Practical completion is a term that is commonly misunderstood by many. Generally, practical completion is achieved when all building work is completed except for minor outstanding works and defects which do not prevent the property from being used for its intended purpose. In other words, if the unfinished items prevent occupation, then practical completion is not achieved.
There are various definitions of practical completion depending on the type of contract that is used. Depending on the project, the principal could ask for additional conditions to be fulfilled before practical completion can be achieved. For more complex projects, it is common for practical completion to be defined so as to include the involvement of the engineer or architect.
How practical completion is defined in a contract is important as it is frequently linked to other clauses such as the accrual of liquidated damages, final payment, payment of retentions, possession by the principal, and commencement of the defects liability period.
Sample clauses
For example, Standards New Zealand (NZS) contracts define practical completion as:
Practical Completion is that stage in the execution of the work under the Contract when the Contract Works or any Separable Portion are complete except for minor omissions and minor defects:
Which in the opinion of the Engineer, the Contractor has reasonable grounds for not promptly correcting;
Which do not prevent the Contract Works or Separable Portion from being used for their intended purpose; and
Rectification of which will not prejudice the convenient use of the Contract Works or any Separable Portion.
The New Zealand Institute of Architects (NZIA) contracts define practical completion as:
Practical Completion means that the Contract Works or a Separate Section of them attain Practical Completion when:
They are able to be used for their intended purpose without material inconvenience;
They have generally been built in accordance with the Contract documents;
They are complete except for:
Minor defects and minor omissions for completion during the Defects Liability Period;
Omissions and defects which the Architect becomes aware of during the Defects Liability Period;
Any undiscovered, latent or other defect or omission which the Architect could not have reasonably discovered;
Work which the Architect and the Contractor have agreed to defer for completion during the Defects Liability Period, or such later date as agreed between the parties.
In the context of smaller residential projects, the New Zealand Certified Builders’ contract defines practical completion as:
“Practical Completion” means both the point in time, and the stage in the progression of the Building Work, when the Building Work is so far advanced that the Building can effectively be used by the Owner for its intended purpose, notwithstanding that certain non-critical or aesthetic features are yet to be completed or minor omissions or defects are yet to be rectified.
Relationship with code compliance certificate
Unless the contract states otherwise, practical completion is not contingent upon issuance of a code compliance certificate (CCC) from a local authority. CCC is a certificate issued by a local authority confirming that it is satisfied on reasonable grounds that all building work has been completed in accordance with the building consent issued for the project. The principal is not likely to receive CCC unless practical completion has been reached. However, achieving practical completion does not necessarily mean that CCC will be issued.
Frequently, there is confusion over payments at the practical completion stage as it is common for the principal to wish to withhold some or all of the final payment until all minor outstanding works and defects are completed, or until issuance of CCC. If the principal withholds payment despite the contract stating that that the contractor is entitled to payment upon practical completion, withholding payment may be a breach of contract.
Given that payment is the fundamental obligation of the principal, non-payment would entitle the contractor to terminate the contract and seek damages from the principal.
Conclusion
Practical completion is an important stage of the building process. For principals, they must understand that while the building can be used for its intended purpose, the entire project will not be completed at that time and there will likely be incomplete works for the contractor to perform.
Typically, most contracts would state when the contractor is entitled to be paid its final invoice. If so, principals are unable to withhold payment on the basis that there are minor works to be completed. However, the defects liability period should provide some comfort to the principal in that the principal is able to require the contractor to rectify any defects that become apparent within a certain period after practical completion. This is in addition to the warranties and guarantees provided by the contractor to the principal.
Contact us if you have experienced delays in your construction project. Our lawyers at Norling Law can review your circumstances and discuss strategies on how to progress your project as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link.
There is no doubt that bankruptcy is never a position you expect to find yourself in. However, declaring bankruptcy is more common than one may think. In the wake of COVID -19, rising living costs, inflation and the devastation from natural events the prevalence of bankruptcy is more visible in the community, even though rates of bankruptcy are not as high as they once were.
