Livingstone v Mitchell

[2007] NSWSC 1477

CITATION:	Livingstone v Mitchell [2007] NSWSC 1477
HEARING DATE(S):	19/11/07-23/11/07, 29/11/07, 17/12/07
JUDGMENT DATE :	18 December 2007
JURISDICTION:	Common Law
JUDGMENT OF:	Walmsley AJ
DECISION:	Judgment in favour of the plaintiffs for $10,000 and interest from 9 November 2001.; Costs reserved.
CATCHWORDS:	LEGAL PROFESSION – negligence – conveyancing transaction – where defendants retained by plaintiffs on conveyancing transaction – where plaintiffs purchaser of land – where owner-builder work undertaken on land prior to sale – where contract for sale required certificate of insurance for owner-builder work to be attached – where certificate of insurance for owner-builder work not attached to contract – where plaintiffs had a right to rescind contract due to absence of certificate of insurance for owner-builder work – where defendants failed to ensure that contract for sale had certificate of insurance for owner-builder work attached – where defendants failed to advise plaintiffs of right to rescind contract – where owner-builder work on land defective – where plaintiffs obtained pre-purchase inspection report – where defendants admitted breach of duty - TORTS – negligence – causation – purchase of land – whether plaintiffs would have proceeded with purchase had they known of right to rescind contract – where plaintiffs purchased property to redevelop and sell in short term – where vendors in straitened financial circumstances - TORTS – negligence – damages – measure of damages – solicitor negligence in conveyancing transaction – whether plaintiffs able to recover cost of rectifying defects in owner-builder works – whether measure of damages amount that would have been recoverable under insurance policy for owner-builder work – whether damages limited to diminution of value of land – whether measure of damages amount by which plaintiff could have negotiated reduction in purchase price for absence of certificate of insurance for owner-builder work - TORTS – negligence – contributory negligence – whether plaintiffs ought to have obtained more detailed pre-purchase inspection report - TORTS – negligence – failure to mitigate – where plaintiff failed to sell property upon discovering defects – where plaintiff failed to sue vendors – where vendors unable to be located - EVIDENCE – admissibility – torts – negligence – causation – where factual causation dependant on what plaintiff would have done if properly advised – inadmissibility of statements by plaintiffs regarding what they would have done if properly advised – whether evidence by non-plaintiff as to what he would have done but for the defendant’s negligence admissible – Civil Liability Act 2005, s 5D(3)(b)
LEGISLATION CITED:	Civil Liability Act 2002 Fair Trading Act 1987 Home Building Act 1989
CASES CITED:	Brooker v Friend [2006] NSWCA 385 Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185 Carter v T G Baynes & Sons [1998] EGCS 109 Chamberlain v Ormsby t/as Ormsby Flower [2005] NSWCA 454 Dalton v Dama Pty Ltd (1984) BCLRS 143 Elbourne v Gibbs [2006] NSWCA 127 Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 Feletti v Kontoulas [2000] NSWCA 59 Festa Holdings Pty Ltd v Adderton [2004] NSWCA 228 Ford v White & Co [1964] 1 WLR 885 Hansons Properties Pty Ltd v Geraghty BC9101302 Hartle v Laceys (A Firm) [1999] 1 Lloyd’s Rep PN 315 HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640 Joslyn v Berryman [2003] HCA 34; (2003) 214 CLR 552 Kyriakou v Hughes (1984) Aust Torts Reports 80-646 Lowns v Woods (1996) Aust Torts Reports 81-376 Oates v Anthony Pitman & Co [1998] PNLR 683 Paper Australia Pty Ltd v Ansell Ltd [2007] VSC 484 Philips v Ward [1956] 1 WLR 471 Pilkington v Wood [1953] Ch 770 Rentokil Pty Ltd v Channon (1990) 19 NSWLR 417 Robinson v Harman (1848) 1 Exch 850 Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434 Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121 Spencer v The Commonwealth (1907) 5 CLR 418 Sved v Council of the Municipality of Woollahra (1995) 86 LGERA 222; Aust Torts Reports 81-328; NSW ConvR 55-736 T C Industrial Plant Pty Ltd v Roberts Qld Pty Ltd (1963) 180 CLR 130 Taylor v R (1978) 22 ALR 599; 45 FLR 343 Telstra Corporation Ltd v Bisley [2005] NSWCA 128 Thomas v Adam [2000] NSWCA 127 Walmsley v Cosentino [2001] NSWCA 403 Watts v Morrow [1991] 1 WLR 1421
PARTIES:	Ian Hunter Livingstone (First Plaintiff) Merrilyn Leigh (Second Plaintiff) William Paul Mitchell (First Defendant) Julia Gillard (Second Defendant)
FILE NUMBER(S):	SC 20427/05
COUNSEL:	DKL Raphael; J O'Sullivan (Plaintiffs) J Downing (Defendants)
SOLICITORS:	David Zammit & Associates (Plaintiffs) Ebsworth & Ebsworth (Defendants)

