Construction law is a specialised area of law which comprises an amalgamation of contract and tort law within a statutory and regulatory framework. It covers a wide range of legal issues with its own jurisprudence and terminology.
A construction contract is a cornerstone of any construction project. Like any other contract, a contract is enforceable if, there is an offer to perform an act in exchange for something, the offer is accepted, and there is an intention to form a binding relationship. The construction contract governs the contractual rights and duties of the parties to the construction project.
The main parties to a construction contract are frequently known as the principal and contractor.The principal being the party for whom the contract is being undertaken (the Principal)and the contractor the party completing the contracted works (the Contractor).Depending on the size and complexity of the project, other professional advisors such as architects, engineers, surveyors, quantity surveyors and project managers may also be involved. These professional advisors will often be governed by their own professional bodies and terms of engagement.
It is important to understand the role of each party and any overlapping contractual obligations contained in a construction contract. This is discussed below.
Principal
In the construction industry, the Principal (also known as the employer or client), is the party for whom the project is being undertaken. In most cases, the Principal supplies information to the Contractor to review and price the project. In some instances, the Contractor may provide design services and construct the building as well.
The three main obligations owed by the Principal to the Contractor are:
To pay the Contractor;
Not to hinder the Contractor from completing its work; and
To do anything necessary for the Contractor to complete its work.
A breach of the first obligation is normally considered to be an essential breach that would entitle the Contractor to terminate the contract or in some circumstances, suspend work. Accordingly, the Principal should ensure that it does not fall foul of this obligation.
It is imperative for the Contractor to understand and verify the identity of the Principal before entering into the contract. The Principal could either be a natural person, a company or a trust and it is important to properly understand the different legal requirements for contracting with each entity.
This issue of identifying the Principal is crucial in the residential construction industry where it is common for the property in question to be held in trust. For example, if a trust is involved, the law requires unanimous consent from all trustees to enter into a contract.If not, there could be issues with enforcing the contract against the trustees.
To avoid any difficulties with enforcement, we recommend naming all trustees of a trust as the Principals to the contract and requiring each trustee to execute the contract.This will provide the Contractor with the best chance of enforcing the contract against the trust in the event of non-payment.
Contractor
The Contractor constructs the project in accordance with the information provided by the Principal. In contrast to the Principal, the Contractor provides that Principal with a range of warranties. Typical warranties that are implied in a construction contract are:
All building work will be done properly, competently and according to the plans and specifications in the approved consent;
All materials used will be suitable and, unless otherwise stated in the contract, new;
The building work will be consistent with the Building Act 2004 and the Building Code;
The building work will be carried out with reasonable care and skill, and completed within the time specified or a reasonable time if no time is stated;
The home will be suitable for occupation at the end of the work; and
If the contract states any particular outcome and the Principal relies on the skill and judgment of the Contractor to achieve it, the building work and the materials will be fit for purpose and be of a nature and quality suitable to achieve that outcome.
These warranties apply automatically to all contracts for building work on a residential house, whether written or oral. In addition, there are other legal obligations imposed by the Building Act 2004, the Consumer Guarantees Act 1993, and other duties of care under general law.
Generally, when entering a construction contract, the parties agree to do all that is necessary to be done on their part for carrying out of the project, though there may be no express words to that effect.
Professional advisors
In complex projects, professional advisors will also be appointed to administer different elements of the contract requiring specialist advice, such as design, quantity surveying and engineering (the Professional Advisors). The Professional Advisors are normally appointed by the Principal and are responsible for tasks allocated under the contract.
The Professional Advisors are Principal’s agents. It means that they must act in the best interests of the Principal and are authorised to legally bind the Principal. However, the Professional Advisors can also carry out a quasi-judicial role. This distinction is regularly misunderstood.
For example, an engineer may issue a payment claim and/or a payment schedule as a Principal’s agent. However, when an engineer assesses the value of the Contractor’s payment claims, it must do so impartially. Given the dual role of some Professional Advisors, it can be difficult to act in an impartial manner and in good faith. In this example, an engineer must also act in an impartial manner when making decisions such as approving and valuing variations, confirming unforeseen physical conditions, granting extensions of time, and resolving disputes between the parties.
