It is common practice in the construction industry for clients to ask a contractor to provide a quote or estimate on a project.
What is a quote?
A quote is an offer to carry out the work for an exact price. Once a quote is accepted, the contractor is unable to charge more than the agreed price, subject to variations, cost fluctuations and provisional sums.
The benefits of a quote are that both parties are aware of the costs from the outset and can budget for the project accordingly. However, this can be a high risk path for the contractor if they fail to adequately price any element of the project as they are contractually required to bear any losses from their mispricing. The high-profile losses by Fletcher Construction on the International Convention Centre is an example of this.
What is an estimate?
Unlike a quote, an estimate is a best guess of how much a project might cost. It is a contractor’s best guess of what the labour, materials and margin is going to be from start to finish. An estimate does not carry with it a legal obligation to carry out the work at a fixed price and does not provide a cap for the total cost. While a contractor is not legally bound to its estimate, it owes a duty of care to the principal when providing the estimate.
An experienced contractor is likely to price a project on this basis if they consider the project too risky to provide a fixed price. This would be more common particularly in the current market. The uncertainties could include their ability to obtain materials, the site conditions, and the scope of works itself.
Estimates in court
A common dispute that arises is where the principal claims that it was provided a quote as opposed to an estimate.
In Jefferson v Straw Homes Limited [2017] NZHC 1766, the contractor and principal entered a residential building contract. In that case, the agreement was specified to be for “managed labour only” and the contract price was not stated. The principal had limited funds available to it which were sourced mostly from borrowings. This was made known to the contractor before work commenced and it was communicated that this was the limit.
Two written estimates were provided both containing words stating that it was a “price estimate” for $646,060.63. This was subsequently inserted into the contract as the “contract price”, at the principal’s request. As the project progressed, the principal enquired as to the cost to complete the project. The contractor informed him that there was approximately $100,000 of work still required over and above the estimate. After that, the relationship between the parties deteriorated and the principal stopped paying the contractor’s invoices.
At Court, the principal relied on the “contract price” in the agreement. However, the Court considered that the interpretation of the phrase “contract price” must be determined according to what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean, and the facts and circumstances known and likely to be operating on the parties’ minds at the time.
In considering the facts of the case, the Court held that a reasonably and properly informed third party would have considered the words “contract price” in this instance to mean an estimate as per the written estimate provided at the same time, as:
The contractor indicated that it was not prepared to commit to a fixed price at the time;
The plans were still fluid when the contract was entered into;
The estimate gave imprecise figures for a number of items;
The estimate was based on plans with a smaller floor area and a large plan was being considered at the same time;
A third party would understand that the parties had agreed on a managed labour contract with the hope that the project could be completed for less with labour input from the principal;
The principal’s behaviour was consistent with there being no fixed price; and
The contractor continued to invoice the principal when the “contract price” had been exceeded, and the principal paid those invoices.
Having found that it was an estimate, the Court proceeded to consider whether the contractor owed the principal a duty of care in providing its estimate and whether that duty was breached.
On this issue, the Court held that in circumstances where the contractor was made aware of the principal’s financial situation and wished to limit the amount they wished to spend, this gave rise to a duty on the contractor, in contract and in tort, to ensure that accurate cost estimates were given before work commenced. This would have enabled the principal to make decisions to ensure that it remained within its financial limit.
In any event, the Court considered that while there was a breach, the principal did not suffer a loss. The Court held that it was wrong to consider the additional expenditure they were forced to incur as a loss when some of the additional expenditure was not caused by the contractor. Furthermore, the principal received a larger asset.
Conclusion
For contractors, the takeaways are to always be clear whether you are providing an estimate or a quote. Frequently, we encounter contractors providing estimates headed up with the word “quote” when it had no intention to provide a quote.
Additionally, contractors owe a duty of care to the principal in preparing its estimate. Practically, this means that a contractor may be required to do more than review plans and designs when preparing the estimate by visiting the site or engaging a quantity surveyor to ascertain the materials required.
Likewise, for the principal, if you are not sure whether you have received an estimate or quote, seek clarification from the contractor. Inform the principal of your financial situation and what you can afford before entering a construction contract, and regularly update the contractor on your financial situation as your project progresses.
The impacts of COVID-19 to local and global supply chains have resulted in unprecedented pressure on the construction industry as a result of price increases on some building materials. In some cases, this made projects unaffordable for principals and contractors alike, with elevated risk of budget blowouts. As such, care should be used in the current market when assessing when to issue a quote or an estimate for a particular job.