IN THE SUPREME COURT
OF NEW SOUTH WALES
COMMON LAW DIVISION
PROFESSIONAL NEGLIGENCE LIST

WALMSLEY AJ

18 DECEMBER 2007

20427/05 IAN HUNTER LIVINGSTONE & ANOR v WILLIAM PAUL MITCHELL & ANOR

JUDGMENT

Introductory

1 HIS HONOUR: In this claim for damages by former clients against a firm of solicitors, the principal issue is what, if any, damages, the plaintiffs are entitled to recover.

2 The claim arises from a conveyancing transaction.

3 In 2001 the plaintiffs (who are husband and wife) decided to buy a property (“the property”) at Caves Beach. Caves Beach is about 25 kms south of Newcastle. The property is a substantial home built of hebel blocks, of several levels, on a large block of land, with distant ocean views. The home was in an incomplete condition, and had been under construction for about eight years by the vendors. The plaintiffs planned (as they had done with other properties) to improve the property and sell it at a profit. There was some negotiation over the price. Agreement was reached at $400,000. Before contracts were exchanged, the plaintiffs obtained a building inspection report (“Jeffs report”) from Daryl and Liz Jeffs. The author of the report made it clear that there had been limitations to what could be inspected. Taking those limitations into account, the report drew attention to several aspects of defective workmanship and a large number of items needing to be done before the building could be regarded as completed.

4 The defendants at that time practised as solicitors in Belmont, New South Wales. They acted for the plaintiffs on the purchase. Contracts were exchanged on 21 September 2001. After exchange they delivered requisitions.

5 Requisition 24C said:

“(a) Was any residential building work done on the land on or after 1 May 1997?
(b) If so:
(i) Please provide a certified copy of the Certificate of Insurance;
(ii) Has there been any breach of the statutory warranties (s18B)”? If so, please provide full details.
(iii) Has the Vendor or any predecessor in Title sought enforcement of any statutory warranty? If so, please provide full details.”

6 In answer to that requisition the vendors’ solicitors on 7 November 2001 said:

“24C(a) Yes.
24C(b)(i) Our clients’ property is insured with CGU Insurance and the Policy Number is O6K756478500. We do not hold a certified copy of the Certificate of Insurance.
24C(b)(ii) Not so far as Vendors are aware.
24C(b)(iii) Not to Vendors’ knowledge.”

7 Owner builders, as the vendors were, had, at that time, obligations under the Home Building Act 1989. In particular, ss 95 (1), (2) and (4) provided as follows:

“(1) An owner-builder must not enter into a contract for the sale of land on which owner-builder work is to be or has been done by or on behalf of the owner-builder unless a contract of insurance that complies with this Act is in force in relation to the work or proposed work.
Maximum penalty: 200 penalty units.
(2) An owner-builder must not enter into a contract for the sale of land on which owner-builder work is to be or has been done by or on behalf of the owner-builder unless a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, is attached to the contract.
Maximum penalty: 200 penalty units.
…
(4) If an owner-builder contravenes subsection (1) in respect of a contract, the contract is voidable at the option of the purchaser before the completion of the contract.”

