IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE	
CIV-2019-404-869
[2019] NZHC 2641	

BETWEEN	HELLABY RESOURCE SERVICES LIMITED
Plaintiff	
AND	BODY CORPORATE 197281
Defendant	

Hearing:	1 October 2019	
Appearances:	J Q Wilson and R D H Massey for the Plaintiff
R J Hollyman QC and W J Revell for the Defendant	
Judgment:	16 October 2019	

JUDGMENT OF ASSOCIATE JUDGE LESTER

This judgment was delivered by me on 16 October 2019 at 4.00pm pursuant to Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar 16 October 2019

HELLABY RESOURCE SERVICES LTD v BODY CORPORATE 197281 [2019] NZHC 2641
[16 October 2019]

Background

[1]	The plaintiff, Hellaby Resource Services Ltd (“Hellaby”), seeks summary judgment in relation to a debt it claims it is entitled to enforce as assignee.

[2]	The debt is said to arise under a construction contract entered into in November 2014 (“the Contract”) between TBS Remcon Ltd (“TBS”) and the defendant, Body Corporate 197281 (“the Body Corporate”).

[3]	Hellaby says it was assigned the debt  under a Deed of Assignment dated    12 December 2018 with TBS and another party. Hellaby says the debt is due and payable pursuant to the Construction Contracts Act 2002 (“the Act”). Hellaby says the Act prevents the Body Corporate from raising defences such as set-off or abatement to its claim.

Issues

[4]	A preliminary issue arises as to whether the Deed of Assignment is effective so  as  to  permit  Hellaby  to  bring  this  proceeding  given  the  Contract  contains  a prohibition on assignment.

[5]	The  Contract  is  based  on  the  standard  form  contract  NZS  3910-2013.  It provides as follows:

2.9 Assignment 2.9.1
Neither party shall assign the whole or any part of the Contract without the prior written consent of the other party. Such consent shall not be unreasonably withheld or delayed.

2.9.2

The assignment or transfer of shares in or the restricting of the Contractor so that the effective control of the Contractor passes to Persons other than those holding it at the date of this Contract will be an assignment of this Contract for the purpose of this clause.

[6]	Under the Deed of Assignment, TBS and Hellaby and a third party agreed as follows:

3.	Assignment of Rights

3.1	With effect on and from the date of the payment referred  to  in clause 2.1 of this Deed being received by SRG, the Assignor hereby irrevocably and unconditionally assigns all contractual rights and recourse that it has:

(a)	under   the   Relevant   Agreement   against    Body Corporate 197281 regarding the recovery of the Mountain Road Receivable; and

(b)	under the Mountain Road Financing Agreement against Body Corporate 197281 to receive any Financing Payment,

(together, the Assigned Rights).

[7]	SRG Contractors NZ Ltd (“SRG”), the third party to the Deed of Assignment, is the ultimate holding company of TBS. The payment referred to in the above clause is set out at cl 2.1 of the Deed of Assignment as being $2,988,868.67. Under cl 2.1, Hellaby had to pay that sum to SRG before the assignment took effect. There is reference in a letter giving the Body Corporate notice of the assignment that the payment had been made.

[8]	Mr Hollyman QC, counsel for the defendant, made the point that the terms “Relevant Agreement”, “Mountain Road Receivable” and “Financing Payment” used in the Deed of Assignment are not defined in that Deed. Apparently, those terms are defined in a separate Sale and Purchase Agreement between SRG and others under which all of the shares in TBS were sold to Hellaby.

[9]	Mr Wilson, counsel for the plaintiff, noted that the email sent to the Body Corporate giving notice of the assignment explained the terms used in the Deed of Assignment. For present purposes I accept that the notice of assignment gave an adequate explanation of the terms used in the Deed of Assignment.

[10]	The more fundamental issue is whether cl 2.9.1 prohibited the assignment of what Hellaby says was an accrued debt owed by the Body Corporate.