It is common for engineers to act in “subjective fairness” rather than the objective standard required under law. In Brown & Doherty v Whangarei District Council, the Court held that:
I commenced this section of the judgment by emphasising that no criticism is intended of the personal subjective honesty of either Mr Beck of Mr Brennan. Both struck me as competent Engineers honest and reasonable men, who sought to discharge their duties under this contract in a proper and fair manner. But as the cases I have quoted emphasise, it is not a matter of subjective fairness. Rather it is a matter of looking at the whole situation objectively from the point of view of a reasonable contractor and asking whether what occurred appears to be fair and whether, in carrying out his duties, the Engineer appeared to act with independence and impartiality. To borrow words from the judgment of Woodhouse and Cooke JJ in the Canterbury Pipe Lines case I have reached the conclusion that “both as to a matter of fact and degree” it cannot be said objectively that Mr Beck’s conduct in this case was fair and impartial in the sense that is required by law.
If an engineer does not act impartially in making a quasi-judicial decision under the contract, that will be a breach of contract by the Principal as the engineer is the agent of the Principal. The Principal can therefore be liable in damages for such a breach.
The Principal must therefore be careful when communicating with a Professional Advisor, especially if it concerns a dispute. Prudently, Professional Advisors should also obtain legal advice in respect of their conduct to ensure that they do not commit a breach of contract and/or their professional obligations.
Summary
In summary, we have identified that the obligations owed by the Principal, Contractor, and Professional Advisors are extensive. There are overlapping contractual obligations that must be considered carefully.
Essentially for the Contractor, these obligations can significantly affect the Contractor’s ability to be paid for its work and the enforceability of the construction contract. This will be discussed in further detail in future articles.
Professional Advisors also need to be mindful of their dual capacities so as not to prejudice the Principal in respect of their decisions.
Contact us if you have a question about a construction contract that you are a party to, or if you are considering entering a contract. Our lawyers at Norling Law can also review your contract and discuss potential fishhooks that are in the contract as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation
Brown & Doherty v Whangarei District Council CP 3/86, Smellie J, Auckland, 13 February 1987.
A guarantor is an individual who agrees to be liable for the debt of another person (principal borrower) if that principal borrower defaults on their debt obligations. There could be one guarantor or several guarantors for the same debt. In a corporate context, it is common for lenders to require directors and/or related entities to guarantee the debts of the company that has insufficient assets/does not have a lot of trading history.
If the principal borrower complies with their debt obligations, the guarantors would not be required to make any payments towards the debt. However, if the principal borrower defaults, the lender could require one or all of the guarantors to pay in place of the principal borrower. The lender is under no obligation to pursue all guarantors at once, and often they would pursue the guarantor that has most assets and/or who the lender finds easiest to pursue.
If the lender recovers payment (or majority of it) only from one of the guarantors, that guarantor can compel other co-guarantors to contribute. The Court of Appeal in Milloy v Dobson [2016] NZCA 25 held that the normal rule as to the right to contribution in equity is that co-guarantors will share the debt equally.
Relief before and after payment
A guarantor’s right to contribution from co-guarantors may arise before or after the guarantor has fulfilled the guarantee.
However, in instances where the guarantor has not fulfilled the guarantee yet, for the right to contribution to arise, the guarantor’s liability must have become unconditional.
For instance, where the lender has obtained judgment against the guarantor (but no payment has been made yet), the guarantor may bring an action against the co-guarantors to compel them to contribute to the common liability.
At this point, there is little authority to demonstrate the exact extent of the guarantor’s ability to seek contribution prior to the payment being made by them and further developments in this area are expected.
In relation to instances where contribution is sought after payment, a guarantor’s right to contribution from any co-guarantors does not arise until the guarantor has paid more than their total proportion or share of the common liability.