8 The contract did not have attached to it a certificate of insurance. Thus, it was voidable at the option of the plaintiffs. Contrary to what they asserted in their answer to requisition 24C, the vendors had no policy of insurance under the Home Building Act. The policy number in their answer related to a home and contents policy.

9 The conveyance was settled on 16 November 2001. Shortly after, the plaintiffs, and their son Jonathan, moved into the property. The plaintiffs have lived there since. Their son Jonathan moved out on 1 December 2001 when he married.

10 Shortly after they moved in, the plaintiffs noticed a number of defects in the property. For example, Mr Ian Livingstone from early 2002 noticed that the garage would flood during rainy periods; and he noticed a number of cracks had begun to appear in the walls of the building.

11 Mr Jonathan Livingstone had conducted most of the negotiations when the plaintiffs bought the property. He continued to help his parents after they noticed defects appear. He commissioned a report (“the Mathew report”) from a building company, Athmew Pty Limited, trading as Reg Mathew & Associates. It confirmed the need for extensive work to be done.

12 The plaintiffs and Mr Jonathan Livingstone continued to consult the defendants. There were discussions about suing the council, and the vendors. The defendants attempted unsuccessfully to find the male vendor. They learned in the course of time that the vendors had had no building insurance. They told the plaintiffs about that. Eventually they told the plaintiffs that they had a conflict, and the plaintiffs consulted other solicitors.

The case pleaded

13 In their Statement of Claim filed 9 December 2005, the plaintiffs allege inter alia that the defendants, when acting as their solicitors,

(a) did not tell them the contract did not have an insurance certificate attached to it; and

(b) did not tell them that because of the absence of the certificate, the plaintiffs had had an entitlement to rescind.

14 The plaintiffs say that had they been advised of the lack of a certificate, its implications and their rights, either (depending on when they heard about it) they would not have exchanged at all, or they would have rescinded. They allege the defendants, in not advising them of their relevant rights, were in breach of contract, negligent and in breach of section 42 Fair Trading Act 1987.

15 In their Statement of Claim, the plaintiffs particularise as their damages the total cost of remedying the defects in the property, namely, $520,860.

16 By their Amended Defence, the defendants relevantly admit that they were retained to act on the conveyance and owed the plaintiffs a duty to act with reasonable care and skill in acting on the purchase. Further, they admit breach of their contractual and tortious duties by failing to undertake adequate enquiries as to whether there was a contract of insurance that complied with the Home Building Act in force in relation to the property, and by failing to inform the plaintiffs that in the absence of a relevant contract of insurance, the contract was voidable. However, they deny the plaintiffs would have acted differently had they been made aware of their rights, and plead that the plaintiffs’ assertion as to what they would have done if adequately warned was bad at law, evidence to support that assertion being excluded by section 5D(3)(b) Civil Liability Act 2002.

17 Further, the defendants plead contributory negligence, asserting inter alia a failure to read the Jeffs report properly and not enquiring about whether there was a contract of insurance (this is based on the plaintiffs’ previous experience in buying and selling properties). The defendants also allege a failure to mitigate in various ways including by suing Daryl and Liz Jeffs, (for not inspecting properly) or the male vendor (“the builder”). Further,

(a) they say the plaintiffs were slow to consider suing the builder, so that by the time they considered it he had disappeared;

(b) they failed to sell the property; and

(c) they failed to rectify the defects themselves or look after the property properly.

18 Finally, the defendants plead that the claim was an apportionable one within the meaning of Part 4 of the Civil Liability Act and that they should bear only a proportion of any judgment.

19 At the beginning of the trial, counsel for the defendants abandoned the defence under Part 4 Civil Liability Act, but maintained the other defences. At the end of the trial, counsel for the defendants abandoned the defence that the plaintiffs had failed to mitigate their damages by suing Daryl and Liz Jeffs.

