MARINESCAPE NZ LIMITED V CONNELL WAGNER LIMITED HC AK CIV-2007-404-001959

MARINESCAPE NZ LIMITED V CONNELL WAGNER LIMITED HC AK CIV-2007-404-001959 26 October 2007IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY CIV-2007-404-001959BETWEEN MARINESCAPE NZ LIMITED Plaintiff AND CONNELL WAGNER LIMITED Defendant Hearing: 12 October 2007 Counsel: C Foote for Plaintiff K P Sullivan for Defendant Judgment: 26 October 2007 at 1600JUDGMENT OF ASSOCIATE JUDGE ROBINSON [on application to set aside statutory demand]This judgment was delivered by Associate Judge Robinson on at pursuant to Rule 540(4) of the High Court Rules Registrar/Deputy RegistrarDate: Solicitors: Kendall Sturm & Foote, PO Box 659, Auckland for plaintiff DLA Phillips Fox, PO Box 160, Auckland for defendant[1] The plaintiff applies to set aside the statutory demand dated 20 March 2007 for the sum of $27,562.50 served on the plaintiff by the defendant on the 22 March 2007. [2] The plaintiff, Marinescape NZ Limited, is one of a group of related companies trading under the Marinescape name and involved in the design and development of marine aquariums around the world. The amount claimed in the statutory demand, namely $27,562.50, comprises the total of two invoices issued by the defendant to the plaintiff in August and November 2006. Those invoices relate to engineering services and design work rendered by the defendant to the plaintiff pursuant to a contract between the parties in March 2006 in respect of a project being undertaken by the plaintiff for the construction of an aquarium in Istanbul, Turkey. [3] The plaintiff claims there to be an arguable case as to liability based on three grounds: a) whether a debtor/creditor relationship exists between the plaintiff and the defendant; b) whether the debts which are the subject matter of the statutory demand have been satisfied; c) whether there is a counter-claim set-off or cross-claim which avails the plaintiff in respect of the defendant's work on a project in Vladivostok, Russia.Case for the plaintiff(1) Whether a debtor/creditor relationship exists[4] In support of the plaintiff's contention that no debtor/creditor relationship exists between the plaintiff and the defendant, the plaintiff points out that the contract between the parties was in effect a sub-contract, the head contract beingbetween Marinescape Projects Limited and a Turkish corporation. The coversheet of that contract refers to the consultant being Marinescape Projects Limited. However, the agreement provides for the parties being the Turkish corporation and "Marinescape whose registered office is at 155 Richmond Rd, Ponsonby, Auckland". It is claimed on behalf of the plaintiff that the defendant's agreement to assist in this project included a letter wherein the defendant referred to work to be done by the defendant in connection with the head contract. Consequently, as that head contract was with Marinescape Projects Limited, the defendant's agreement was with that company and not with the plaintiff, Marinescape NZ Limited. [5] It is further submitted on behalf of the plaintiff that if the correct creditor is Marinescape Projects Limited then the defendant cannot make Marinescape NZ Limited liable simply by addressing the invoices to Marinescape NZ Limited.(2) Whether the debts which are the subject matter of the statutory demand have been satisfied[6] The plaintiff claims that on 28 November 2006 it paid the sum of $35,000 to the defendant on the basis that the amount which is the subject of the statutory demand, namely $27,562.50, would be deducted from the $35,000 and applied in satisfaction of that debt. [7] Reference is made to the evidence of Mr Mellsop on behalf of the plaintiff where in his affidavit he states as follows:6. Because of the impact of non-receipt of contract payments on Marinescape's cashflow, I advised Adrian Muir on 28 November 2006 that I could allocate a payment of $35,000 to his company. This was sufficient to cover the outstanding Connell Wagner invoices for the Istanbul project amounting to $27,562.50 and left something over towards the Vladivostok job. I met face to face with Adrian Muir and I spoke by telephone personally to him, and I told him on both occasions that the $35,000 was to be applied first in payment of the Istanbul projects.[8] On the basis of Mr Mellsop's evidence the plaintiff claims that at the time when the payment of $35,000 was made to the defendant it directed that, of that sum, $27,562.50 was to be applied by the defendant in satisfaction of the amounts claimed by the defendant for the Istanbul project. It is pointed out on behalf of the plaintiffthat the defendant accepted payment on this basis and was therefore legally bound to apply the payment as directed by the plaintiff in satisfaction of the amounts owing in respect of the Istanbul project.