Know your contract: Case law highlights

New Zealand’s construction industry and projects have weathered a turbulent year with a consistent flow of seminal judicial decisions addressing issues arising in the life cycle of a project.

The courts have considered elements giving rise to the very existence of a contract; the requirements for a valid payment schedule; the test for a penalty clause; the scope of an exclusion of liability clause; and what sets out the adjudicator’s jurisdiction under the Construction Contracts Act 2002 (CCA). Here we summarise some of the key decisions and the legal principles they advance.

Electrix Ltd v Fletcher Construction Co Ltd (No.2) [2020] NZHC 918:

Confirmed the absolute pre-requisite to contract formation as (1) an  intention to be immediately bound and (2) an agreement on essential terms.

Where work done by a contractor (at request of the principal) is not referable to any contract or an agreed price, the law imposes an obligation on the principal to pay a reasonable remuneration (non-contractual quantum meruit).

The absence of a contract will not deprive the contractor of reasonable remuneration for work performed.

127 Hobson Street Ltd v Honey Bees Preschool Ltd [2020] NZSC 53:

A clause stipulating a consequence for breach (i.e. a liquidated damage clause) will be a penalty if the consequence is out of all proportion to the legitimate interests of the innocent party in performance of the primary obligation.

A legitimate interest in performance includes an interest in enforcing performance or an appropriate alternative. It may extend beyond the harm caused by the breach

as measured by a conventional assessment of contractual damages. Parties may agree to consequences for breach which recognise the broader impact of non-performance on the commercial interests the parties seek to achieve through the contract.

MSC Consulting Group Limited v Oyster Management Limited [2020] NZCA 417:

Consultants in producing work (i.e. a seismic report) may owe a duty of care beyond the original client.

Exclusion of liability provisions need  to be drafted clearly and appropriately scoped to avoid unintended liabilities arising to third parties.

The Fletcher Construction Company Limited v Spotless Facility Services (NZ) Limited [2020] NZHC 1942:

A payment schedule issued under the CCA containing contra charges must indicate with clarity how these charges arose and how they were calculated.

When it is common practice between two parties to calculate payments as a percentage of work under each item, it is not required for a payment schedule to contain an explanation of how deductions were calculated.

A payment schedule must provide reasoning for deductions, when those deductions total a significant sum.

Alaska Construction + Interiors Auckland Limited v Lahatte [2020] NZHC 1056:

A controversial decision that found:

An adjudicator is not required to determine the rights and obligations of the parties under the contract if the dispute set out in the adjudication claim is separate from the question of the rights and obligations of the parties under the contract.

The role of the adjudication notice does not go beyond initiating the adjudication.

**This is a controversial decision that is not widely accepted as correct.

We continue to recommend scoping the adjudication notice with care as other authorities provide that the notice is relevant to the setting of the adjudicator’s jurisdiction.

Haskell Construction Ltd v Ashcroft [2020] NZHC 772:

Parties must ensure to put forward their full case to the adjudicator as they will be unable to re-adjudicate the same issue.

Confirmed that the courts are cautious in interfering with and overturning the adjudicator’s decisions.

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