The trial

20 It was the plaintiffs’ primary contention at trial that had they been advised properly, they would have rescinded the contract, so they should receive damages to pay for the cost of fixing the many defects discovered in the property after settlement. Thus, there was a great deal of evidence from experts called by both parties about those costs. Since the plaintiffs knew they were buying a house that was only partially completed, it was necessary for the experts to distinguish between the unexpected defects, and what merely amounted to “completion” items.

21 An alternative proposition put by the plaintiffs was that they lost the opportunity to insist that the vendors obtain building insurance before settlement. Had they been able to insist on the vendors’ obtaining building insurance, they say that they could have made a claim under the policy. By reason of that alternative claim for the value of the lost opportunity to make a claim under a building insurance policy, there was evidence called about how such insurance is arranged and its costs, and how an insurance claim might have fared.

22 The defendants, although they called evidence to meet the plaintiffs’ claim for the cost of fixing the defects, contended that assuming the plaintiffs proved they would have rescinded the contract if given proper advice, since the plaintiffs had bought it in the course of their property development activities, damages should be based on the “diminution in value” method. By this method, usually assessed as at the date of settlement, a comparison is made of the property’s value with the defects known to the buyer, with the sum in fact paid. The plaintiffs called no expert evidence on property values. However, evidence called by the defendants, if I accept it, shows little difference in value. Thus, the plaintiffs will, if I adopt that method and that evidence, receive only nominal damages.

23 At trial, counsel for the defendants objected to evidence the plaintiffs sought to give about what course they would have taken if advised of their rights to rescind. Ultimately, counsel for the plaintiffs did not read that evidence. This, I consider, was correct, and conformed to section 5D(3)(b) Civil Liability Act, which says:

“any statement made by the person after suffering the harm about what he or she would have done is inadmissible except to the extent (if any) that the statement is against his or her interest.”

Principles in assessing damages

24 In Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 at 365, Parke B said:

“[W]here a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”

25 Where a solicitor has been negligent in the way the defendants admit they were here, in order to recover other than nominal damages, the former clients must prove the failure to advise properly has caused loss. Here, the plaintiffs have an onus of proving that if properly advised, they would have acted differently, such as by rescinding the contract, or insisting on the vendors obtaining a policy before settlement. If I find they would have acted differently, I must assess the value of the lost opportunity to act differently.

26 Where a court finds a plaintiff would not have bought a property if properly advised, the method of assessing the damage is well established. In Philips v Ward [1956] 1 WLR 471, a claim against a surveyor for negligently advising on the state of a building, Denning LJ (as he then was) said (at 473):

“The proper measure of damages is … the difference between the value in its assumed good condition and the value in the bad condition which should have been reported to the client.”

27 That was the principle applied by Pennycuick J in Ford v White & Co [1964] 1 WLR 885, a case of solicitor’s negligence where the breach involved failing to tell the client, a purchaser of land, of a building restriction on part of it.

28 In Watts v Morrow [1991] 1 WLR 1421, a decision of the United Kingdom Court of Appeal, Ralph Gibson LJ said (at 1435):

