. The claim included a time extension claim of 164.5 calendar days. [8] One Hobson was placed in voluntary liquidation on 10 August 2006 by special resolution of its shareholder, Mr Henderson. [9] On 17 August 2006 the liquidator issued his first report to creditors and shareholders, in which he noted that the reasons for liquidation were One Hobson's lack of resources to meet a GST demand from the Inland Revenue Department, the potential claim by Downer, and a substantial amount owed to a company controlled by Mr Henderson. In the estimated statement of affairs attached to the report he identified a shortfall of assets available to secured creditors of $339,268, the Inland Revenue Department as a preferential creditor for $568,656, and unsecured creditors in the sum of $1,077,155 (an overall deficit of $1,985,079). The most substantial unsecured creditor was the company controlled by Mr Henderson. The liquidator dispensed with a meeting of creditors on the basis that unsecured creditors were unlikely to receive more than .20c in the dollar.[10] On 30 August 2006 Downer submitted a further revised contract claim to the engineer, taking into account accrued interest to that date. On 15 September 2006 Downer filed a proof of debt in the liquidation in the sum of $4,002,759.12 being the further revised claim adjusted back to the date of liquidation. [11] On 19 September 2006 the engineer issued a final payment certificate in respect of Downer's final contract claim, certifying entitlement to a payment of $736,321.61 and granting a thirty-eight day extension of time. This certificate and advice were confirmed in a formal decision of the engineer issued on 6 November 2006. [12] In the formal decision on Downer's final claim, the engineer recorded that seven disputes had been referred to arbitration at that point (although it is agreed that Downer wishes to proceed with only six of these disputes). Although there is an issue as to whether formal notice of reference to arbitration was given in respect of these six disputes, it is common ground that if a reference did take place, it was prior to One Hobson being put into liquidation. [13] Meanwhile the engineer was also being asked to review a claim by One Hobson for liquidated damages for late completion. Downer sought a formal decision on the sum payable for late completion, taking into account a claim for proportional reduction for early completion of certain parts of the contract work. [14] The engineer issued a formal decision on the amount of liquidated damages on 26 January 2007. He determined that total liquidated damages of $980,000 were payable based on a 138 day over-run, but allowing a deduction of forty days for delays caused by inclement weather and variations. He declined to allow any reduction for early completion of separable parts of the contract works. [15] Between December 2006 and March 2007, the liquidator agreed to various extensions to time for referring these later disputes to arbitration. On 27 April 2007 Downer referred the engineer's formal decisions of 6 November 2006 and 26 January 2007 to arbitration. At the same time Downer sought the liquidator's consent to Downer proceeding with the arbitrations. The liquidator responded thathe would not consent unless Downer provided an unqualified indemnity for the liquidator's costs of the arbitration. Downer was not prepared to provide that indemnity and has instead brought this application.Amendment to application[16] At the commencement of the hearing counsel for Downer sought leave to amend its application to clarify the nature of the leave being sought. The original application sought leave to commence arbitration proceedings. The amended application makes it clear that leave is sought both to continue proceedings already commenced, and to commence further proceedings in respect of the engineer's post- liquidation decision. [17] Counsel for One Hobson did not oppose the application, acknowledging that it helps to resolve an issue otherwise arising in respect of extension of time for bringing disputes that had arisen prior to the liquidation. I granted leave to Downer to file the amended application.Issues[18] Counsel are agreed that two broad issues arise on this application: a) Whether the Court should exercise its discretion under section 248 (1) (c) of the Companies Act 1993 to continue arbitration proceedings already commenced, and to commence further proceedings in respect of the decision of the liquidator since liquidation; and b) Whether an extension of time for Downer to commence the further proceedings should be granted pursuant to clause 7 of the second schedule to the Arbitration Act 1996.Applicable principles[19] A person may only continue or commence legal proceedings against a company once it is placed in liquidation with the consent of the liquidator or leave ofthe Court: section 248 (1) (c) Companies Act 1993. The Court has a discretion whether or not to grant leave. There are no criteria in the section for the exercise of that discretion, but a number of factors have been recognised by the Courts as relevant to the exercise of the discretion. These factors are summarised in Birchall v Project Works Construction Ltd (in liquidation) (2004) 9 NZCLC 263,547:[23] The leading recent authority concerning the granting of leave under s 248 is Fisher v Isbey (1999) 13 PRNZ 182 (HC) where Master Faire, at para 19, p 186, summarised the factors which have weighed with the Courts in other cases concerning the exercise of the discretion to allow proceedings to continue. His conclusions are helpfully set out in the headnote to the case, as follows: "(1) The Court has a discretion whether to grant leave. It is a cardinal principle that there must be equality among various creditors, and the bringing of proceedings should not produce a comparative advantage to any particular creditor: Steel & Tube Co v JBL Construction Ltd [1973] 2 NZLR 30, Langley