RICHINA PACIFIC LTD & ANOR v SAMSON CORPORATION LTD [2018] NZCA 132

RICHINA PACIFIC LTD & ANOR v SAMSON CORPORATION LTD [2018] NZCA 132 [1 May 2018]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA449/2017[2018] NZCA 132BETWEEN RICHINA PACIFIC LIMITEDFirst AppellantAAI LIMITED (FORMERLY VEROINSURANCE LIMITED)Second AppellantAND SAMSON CORPORATION LIMITEDRespondentHearing: 21 March 2018Court: Kós P, Miller and Gilbert JJCounsel: D J Chisholm QC and DAC Bullock for First AppellantS Stokes for Second AppellantG J Christie and JRJ Knight for RespondentJudgment: 1 May 2018 at 3.00 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The respondent is entitled to one set of costs, payable by both appellants, fora standard appeal on a band B basis and usual disbursements. We certify forsecond counsel.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)[1] The principal question in this appeal is whether a performance bond given byAAI Ltd (the second appellant) to secure the performance of a building contractor,Mainzeal Property & Construction Ltd, was discharged when Mainzeal and thebuilding owner, Samson Corporation Ltd (the respondent), agreed to allow the contractengineer to certify practical completion on terms that expressly excluded part of thecontract works, an automated car stacker.[2] The bond provided that it would be "null and void" if Mainzeal "duly carriesout and fulfils all the obligations imposed on [it] by the Contract Documents prior tocommencement of the period of Defects Liability".[3] Mainzeal went into receivership on 6 February 2013 without completing itsobligations under the construction contract. In particular, the car stacker never metthe contractual performance standard. The appellants do not dispute this, but theyargue that AAI is not liable to pay out under the bond. The case for AAI is as follows:the period of defects liability commenced when the engineer to the contract certifiedpractical completion; the certificate, which was given on 25 September 2012, couldnot and did not have partial effect, so the bond was discharged at that point; oralternatively that the parties instead varied the contract by agreeing to treat the carstacker as a deferred work to which no practical completion requirement attached.[4] Richina Pacific Ltd (the first appellant) was the parent company of Mainzeal,and it agreed to indemnify AAI for any payments the latter made pursuant to the bond.It contends, in the alternative to AAI's argument, that the bond was discharged becauseAAI was disadvantaged; the arrangement between Samson and Mainzeal allowedSamson into possession prematurely and resulted in Samson paying retentionsprematurely. It is said that the construction contract did not provide for these things.The bond contained an indulgence clause stating that it was not discharged by, amongother events, any alteration in the terms of the construction contract, but Richina saysthis clause does not apply. In its written submissions AAI itself did not advance thisargument, which presumes that the practical completion certificate did not dischargethe bond, but when asked Mr Stokes (who appeared for AAI) adopted it before us.1[5] Samson succeeded before Hinton J, who found on the facts that Samson andMainzeal agreed to partial practical completion and behaved accordingly; and furtherthat the indulgence clause applied and in any event AAI was not prejudiced by whathad happened.2[6] We agree in the result and our reasons may be expressed relatively shortly.In particular, reference should be made to the judgment below for a fuller account ofthe facts.The construction contract[7] In 2010 Samson engaged Mainzeal to erect the Geyser Building at 100 ParnellRd, Auckland. It was a complex of five buildings around a common courtyard withshared basement parking. The contract price of approximately $37m included aprovisional $5.1m for the car stacker, a machine which was to shuttle vehicles fromcentral garages to 165 parking spaces over four basement virtual garages viaturntables, transfer shuttles, lifts, and rails, all using an automated control system.Mainzeal subcontracted the stacker to International Parking Systems Ltd (IPS).[8] The contract employed New Zealand Standards conditions of contractNZS 3910:2003 and incorporated, among other documents, a number of special andgeneral conditions together with the specifications. These included performance testsfor the stacker, which must process a vehicle every 36 seconds, equating to 92 inboundmovements and nine outbound in one hour for morning traffic and 18 inbound and 110outbound in one hour for evening traffic. It is common ground that practicalcompletion required that the stacker pass those tests, which were set to meet acondition of the building's resource consent designed to avoid queues on the site andin the street outside.1 We were told that Richina has paid AAI, which in turn has paid Samson subject to this appeal.2 Richina Pacific Ltd v AAI Ltd [2017] NZHC 1686.