“The cost of doing repairs to put right defects negligently not reported may be relevant to the proof of the market price of the house in its true condition (see Steward v Rapley [1989] 1 EGLR 159); and the cost of doing repairs and the diminution in value may be shown to be the same. If, however, the cost of repairs would exceed the diminution in value, then the ruling in Philips v Ward , where it is applicable, prohibits recovery of the excess because it would give to the plaintiff more than his loss. It would put the plaintiff in the position of recovering damages for breach of a warranty that the condition of the house was correctly described by the surveyor and, in the ordinary case, as here, no such warranty has been given.
It is clear, and it was not argued to the contrary, that the ruling in Philips v Ward may be applicable to the case where the buyer has, after purchase, extricated himself from the transaction by selling the property. In the absence of any point on mitigation, the buyer will recover the diminution in value together with costs and expenses thrown away in moving in and out and of resale: see per Romer LJ in Philips v Ward [1956] 1 WLR 471, 478. I will not here try to state the nature or extent of any additional recoverable items of damage.
The damages recoverable where the plaintiff extricates himself from the transaction by resale are not necessarily limited to the diminution in value plus expenses. The consequences of the negligent advice and of the plaintiff entering into the transaction into which he would not have entered if properly advised, may be such that the diminution in value rule is not applicable. An example is County Personnel (Employment Agency) Ltd v Alan R Pulver & Co (a firm) [1987] 1 WLR 916, a case of solicitors' negligence, where the plaintiff recovered the capital losses caused by entering into the transaction.
It is also clear, and again there was no argument for [the plaintiffs] to the contrary, that, if the plaintiff would have bought the house anyway, if correctly advised, the ruling in Philips v Ward is applicable: the fact that after purchase he discovers that the unreported defects will cost more than the diminution in value does not entitle him to recover the excess. That is, again, because, if the contract had been performed properly, he would have negotiated and, absent proof of a different outcome, would have done no better than reduction to the market value in true condition .” (My emphasis)

29 Subsequent English authority has been to like effect. In Oates v Anthony Pitman & Co [1998] PNLR 683 (another decision of the UK Court of Appeal), Sir Brian Neill illustrated difficulties with the diminution in value method. At 694-5 he said:

“In the ordinary case it may be possible to apply the diminution in value rule without difficulty by considering evidence as to the market value of comparable properties. Such evidence, from witnesses with knowledge of the relevant market, should enable the court to decide the market value of the property in question with the attributes, or lack of attributes, which it possessed at the time of the transaction concerned.
The application of the diminution in value rule may be more difficult, however, where the property is unusual, or where, to the knowledge of the solicitor, it is being purchased for a particular purpose, or where a substantial interval has elapsed between the purchase and the defects coming to light. In such a case there may be no satisfactory evidence which would enable the court, by making a comparison with other properties, to decide the market value of the property in question. The court may then have to consider the price which the hypothetical reasonable buyer would have been willing to pay had he known of the defects, and the estimated cost of removing or correcting the defects may be the most reliable guide to the reduced market value. Any other method of calculating the market value might be too speculative.”

See also Thomas v Adam [2000] NSWCA 127 at [20]-[26]; Carter v T G Baynes & Sons [1998] EGCS 109; Hartle v Laceys (A Firm) [1999] 1 Lloyd’s Rep PN 315; McGregor on Damages (17th edition) at 29-009 to 29-017 and 29-034 to 29-040; and Jackson & Powell on Professional Liability (6th edition) at para 11-275-11-283.

30 This assessment of damages issue has arisen in a number of Australian cases. In Kyriakou v Hughes (1984) Aust Torts Reports 80-646, the diminution in value method as explained in Ford v White was applied.

31 In Dalton v Dama Pty Ltd (1984) BCLRS 143, Davies J, sitting as an additional judge of the Supreme Court of the Australian Capital Territory, said (at 148):

“In a case where negligent advice is given and has been acted upon in the purchase of a home, the ordinary principle is that the plaintiff is entitled to the difference between the value of the house in its reported condition and its value in its true state, that is to say, ordinarily the difference between the price paid for the home and its true value. Especially is this appropriate in a case where the repairs, if done, will improve the home and put it into a state better than it appeared to be in when acquired.”