The number of individuals who declared bankruptcy for the period of July 2021 to June 2022 was 528 in comparison with the figures from July 2016 to June 2017 where 1873 individuals were declared bankrupt.
Besides the clear decrease in number of bankruptcies occurring, the main difference between declaring yourself bankrupt in is the prevalence of conversations about insolvency and bankruptcy in general. New Zealanders are having to declare bankruptcy at no fault of their own, but rather as a victim of the circumstances of our current economic climate.
This article aims to inform you on what bankruptcy is, and what you need to be aware of if you are faced with debts which you are not able to manage.
The basics
Bankruptcy can occur when an individual is unable to pay their debts as they become due. If you are unable to pay your debts as they fall due you are insolvent. The typical length of a bankruptcy is three years from the date upon which you file your statement of affairs with the Official Assignee (OA) but can be extended in certain circumstances.
A person who owes debts can make a voluntary application for bankruptcy. This process is relatively easy and does not require legal representation. An ordinary layperson can make themselves bankrupt or can wait until a creditor adjudicates them bankrupt via the prescribed process at the High Court.
However, bankruptcy should not be viewed as an easy way out of paying debts as it can have significant and potentially long lasting consequences for the bankrupt. It is also important to note that bankruptcy does not wipe all of your debts, court ordered fines, orders of compensation for creditors and child support fees will be still viewed as due and owing by you.
Bankruptcy removes the control over your assets. You will no longer be able to live your life as your normally would, and are bound by a number of duties and restrictions which we will discuss in this article.
Voluntary Application
To enter bankruptcy a debtor must have debts greater than $1,000.00.
An application can be made on the insolvency.govt.nz website, a response by the OA should be received within 10 working days of making the application. It is up to the OA to decide whether the proposed bankrupt is accepted to bankruptcy.
It is also important to consider whether bankruptcy is the best option for a voluntary insolvency procedure. If you have not been made bankrupt before, have no assets of value and have debts of under $50,000.00 no assets procedure may be a more favourable option.
Creditor application
A creditor may also make an application to the High Court seeking that the debtor be adjudicated bankrupt.
The debtor must have committed an act of bankruptcy within the last 3 months before the filing of the application and the debt must be a liquidated sum of more than $1,000.00.
An act of bankruptcy is central to the creditor’s application. It must show an act of personal default by the debtor. There are 12 separate acts of bankruptcy, but the most common act alleged by a creditor is failure to comply with a bankruptcy notice.
Once the creditor makes an application there will be a hearing. the debtor does not have to attend the hearing. If they do not attend it is very likely the Judge will adjudicate the debtor bankrupt.
Responsibilities and restrictions under bankruptcy
When a debtor is made bankrupt they must first file a statement of the debtor’s affairs in the prescribed form. It is important this form is returned to the OA as the period of 3 years for bankruptcy does not begin until the statement of affairs is returned to the OA.
Once bankrupt, the property of the bankrupt vests in the OA. The definition of property is very wide in the Insolvency Act 2006. It might include any interests in trusts that can be defined as property. It may also include any interests in property (such as a 50% claim against the property of a spouse/de facto partner). Income earnt between the time of commencement of bankruptcy and discharge is also included as acquired property, so any income earnt by the bankrupt vests in the OA.
However, in most bankruptcies if the income is modest the OA will not take any steps as bankrupts have a right to retain earnings that are necessary to maintain themselves, their spouse and family to a reasonable standard. This includes necessary tools for trade, necessary household furniture and effects, motor vehicle worth up to $6,000.00 and in most cases, Kiwisaver funds.
The OA is entitled to look at transactions you have made in the years before your bankruptcy. These transactions can be deemed a voidable transaction, which is payment or transaction made whilst you were about to be made insolvent. The OA can reverse these transactions, therefore if you are considering going bankrupt disposing of assets is not recommended.
If a sole business owner is made bankrupt, there are serious consequences. The OA may shut down the business and any assets will be sold to pay creditors.