Constructions (Brixham) Ltd v Wells [1969] 1 WLR 503 noted. (2) The assets of a company should not be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim. The onus is on the party seeking leave to satisfy the Court that leave should be given: McPhail v Durbridge Developments Ltd (in liq) (1998) 8 NZCLC 261, 610 adopted. (3) The Court must determine whether it is appropriate for the creditor's claims to be proved in the liquidation, or whether leave should be given to allow the claims to be established by way of civil proceedings: Pacific Produce Co Ltd v Franklin Coop Growers Ltd (in liq) [1969] NZLR 65,Royal Ltd v Standard Tobacco Co Ltd (in liq) [1935] NZLR 83 referred to. (4) The appropriate test is that the Court be satisfied that the proposed claim is not clearly unsustainable. The Court should not examine the merits of the case: Bristol & West BS v Trustee [1998] 1 BCLC 485." [24] As Mr Tingey pointed out, however, the principles noted in Fisherare not exhaustive. I accept, as he submitted, that the following two factors are also relevant to an exercise of discretion under s 248(1)(c), namely: (5) "Leave under s 248(1)(c) will usually be declined if the proceedings sought to be commenced, even if successful, are likely to be fruitless:Johnson v CBD Real Estate Limited (in Liquidation) (1999) 14 PRNZ 320, 322 at para 13 . . . (6) "Delay by the applicant: McPhail (t/a Leader brand Produce) v Durbridge Developments Limited (in Liquidation) (t/a Country Manor Foods) (1998) 8 NZCLC 261, 610."[20] Counsel agreed that these factors overlap to a certain extent, and are not exhaustive. They also agreed that three of these factors in particular are relevant to the present application: a) Assets of the company should not be dissipated in wasteful litigation, particularly if there is a more convenient method for determining the claim; b) Leave will usually be declined if the proceedings sought to be commenced, even if successful, are likely to be fruitless; and c) The appropriate test is that the Court be satisfied that the proposed claim is not clearly unsustainable.Will there be inappropriate dissipation of assets?[21] The liquidator has given evidence that the liquidation presently has available funds of approximately $20,000. Counsel for One Hobson argued that granting leave would inevitably result in dissipation of assets and the arbitration was wasteful as it was unnecessary for the purposes of the liquidation given One Hobson's financial state. As I understood his argument it was that the liquidator should determine the claims as part of the liquidation, and should not have to be drawn into the costs of a complex commercial arbitration. I will deal with a further aspect of his argument (the lack of resources to fight the arbitration) when I address exercise of the discretion generally. [22] There are probably many who would regard all litigation as potentially wasteful. That is not the proper test. The disputes have to be determined in some form, and there is an inevitable cost associated with that. The Court has to take into account what is fair as between the parties, rather than simple convenience. Arbitration has long been accepted as the best method of determining large and complex construction disputes. One of the reasons for that is the ability to select an arbitrator with expert construction knowledge. With due respect to the liquidator, Isuspect he is unlikely to have that expert knowledge. His strengths are in a different commercial sphere.Will an arbitration be fruitless?[23] Downer acknowledges that there is little likelihood of a significant recovery from One Hobson, even if largely successful in the arbitration. However, it says that a successful arbitration would not be fruitless as it would have the effect of determining One Hobson's indebtedness under the contract. It wishes to pursue its rights under the guarantees, particularly against One Hobson's director and shareholder, Mr Henderson. As matters stand, the net effect of the engineer's decisions is that there is no sum due by One Hobson (the final contract being more than offset by the liquidated damages and the contract retention being insufficient to meet the estimated costs of remedying the leak in the basement of the building). Downer argues, correctly in my view, that it has to use and exhaust its dispute resolution rights under the contract to establish what sum it is properly due. [24] Counsel for One Hobson argued that the issue of whether or not the judgment would be fruitless had to be gauged in relation to recovery from the company in liquidation as distinct from the wider consideration of possible recovery from guarantors. In support of this argument he referred to Johnson v CBD Real Estate Limited (in liquidation) (1999) 14 PRNZ 320 where one of the factors causing Salmon J to decline to grant leave was that the company (my emphasis) would not be able to meet any part of the judgment. The claim in Johnson was by a real estate agent suing for breach of contract of engagement and commission on a sale. The liquidator rejected her proof of debt. She then applied for leave to continue against the company. However, in that case there was no suggestion that there could have been recovery from another source as a consequence of the judgment. [25] In most cases the inability of the company to meet the judgment would be a compelling factor. However, the prospect of recovery under a guarantee which is specifically related to the possible debt is a matter which I consider can be taken into account.Are the claims clearly unsustainable?