32 In Rentokil Pty Ltd v Channon (1990) 19 NSWLR 417 a house after purchase was found to be riddled with termites, despite there having been an inspection and a report by the defendant, before purchase, saying there were no termites. The house could not be repaired. The diminution of value method was held to be appropriate. An issue arose as to the date values should be assessed. Usually it is the date of purchase. But this is not universal. At 432 Meagher JA observed:

“[O]ne certainly finds that in England a subrule has emerged to the effect that in the case of damages against the provider of a negligent report or valuation, the normal measure of damages is the diminution in value of the property in question as at the date of breach. This was decided by the English Court of Appeal in Perry v Sidney Phillips & Son [1982] 1 WLR 1297; [1982] 3 All ER 705; see per Lord Denning MR (at 1302; 708) per Oliver LJ (at 1303-1304; 709-710) and per Kerr LJ (at 1305-1306; 711-712). The matter is not directly covered by Australian authority. However, presumably the logical basis of the subrule is that on the plaintiff’s discovery of the breach he is in a position to sell the property in question and re-purchase another, claiming any diminution in value from the defendant. However, in the present case, that logic would not have worked. The plaintiff did not have the money to re-purchase another block of land, and was not confident of her ability to borrow sufficient money to enable her to do so; moreover, she could have no confidence in the defendant’s reimbursing her with compensation for the diminution in value of her land, since until the actual morning of the trial it stoutly maintained its denial of liability. In these circumstances, it seems to me not unreasonable for her to ask for the diminution in value of the property to be assessed as at the date of the hearing.”

33 Hansons Properties Pty Ltd v Geraghty BC9101302 (unreported, 20 December 1991, Wood J) was a claim against a solicitor whose negligent advice caused the client to take as mortgage security property whose value was well short of what the client was entitled to have. There was a difference in outcome between the diminution in value and what his Honour called the “reinstatement” approach. At 56-57 his Honour said:

“While the "diminution in value" approach often achieves an identical result to the "reinstatement" approach, particularly in "sale" cases, it will not always produce a just result in other cases.
A good example of the "diminution in value" approach in a simple "sale" case is Ford v White and Co , where it was held that the plaintiffs were entitled to the difference between the true market value of land and the price they had paid for it (which turned out to be nil).
An example of the "reinstatement" approach is L Shaddock and Associates Pty Ltd v Parramatta City Council (1981) 150 CLR 225 where the High Court assessed the plaintiff's damages on the basis that if the correct advice had been given, it would not have bought the land (being development land) at all. It was therefore entitled to the reinstatement of its purchase money, and also its expenses of acquiring and retaining the land, which would not have been incurred if it had not bought it.
It is clear from the authorities on the "reinstatement" approach that the question of what the plaintiff would have done if the tort or breach had not been committed is a question of fact which must be established by evidence. (See Gates v City Mutual Life Assurance (1986) 160 CLR 1 at 13; Kyogle Shire Council v Francis (1998) 13 NSWLR 396 at 417 per Clarke JA). In Kyogle SC , Kirby A-CJ was prepared to infer in the absence of evidence that the plaintiff would have bought other land to subdivide and sell, but Clarke JA, with whom Mahoney JA agreed, said that evidence was required.
In "sale" cases, the "diminution in value" approach and the "reinstatement" approach can often have the same result. If the correct advice had been given, the plaintiff would have bought the property for a lower price, or perhaps not bought it at all. Awarding him the diminution in value will put him in the position he would have been in, had the tort not occurred, in either case, because he is free to resell it at the reduced value.
However, the "diminution in value" approach will not always achieve a just result where the facts become a little more complicated. In Kyogle SC , the plaintiff bought land with the intention of subdividing it and selling it for a profit, relying on negligent advice that it was subdivisible. In addition to the diminution in value, he sought damages for loss of profit. The Court of Appeal held that the correct approach was to put the plaintiff in the position he would have been in if the tort had not occurred, and this included his loss of profits, provided he could establish that he would in fact have bought other land, subdivided it and made a profit.”

34 In Sved v Council of the Municipality of Woollahra (1995) 86 LGERA 222; Aust Torts Reports 81-328; NSW ConvR 55-736, land purchasers were found to have been misled by the defendant to their financial detriment. Giles J awarded the cost of reinstatement, which was less than the sum which would have been derived from the diminution in value rule.