Other restrictions on the bankrupt include:
A bankrupt is unable to be a director of a limited liability company;
A bankrupt cannot incur credit of more than $1,000 without making the creditor aware that the bankrupt is bankrupt;
A bankrupt must not prevent, attempt to prevent or hamper the OA dealing with any property or assets;
A bankrupt must notify the OA whenever they change their name, address, employment or income/expenditure;
A bankrupt must not leave the country without consent of the OA;
A bankrupt cannot be employed by a relative or take part in the management or control of any business without consent of the OA; and
A bankrupt is prevented from employment in numerous professions such as auctioneers, officer of a charitable entity, motor vehicle trader and so on.
Bankruptcy considerations
In some communities, professions or circles, bankruptcy has a negative stigma attached to it. However, many individuals are adjudicated or volunteer themselves to bankruptcy and it does not necessarily have the same stigma attached as it once did. Life can continue beyond bankruptcy, and it does for many individuals in New Zealand
Being chased by creditors can be a substantial burden. Bankruptcy can be a good way to end that stress. However, the implications of bankruptcy can be long lasting in some cases and is not always a suitable solution. A debtor is considered bankrupt for a term of 3 years upon admission to this scheme and details of this are on the Insolvency Register for the entire term plus 4 years after discharge. In some cases, this term can be extended if the circumstances warrant an extension.
In many cases, there are alternatives to bankruptcy for debtors in financial turmoil. We have published a number of these articles on our website and encourage you to read these or book in for a consultation with us if you would like to discuss your options.
Sound, strategic advice is necessary to navigate the process or to navigate the alternatives to the process.
Before applying for bankruptcy, it is important to ensure you are fully informed of the process and the effect it will have on you and your day-to-day life.
If you would like a confidential no obligation discussion with one of our solicitors please book in here:
Any undertaking to perform construction work must come with a time for such work to be completed. This obligation could be expressly stated in the contract, or it can be implied. If the contractor fails to complete its work on time, the contractor may be in breach of contract and may become liable to the principal in damages, if the principal is able to prove it has suffered losses as a consequence of the contractor’s breach.
Most standard form contracts make provision for a set date by which the work is to be completed. If the contract is not properly completed to include a start and completion date, then the contractor’s obligation would be to complete the work within a reasonable time.
Express completion date
Where the completion date is expressed in the contract, the contractor is not entitled to seek as of right an extension unless there is an extension of time clause in the contract allowing the stated time to be altered. Commonly, these clauses provide that the contractor is entitled to an extension of time due to an event that occurs which causes delay and for which the contractor is not at fault.
Most contracts express what the contractor is entitled to claim an extension of time for. This could be additional works, variations that the contractor is required to perform, or an unforeseeable event such as COVID-19, or a force majeure event such as the recent flooding New Zealand experienced. For example, the NZIA SCC 2018 contract provides that the contractor is entitled to an extension of time under the following circumstances:
A delay in the issue of a consent or approval that the principal had to obtain.
Unforeseeable physical conditions on site which materially differ from the physical conditions which an experienced contractor should have reasonably seen at the time of tender. They do not include climatic conditions on the site.
The contract works are suspended in a way allowed under the contract.
The architect does not give a direction within a reasonable time after being asked by the contractor in writing to do so.
The principal does not supply materials, work or services on time.
A separate contractor’s act or omission.
In order to claim an extension of time, contractors must ensure that they follow the process set out in the contract in seeking to extend the deadline. This may include providing relevant information to the principal to support the claim.
It is common for contractors to make claims for an extension of time late and they are often poorly documented. Contemporary evidence of matters that give rise to a delay are the best source of evidence to support a claim for an extension of time. This could include, inter alia, instructions, communications between the parties, site notes, photographs, minutes of meetings, and timesheets. Any approval should be in writing to prevent disputes.
Other instances
Where there is no express contractual right to extend time, or where the clause does not apply in the claimed circumstances, a stated time for completion would be replaced by a reasonable time for completion, if:
The parties agree.
If the principal waives the obligation to complete by the stated date.
If the principal prevents completion within the stated time by some act or omission caused by the principal.