Payment of guaranteed debt and amount recoverable
The payment by a guarantor must be made by the guarantor or on the guarantor’s behalf. The guarantor should pay to the person legally entitled to receive it or else the guarantor may not be relieved from liability and may not claim contribution.
The amount recoverable from each co-guarantor is regulated by the number of solvent guarantors and the proportion of the amount each is liable for. The share of the liability which would otherwise have fallen on an insolvent guarantor must be shared by all solvent co-guarantors.
No right to contribution
It has been found that there could be no right of contribution from co-guarantors in the following circumstances:
If co-guarantors are bound by different instruments for separate portions of the debt or it has been expressly agreed that each guarantor was to be individually liable only for a given portion of the debt.
Where a person became a co-guarantor at the request of another person, and it can be inferred from the circumstances that only the other person was to be liable for the guaranteed debt.
If the co-guarantor is not liable to the lender because the guarantee in question has been avoided or liability did not attach.
If the person seeking to enforce it was guilty of misrepresentation.
Enforcing right to contribution
A guarantor may bring an action in the High Court or the District Court (depends on amount in question) to enforce their right to contribution from the co-guarantors.
The rights and liabilities of all solvent co-guarantors are interlinked. Therefore, a guarantor must ensure that all solvent co-guarantors are joined in the action. If a co-guarantor is deceased, an action may be brought against the estate.
A co-guarantor who has a claim against another co-guarantor may rely on that claim as a defence to a money claim. The right of set-off may be excluded or modified by the agreement where there is an express agreement for contribution and all parties are solvent.
Co-guarantors cannot bring a counterclaim against a lender for breach of warranty without the principal borrower. This is because it is the principal borrower’s claim. Likewise, if a co-guarantor is discharged by the lender, other co-guarantors will also be discharged due to the joint nature of the liability.
Guarantor’s right to securities
A guarantor who pays more than their proportionate share has a statutory right to have all the rights and securities held by the lender transferred to them once the lender receives full payment.
Conclusion
A guarantor may bring proceedings to enforce their right to contribution from the co-guarantors and determine what a just apportionment should be. The amount recoverable from each co-guarantor is determined by the number of solvent guarantors. This is because the share of the liability which would have fallen on an insolvent guarantor must be shared by all solvent co-guarantors. All solvent coguarantors should be joined in the action as the rights and liabilities of all solvent coguarantors are interlinked.
Use of Company Name — s 25 of the Companies Act 1993
Under s 25(1) of the Companies Act 1993 (the Act), a company’s registered name must be clearly stated in every written communication sent by or on behalf of the company. The company’s name must also be clearly stated in every document issued or signed by or on behalf of the company that evidences or creates a legal obligation of the company.
Failure to comply with s 25(1) can result in a maximum fine of $5,000 for the company and every director of the company (see ss 25(5), 373(1) and 374(1) of the Act).
Further, where a document that evidences or creates a legal obligation of a company is issued or signed, and the name of the company is incorrectly stated in the document, every person who issued or signed the document may be liable to the same extent as the company if the company fails to discharge the obligation. However, there are two exceptions.
First exception — s 25(2)(c)
If the person who issued or signed the document can prove that the person in whose favour the obligation was incurred was aware at the time the document was issued or signed that the obligation was incurred by the company, then that person may avoid personal liability.
The Employment Relations Authority in Oldridge v Mukund and Priyanka Enterprises Ltd [2016] NZERA Auckland 333 found that, despite the omission of the word “Limited” in describing a company as the employer under an employment agreement, the company was liable under the agreement as all parties confirmed that the company was the employer under the agreement.
Second exception — s 25(2)(d)
If the court is satisfied that it would not be just and equitable for the person who issued or signed the document to be liable, the Court may relief the personal liability.
Section 25(2)(d) applies to where the company’s name has been included in a document but has been technically misstated. The High Court in Southland Building Society v Austin [2012] NZHC 497 observed that if s 25 had applied, it “would not regard the omission of the word ‘Limited’ as misleading in the circumstances”.