35 His Honour said (at 236; 62,228; 55,693-55,694):

“The inescapable fact is that they purchased the properties, and it may be that in the particular circumstances restoration of their positions is possible, and more appropriate, by damages such as the cost of rectification. I do not think that there is an inflexible rule that in cases such as the present the damages are measured by the difference between the price paid for the property and its true value. That there may be a different basis of assessment of damages if the circumstances so warrant is, it seems to me, recognised in cases such as L Shaddock and Associates Pty Ltd v Parramatta City Council (No 1), Kyogle Shire Council v Francis (1988) 13 NSWLR 396, Hansons Properties Pty Ltd v Geraghty (Wood J, 20 December 1991, unreported) and Rentokil Pty Ltd v Channon (1990) 19 NSWLR 417.”

36 Regard may be had to subsequent events to indicate real value: HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd [2004] HCA 54; (2004) 217 CLR 640; Kyriakou at 68,724; Thomas at [20].

37 I conclude that where the plaintiffs establish they would, but for the negligence, have not bought the property:

(a) the usual method of assessment of damages is the “diminution in value” method;

(b) where there is evidence the purchaser intended to subdivide and sell blocks or buildings at a profit, but cannot do so, the “reinstatement” method may be appropriate; and

(c) where the purchaser has limited funds and intends at the time of purchase to live in the property in the long term, the “reinstatement” approach may be appropriate.

38 There is another method of assessing loss which both parties conceded was open to me here. Where a plaintiff fails to persuade the court he or she would not have settled if properly warned, the court may find that although settlement would still have occurred, the plaintiffs, if properly advised, would have been able to persuade the vendors to reduce the price. In that event, the damages would be the sum by which the court finds the plaintiffs, but for the negligence, would probably have persuaded the vendors to reduce the price.

39 Whichever method is adopted, it must conform to the principle that the compensation received by the plaintiff is to be a sum of money which, so far as money can do so, will put the plaintiff in the same position he or she would have been in had the contract been performed or the tort not been committed: Butler v Egg and Egg Pulp Marketing Board (1966) 114 CLR 185.

Giving evidence about a hypothetical situation

40 The parties agree that the loss suffered here was the plaintiffs’ loss of opportunity to be advised in a timely way on the implications for them of the lack of a building policy, and, in particular, their right to rescind the contract, and to exploit that opportunity.

41 As I have noted, by reason of section 5D(3)(b) Civil Liability Act, the plaintiffs were not permitted to give evidence about what they would have done if the defendants had taken the steps and given them the advice they admitted they should have. In Review of the Law of Negligence Final Report (September 2002, by The Hon David Andrew Ipp and others) at 7.40 the authors say:

“[T]he panel is … of the view that the question of what the plaintiff would have done if the defendant had not been negligent should be decided on the basis of the circumstances of the case and without regard to the plaintiff’s own testimony about what they would have done. The enormous difficulty of counteracting hindsight bias in this context undermines the value of such testimony.”

42 In the past there had been judicial laments about the difficulties with such testimony. In Ellis v Wallsend District Hospital (1989) 17 NSWLR 553 at 581, Samuels JA, dealing with an alleged failure to warn in a medical negligence context, said:

“It is, of course, true that a patient's evidence about what he or she would have done if told of certain risks may be coloured by the fact that the risks did in fact eventuate; but it is open to a court to disbelieve evidence found to be tainted by hindsight: Manderson, “Following Doctors' Orders: Informed Consent in Australia” (1988) 62 ALJ 430 at 434. Obviously, in endeavouring to ascertain what the plaintiff's response would have been to adequate information had it been conveyed at the appropriate time, a court will be greatly assisted by evidence of the plaintiff's temperament, the course of any prior treatment for the same or a like condition, the nature of the relationship between patient and doctor including pre-eminently, so far as it can be established, the degree of trust reposed in the doctor by the patient. The extent to which the procedure was elective or imposed by circumstantial exigency and the nature and degree of the risk involved will all be matters of considerable importance: see Robertson, “Informed Consent to Medical Treatment” (1981) 97 LQR 102 at 122.”

