Volcanic eruption in High Court

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The High Court in Volcanic Investments Limited1 v Dempsey & Wood Civil Contractors Ltd has signalled a departure from the conservative approach of the court in Rapaki Property Group v Energysave Ltd2 , now reinforcing the protections afforded to payees under the Construction Contracts Act 2002 (“the CCA”). 

In Volcanic Investments, a failure by Volcanic to make payment of an amount claimed under the CCA was referred to adjudication. The adjudicator determined that Volcanic was liable to pay Dempsey the total amount by February 24, 2005. Volcanic failed to make payment as required and Dempsey issued a statutory demand under the Companies Act 1993. 

Volcanic applied to have the statutory demand set aside under section 290(4) of the Companies Act on the basis that it had a claim arising from alleged delays by Dempsey in carrying out the contract works that could be set-off against the sum due to Dempsey. 

Dempsey grounded its opposition to Volcanic’s application on section 79 of the CCA. This provides that in any proceedings for the recovery of a debt under the CCA, 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 where judgment has been entered for that amount or there is not, in fact, any dispute between the parties in relation to the claim for that amount. 

The court held that the meaning of section 79 was plain, and that it was forbidden from giving effect to Volcanic’s cross-claim because judgment had not been entered for the amount of the cross-claim and there was a genuine dispute between the parties as to the amount of the cross-claim. 

Crucial issue Having made this assessment, the crucial issue for the court was whether the provisions of section 290(4) of the Companies Act (which allows the setting aside of statutory demands where there is a cross-claim) trumped section 79 of the CCA. 

Following established guidelines to statutory interpretation, the court expressed its view that there was no doubt that Parliament intended section 79 to prevail. The court gave the following reasons for its decision: • Section 290(4) is a provision relating to the recovery of debts generally. 

In contrast, the CCA is special legislation dealing with the recovery of specific types of debt under specific types of contracts. The usual rule of statutory interpretation is that later,specific legislation should prevail over the earlier, general enactment.

• There is a clear statutory intention that payments due under construction contracts should be paid and disputes resolved quickly. To permit an unproven setoff to be raised as a means of avoiding payment of an established debt would be inconsistent with the purpose and intention of the CCA. 

• Volcanic was not prevented from pursuing the setoff in separate proceedings. Section 79 simply required that the set-off may not be given effect to in recovery proceedings from the amount due to the contractor. 

The decision in Volcanic Investments will, no doubt, provide some level of comfort to payees following the approach taken in Rapaki v Energysave. In that case, the court failed to give effect to the protections afforded to payees under section 60 of the CCA, which provides that an adjudicator’s determination shall be of full effect even though a party has applied for judicial review. 

Instead, Associate Judge Gambrill allowed the striking out of the payee’s statutory demand on the basis that the judicial review proceedings signalled a substantial dispute as to whether the debt was due or owing. Significantly, the outcome of the judicial review proceedings would determine whether the payment claims were, indeed, covered by the CCA (and therefore could trump the provisions of the Companies Act). 

Further complication As a further complication, even if the Associate Judge’s approach was incorrect, it was found that the statutory demand was issued before the “due date” for payment had arisen and may not, therefore, have even been valid. 

The Volcanic decision emphasises the precedence to be given to the protections offered to payees under the CCA in accordance with its stated purpose of facilitating regular and timely payments between the parties to a construction contract. 

In doing so, it demonstrates greater cohesion with the principles expressed in other judgments under the CCA to date. 1 High Court, Auckland, CIV-2005-404-1320, 24 May 2005, Randerson J 2 High Court, Christchurch, CIV-2004-409-000991, 1 June 2004, Associate Judge Gambrill