Section 25(2)(d) may also apply where it may be unfair to require a director who signed to incur the obligation owed by the company if the document was prepared by another director.
The exception may even apply where the wrong company is named in a document. In Clarence Holdings Ltd v Hall (2001) 9 NZCLC 262, 566 (CA), the directors of a new company entered into a fresh lease agreement with the lessor using the name of the original company rather than that of the new one. This gave rise to a legal dispute when the directors of the new company decided it should vacate the premises. The Court of Appeal noted that the policy of the section was to make a person who signed a document that misdescribed the name of a company personally liable concurrently with the company. However, the exception in s 25(2)(d) applied because no disadvantage had been caused to the appellant.
In contrast, in Ede t/a Electro Sheetmetals Ltd v J A Russell Ltd (2001) 9 NZCLC 262, 539, the director misstated the name of the trading company in a credit application form. He signed the document to create a legal obligation for Electro Sheetmetals and failed to make clear that Stephen Ede Limited (trading as Electro Sheetmetals Ltd) was responsible. The High Court held that the director was personally responsible for the debts of the company under s 25.
The High Court in Rebnik Properties Ltd v Dobbs [2020] NZHC 3494 also held that a person using a trading name could be personally liable if they did not disclose that they were representing a company at the time of contracting.
On 20 June 2022, the highly anticipated decision of the Supreme Court in Deng v Zheng matter was released. The Supreme Court was to decide whether the Court of Appeal was correct in its findings that there was a partnership between the two parties, of which they were allegedly equal partners. As part of this, the Supreme Court was faced with a raft of potential issues surrounding the interpretation of documents, specifically documents which were translated from Mandarin. Another important consideration of this hearing were the cultural elements present between the two Chinese parties, and the impact it should have on the understanding of the parties’ relationship.
The Judges recognised the increasing presence of different cultures in New Zealand which differ from our Western system, including that of Eastern culture. As such, the Supreme Court has taken the first step into recognising how different cultures may impact decisions in a Western Court system.
Background
Donglin Deng (Mr Deng) and Lu Zheng (Mr Zheng) entered into a business relationship in the late 1990s. The relationship was carried out until 2015 when the parties agreed to end their associations. By trade, Mr Deng is a project manager and land developer, whilst Mr Zheng is a property developer. In 2004, Mr Deng acquired ownership interests in some of the projects Mr Zheng was involved in.
The heart of the dispute stems from the Bella Vista Agreement, a short agreement dated 27 April 2008. Its title was variously translated into English from the original Mandarin as “partnership agreement” or “cooperation agreement”. Mr Zheng signed the Bella Vista Agreement, however, Mr Deng did not. Mr Zheng contends he signed this agreement on behalf of himself and Mr Deng.
By 2015, the strained business relationship between Mr Deng and Mr Zheng came to an end. No settlement could be reached between the parties as to the separation of their affairs and High Court proceedings were brought to resolve the issues at hand. The most relevant issue being Mr Zheng’s claims that there was a partnership between him and Mr Deng or, alternatively, a joint venture. Mr Deng argued that his relationship with Mr Zheng was based on various corporate and contractual structures but with no overarching partnership or fiduciary elements.
There was quite a contrast between the findings of fact of the High Court Judge (which were firmly in favour of Mr Deng) and those of the Court of Appeal (which were equally firmly expressed but went in favour of Mr Zheng and found the existence of a partnership between the parties).
Barriers in translation
Within their decision, the Supreme Court referred to cultural considerations. Specific reference was made to whether the meaning of specific Chinese characters goes beyond “company” and can extend to “firm” or “enterprise.”
In the Court of Appeal decision, a note of caution was intertwined into the findings. Nearly all of the documents in this case, including the parties’ correspondence and evidence given by witnesses, was provided in Mandarin. The Court had the challenging task of ascertaining what the true purpose of each piece of evidence was. As stated at paragraph [86] of the Court of Appeal judgment:We are conscious that when referring to relevant documents, it is necessary to bear in mind that Court is referring to English translations prepared by different people at different times, who may or may not have understood and taken into account the legal nuances of particular words and phrases that they have used.