(3) Whether there is a counter-claim set-off or cross-claim which avails the plaintiff in respect of the defendant's work on a project in Vladivostok[9] Pursuant to s 290(4)(b) of the Companies Act 1993 the Court may grant this application to set aside the statutory demand if satisfied that the plaintiff appears to have a counterclaim, set-off or cross-demand for an amount exceeding the amount claimed by the defendant in the statutory demand. The plaintiff relies upon a counterclaim against the defendant arising out of the defendant's alleged breach of its obligations under a contract with the plaintiff to perform work in respect of the project in Vladivostok, Russia. [10] The head contract between the plaintiff and the Russian federal state institution Directorate of the Building of Complex Primorsky Oceanarium contained a provision requiring that all documentation made by Marinescape Limited comply with Russian standard requirements. The plaintiff says that such a condition was incorporated in the contract between the plaintiff and the defendant for the defendant's work on the Vladivostok project. [11] The plaintiff says that in December 2006 it became aware that the work subcontracted to the defendant fell seriously below acceptable Russian standards. According to a progress assessment report prepared on behalf of the Vladivostok Design Institute, none of the structural design work prepared by the defendant was acceptable to Russian standards. Only ten percent of the heating air ventilation design work was acceptable. Only ten percent of the defendant's air-conditioning design work and ten percent of its communication and security alarm design work was acceptable. Furthermore, none of the automation control design work was prepared by the defendant to an acceptable standard. [12] Although the plaintiff states that it advised the defendant of these defects in its work, the defendant apparently failed to remedy these deficiencies in anysignificant way. Consequently, on 14 March 2007 the head contractor terminated its contract with the plaintiff for the Vladivostok job. Consequently, the plaintiff claims to have lost a substantial amount of money measured in hundreds of thousands of dollars because of the defendant's failure to perform its obligations under its contract with the plaintiff with regard to the Vladivostok work.Case for defendant(1) Whether a debtor/creditor relationship exists[13] It is the case for the defendant that its contract to work on the Istanbul project was with the plaintiff, namely Marinescape NZ Limited and not Marinescape Projects Limited. It is pointed out on behalf of the defendant that its contract included a letter emailed on 8 March 2006 and addressed to Nicholas Traviss of Marinescape NZ Limited. That letter, it is accepted, included in the services to be performed by the defendant work referred to in the head contract with "Marinescape". Whilst that head contract on its coversheet refers to the consultant as being "Marinescape Projects Limited" the agreement does not refer to Marinescape Projects Limited as a contracting party but refers to the contracting party as "Marinescape whose registered office is at 155 Richmond Rd, Ponsonby, Auckland, New Zealand". The accounts rendered by the defendant for work on the Istanbul project were all rendered to Marinescape NZ Limited. [14] During the latter part of 2006 there was a considerable amount of correspondence by email between the parties. In that correspondence the plaintiff seeks time to pay explaining difficulties with cashflow. At no time does the plaintiff suggest to the defendant that the defendant has been billing the wrong party. Consequently, it is claimed that the debt is owing by the plaintiff and not Marinescape Projects Limited.(2) Whether the debts, which are the subject matter of the statutory demand, have been satisfied[15] The defendant denies that the plaintiff when paying $35,000 on the 28 November 2006 specified that from that amount $27,562.50 was to be applied towards the accounts rendered in respect of the Istanbul project. The defendant has produced emails relating to that payment and points out there has been no reference in those emails to the direction for $27,562.50 to be applied towards payment of the amounts owing in respect of the Istanbul project. [16] It is further submitted on behalf of the defendant that at the time of the payment the plaintiff wanted the defendant to perform extra work on the Vladivostok contract. It is therefore submitted to be more likely that the plaintiff, when requesting extra work from the defendant, would arrange for payment of $35,000 in respect of the contract involving that work, namely the Vladivostok contract. It is submitted to be inconsistent and unrealistic for the plaintiff, on the one hand, to demand the defendant do