Contact us if you are considering embarking on a construction project and are weighing up proceeding with a fixed price quote or an estimate. Our lawyers at Norling Law can review your options and discuss the pros and cons as they relate to your specific situation as part of our no obligation legal consultation. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation
So, you or your client have been served with a statutory demand.
What does it mean? What are the consequences? What must you do and by when? These are all questions that need to be answered within a short timeframe.
Issuance of a statutory demand is the first step in the process to commence liquidation proceedings against a company. This is not the only available path to commence liquidation proceedings against a company, however, this is the most used one.
As such, if a statutory demand has been served on a company, it should not be ignored as there could be serious consequences if it is not addressed.
Usually, a statutory demand can be set aside if there is a substantial dispute as to whether the debt is owing, or there appears to be a counterclaim or a setoff. The methods of setting aside a statutory demand are discussed in our previous article.
Unlike a usual statutory demand, the Supreme Court in Laywood v Holmes Construction Wellington Ltd [2009] NZSC 44 held that in certain circumstances, a statutory demand for a debt under the Construction Contracts Act 2022 (the CCA) might not be able to be set aside even if a company has a substantial dispute, counterclaim, or setoff. This is due to the “pay now, argue later” regime under the CCA.
This has recently been affirmed by the Court of Appeal in Demasol Ltd v South Pacific Industrial Ltd [2022] NZCA 480.
Background to Demasol Ltd v South Pacific Industrial Ltd
South Pacific Industrial Ltd (SPI) was the head contractor for demolition works. Demasol Ltd (Demasol) specialised in asbestos removal and was the subcontractor to demolish a large bin tank containing asbestos.
Demasol served two payment claims which contained charges for additional works due to variations to the contract. SPI did not dispute the payment claims by issuing payment schedules as required by the CCA, nor did it pay the amounts sought in the payment claims. Consequently, Demasol served a statutory demand on SPI.
SPI applied to set aside the statutory demand. The High Court set aside the statutory demand under s 290(4)(a) of the Companies Act 1993 because it was reasonably arguable that the second payment claim was not valid due to the charged variations being disputed. Demasol appealed to the Court of Appeal.
Payment claims under the CCA
The Court of Appeal noted that the objective of the CCA is to secure timely cashflow to contractors and subcontractors in the construction industry. The CCA does not shut the payer out from disputing the amount claimed but it requires the payer to pay first and argue later.
If a payer does not respond to a payment claim by serving a payment schedule under s 21 of the CCA, then the contractor is entitled to recover the amount as a debt due under s 23.
If a payer had issued a payment schedule and the dispute has not been resolved, then there may be a substantial dispute and s 290(4)(a) of the Companies Act 1993 may be invoked to set aside a statutory demand.
Whether the statutory demand should be set aside
Demasol made its payment claims under the CCA and complied with the statutory requirements under s 20.
SPI then became liable to pay the claimed amounts under s 22 as it failed to provide a payment schedule or pay the amounts claimed within 20 working days.
All the issues SPI belatedly disputed should have been covered in a payment schedule (which SPI failed to do). As a result, Demasol became entitled to recover the debt from SPI under s 23.
The Court of Appeal held that the payment claims served by Demasol on SPI were valid payment claims under the CCA. There was no substantial dispute as to whether SPI was liable to pay the amounts claimed. Accordingly, Demasol was entitled to enforce its statutory demand.
Therefore, the Court of Appeal held that the High Court erred in setting aside the statutory demand under s 290(4)(a) of the Companies Act 1993 as doing so would be contrary to the CCA and undermine its purposes. SPI was not shut out from the CCA’s adjudication processes or other proceedings. It simply had to pay now and argue later.
Outcome
SPI’s application to set aside the statutory demand was dismissed but the time for complying with the statutory demand was extended.
Our view
This recent Court of Appeal case reinforces the “pay now, argue later” regime under the CCA. It is a good reminder to all in the construction industry to respond promptly to payment claims pursuant to the process prescribed in the CCA.
The timeframes in the CCA are strict and failing to comply has irreversible consequences and can result in the payment claim being enforced in the Courts as a debt which will likely result in increased costs for the payer. It might be too late to dispute the debt once the contractor takes enforcement steps in reliance on s 23(2)(a) of the CCA.
Conclusion
If you have been served with a payment claim under the CCA or a statutory demand, or require legal assistance, we invite you to contact our specialists for a no obligation discussion. Our lawyers at Norling Law can assist you as part of our no obligation legal consultation.
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How a construction project is designed and constructed is known as the “delivery method”. The delivery method is one of the most important decisions for every owner looking to commence a construction project.