Prevention principle
The latter is also known as the prevention principle. It is based on a common law rule that creates an implied obligation on a contracting party to not impede another contracting party from achieving a condition that some contractual outcome or benefit depends on. In the context of construction contracts, where a party to a construction contract has been prevented from fulfilling its contractual obligations as a result of the conduct of the other party, the preventing party cannot insist upon strict contractual times for performance.
If the prevention principle applies, time in the contract becomes “at large” and is replaced by whatever is reasonable in the circumstances. What is reasonable depends on the circumstances of each case such as the nature of the work, the necessary time to do the work and the ability of a reasonable contractor to perform. The prevention principle does not prohibit the contractor from seeking damages against the principal.
Additionally, if time is “at large”, the principal cannot rely on its entitlement to liquidated damages. However, the principal is able to claim for actual damage suffered if the contractor fails to achieve practical completion within a reasonable time.
Peak Constructions (Liverpool) Limited v McKinney Foundation Limited
In Peak Constructions (Liverpool) Limited v McKinney Foundation Limited (1970) 1 BLR 111, Peak was contracted to build a 14-storey block of flats. The piling works were subcontracted to McKinney. The completion date was 17 February 1966. McKinney completed the piling work in July 1964. In October 1964, defective work was discovered due to a negligent work by McKinney. The principal delayed issuing instructions to proceed with the rectification work until August 1965. Once issued, McKinney commenced rectification works promptly. Six of the 58 weeks of delay were taken by McKinney for the rectification work.
The English Court of Appeal held that it was not reasonable to hold McKinney responsible in damages for the entire 58-week delay. Where acts of the principal have prevented completion, the only way to preserve the principal’s right to liquidated damages is for the contract itself to allow the date for completion to be extended for those very acts. As no extension of time had been granted for the principal’s delay, there was no date under the contract to measure McKinney’s liability to pay liquidated damages and therefore, none was payable.
Summary
The purpose of extension of time regime is to allocate risks and responsibility between the parties to the contract.
Generally, the causes of delay can be classified into one of the following categories:
Caused by the principal.
Caused by the contractor.
Caused by factors outside of the control of either party.
When negotiating the terms of a construction contract, it is important that the party best able to control the relevant risk should bear the time and cost consequences of delay. Failure to do so could result in unintended consequences.
Contact us if you have experienced delays in your construction project. Our lawyers at Norling Law can review your delay circumstances and discuss strategies on how to progress your project as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link.
What is a contractor’s entitlement to payment for variations if there is a dispute as to whether consent for particular variations was given?
The starting position in contract law is that if a contractor provides services to another party, the other party is not obliged to pay for those services unless they have agreed to do so.
However, the law recognises that there are cases where a party benefiting from services should pay because of some factor that makes it unjust to assert that the services had no value to them. In these instances, contractors might be able to bring a claim in equity.
Quantum meruit
Quantum meruit means “what one has earned”. The doctrine of quantum meruit is based on the principle that a party should be entitled to restitutionary relief for the reasonable value of work or services provided to the other party which for some reason falls outside of their contractual relationship. Quantum meruit claims have historically been linked to unjust enrichment, though that is no longer a requirement.
To succeed in a quantum meruit claim, the claimant must establish the following elements:
That services were provided by the claimant to another party.
The claimant wanted payment in exchange for these services and made that reasonably apparent to the other party.
The other party freely accepted the services or at least acquiesced to their provision.
The recipient knew or ought to have known that the claimant expects to be paid for those services.
Typical scenarios where the doctrine could apply include:
Where no specified value has been fixed for work done under an agreement.
Where work is done at the request of the principal under the contract, but the contract is later found to be void or unenforceable.
Where additional work is carried out by a contractor at the request of the principal and the work does not fall within the scope contained in the contract.
Where work has been performed in the expectation that contract would be formed, but no contract is subsequently entered into.
Where the party requesting the works wrongly terminates the contact or performs such a fundamental or serious breach as to allow the party performing the works to terminate the contract.