[11]	Mr Wilson submitted cl 2.9.1 does not apply to bar assignments of accrued debts. He submitted that once a debt was accrued, it was a standalone chose in action that could be assigned. The submission was that as a matter of construction cl 2.9.1 did not apply to prohibit the assignment of accrued debts.

[12]	Mr Wilson submitted that a “natural and purposive interpretation of cl 2.9.1” meant that it did not prohibit the assignment of accrued rights but only applied to “performance expectations”.

[13]	Mr Wilson relied on the particular wording of the clause noting that it prevented the assignment of the whole or any part of the “Contract” and did not refer to the rights or interests arising under the “Contract”.

[14]	Mr Wilson relied  on  the  fact  that  the  term  “Contract”  is  defined  in  NZS 3910-2013 as:

The documents referred to in the Contract Agreement as comprising the Contract, or the documents which constitute the Contract under 2.6.1.

[15]	“Contract Agreement” is defined:

The written agreement for the fulfilment of the Contract signed by the Principal and the Contractor.

[16]	While Mr Wilson accepted that cl 2.9.1 was susceptible to more than one interpretation he maintained the submission that it did not apply to accrued debts.

[17]	Mr Hollyman on the other hand submitted that the words “the whole or any part of the Contract” on a plain reading included all rights under the Contract whether they were accrued debts or not. He asked rhetorically “What else could ‘part of the Contract’ mean?”

Discussion

[18]	The definition of “Contract” above does not fit easily with the prohibition on assignment created by cl 2.9.1. “Contract” is defined as meaning the documents referred to in the “Contract Agreement”. The clause in my view is not concerned with

preventing an assignment of the contract documents and that is not what parties would understand the non-assignment clause to be aimed at.

[19]	I take support for that view from a comment by the Supreme Court in the recent decision of Xu v IAG New Zealand Ltd, where the Court said:1

Although it remains the law that  only the benefit, and not the burden, of       a contract can be assigned,  it  is  also  customary  to  refer  to  “assignment of contracts”.

[20]	The footnote given for the above passage is a reference to the comments of Lord Browne-Wilkinson in Linden Gardens Trust v Lenesta Sludge Disposals Ltd, where His Lordship said:2
Although it is true that the phrase “assign this contract” is not strictly accurate, lawyers frequently use those words inaccurately to describe an assignment of the benefit of a contract since every lawyer knows that the burden of a contract cannot be assigned.

[21]	In Linden Gardens Trust, the House of Lords was concerned with a clause which provided as far as material:

17(1)	The employer shall not without the written consent of the contractor assign this contract.

17(2)	The contractor shall not without the written consent of the employer assign this contract …

The clause then went on to deal with sub-contracting. The employer assigned the contract without obtaining consent.

[22]	Lord Browne-Wilkinson went on to say:3

Accordingly, in my view clause 17(1) of the contract prohibited the assignment by the employer of the benefit of the contract.

[23]	The  Judge  went  on  to  determine  whether  cl 17  was  intended  to  draw   a distinction between the right to performance of the contract and what the Judge referred to as “the right to the fruits of the contract”. Lord Browne-Wilkinson rejected

1	Xu v IAG New Zealand Ltd [2019] NZSC 68 at [29].
2	Linden Gardens Trust v Lenesta Sludge Disposals Ltd [1994] 1 AC 85 (HL) at 103.
3	At 103.

there being any distinction to be drawn in terms of the prohibition on assignment. The Judge said:4

The question is to what extent does clause 17 on its true construction restrict rights  of  assignment  which  would  otherwise  exist?    In  the  context  of  a complicated building contract, I find it impossible to construe clause 17 as prohibiting only the assignment of rights to future performance, leaving each party free to assign the fruits of the contract.