[9] Jeremy Hay of Resource Coordination Partners Ltd was appointed engineer tothe contract. It was his duty, among other things, to certify practical completion, whichwas defined as:10.4.1 that stage in the execution of the work under the contract when theContract Works or any Separable Portion are complete except for minoromissions and minor defects:(a) Which in the opinion of the Engineer the Contractor has reasonablegrounds for not promptly correcting; and(b) Which do not prevent the Contract Works or Separable Portion frombeing used for their intended purpose; and(c) Rectification of which will not prejudice the convenient use of theContract Works or any Separable Portion.Special conditions extended this definition to require evidence that, among otherthings, a code compliance certificate had been sought and the works had beencompleted to the satisfaction of the territorial authority such that a code compliancecertificate would issue in due course.[10] It will be seen that practical completion was achieved when the works werecomplete except for minor omissions and minor defects. A "Separable Portion" wasdefined as any part of the works which the parties agreed would be completed andhanded over separately from the rest of the works. Such portion might attract its ownpractical completion requirement.[11] The contract also provided that with Mainzeal's agreement Samson wasentitled, before practical completion, to occupy any separable portion of the works thatwas sufficiently completed to allow such occupancy or use without unduly interferingwith Mainzeal's work:10.7.2 The Principal shall be entitled prior to the issue of a certificate ofPractical Completion to the occupancy or use by itself or its nominee of anyportion of the Contract Works which is sufficiently completed to allow suchoccupancy or use without undue interference with the work of the Contactor.Such occupancy or use shall be subject to the consent of the Contractor and tothe agreement of the Principal and the Contractor that the portion of theContract Works shall be a Separable Portion.[12] Mainzeal was liable for liquidated damages for delay past the scheduledcompletion date of 29 March 2012, at $6,450 per calendar day.The bond[13] The contract required that the contractor provide a bond to secure itsperformance. Mainzeal procured AAI to issue the bond, securing it with an indemnitysupported by Richina's guarantee.[14] The bond specified that Mainzeal and AAI were jointly and severally bound toSamson in the sum of $2m and provided that it was to remain in full force and effectexcept as provided in cl 2, which stated relevantly that the bond shall be "null andvoid" if:(a) [Mainzeal] duly carries out and fulfills all the obligations imposed on[it] by the Contract Documents prior to commencement of period ofDefects Liability referred to in the Contract Documents.The contract provided that the period of defects liability commenced on the date ofpractical completion of the contract works or separable portion. So commencementof the period of defects liability under the bond was synonymous with practicalcompletion of the works or any separable portion under the construction contract. Thebond would be discharged if, upon practical completion, Mainzeal had performed allits obligations under the construction contract.[15] The indulgence clause provided:4. THE Surety shall not be released from any liability under this bond:(a) By any alteration in the terms of the contract between the Principaland the Contractor;(b) By any alteration in the extent or nature of the Contract Works to becompleted, delivered and maintained;(c) By any allowance of time by the Principal or by the Engineerappointed by the Principal under the Contract Documents;(d) By any forbearance or waiver by the Principal or by the Engineer inrespect of any of the Contractor's obligations or in respect of anydefault on the part of the Contractor.[16] The bond was given on 27 May 2010, and the premium was calculated on thebasis that it would expire on 17 August 2012.The proceedings[17] The proceeding was commenced by Richina, which sought a declaratoryjudgment that AAI was not liable to Samson under the bond. Samson did not acceptthat Richina had standing or that the declaratory judgment procedure was appropriate,but we need not concern ourselves with that, for Samson filed a cross-claim againstAAI, pleading that it was liable under the bond, and AAI denied liability, joining causewith Richina. The decision on Samson's cross-claim accordingly disposes of theproceeding, except as to costs in the High Court, which remain to be fixed there. Wedecline Richina's invitation to interfere with an indication given by the Judge as to herlikely approach to costs.3[18] Richina and AAI pleaded that Mainzeal's obligations had been completedwhen practical completion was certified, no separable portions having been agreed.They pleaded in the alternative that the bond was discharged for several reasons, ofwhich some were abandoned before us, leaving only the two mentioned above(allowing Samson into possession and paying retentions). An appeal as to quantumwas also not pursued.[19] A single notice of appeal was filed for Richina and AAI, though they wereseparately represented before us.Practical completion[20] Mainzeal experienced construction delays which began with the foundationsand eventually triggered its liability for liquidated damages. By 1 July 2012 theamount payable had risen to more than $600,000. Mainzeal was anxious to mitigatethis liability. For its part, Samson had agreed to let parts of the complex to tenantsfrom 31 August and was anxious to take possession.3 At [152] and [161].