Quantum meruit in the courts
In Cobbe v Yeoman’s Row Management Ltd, Yeoman was the owner of land with potential for residential development. It entered negotiations with Mr Cobbe for the sale of the land to him. They reached an oral “agreement in principle” on the core terms of the sale but no written contract, or even a draft contract for discussion, was produced. There remained some terms still to be agreed.
The structure of the agreement in principle was that Mr Cobbe, at his own expense, would make an application for residential development. If the desired planning permission was obtained, Yeoman would sell the land to Mr Cobbe for an agreed up-front price, £x.
Mr Cobbe would then, again at his own expense, develop the land in accordance with the planning permission, sell off the residential units, and when the gross proceeds of sale received equalled £2x, any further gross proceeds of sale would be divided equally between the parties.
Pursuant to this agreement in principle, Mr Cobbe applied for planning permission for the residential development. He was encouraged by Yeoman to do so and spent a considerable sum of money and time on this. The application was successful and planning permission was obtained.
However, Yeoman then sought to re-negotiate the core financial terms of the sale, asking, in particular, for a substantial increase in the sum of money that would represent £x. Mr Cobbe was unwilling to commit himself to the proposed new financial terms and Yeoman was unwilling to proceed on the basis of the originally agreed financial terms.
The House of Lords considered that the property increased in value by the grant of planning permission and Yeoman had been enriched by that as it had to pay nothing. However, the Court considered that the extent of the enrichment was not the difference in value of the land, but rather, the value of Mr Cobbe’s services as Yeoman did not have to pay for them, and Mr Cobbe did not intend to provide his services gratuitously. As a result, XX.
In Mega Project Holding Limited v Orewa Developments Limited, Mega and Orewa entered into an agreement to upgrade a road jointly with the cost of the works to be shared equally. The contract stated that Orewa shall not commence works until Mega gave written approval of the estimated costs and the contractor to be engaged. Orewa did not obtain Mega’s approval (or even sought approval) and engaged a contractor to perform the works on the basis that the costs would be shared equally.
The Court held that Orewa was entitled to recover half of the cost of the work as Mega:
Knew that Orewa was carrying out the work on the basis that the costs would be shared.
Knew that a contractor was engaged and did not raise an objection.
Was provided with detailed schedules showing work carried out and how charges are made up.
Did not challenge amounts claimed by the contractor.
Did not challenge the payment schedules produced by Orewa.
What will the Court award?
Whether quantum meruit applies will depend on the facts of each individual case.
If quantum meruit is established, there is no set rule on what the Court will award. The guiding principle is the justice of the situation. In some circumstances, the contractor may be awarded only its actual costs. However, the Court has also awarded a margin for profit and overhead in the past.
In making its decision, the Court will consider several factors, including:
The commercial rate for the work;
Site conditions;
Whether the contract refers to certain prices (or formulas);
Conduct of the parties; and
Quality of the work.
In the Australian case of Sopov v Kane Constructions Pty Ltd (No. 2) [2009] VSCA 141, the principal repudiated the contract by wrongly calling on the contractor’s bank guarantee.
In response, the contractor terminated the contract and claimed damages based on quantum meruit. In order to make out its claim, the contractor was required to prove the total costs incurred in carrying out the works, and that those amounts were fair and reasonable in the circumstances. In the circumstances, it did not matter that the work performed was outside of the contract’s scope. The Court granted the contractor’s costs and also allowed the contractor a 10% margin for overhead and profit.
In Electrix v Fletcher Constrution Co Limited, Electrix completed electrical work as a subcontractor on the Christchurch Justice Precinct prior to any formal contract being agreed between the parties. Electrix brought a quantum meruit claim against Fletcher after Fletcher refused to pay its invoices. The Court held that Electrix had established a claim in quantum meruit, all that was to be decided was the value of the award.
In calculating the award, Justice Palmer took the starting point from UK sources: Electrix was to prove market value for the work completed and Fletcher was to demonstrate that it did not value the benefit in the same way. Both parties presented expert evidence to support their position. Justice Palmer preferred the evidence of one of Electrix’s experts, who sourced her cost evidence from the actual cost incurred by Electrix, as recorded in its project management software, and awarded Electrix almost $7,500,000 plus GST and interest.
