By Katrina van Houtte
Kensington Swan Lawyers
The Construction Contracts Act (CCA) provides machinery for contractors to resolve disputes and recover debts in what was intended to be a fast-track, rough and ready dispute resolution procedure. So, what happens when title in the construction site (generally the only asset owned by the development company) is transferred away to a related party, to frustrate a contractor’s efforts at recovery?
Associate owner liability
The CCA has put in place a regime (unique to New Zealand) whereby liability to pay the contractor is carried over to subsequent owners of the construction site, provided that the new owners fall within the definition of ‘associate’ under the Act. ‘Associate’ is defined in s7 of the Act. The definition is wide and includes family members, trustees and related companies and subsidiaries.
The procedure is this. A contractor obtains an adjudicator’s determination against the developer. The Act provides a mechanism for an adjudication award to be enforced through the registration of charging orders over the construction site. But charging orders are worthless where the developer no longer owns the construction site. Enter associate owner liability. Provided that the associates are joined in the notice of adjudication, section 50 of the Act empowers the adjudicator to determine that an ‘associate’ owner of the construction site is jointly and severally liable with the developer for the debt.
Parliament’s rationale was clear. Unscrupulous property developers cannot avoid liability to the contractor by simply transferring titles in the construction site to a related party.
Powers of the district court on review
Associate owners may apply to the district court under section 52 of the Act for a review of the adjudicator’s finding of joint and several liability. The scope of the review power was the subject of a recent pre-trial ruling by Judge Sharp (Sonsram Development Holdings Ltd & Anor (DC Auckland) 26 November 2009, CIV 2009-044-1266). Liability is founded on the adjudicator’s determination that the new landowner fits within the definition of ‘associate’.
It is only this aspect of the determination that is reviewable. The review is not an opportunity to revisit the finding of primary liability against the developer.
There is some judicial discussion that the powers of the district court on review may extend to examining whether the associate ought to be liable for only a portion of the amount claimed. It has been suggested this type of situation might arise where an associate has purchased only a few sections in a subdivision and the amount that the contractor is claiming relates to works carried out on the whole of the site. (See Redhill Development (NZ) Ltd & Anor v Green & Anor (HC Auckland), 5 August 2009, Lang J).
A close reading of the relevant sections suggests otherwise. It comes down to the meaning of the words ‘whether in whole or in part’.
In a related part of section 50, the words ‘whether in whole or in part’ refer to the adjudicator’s finding as to how much of the original claim the developer is liable to pay; the whole or part of the amount claimed. The wording in respect of associate owner liability is precisly the same. It follows that the adjudicator has no jurisdiction to find associate owners liable for a different or lesser amount.
There are limited exceptions found in sections 50(3) and 50(4), however, it appears, and this is consistent with comments made by Lang J in Redhill, that s 50(3) contemplates payments made from the associate to the contractor directly. It does not follow that the owner’s joint and several liability is extinguished by paying the purchase price for the land to the respondent.
Conclusion
The message for associates is beware! If you purchase some or all of the land to a construction site or subdivision, you may find yourself liable to the contractor for the cost of unpaid works on the land, regardless of whether you purchased one section or one hundred.
Contractor Vol.34 No.2 March 2010
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