extra work on the Vladivostok contract on which substantial sums of money were owing whilst, at the same time, arranging for an overpayment on work done by the defendant in respect of the Istanbul project. At that time, invoices for $35,033.06 had been rendered on 24 April 2006 and for $37,707.66 on 30 June 2006 in respect of the Vladivostok contract. The invoices for the Istanbul contract were issued later, being $19,687.50 on 25 August 2006 and $7,875 on 24 November 2006. [17] Consequently, it is submitted that the plaintiff's evidence that it directed the $27,562.50 was to be appropriated towards the amounts owing in respect of the Istanbul project is inconsistent with the contemporaneous written record of what happened at that time and is therefore unreliable.(3) Whether there is a counter-claim set-off or cross-claim which avails the plaintiff in respect of the defendant's work on a project in Vladivostok[18] Counsel for the defendant points out that the claim by the plaintiff against the defendant arising out of the Vladivostok contract is a separate and contingent claim.At this stage the claim has not been quantified. There is no evidence of the Primorsky Oceanarium bringing any proceedings against the plaintiff arising out of the plaintiff's contract with that firm. [19] Counsel for the defendant relied upon Alfex Doors & Windows Limited v Alutech Windows & Doors Limited (2001) 16 PRNZ 963. In that case the plaintiff also claimed there to be a set-off, cross-claim or counterclaim which justified bhe setting aside of the statutory demand. The plaintiff was refusing payment, maintaining that the terms of its contract with the defendant incorporated the terms of a head contract which entitled retentions together with liquidated damages for late supply of drawings and windows. Having regard to evidence of retentions produced by the plaintiff the defendant agreed to a reduced amount of $56,153.73 as being owing in place of the original amount claimed of $76,644.67. After reviewing that evidence the Master decided not to set aside the statutory demand, exercising the residual discretion contained in s 290 Companies Act 1993. [20] The Court of Appeal upheld the Master's decision. In doing so the Court preferred not to deal with the matter on the basis of the residual discretion. In concluding that the plaintiff had not made out of a case justifying setting aside the demand on the basis set forth in s 290(4)(b), Gault J at [15] stated:[15] Employing the generally accepted threshold of a "fairly arguable basis": United Homes (1998) Ltd v Workman 25/5/01, CA68,69, 70/01, we are not satisfied that Alfex presently has any counterclaim set-off or cross- demand within the statute. The unquantified claim of "liquidated damages" plainly is contingent on the outcome of the unresolved dispute between Alfex and Ebert. Mr Michalik accepted that it is not possible to set-off or claim in respect of contingent indebtedness, as recognised in Body Corp s66289 v Rua Developments Ltd 29/4/98, Master Faire, HC Hamilton M328/96, to which we were referred. [16] There is before the Court no sufficient basis for Alfex to continue to retain part of the purchase price against unquantified contingent claims of the kind in question. We are not therefore satisfied that there has been shown a substantial dispute whether or not that part of the debt is due.[21] It is the submission on behalf of the defendant that any amount owing by the defendant to the plaintiff arises out of the contract relating to work in Vladivostok. Any liability on behalf of the defendant is therefore contingent on the outcome of the dispute between the plaintiff and Primorsky Oceanarium. There is no precisequantification of the amount involved. Consequently, applying the decision of the Court of Appeal in Alfex Doors & Windows Limited, the plaintiff has not made out a counterclaim, set-off or cross-demand in terms of s 290(4)(b).Decision(1) Whether a debtor/creditor relationship exists[22] The letter from the defendant to Nicholas Traviss, Marinescape NZ Limited, dated 8 March 2006 and emailed to Mr Traviss on that date clearly forms an essential part of the contract relating to the Istanbul project. The fact that the agreement, based on correspondence from the defendant of 8 March 2006, incorporated the work to be performed under a head contract between "Marinescape" and a corporation in Turkey is not inconsistent with the defendant's claim to have contracted with Marinescape NZ Limited. The head contract refers to one of the contracting partners being "Marinescape". Whilst it could be argued that reference to "Marinescape" relates to Marinescape Projects Limited, this being the party referred to on the coversheet of the contract, this by no means results in a situation where the defendant was contracting with Marinescape