[26] Counsel were agreed that the Court should not embark on an examination of the merits of the dispute, and that a party seeking leave had only to establish that the claims had some basis to them (in other words, were not clearly unsustainable). [27] Downer's claims were prepared by an independent construction claims consultant and an expert programming engineer. The claims consultant has provided an affidavit in support of the application for leave. He has briefly described his role and the work he undertook, and addressed some of the arguments put forward by the liquidator for opposing leave. He states that he remains of the view that the claims (both the final contract account and the time extension) are valid notwithstanding the engineer's decision. [28] In light of this evidence, counsel for One Hobson argued that two aspects only of Downer's claims notified on 27 April 2007 were "clearly unsustainable". The first was Downer's claim over the engineer's refusal to allow a reduction of liquidated damages for parts of the contract works which were completed prior to the completion of the contract as a whole. The second was Downer's claim on the six matters allegedly referred to arbitration prior to the liquidation. The notice of 27 April 2007 purported to include in the arbitration disputes for which requisite notice had not been given, namely the six disputes allegedly referred. [29] I will deal first with the latter point. Counsel for Downer argued that the earlier disputes were referred to in its final claim, and therefore were part of the dispute of the engineer's decision raised in the notice given on 4 December 2006, as claims disallowed by the engineer. Counsel for One Hobson said that that notice referred only to claims that were disallowed by the engineer, and the engineer had merely recorded that they had been referred to arbitration. Counsel agree that this issue has been resolved by the amended application, in which Downer seeks to continue claims referred earlier to arbitration, as well as to commence claims arising out of the engineer's decisions of 6 November 2006 and 26 January 2007.[30] There remains an issue as to whether or not the earlier six items were, in fact, referred to arbitration, as no document containing the formal notice can be located at present. This point can be answered by giving leave to continue, rather than commence, arbitration on these matters. If notice was not in fact given there is no arbitration to continue. [31] I return now to One Hobson's first point, that Downer's claim for reduction of liquidated damages is unsustainable. [32] Clause 10.5.2 of the general conditions of contract provide for the engineer to make an equitable reduction in liquidated damages for parts of the work that were completed early and which One Hobson occupied or used, provided separable portions (as they are called) were notified in the special conditions of contract. It is common ground that the parts of the work in question were not noted in the special conditions. [33] Counsel for Downer argued that the parties had subsequently agreed to treat several areas as separable portions, and therefore that this aspect of the claim was arguable. This appears to be supported by the wording of the practical completion certificates issued by the engineer, all of which contain the following or similar wording:1. Separable Portions The contract does not provide for completion of separable portions, however it has been agreed by the Principal to accept early completion of areas of the building to be occupied and identified as separable portions in accordance with Clause 10.4. 2. Certificate I hereby certify in accordance with Clause 10.4 of the General Conditions of Contract that practical Completion of the following list of separable portions occurred on the dates shown:-[34] One Hobson challenges this claim, relying both on the express wording of Clause 10.5.2 (that the reduction was only available in respect of separable portionsof which notice had been given in the special conditions), and on the engineer's formal decision of 26 January 2007, which included the following:Clause 10.5.2 clearly states: "If before the time of practical completion of the contract works or any separable portion, of which notice has been given in the Special Conditions, the principal shall occupy or use any portion thereof under 10.7.2 the amount of any liquidated damages that would be payable in respect of the period between the due date for completion and the time of practical completion shall be reduced by such portion as may be equitable. The amount of such proportional reduction shall be determined by the Engineer." Please note the following:- 1. No notice in the Special Conditions has been given. 2. The Principal did not occupy or use any portion, except the hotel floors (levels 5, 6 & 7 – 63 apartments) for the purpose of completing their fitout. 3. The practical completion certificates were issued by agreement to identify the 'sign off' of completing remedial works and identifying completion of individual apartments. There was absolutely no suggestion by Downer or acceptance by the Principal that occupation could be achieved prior to late December . [35] I am unable, on the material before me, to assess whether the parties agreed to vary the contract as Downer contends, or to decide the reason for, and contractual effect of, the clauses relied upon by Downer in the practical completion certificates. Similarly I am unable to assess whether the prerequisites of clause 10.5.2 have been met. The engineer's response suggests not, but it does not sit easily with the wording of the certificates. This will need evidence and cross-examination to decide. I cannot therefore say that this claim is not clearly unsustainable. I also accept the submission of counsel for Downer that granting leave to include this claim will notsignificantly increase the time and cost of the arbitration given that the general time extension claim is clearly sustainable.Exercise of discretion[36] Although the factors I have just discussed are relevant to the exercise of my discretion, the ultimate question that I must determine is what is fair and appropriate in the circumstances. I must balance Downer's individual interests against the wider interests of