There is no “one size fits all” solution.
Owners and contractors should have a clear understanding of the delivery methods best suited for their project. The delivery method can have a direct impact on cost, time to complete, quality and risk allocation.
There are three traditional delivery methods:
Construction only;
Design and construct; and
Project management.
For each situation, there will be advantages and disadvantages in the use of any specific delivery method.
Construct only
This delivery method is where the owner engages the contractor on a construction only basis whereby the contractor is only responsible for building the project based on the designs provided from a building consultant. This delivery method is common for small-scale domestic, commercial and infrastructure projects. This delivery method works well where the contractor is unable to offer value to the owner in the design process, particularly where the design is not complex.
This delivery method is considered to be low risk to the contractor as the design consultant retains liability for the design that the contractor uses. However, the disadvantage is that the owner does not gain any design input from the contractor which may, in turn, increase the time taken for the whole project and diminish potential cost savings. If there are errors in the design, the contractor may be entitled to an extension and may charge additions as variations.
Design and construct
This delivery method is where the owner engages a consultant to prepare a preliminary design, then engages a contractor to complete the design and construct the project. This method carries risk for the contractor and is often used for large-scale domestic buildings, large commercial buildings, and infrastructure work.
The owner would usually engage a design consultant first. The design consultant would carry out the design to completion of the preliminary design phase and would assist the owner in determining the project requirements. Then, the owner would engage a contractor who undertakes to meet the owner’s project requirements by completing the design and constructing the building. This creates a single point of accountability for design and constructing with the contractor. This allows the contractor to make cost savings to the project, and for it to be expedited. However, the owner has less control over the design and the contract sum may be higher to reflect increased contractor risks.
Project management
This delivery method occurs where the owner engages a project manager to control, manage and coordinate the project. The project manager’s scope of work tends to be oversight of the design and construction of the project from start to finish.
The owner also chooses and engages the consultants and the contractors. The owner is not required to engage a head contractor. The owner may engage several contractors, similar to subcontractors for various parts of the project. By engaging each party individually, the owner retains control of the project, but communicates with all parties via the project manager. The owner in this case tends to be experienced in the construction industry.
This delivery method enables faster completion of the project and provides the owner with more flexibility and control. However, this approach can be costly due to the requirement to managing the multiple contractors. The owner also takes on a higher risk of cost fluctuations.
Which delivery method should you choose?
The delivery method chosen for a particular project will depend on the owner’s objectives. This includes considerations of the following factors:
Timing – Where speed is required, the project management delivery method is more suitable compared to construct only, and design and construct.
Cost – Greater cost certainty can be obtained under construct only, and design and construct, where the owner is able to ask for fixed price contracts. Owners should also consider the risks of exceeding those costs.
Control over design – Design and construct contracts give more control over the design to the contractor as compared to construction and project management.
Experience of the owner – An inexperienced owner should tend towards construct only or design and construct as these methods offer greater time and price certainty.
Complexity – Some delivery methods are probably only value for money if the project is complex.
Risk assessment – The owner should assign risk to the parties that are in the best position to control those risks.
Summary
Selecting the right delivery method can be a daunting prospect, with a lot at stake. Our lawyers at Norling Law have the expertise to advise on the terms of your construction contract. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-brent/.
Essential terms of a residential building contract
From 1 January 2015, it has become mandatory to have a written contract for all residential building work that costs $30,000.00 (including GST) or more (however, this rule does not apply to sub-contracts between a main contractor and a subcontractor).
Regardless of whether the construction work costs more or less than $30,000.00, you should always have a written building contract.
In an industry where disagreements are common, a written contract helps to protect your client, and more importantly, yourself, if disputes arise. In this article, we discuss the important terms that should be addressed in any residential building contract.
The Parties – who are you contracting with?
It is easy to assume that the people you are dealing with are the parties to the contract. This is not always the case. It is possible that the property/business could be owned by a company or, more commonly, by trustees of a trust.
For the contractor, failure to identify the correct party could mean that you are contracting with a party who may not be able to meet the financial costs of the project. Before entering a contract, the contractor should always ascertain who the owner of the property/business is and whether that person has the ability to pay for the project. Failure to do so could mean that the contractor would be providing its services for free.
Contract Price
In the context of residential building work, generally, there are two main ways for the contractor to charge:
Fixed price; or
Cost-plus margin.
Each has its own advantages and disadvantages.
A fixed price basis is an agreement to perform work at a set price. That price includes all costs and profit.
A cost-plus margin basis means that the price of construction is the cost, plus a margin for profit. The cost includes the cost of materials and labour along with indirect costs known as “overhead”.
