Introduction
The construction industry in New Zealand relies heavily on subcontracting arrangements. However, when payment disputes arise, the question of whether a valid and binding contract exists can become pivotal. The High Court case of Teak Construction Group Limited v KMJB Harris Limited [2025] NZHC 700 serves as a significant illustration of how the courts interpret contract formation, payment obligations, and the statutory demand mechanism under the Construction Contracts Act 2002 and the Companies Act 1993.
This article explores the background, legal issues, court reasoning, and the practical takeaways from this recent High Court decision, providing critical insights for contractors, subcontractors, and legal professionals operating in the New Zealand construction sector.
The Dispute in Context
Teak Construction Group Limited (“Teak”), a principal contractor, engaged KMJB Harris Limited (“KMJB”) for earthworks at a factory extension project in Penrose, Auckland. The crux of the dispute lay in a statutory demand issued by KMJB for an unpaid payment claim, which Teak sought to set aside.
KMJB claimed that Teak failed to issue a timely payment schedule for Payment Claim 22, thereby triggering an automatic liability under s 22 and s 23 of the Construction Contracts Act 2002. Conversely, Teak contended that its payment schedule was served in accordance with previously agreed contractual terms, which allowed 25 working days for a response, not the 20 days asserted by KMJB.
Teak further argued that either
(a) a subcontract existed with agreed payment terms, or
(b) there was no binding contract, in which case KMJB’s demand was not valid under the Construction Contracts Act and was instead a matter for quantum meruit.
Key Legal Issues
The High Court was tasked with determining whether there was a substantial dispute as to the debt claimed by KMJB, justifying the setting aside of the statutory demand under s 290(4)(a) of the Companies Act 1993.
Central to this determination were two legal questions:
- Was there a binding subcontract between Teak and KMJB, and what were its terms?
- If no subcontract existed, could the default provisions of the Construction Contracts Act apply?
Additionally, the case involved analysing the validity of payment claims and payment schedules, a frequent area of contention in construction disputes.
Court’s Analysis
The Court applied the test from Fletcher Challenge Energy Ltd v ECNZ to assess whether a binding contract existed. This required evidence of:
- An intention to be immediately bound; and
- Agreement on all essential terms.
- The Court found it fairly arguable that a subcontract had been formed, based on:
- KMJB’s continuation of work without further protest,
- Conduct consistent with other subcontract agreements between the same parties,
- The absence of further objection after a February 2023 meeting where payment terms were discussed and allegedly agreed.
Importantly, while KMJB did not sign the subcontract agreement, its conduct, such as requesting variations in a manner consistent with Teak’s standard terms and continuing to submit claims according to the previous payment schedule—suggested acceptance of the contractual framework.
The Judge dismissed KMJB’s shifting arguments, including its claim that NZS 3910:2013 governed the relationship. The Court noted there was no credible evidence to support that assertion, especially since KMJB’s own director acknowledged rejecting the subcontract terms.
The Court ruled that Teak’s payment schedule was served within time under the agreed 25-day term, thereby invalidating KMJB’s statutory demand.
Practical Implications for Construction Professionals
The judgment underscores that a formal, signed contract is not always necessary for a court to find that a binding subcontract exists. Conduct matters—particularly if one party continues to act in accordance with terms proposed by the other.
Contractors should ensure their letters of intent, pre-award checklists, and correspondence clearly define when and how a contract is formed to prevent ambiguity later.
Subcontractors, on the other hand, should be cautious about commencing work without resolving payment terms or clarifying whether they accept the main contractor’s conditions.
In relation to payment claims and schedules, this decision reinforces that the timing requirements in the Construction Contracts Act can be overridden by express agreement—provided such agreement can be inferred from conduct or communication.
From a debt recovery perspective, the decision serves as a caution against issuing statutory demands where the underlying debt is genuinely disputed, as doing so may be deemed unduly aggressive or unfair.
Key Learnings from Teak v KMJB Harris
Unexecuted Contracts Can Still Bind Parties: A lack of formal execution does not necessarily mean a contract doesn’t exist. Courts will consider the parties’ behaviour and correspondence.
Payment Terms Must Be Clear and Accepted: Relying on the Act’s default provisions is not advisable if alternative terms have been agreed upon, even informally.
Statutory Demands Are Not to Be Used as Leverage: The Companies Act requires there to be no substantial dispute. Using a statutory demand in a disputed context risks being struck down.
Evidence of Agreement Can Be Inferred: Even where parties dispute having reached a full agreement, the court may infer contractual terms based on performance and conduct over time.
Document All Variations and Communications: Maintaining a clear, documented record of contract negotiations, changes, and communications can be decisive if a dispute arises.
Conclusion
The Teak v KMJB Harris case serves as a pivotal reference point in New Zealand construction law, particularly for understanding how the courts assess the existence and terms of a contract where formal execution is absent.
The ruling reiterates the importance of clear communication, consistent practices, and well-documented processes in managing construction relationships and avoiding disputes over payment.
For contractors and subcontractors alike, this case is a timely reminder that substance can outweigh form—what parties do may count more than what they formally sign.
Disclaimer:
This article does not constitute legal advice. If you need assistance with your case, please book a consult with our law firm.