[21] On 23 August 2012 Mainzeal applied to the engineer for practical completion,listing a significant number of items which it wanted the parties to agree to treat asdeferred works (we discuss this term at [31] below). The list did not include the carstacker. Mr Hay declined, listing a number of items which must be completed oraltered to qualify for practical completion.[22] He refused to treat the listed works, or any works, as deferred works.A contract instruction issued on 24 August following an inspection stated that "[w]ithconsideration of the items highlighted within your letter as 'deferred works' and theworks inspected, we advise that we are unable to issue Practical Completion of theWorks at this time".[23] On 24 August 2012 performance tests were attempted but aborted when thestacker broke down. On or about the same date, Mainzeal agreed to allow Samsoninto possession of three of the two buildings and the car stacker, in return for a pro ratareduction in liquidated damages. The parties later extended this agreement to reflectSamson entering into possession of a third building.[24] On 31 August Samson took possession of the three buildings and began to usethe car stacker. By 5 September it had taken possession of all five buildings, and byagreement liquidated damages ceased to run.[25] At this time the stacker still could not achieve the performance standard and itwas unreliable. IPS remained on site and its technicians operated the machinemanually.[26] Mainzeal reapplied for practical completion on 18 September, again asking thatlisted items be treated as deferred works and again omitting the car stacker.[27] On 25 September 2012 Mr Hay issued a certificate of practical completionstating that "with the exception of the car stacker machine" the contract works hadreached practical completion as at 14 September 2012. Practical completion was"granted with the exception of" certain listed items which were to be completed nolater than 31 October 2012. One of those items was:Car Stacker Performance to be demonstrated in accordance with our letterdated 1st July 2010 and Contract Instruction 59 issued 22 September 2010.The certificate added that the bond would not be released until the listed items werecompleted.[28] At no time did Mainzeal suggest that the stacker met the performance standardor resist its exclusion from the practical completion certificate or assert that thecertificate discharged the bond. On the contrary, it agreed at a meeting on25 September to defer the car stacker performance tests until the machine was runningmore reliably. It then set about achieving practical completion for the stacker andacknowledged at a series of close-out meetings that practical completion had not beenachieved. This continued until 21 December 2012, when Mainzeal advised theengineer that following a demonstration the previous day the machine "is now at arequired position to achieve Practical Completion". It also secured from AAI a seriesof extensions for the bond, beginning on 28 September 2012.Was the bond discharged on issue of the practical completion certificate?[29] We have summarised AAI's argument at [3] above. It was put in various ways,all of which proceeded on the premise that the 25 September certificate of practicalcompletion brought Mainzeal's obligations to an end.[30] We do not accept the premise. Under clause 2(a) the bond was discharged onlyif at the date of practical completion Mainzeal had duly carried out and fulfilled allobligations imposed on it under the contract documents. At no material time didMainzeal ever complete those obligations. It certainly had not done so when thecertificate was given. Accordingly, the giving of the certificate did not dischargeMainzeal.[31] We need not go further, but in deference to counsel we briefly addressMr Stokes's argument that the engineer was obliged to certify practical completion, orthat the certificate should be deemed unconditional, because the stacker was treated as"deferred works", meaning, to use the definition that Mr Hemi, Mainzeal's regionalmanager, later adopted in evidence, parts of the contract works that have no significanteffect on use of the building and can be done after practical completion, that the partiesagree to complete later, and that attract no separate practical completion requirement.In Mr Hemi's opinion such items are usually minor.[32] We make two points about this. First, we observe that Mr Hay had a differentunderstanding of the term. He described deferred works as "major incomplete ordefective items" which the parties agree to defer to a later date. Mr Hay'sunderstanding is more plausible, since the definition of practical completion alreadyexcludes minor defects and omissions that do not affect use and which the engineerfinds excusable. We are not prepared to accept that an agreement to treat part of abuilding as a deferred work necessarily excuses that part from practical completion;whether it does so must be a question of fact.