For the contractor, cost-plus margin allows the contractor to be reimbursed for all costs and ensures a profit. Under a fixed price contract, the contractor must ensure that the cost of construction is less than the price quoted, or it may not make a profit.
For the homeowner, cost-plus margin allows flexibility and control over costs of the project in that the project can be suspended if there are insufficient funds to continue. However, there is also uncertainty of the final cost. A fixed price contract provides certainty but binds the homeowner contractually to pay for the entire amount in the contract.
Provisional sums
The contractor should consider whether there are any elements of the works that are not yet defined in sufficient detail to price in a contract. If so, the parties could agree that these elements are provisional sums. The contract should provide expressly how it is to be dealt with. A common clause provides for the provisional sum to be omitted and an appropriate valuation of the work carried out to be substituted for it.
As provisional sums are replaced by valuations of work performed as the project progresses, the contract sum may increase or decrease. The clause should also address the potential costs and extensions of time that might be claimed to avoid potential disputes.
Scope of work
The scope of work sets out the work that the contractor has been engaged to provide. You should always be as precise as possible when defining what is included within the scope of work. Failing to do so may mean that work can be implied to be included within the scope of work if it is incidentally required, potentially at your expense.
For example, if a plan shows that the contractor is to install a door and the specifications do not specifically refer to any hinges on those doors, supplying the hinges are part of the scope as it is necessary for the completion of that work.
Failure to define what is included within the scope of work is a common area of dispute. Accordingly, it is always advisable to include and refer to all plans and specifications. Precisely defining the scope of work will not only prevent disputes on what is included within the scope of work, but also disputes as to whether a variation is in fact a claimable variation.
Insurance
There are risks for the homeowner and contractor in any construction project.
The law does not require the homeowner and/or contractor to insure unless the party expressly undertakes that obligation.
Insurance may not be necessary if the parties are willing to accept certain risks. However, it is strongly recommended that a homeowner obtain Contract Works insurance before undertaking any major home renovations or building a new house.
Variations
All building contracts should have a variations clause. The clause should set out:
What can be varied;
The process to be followed; and
How the variation is to be valued.
It is important for contractors to take note of the process required under the contract, or disputes are likely to arise. The process could include documenting the variation and submitting it to the homeowner or the homeowner’s agent, or the process could be a verbal instruction with no requirement for it to be documented.
In respect of the latter, this creates risk to the contractor in that the variation could be disputed and the contractor will have to prove that consent was given. As a general rule, if the contract does not require variations to be documented, contractors should document all variations to avoid disputes.
Practical Completion
Given that practical completion is a common trigger for payment, contractors should be aware of the conditions to achieve practical completion. Under some contracts, it is insufficient to complete construction of the building to claim practical completion. It is common for clauses to require a certificate to be provided to the architect together with all necessary documentation and warranties for practical completion to occur. We recommend understanding the requirements for practical completion and carefully following any procedure outlined in the building contract.
Dispute Resolution
It is common for contracts to stipulate how disputes are to be determined. These provisions may be limited to contractual disputes or to cover all disputes. Aside from the contract, it is possible for the parties to agree on a particular means of resolving the dispute when it arises.
In addition, the Construction Contracts Act 2002 (CCA) also provides that the parties have a right to refer the dispute to adjudication, despite the procedure outlined in the building contract.
The purpose of the CCA is to reform the law relating to building contracts and, in particular:
To facilitate regular and timely payments between the parties to a building contract; and
To provide for the speedy resolution of disputes arising under a building contract; and
To provide remedies for the recovery of payments under a building contract.
Accordingly, where the parties to a building contract are looking for timely payments and a speedy resolution to a dispute, adjudication is a preferred dispute resolution procedure.
While adjudication is a relatively quick process, it is important to note that it only provides the party with interim relief. While an adjudication determination is binding in the interim, and any amount awarded is due and payable within 2 working days of the determination, a final determination of the matter can be made if the matter is referred to arbitration or the Courts. However, it is common for disputes to be resolved through adjudication as it is often uneconomic to pursue the dispute further due to the costs involved.
Summary
The contract will have to be adjusted for each individual project to meet the project specifications.
There are various standard forms available to the parties. However, it would be unwise to simply sign a contract without carefully considering its specific terms and conditions.
If you have found yourself in a dispute over the terms of a contract, our lawyers at Norling Law can review your contract and discuss potential strategies to resolve the matter quickly. To book a free 30-minute consultation please click this link https://norlinglaw.co.nz/consultation-br
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.