Alternative equitable remedies
There are alternative remedies available to parties to a construction contract where work has been completed under an unapproved variation:
Estoppel – an equitable remedy available to contractors in scenarios where they have acted to their detriment in reliance on statements or behaviour of the principal; and
Free acceptance – where a principal has had the opportunity to accept or reject the services of a contractor, has failed to reject the services, and knows that the contractor expected payment for the services, they may be considered to have freely accepted the benefit.
If a contractor can demonstrate that the principal did accept the services or work with the knowledge that it expected to be paid, they may be required to pay the contractor for the value of the work.
Conclusion
While the ideal starting point for any construction project is a watertight contract that accurately reflects all party’s rights and obligations and all parties closely following the process for variations prior to beginning any work, the reality is that works are sometimes completed outside the scope of a contract, and the value of the works can be disputed. If you find yourself in this situation, a claim in quantum meruit, estoppel, or free acceptance might be an available option.
Contact us if you are in the middle of a project and invoices have been disputed, or if you wish to dispute an invoice. Our lawyers at Norling Law can review your contract and provide preliminary advice on the strength of a claim as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link .
Original tax debt can quickly get out of control with the accruing interest and penalty fees. This may result in the debtor becoming insolvent and facing bankruptcy (for individual debtors) or liquidation (for companies) proceedings commenced by the Inland Revenue Department (IRD).
At Norling Law, we have extensive experience negotiating settlements with the IRD. Settlement with the IRD could be in the form of a provisional payment plan and/or partial principal debt/interest/penalties write-off. When faced with a settlement proposal, the IRD has a set of requirements that they must consider. At Norling Law, we take these requirements into account when formulating a settlement proposal.
In the event the debtor is not in a position to settle the debt, we can provide advice on other alternatives to bankruptcy and liquidations. The sooner the issue with the outstanding debt is addressed, the more options could be available.
Below we set out a recent example of a negotiation conducted by us on behalf of a client, which resulted in a significant write-off of the client’s debt to the IRD.
Our client was in significant arrears with the IRD, amounting to approximately $558,000. This amount related to a company and its two individual shareholders. This particular client, due to unforeseen circumstances, failed to meet its tax obligations over a period of approximately 3 years.
Our client came to Norling Law for assistance when the sole director of the company had a serious accident leaving them unable to earn an income. They came to Norling Law to obtain specialist insolvency advice.
First, we explained the legal consequences of this situation and provided our client with a detailed memorandum of advice which explained their options going forward. Included in this advice was a practical pathway to voluntarily liquidating the company and explaining the possible risks associated with liquidation. We also provided an outline of various steps and timelines that would take place in the liquidation proceeding, which provided the necessary support and guidance to our client in this particularly stressful time of their life.
We also interviewed our clients and explored:
The personal and financial circumstances they were experiencing at the time of the tax arrears;
Analysed their current financial position; and importantly
The effect of the serious accident and the consequences for them currently; together with all
Other matters relevant for an application for financial hardship.
We then conducted negotiations with the IRD on behalf of the client focussing on these four areas. We assisted our client to apply for financial relief under Section 177C(1) of the Tax Administration Act 1994. The outcome was an astounding $558,000 reduction in the tax payable for the company and both shareholders personally. Due to the unique set of circumstances, our client was able to resolve the matter entirely with no payment due to IRD at all. This provided our client with enormous relief at a particularly stressful time of their life.
Our client could draw a line in the sand and move on with life free of the stress of having outstanding arrears with the IRD. They could move forward with a clean slate with IRD.
Whether a reduction of debt owed to the IRD can be achieved depends on various circumstances associated with the non-payment of tax, position of the debtor and etc.
If you would like further information in relation to negotiating a settlement of your outstanding tax debt with IRD, contact the team at Norling Law at info@norlinglaw.co.nz or you can book a consultation here: https://calendly.com/wendy-506/30min