[33] Second, the argument fails on the facts. We have noted that the engineerrefused Mainzeal's request to treat a number of items as deferred works.The certificate which followed was quite clear that it excluded the stacker, which hadstill to meet the performance tests and must do so by a fixed date. Hinton J found thatthe parties proceeded accordingly.4 We agree. Most importantly, the claim that thestacker was somehow excused compliance with practical completion requirements isuntenable. The stacker was no minor part of the works; as Mr Hay explained, it was"fundamental" that the machine achieve the performance criteria. No agreement totreat it as a deferred work can be inferred from the exchange of schedules beforepractical completion; it was not even in Mainzeal's proposed list of deferred worksand the engineer refused to treat anything as a deferred work. The evidence showsrather that the parties agreed the stacker must pass the performance tests and far fromdisputing the engineer's certificate, Mainzeal set to work on the stacker so that it couldhave practical completion certified.[34] Hinton J characterised this arrangement as a variation, reasoning that thecontract did not provide for partial practical completion and there was insufficientevidence of the stacker having been treated as a separable portion.54 Richina Pacific Ltd v AAI Ltd, above n 2, at [81]–[89].5 At [81]–[82].[35] We respectfully differ from the Judge's characterisation of the arrangement.First, the Judge recognised that there is very little difference between a partialcertificate and a certificate for a separable portion.6 So far as this case is concerned,we think there is no difference at all. That is so because either way the stackerremained subject to practical completion.[36] Second, under the terms of contract the principal and contractor must be partyto a separable portion agreement but there are no process requirements. The evidenceplainly sustains the Judge's conclusion that in September Samson and Mainzeal agreedfor immediate mutual benefit to defer practical completion for the stacker andauthorise it for the balance of the works. That being so, they treated the two asseparable portions under the contract.7[37] We consider that the evidence supports this conclusion. Mr Creemers acceptedthat the term "separable portion" was not used but explained that "we would just talkabout parts of the building". Mr Hay said in his reply brief that he carved the stackerout of the practical completion certificate, so effectively treating it as a separableportion. And while Mr Chisholm QC, (who appeared for Richina, and whorepresented both appellants in the High Court) had him concede in cross-examinationthat "at a technical level" there was probably no agreement to create a separableportion, Mr Hay rejected the alternative explanations that the stacker was treated as adeferred work or included in practical completion. When it was put to him that insubstance he was saying that there were separable portions he agreed, saying that whatcreates a separable portion is an agreement between the parties that certain works arenot practically complete and adding that to accommodate Samson's desire for accessand Mainzeal's for diminution of liquidated damages "we were trying break thecontract into parcels" amounting to separate portions. In our opinion, that is what heachieved by excluding the stacker from the practical completion certificate, and theparties concurred in that course of action.6 At [78].7 The stacker was not the only item reserved, but nothing turns on this point.Was the bond discharged on Samson being allowed into possession?[38] We now turn to Richina's alternative argument that AAI was dischargedbecause the agreement between Samson and Mainzeal was beyond the scope of theindulgence clause and adverse to AAI.8 As noted, this argument focused on twoactions. The first was the decision to allow Samson into possession of the entirecontract works; and the second, the voluntary decision to release retentions toMainzeal.[39] The indulgence clause encompassed any alteration in the contract terms, or theextent and nature of the contract works (it is set out above at [15]). It also covered thegiving of time by the engineer. If the parties agreed to vary the contract by allowingfor partial practical completion, as Hinton J found, their agreement would be capturedas an alteration in the contract terms. On the view we prefer, however, the partiesmerely did that which the contract expressly allowed by treating the stacker and therest of the works as separable portions and allowing Samson into possession of thelatter. As between Samson and AAI, this is properly characterised not as a variationof the contract but a behaviour expressly permitted by it.[40] As noted, Samson was also permitted to use the car stacker although it had yetto achieve practical completion. The contract expressly envisaged that withMainzeal's consent possession of a separable portion might precede practicalcompletion. We have held that the stacker was a separable portion and Mainzealunquestionably agreed to Samson using it. It is debateable whether Samson actuallytook possession of the stacker; IPS technicians remained on site to work on it andoperate it. But if Samson did take possession, it did so pursuant to the constructioncontract and not by way of variation.