Projects Limited. [23] If, as is contended on behalf of the plaintiff, the plaintiff was not in fact contracting with the defendant, then it is surprising this was not pointed out to the defendant at the time the plaintiff received the letter of 8 March 2006 addressed to the plaintiff, namely Marinescape NZ Limited. [24] The defendant cannot, by issuing invoices to the plaintiff, create a liability on the part of the plaintiff to pay those invoices. However the plaintiff at the time of receiving the invoices made no complaint about the invoices being addressed to the wrong party. This together with evidence that the correspondence enclosing the agreement was addressed to the plaintiff supports the defendant's contention that the plaintiff is liable and not Marinescape Projects Limited. If, as the plaintiff contends, Marinescape Projects Limited is the company liable for payment of these debts, then it is surprising that the plaintiff, far from pointing out that the defendant wasclaiming from the wrong party, instead entered into arrangements to defer payment, thus apparently acknowledging liability. [25] Having regard to the evidence I have referred to, I do not consider that there is a substantial dispute as to whether the plaintiff is liable. I conclude that there is really no dispute in this regard and that the plaintiff has not made out an arguable case to justify setting aside the statutory demand on this ground.(2) Whether the debts, which are the subject matter of the statutory demand, have been satisfied[26] There is a conflict of evidence as to whether, when making payment of $35,000, Mr Mellsop, on behalf of the plaintiff, directed that the amounts claimed from the statutory demand were to be deducted from that amount. I accept that normally it would not be appropriate to attempt to resolve conflicts of evidence on affidavits at the hearing of an application of this sort. However, as stated by the Privy Council in Eng Mee Yong v Letchumanan [1980] AC 331 at 341 (an appeal from the Federal Court of Malaysia), this does not mean that I am bound to accept:uncritically, as raising a dispute of fact which calls for further investigation, every statement on an affidavit however equivocal, lacking in precision, inconsistent with undisputed contemporary documents or other statements by the same deponent, or inherently improbable in itself.As pointed out in that decision:the Judge is vested with a discretion which he must exercise judicially. It is for him to determine in the first instance whether statements contained in affidavits that are relied upon as raising a conflict of evidence upon a relevant fact have sufficient prima facie plausibility to merit further investigation as to their truth.[27] In Eng Mee Yong v Letchumanan, the Privy Council upheld a decision that evidence from a caveator as to an agreement for an extension of time for payment of money under an agreement for sale and purchase of a building was too implausible to throw any doubt upon the ceaveatee's express denial upon oath that there ever had been such an agreement. The Privy Council confirmed the decision of the High Courtfor removal of the caveat based as it was on an interest the caveator claimed existed as a result of the agreement for sale and purchase. [28] In Bilbie Dymock Corporation Ltd v Patel (1987) 1 PRNZ 84 the Court of Appeal, in overturning a High Court decision refusing summary judgment to enforce an agreement for sale and purchase, concluded that the defendants' evidence that they relied on a misrepresentation was inherently improbable. [29] If, as the plaintiff claims, there was a direction when payment was made for some of the funds being paid to be applied in satisfaction of money owing in respect of the Istanbul project then it is surprising that at that time there is no written reference to this stipulation. [30] In an email message to the defendant, Mr Ian Mellsop, on behalf of the plaintiff, when advising that $35,000 was to be paid immediately stated:I have looked at our cashflow and advise that we can pay NZD35,000 to you immediately with the balance due when we receive the next payment for the current design stage completion. This has been promised for release as soon as the last of the design is handed over estimating 10 th December.[31] In that email there is no mention of any requirement for the funds being paid to be applied in payment of the moneys owing in respect of the Istanbul project. [32] Furthermore, in an email from the defendant to Mr Mellsop of 28 November 2006 Adrian Muir, on behalf of the defendant, states:Ian, please forward the 35k immediately. Whilst we appreciate the cashflow situation that Marinescape is in, the continued delays to payment, despite numerous guarantees, is unacceptable. We will complete the remaining work required for Vladivostok on the understanding that Marinescape will pay all outstanding invoices by 10 th December.