One Hobson's creditors and contributories. [37] Counsel for One Hobson submitted that the $20,000 currently held by the liquidator was patently insufficient to allow the liquidator to take an active part in an arbitration. With that limited fund only at his disposal the arbitrator was potentially unable to meet the arbitrator's costs, let alone pay for experts or legal fees. He submitted that in the absence of funding the arbitration would be one-sided and issues were unlikely to be properly tested. Any award made on such a one-sided arbitration could theoretically favour Downer as against other creditors. Although the liquidator was holding $200,000 in contract retentions, he could not be certain of those funds until a favourable arbitral award was released, at the earliest. [38] Counsel for Downer argued that I was able to take into account the likelihood of the guarantors (and in particular Mr Henderson) funding the company in any arbitration. Secondly, he argued that it was in fact in the best interests of unsecured creditors for the arbitration to proceed. [39] I accept that unless the liquidator obtains funding from interested parties, including the guarantor, Mr Henderson, he will not be in a position to respond in a comprehensive way to the arbitration. However, that is not necessarily as prejudicial to other creditors as might at first be thought. If Downer succeeds in any substantial way the effect for One Hobson will be an increase in the level of unsecured creditors, without any improvement in its asset position. There seems no likelihood of recovery for unsecured creditors at present unless the liquidator was to succeed completely in a claim over the leaky basement. The liquidator faces the same funding issue with respect to that claim, and if it were to be funded byinterested parties it would be only fair that Downer was able to raise its issues over the contract debt by way of set off or counter-claim. Conversely, if the arbitration proceeds all of these issues can be determined within it (the liquidator would be able to claim a set off or bring a counter-claim in respect of the leaky basement). Accordingly, there is a real possibility, if Downer's claim is rejected and the liquidator's claim was to succeed, that there could be an overall recovery which has some prospect of benefitting unsecured creditors. This would also appeal to guarantors (and hence be a cogent reason for them to fund the liquidator) in that it would reduce money payable under the guarantees. [40] Although this is not the strongest of the factors, I also take into account that Mr Henderson chose to put the company into voluntary liquidation in the face of Downer's claim. In those circumstances, he can hardly claim to be unfairly treated if he chooses not to fund the liquidator in the arbitration, and finds that he has a greater liability arising under the guarantee as a consequence. [41] Weighing this overall consideration with the other specific factors that I have discussed, I take the view that it is appropriate to grant leave in the circumstances of this case.Extension of time for commencement of arbitration[42] The second aspect of Downer's application is for extension of time to commence the arbitration, assuming leave is given. This applies to the reference of its dispute over the two formal decisions of the engineer. [43] It is common ground that the general conditions of the contract set time limits for commencement of any arbitration. An arbitration is deemed to commence on the date that the claimant refers the dispute to arbitration (Article 21 of Schedule 1 of the Arbitration Act 1996). [44] By agreement between the parties, the time for referring disputes over the engineer's formal decisions was extended to 27 April 2007. Downer referred the disputes on that day, but by then One Hobson was in liquidation and Downerrequired either the liquidator's consent or leave of the Court to do so. This means that Downer has in fact been unable to commence the proceeding and cannot do so until given leave. [45] The second schedule to the Arbitration Act 1996 applies to this arbitration. Clause 7 of that schedule provides that the Court may extend any time agreed for commencement of an arbitration if undue hardship would otherwise be caused to parties. Downer relies on that provision in seeking an extension of time to fourteen days after any order granting leave. [46] Downer's failure to commence the arbitration on its disputes arising out of the engineer's decisions within the agreed time is entirely a consequence of the automatic stay that arose with One Hobson's liquidation. It would, in my view, cause Downer undue hardship not to extend time.Decision[47] For the reasons I have given I make orders as follows: a) Granting leave to Downer: i) To continue the arbitration proceedings commenced by it against One Hobson prior to One Hobson being placed into liquidation that are listed in section 2.3 of Downer's revised final account claim as at 30 August 2006 in respect of the written construction contract between the parties dated 28 March 2002; ii) To commence arbitration proceedings against One Hobson concerning the formal decisions of the engineer dated 16 November 2006 and 26 January 2007 in respect of the written construction contract between the parties dated 28 March 2002;b) Time for Downer to commence the arbitration proceedings (as referred to above) is extended to 17 August 2007. [48] Given the nature of the application, and the difficult position that the liquidator faced by reason of One Hobson's financial position, I am minded to make no order as to costs. However, as Counsel did not address me on the question of costs, I reserve leave for either party to seek costs by memorandum to be filed within fourteen days. Any reply memorandum is to be filed within a further seven days, and I will determine the matter on the papers.__________________________Associate Judge D H Abbott