[24]	Linden Gardens Trust has been followed in New Zealand.5

[25]	FTG Securities Ltd v Bank of New Zealand confirms that the usual rules of contractual interpretation apply to a non-assignment clause. The starting point is always the ordinary meaning of the words used.6

[26]	In the article The Efficacy of Contractual Provisions Prohibiting Assignment, when discussing the construction of prohibitions on assignment, the author said one form of construction was where:7
… the parties may promise that they will not assign their rights under the contract (or only assign them to a limited group). This is usually expressed as the parties ‘shall not assign’ or the parties ‘shall not assign without the consent of the other party’ or ‘this contract is not to be assigned’.

[27]	Accordingly, a reference to not assigning a contract is usually taken as meaning that the parties will not assign their rights under the contract as rights are the only thing it is possible for parties to assign.

[28]	Clause 2.9.1 with its reference to “the whole or any part of the Contract” is in my view referring to the parties’ rights under the Contract. I do not see a need to read the clause down so that it only applies to “performance expectations” rather than accrued rights such as debts. The reasons given by Lord Browne-Wilkinson in Linden as to why in a complicated building contract it would not have been intended to draw

4	At 105.
5	For example, New Zealand Payroll Software Systems Ltd v Advanced Management Systems Ltd
[2003] 3 NZLR 1 (CA); FTG Securities Ltd v Bank of New Zealand [2019] NZCA 16.
6	FTG Securities Ltd v Bank of New Zealand, above n 5, at [36].
7	G J Tolhurst The Efficacy of Contractual Provisions Prohibiting Assignment [2004] SydLawRw 8 [emphasis added].

a distinction between the “fruits of performance” and the right to performance are equally applicable to this involved construction contract.8

[29]	Again, a reference to assigning a contract is generally taken to mean assigning rights or benefits under a contract given that the burdens and obligations cannot be assigned. The use of the words “whole” or “part” in my view are wide enough to prevent TBS being able to confer on Hellaby by assignment a right to sue the Body Corporate in respect of the debt alleged to be due under the Contract and:9
… an assignment of contractual rights in breach of a prohibition against such assignment is ineffective to vest the contractual rights in the assignee.

[30]	The payment obligations on a client under the Contract are a significant part of the rights enjoyed by the contractor. Had the parties intended to deal differently with such a right fundamental to the Contract they would have said so.

[31]	In short, Hellaby did not acquire the right to sue the Body Corporate as TBS purported to assign one of its rights under the Contract without the consent of the Body Corporate. On that basis the Body Corporate has a reasonably arguable defence to the application for summary judgment.

[32]	Given the above finding, I comment only briefly on the remaining issues.

An accrued debt?

[33]	Hellaby relied on having met the requirements of pt 12 of the Contract which sets out how a payment claim intended to be a payment claim under the Act is to be tendered. Mr Hollyman did not submit that the process set out in pt 12 of the Contract had not been satisfied. On that basis without more, I would have concluded that Hellaby had established  that it  was entitled to  payment  of the  amount  claimed as a payment due under the Act.

[34]	However, Mr Hollyman submitted there was more to take into account in this case. Under pt 12 of the Contract, the engineer under the Contract is responsible for

8	Linden Gardens Trust v Lenesta Sludge Disposals Ltd, above n 2.
9	Linden Gardens Trust v Lenesta Sludge Disposals Ltd, above n 2, at 109.

receiving the payment claim on behalf of the principal. The engineer then produces  a provisional payment schedule which is provided to the contractor and the principal. The principal then has 10 working days to make amendments or deductions to the schedule and if the principal does not do so then the provisional schedule prepared by the engineer becomes a final payment schedule setting out the amount due.

[35]	Mr Hollyman argued that what he submitted were major deficiencies in the administration of the Contract by the engineer meant that the payment schedules issued did not qualify as payment schedules under the Contract.