[33] It is significant that in an email from Ian Mellsop on behalf of the plaintiff to Adrian Muir on behalf of the defendant dated 28 November 2006 Mr Mellsop states:Our project in Vlad remains in jeopardy unless we deliver the final design works by 6th December. Unless we meet that date it is likely that our cashflow problems will compound with the client threatening all sorts of remedies.Marinescape works will be completed by 30 th November and the only outstanding item will be the Connell Wagner work.[34] It is common ground that moneys owing by the plaintiff in respect of the Vladivostok project pre-dated moneys owing in respect of the Istanbul project. Thus, there was a situation where the defendant was concerned about payment of all outstanding accounts, including the accounts relating to work at Vladivostok. The work at Vladivostok pre-dated the work at Istanbul. The plaintiff was anxious for the defendant to complete its work for the Vladivostok contract. In the email of 28 November 2006 the plaintiff offered to pay $35,000 immediately. It is a reasonable inference that such offer was made as an inducement to the defendant to complete the plans for the Vladivostok contract. It is therefore most unlikely that the defendant would have accepted any stipulation from the plaintiff as to the application of the $35,000 it was to receive. Furthermore, at the time it was the Vladivostock contract that the plaintiff was anxious for the defendant to complete. Moneys had been outstanding in respect of that contract for a much longer period than the moneys owing in respect of the Istanbul project. [35] It was not until 6 January 2007 that the plaintiff raised the issue of the funds being applied towards the work on the Istanbul project. In an email of that date to Adrian Muir, Ian Mellsop stated:It is my understanding that the funds we have paid you to date cover your work on the Turkish projects and all the outstanding relates to Vladivostok.[36] In his reply by email of 11 January 2007 Adrian Muir stated:With respect to your last paragraph, the funds that you have paid us were, as discussed and agreed, clearly for the additional response to the MOU for Vlad [referring to the Vladivostok contract].[37] In reply Ian Mellsop stated in his email of 18 January 2007:The payment made to you so far quite clearly relate in our files to the Turkish projects.[38] It is significant that in these emails there is no reference by Mr Ian Mellsop to the verbal stipulation he claims to have made requiring the defendant to apply thepayment to the Turkish project. In effect, all the plaintiff does is claim that according to their files the payments made earlier related to the Turkish project. [39] Mr Mellsop in his affidavit of 18 June 2007 at paragraph 18 refers to the Vladivostok project being "a bit of a mess" as at 28 th of November 2006. However according to Mr Traviss' affidavit of 14 April 2007, it was not until December 2006, when a Marinescape design staff member Paul McGregor visited Vladivostok to discuss progress with the contract, that Marinescape became aware of the problems with regard to that project. Mr Traviss in his evidence at paragraph 13 of his affidavit of 14 April 2007 states:He [that is Mr Paul McGregor] returned to New Zealand with the alarming news that he work subcontracted to Connell Wagner Limited fell seriously below acceptable Russian standards. On the other hand the work being done in-house by Marinescape Limited was on target by 100% acceptability.[40] This evidence seems inconsistent with Mr Mellsop's evidence that the project was messy towards the end of November 2006. [41] For the above reasons, I conclude it highly unlikely for the plaintiff to have stipulated that the funds paid in November 2006 were to be applied towards settlement of the amounts outstanding with regard to the Istanbul project. At that time the plaintiff was anxious to ensure that the defendant completed the work required for the Vladivostok project. There was a substantial amount owing in respect of the Vladivostok project. [42] It is therefore most unlikely that the plaintiff would have wanted to make any stipulation with regard to the application of the money it was paying to the defendant. In particular, the plaintiff would have wanted to have the defendant's co- operation in completing the Vladivostok contract as soon as possible. [43] For the reasons I have given therefore, I conclude that the plaintiff does not have an arguable case that there was a direction requiring the $35,000 it paid to the defendant in November 2006 to be applied towards the Istanbul project. Consequently the moneys owing in respect of the invoices for work done on the Istanbul project are now due and payable.