[41] If contrary to the view we have just expressed, it was an alteration of the termsof the contract to allow Samson into possession of the stacker, we are satisfied that itwas covered by cl 4(a) of the bond. We reject Mr Chisholm's submission that although8 Trade Indemnity Company Ltd v Workington Harbour and Dock Board [1937] AC 1 (PC) at 21per Lord Atkin; Triodos Bank NV v Dobbs [2005] EWCA Civ 630, [2005] 2 CLC 95 at [14]–[18]per Longmore LJ; and Samson Corporation Ltd v Macrennie Commercial Construction Ltd [2014]NZHC 1203 at [99].within the plain language, this action was beyond the bond's purview and so excluded.The purview doctrine holds that an indulgence clause is confined to acts of indulgencewithin the general purview of a guarantee, unless such acts are contemplated by theprincipal contract which is the subject of the guarantee.9 The contract expresslycontemplated that Mainzeal might allow Samson into possession before practicalcompletion.[42] On this analysis the question of prejudice to AAI does not arise. That wouldfall for consideration only if the construction contract had been altered, or the partiesto it had behaved, in a manner not contemplated by the bond.Was the bond discharged on Samson paying retentions for the car stacker?[43] Mainzeal submitted a claim for payment in connection with its 18 Septemberapplication for practical completion. Under the general terms of contract, it fell to theengineer to evaluate the claim and issue a provisional payment certificate certifyingthe amount that he considered payable. Samson might protest, but in the event that itdid not, the contract specified that it must then pay that sum.[44] The special conditions provided that 20 per cent of total retentions must bereleased following practical completion and lodgment of an application for codecompliance. Where there was a separable portion, cl 12.3.1 of the general conditionsprovided that the amount to be retained was to be reduced by such percentage as theengineer considered equitable:12.3.1 The Principal shall, in accordance with the Progress PaymentSchedule, retain out of the amount which would otherwise be payable suchretention monies as are required under the Special Conditions in respect of thewhole of the Contract Works or any Separable Portion. The amount to beretained in respect to the Contract Works shall be reduced upon the completionof any Separable Portion under 10.7.2 by such percentage as shall beequitable. The percentage reduction shall be determined by the Engineer.[45] Mr Hay certified Mainzeal's claim without any deduction from retentions forthe car stacker, and Samson paid the certified amount. It is evident that Mr Hay9 Trade Indemnity Company Ltd v Workington Harbour and Dock Board, above n 11, at 21; andCIMC Raffles Offshore Singapore Ltd v Schahin Holding SA [2013] EWCA Civ 644, [2013] 2 AllER (Comm) 760 at [34]–[36].considered the payment of retentions equitable. He explained in evidence that he feltat the time that the remaining retentions would suffice to protect Samson during thedefects period. The total retentions paid to Mainzeal came to $100,000, and Hinton Jfound that any deduction from that sum for the car stacker would have amounted to$13,000—14,000, which she considered de minimis.10[46] Richina's attack on the payment rests on two premises. The first, which wehave rejected, is that the stacker was not a separable portion. The second, which wealso reject, is that practical completion never occurred. The argument is that for thesereasons Samson was under no legal obligation to pay any of the the retentions. So, forexample, Mr Chishom submitted that the payment was voluntary if there was nocomplete certificate of practical completion issued, and emphasised that incross-examination Mr Creemers accepted that Samson's payment was voluntary.[47] We do not accept that the retentions payment was voluntary. Samson wasobliged to pay what the engineer certified following his decision to certify practicalcompletion for a separable portion of the works. It was entitled to be heard on thematter but that did not make the payment voluntary once the engineer exercised hiscontractual authority to certify it. It appears from his evidence that Mr Creemerslacked an expert's familiarity with the conditions of contract, and his attention was notdrawn to the relevant provisions before he was invited to accept that the payment wasvoluntary. In the circumstances we attach no weight to his opinion. As we have notedabove, it was also within Mr Hay's power, if he found it equitable, to allow a nildeduction from the retentions payment on account of the stacker.[48] We conclude that retentions were paid in performance of Samson's obligationsunder the contract and so the act of payment could not discharge the bond. We neednot address Hinton J's conclusions that there was a waiver for purposes of theindulgence clause and that insofar as the payment included retentions for the stackerit caused AAI no prejudice.1110 Richina Pacific Ltd v AAI Ltd, above n 2, at [105].11 At [104]–[105] and [108].Result[49] The appeal is dismissed.[50] The respondent is entitled to one set of costs, payable by both appellants, for astandard appeal on a band B basis and usual disbursements. We certify for secondcounsel.Solicitors:Lee Salmon Long, Auckland for First AppellantDawson Harford, Auckland for Second AppellantSimpson Grierson, Auckland for Respondent