[36]	Mr Hollyman relied on a number of authorities for the proposition that an engineer to a contract must act in a fair and proper manner. He argued that standard was breached, invalidating the payment schedules issued. On that basis, Mr Hollyman submitted the Contract put a gloss on the Act as before the contractor could claim the benefit of the Act, the additional requirements in pt 12 had to be met; those additional requirements being the obligation to act in a fair and proper manner traditionally placed on engineers to a contract.10

[37]	I would not have accepted this argument. Clause 12.2.2 is express that the payment  claim  is  received  by  the  engineer  on   behalf   of  the  principal   and  the provisional progress payment schedule is prepared by the engineer on behalf of the principal.     If the engineer, in acting on behalf of the principal,  fails to act in     a proper and fair manner in relation to the payment schedule then that is a matter between the engineer and the principal.

[38]	While pt 12 does specify a more involved procedure than under the Act for the tabling of payment claims, nonetheless it is intended to specify a procedure that when completed  results  in  an  amount  payable  as  a payment  claim  under  the  Act.    A deficiency in completing the process by the principal’s agent would not, in my view, deprive the contractor of the benefit of the payment claim process in the Contract.

10	Brown & Doherty Ltd v Whangarei County Council [1988] 1 NZLR 33 (HC) and Canterbury Pipe Lines Ltd v Christchurch Drainage Board [1979] 2 NZLR 347 (CA).

[39]	Clause 12.1.3(d) provides  that  where  a  payment  claim  is  intended  to  be a payment claim under the Act, then it is to  include  any information  required by  the Act. Having agreed that claims under pt 12 can qualify as payment claims under the Act, in my view the parties would not have intended such payment claims to lose the fundamental characteristic of claim under the Act which is if the specified procedure is satisfied then the amount in the claim becomes payable.

Abatement

[40]	Mr Hollyman submitted that if I reached the point where I was satisfied that there was a valid payment claim, the issues raised by the Body Corporate with the works were properly characterised as giving rise to an abatement to the Contract price rather than a set-off. He submitted that s 79 of the Act, set out below, did not bar the Body Corporate relying on abatement:

Proceedings for recovery of debt not affected by counterclaim, set-off, or cross-demand

In any proceedings for the recovery of a debt under section 23 or section 24 or section 59, the court must not give effect to any counterclaim, set-off, or cross-demand raised by any party to those proceedings other than a set-off of a liquidated amount if—

(a)	judgment has been entered for that amount; or

(b)	there is not in fact any dispute between the parties in relation to the claim for that amount.

[41]	Mr Hollyman referred to the evidence which he said supported the Body Corporate’s submission that work was not carried out adequately or some work was not carried out at all, and thus he said an arguable abatement was established.

[42]	I  would  not  have  accepted   this  submission.   I  would  have  accepted   Mr Wilson’s submission that when s 79 prohibits the Court from giving effect to any “counterclaim, set-off, or cross-demand” that those words are wide enough to capture an abatement.

[43]	In my view, the purpose of s 79 would be undermined if the door was opened to argue facts that arguably supported a barred set-off could be repackaged under the label of “abatement”. Mr Wilson submitted that set-off and abatement were

“functionally interchangeable”.	Whether that is correct in all cases I need not determine, but there is not a bright line between the two defences.

[44]	Ultimately, these comments reflect my view that the Contract was intended to give principals, where the process  in pt 12 is satisfied, the certainty of  being able   to recover the amount in the payment schedule produced by that process.

[45]	I would not have considered that parties to a major construction contract such as the one using the NZS 3910-2013 form would have intended to put a significant gloss on the payment claim regime under the Act. Cashflow is just as much the lifeblood of construction under an NZS 3910-2013 contract as any other construction contract, if not more so, given that contract wording is routinely used for large projects.

[46]	Accordingly, I would not have accepted the Body Corporate’s argument that payment claims that have been through the process set out in pt 12 are subject to challenge where the principal can point to a failure by the engineer acting on their behalf to properly assess the claim or to fulfil their role under the Contract or where an abatement could be raised.

Conclusion

[47]	For the reasons given in relation to the invalidity of the assignment, the application for summary judgment is dismissed. Costs are reserved.

Associate Judge Lester

Solicitors:
Bell Gully, Auckland Farry & Co, Auckland

Copy to counsel:
R J Hollyman QC, Auckland