(3) Whether the plaintiff appears to have a counterclaim, set-off or cross-demand in terms of s 290(4)(b)[44] During the early part of 2007 the defendant continued to make demand for payment of its outstanding accounts with regard to the work at Vladivostok and Istanbul. In the emails from the plaintiff at that time there is no reference to any claim being made against the defendant for failure to comply with its obligations under the contract for work at Vladivostok. On the contrary, there is an email from David Brown of Marinescape dated 8 February 2007 to Adrian Muir of Connell Wagner, stating:Thanks for completing the VV stuff (and checking). Once again you have "saved the bacon". Looks like I may on the streets next week (Mscape are having trouble paying me, and I am having trouble eating). David[45] The first indication of a claim by the plaintiff against the defendant for work with regard to the Vladivostok contract was in a letter of 13 March 2007 marked "without prejudice" in which the plaintiff points out that none of the work in the invoices relating to Vladivostok has been accepted by the Vladivostok Institute as complete and consequently it has not been able to be approved for payment. It is further pointed out that a considerable amount of the work carried out by the defendant seemed to be not related to Marinescape instructions but outside the scope of works required from the defendant. [46] According to the plaintiff, the Vladivostok contract was eventually cancelled on 14 March 2007 because of an alleged failure to provide acceptable design documents to Russian standards within the contract timeframe. However, no proceedings have been issued by the Russian head contractor, nor has the plaintiff issued any proceedings against the defendant. [47] To qualify as a cross-demand to justify setting aside a statutory demand under s 290(4)(b), the plaintiff's claim against the defendant must so affect the defendant's claim that it would be unjust to allow the defendant to enforce its claimwithout bringing into account the cross-claim by the plaintiff. As stated in Grant v NZMC Limited [1989] 1 NZLR 8 at 12-13:The principle is, we think, clear. The defendant may set-off a cross-claim which so affects the plaintiff's claim that it would be unjust to allow the plaintiff to have judgment without bringing the cross-claim to account. The link must be such that the two are in effect interdependent: judgment on one cannot fairly be given without regard to the other; the defendant's claim calls into question or impeaches the plaintiff's demand. It is neither necessary, nor decisive, that claim and cross-claim arise out of the same contract.[48] On the evidence I have reviewed I have grave doubts as to whether the plaintiff does have a counterclaim against the defendant arising out of the Vladivostok contract. No efforts have been made by the plaintiff to bring that claim. Other than the statements made by witnesses that there is a claim, there has been no formal notice served by the plaintiff on the defendant specifying the amount claimed and the basis of the claim. Prior to the issue of these proceedings the only indication of any claim is contained in a without prejudice letter of 13 March 2007 in which reference is made to the work being incomplete and to a considerable amount of the work being outside the scope of the work required by the plaintiff from the defendant. This is in contrast to the evidence of Mr Traviss in his affidavit of 14 April 2007 where he refers to the work falling seriously below acceptable Russian standards and a failure on the part of the defendant to remedy any deficiencies in the work. Nowhere is there any evidence of the plaintiff bringing to the attention of the defendant the alleged deficiencies in the defendant's work. [49] Furthermore, insofar as this unquantified claim by the plaintiff against the defendant is contingent on the outcome of an unresolved dispute between the plaintiff and the Russian head contractor, such cross-claim cannot justify setting aside the statutory demand, having regard to the Court of Appeal decision in Alfex Doors & Windows Limited.Conclusion[50] It follows, therefore, that none of the grounds raised by the plaintiff in support of the application to set aside the statutory demand has been made out.Although the plaintiff claims that it is solvent, there is a considerable amount of evidence to the contrary. In particular, there is evidence that this debt has not been paid, and, according to the plaintiff, the plaintiff company is not trading. [51] In the circumstances I can see no other basis for setting aside the statutory demand. Consequently the application will be dismissed with costs assessed on a Category 2 Band B basis together with disbursements as fixed by the Registrar. ___________________________ MD Robinson Associate Judge