The Court of Appeal noted that none of the translators gave evidence on why they had used certain terms in favour of others in specific documents. There was a lack of consistency throughout the use of terms, with no clarity on which term was correct. This poses a stark contrast between Western and Eastern cultures. Whilst the true purpose of words and documents is quite clear in a Westernised dispute, when different cultures enter the Western court system, a high degree of caution is required by Judges and lawyers before placing any significance to the specific terms that appear in the various English translations.
The Supreme Court dealt with this issue relatively quickly, stating the Court of Appeal was “entitled to have regard to a Chinese-English dictionary and [they] are not persuaded that it placed inappropriate weight on that dictionary.”
Guānxi
The second cultural element of relevance was the significance of Guānxi. Guānxi is a cultural concept in China. It has strong roots in rural society, stemming from where people have known each other for generations and there are strong family connections. The Supreme Court described Guānxi as a complex term with multi-faceted meanings:
Guānxi may be understood as “interpersonal connections”, “social capital”, or the “set of personal connections which an individual may draw upon to secure resources or advantage when doing business or in the course of social life”. Important bases of guānxi for an individual include kinship and co-working.
Guānxi is closely linked with Chinese Confucian culture. It rules the social behaviours between people and dictates how a large proportion of those engaged in Chinese business relationships work. Chinese parties will often deal with each other on the basis of trusting relationships, resulting in no or inadequate documentary evidence that could assist the courts when it comes to civil disputes.
It was clear to the Supreme Court that the relationship between Mr Zheng and Mr Deng fell within the bounds of Guānxi. Little evidence on Guānxi, if any at all, was referred to by the High Court. However, the Court found that this was not needed in this case, as the relationship of Guānxi or partnership between the parties was clear from the documents.
In situations where the relationship may not be as clear, a Judge will need to act with caution when referring to Guānxi. In its comments, the Supreme Court noted “first, people who share a particular ethnic or cultural background should not be treated as a homogeneous group,” and that merely because “guānxi is important for some people of Chinese ethnicity does not mean that it important for everyone of Chinese ethnicity.” If considerations are not taken on a case by case basis, the Western system runs the risk of stereotyping Eastern, and other cultures, into a mere checkbox. Whilst “Guānxi influences the behaviour of some Chinese people, it should not be assumed that this is so with all Chinese people.”
Effect on our legal system
The key lesson for the legal practitioners and Judges in areas of cultural difference is to approach each case with caution. As explained by Emilios Kyrou, Judges specifically should develop “a mental red-flag cultural alert system which gives them a sense of when a cultural dimension may be present so that they may actively consider what, if anything, is to be done about it.”
Legal practitioners should consider whether cultural elements would be of use in their arguments and take great care in introducing it.
Regardless of any information presented, Judges will have to take great care in these types of situations. Specifically, where the evidence comes from an expert, or in reliance on ss 128 and 129 of the Evidence Act:
Assuming, without case-specific evidence, that the parties have behaved in ways said to be characteristic of that ethnicity or culture is as inappropriate as assuming that they will behave according to Western norms of behaviour.
Sections 128 and 129 of the Evidence Act allow Judges to have all the information in front of them, information which is of unquestionable accuracy. It also allows the admission of reliable published documents in relation to matters of public history, literature, science, or art. A key skill for legal practitioners and Judges alike to learn is that of recognition. Recognising and interpreting when cultural aspects will be of use, or when will hold no credibility.
Conclusion
The Supreme Court’s decision is a step in the right direction of ensuring the New Zealand Courts meet the needs of an increasingly diverse population.
Our current legal system provides for several “tests” based on the behaviour of a hypothetical “ordinary reasonable person.” However, it is becoming more common to question who the ordinary reasonable person is. Let alone who the ordinary reasonable person in New Zealand will be in years to come.
It is easier to filter out different cultures, on the assumption that despite cultural differences that everyone operates the same way. However, trying to decide an Eastern cultural case with a Westernised system is like trying to open a door with the wrong key. At first, it may seem like it will work, but upon further inspection, it becomes clear there is a mismatch, and the door will never open.
Deng v Zheng does not provide a detailed guidance on how to interpret different cultures in our Western system. However, the Supreme Court held that the “relevant information can be brought to the attention of the court” and recognised that the Courts shall, in appropriate cases, consider evidence about the cultural framework of the parties.
The onus is on Counsel to bring forward and explain cultural considerations for their clients, and to ensure that adequate evidence (including evidence from experts) is produced to assist the Court.
The door-in-the-face (DITF) technique is a well-known psychological compliance technique that recently has come under scrutiny with regard to its practicality. The technique is commonly used by parties in negotiations.
The technique in essence works in the following manner. An individual is presented with a large request that is likely to be turned down. Once that request is rejected, the individual is then presented with a more reasonable request. The individual is more likely to accept the second, more reasonable request, after denying the first request, when compared in isolation to only being asked the reasonable request. For instance, imagine an employer is asked to provide a pay increase of $20,000, followed by a request to provide a pay increase of $5,000 when the request for $20,000 is rejected. The employer is more likely to provide a pay increase of $5,000, more reasonable request, after denying the first one, than if they were asked to provide a pay increase of $5,000 in the first instance.
According to Arizona State University professor Robert Cialdini and his colleagues, the original conductors, and publishers of the experiment, when a request is rejected and subsequently a lesser request is proposed, the other party sees this as a concession and feels a sense of obligation to reciprocate the concession. It can also be explained by the refusing party experiencing a sense of guilt for denying the first request, and subsequently, being more open to accepting future requests. In the experiment, Cialdini and his colleagues asked participants to accompany a group of young criminals to a zoo for free. Only 17% of participants agreed to do this. Then, different participants were asked to volunteer for a young criminal’s centre for a period of 2 years in the role of a counsellor. Most participants (unsurprisingly) said no, however, when a second request was made to accompany the young criminals to a zoo, 50% agreed to participate.
In theory, this can be a very useful tool in the context of negotiations, however, Cialdini and his colleagues only studied it in one-off interactions.
A more recent experiment conducted by Professor Ricky S. Wong of Hang Send Management College in Hong Kong has explored the possibility of impacts on subsequent negotiations. In this experiment, there were two rounds of negotiations. For the first round, some buyers were educated and instructed to use DITF, with the control group instructed to negotiate as they see fit. After the first round, the sellers were also educated on DITF. In the second round of negotiations, the sellers that detected that the buyers were employing the use of DITF obtained better results than the sellers that did not detect the buyers using DITF. The same sellers that detected their buyer’s use of DITF made more demanding offers and viewed their counterparts as less trustworthy. In the second round of negotiations, when given the opportunity, they also chose a new partner for a collaborative project if they detected the buyer using DITF.
It follows that if your negotiating counterpart detects manipulation, they will likely draw negative inferences and reciprocate those findings, much like if they drew positive inferences from a supposed concession and reciprocated those findings.
These findings may suggest the use of persuasion techniques may ultimately result in worse outcomes for repeated negotiations. In a small commercial environment like New Zealand, DITF and other persuasion techniques must be used with care; if the use of DITF is detected, future commercial relationships could be compromised.
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Footnotes:
[1] Robert B. Cialdini, Joyce E. Vincent, Stephen K. Lewis, Jose Catalan, Diane Wheeler, and Betty Lee Darby Reciprocal Concessions Procedure for Inducing Compliance: The Door-in-the-Face Technique (Arizona State University, 1975).
[2]The Door in the Face Technique: Will It Backfire? (Program on Negotiation, Harvard University, 2021) retrieved from: https://www.pon.harvard.edu/daily/dispute-resolution/the-door-in-the-face-technique-will-it-backfire-nb/