43 It has been said in a medical negligence context that a plaintiff’s assertion as to what he or she would have done in hypothetical circumstances may of itself carry little weight: Rosenberg v Percival [2001] HCA 18; (2001) 205 CLR 434 at [15]-[17], 441-442 (Gleeson CJ); [44]-[45], 449 (McHugh J); [86]-[87] (Gummow J); [157]-[158], 485-486 (Kirby J) and [221], 504-505 (per Callinan J).

44 In Elbourne v Gibbs [2006] NSWCA 127 at [67], another medical negligence case, Basten JA described evidence of what a patient would have done if warned as “indisputably relevant”. But as his Honour observed in Chamberlain v Ormsby t/as Ormsby Flower [2005] NSWCA 454 at [137]:

“[T]he test of causation is ultimately one to be determined on all the relevant material and not merely upon the assertion of the plaintiff as to what he or she would have done in hypothetical circumstances.”

45 Chamberlain was a claim against a firm of solicitors for the loss of an opportunity said to have been suffered by an injured worker who received workers compensation but said he would have wanted, if told he could have done so, to claim damages at common law. It was his assertion that he would have sued if properly advised that was the subject of Basten JA’s observation. The prohibition on the giving of this form of hypothetical evidence has been held to apply to non-professional negligence cases. See for example Telstra Corporation Ltd v Bisley [2005] NSWCA 128 at [26] (per Hodgson JA).

46 Although the plaintiffs did not give evidence on this issue, their son did. His evidence, which I admitted over objection, was:

“Had I known before exchange of contracts or subsequent to exchange of contracts that there was no Home Owners Warranty insurance on the property, I would have advised my parents not to proceed with the purchase. If I found out … after the exchange of contracts that they could have pulled out of the contract because the certificate wasn’t attached to the contract, then I would have advised my parents to pull out of the contract”

47 Since he was not a party to the proceedings and was not one of the people who had suffered harm, I took the view his evidence was not precluded by s 5D(3)(b) and was admissible. Mr Jonathan Livingstone was not cross-examined on that evidence. That does not necessarily mean I must accept it: Ellis at 586-588 (Samuels JA); Brooker v Friend [2006] NSWCA 385 at [134] per McColl JA. But even if I accept it, it can, I think, have little weight. Mr Downing, who appeared for the defendants, submitted I should treat this evidence with great care. He submitted that when finding what the plaintiffs would probably have done, had they been told there was no policy, and the implications of that, including their right to rescind, I should have regard to all of the surrounding circumstances. I did not take Mr Raphael, who with Mr O’Sullivan appeared for the plaintiffs, to disagree with that approach.

The surrounding circumstances

48 Evidence about the transaction, and the events leading up to it, was given by the plaintiffs and their son. Mrs Livingstone said in an affidavit that she inspected the property in August or September 2001 with her husband and son. She noticed some works, such as painting, fitting of door handles on wardrobes, and work in the bathroom, were incomplete. She was not cross-examined. Her husband, Mr Ian Livingstone said that in August or September 2001 his son spoke to him and said, “I have found a property for us to buy that I can fix up at Caves Beach”. He inspected it. As had his wife, he noticed some of the building works appeared incomplete. But he noticed no major structural defects. He consulted Mr Mitchell from the defendant firm. He was told that under the contract they would be buying the property “as is”. He says his son, who was with him, told Mr Mitchell,

“The vendor is building it himself and it is incomplete. We’re going to finish it and then live in it for twelve months or so and then sell it.”

49 Before buying the property, Mr Livingstone said he and his son had bought and sold about three houses. They would do them up on an “owner builder” basis, and sell them for a profit. He recalled in one previous transaction settlement was held up until he could obtain “the requisite building warranty insurance”. He understood when he bought this property that if one did it up as owner builder he had to take out insurance for defective work for about seven years. His understanding was “you can’t exchange contracts without this insurance contract”. However, until problems arose here, he did not know absence of a certificate gave the purchaser a right of rescission. He said he was aware

“there was a lot of work to be done on the place in fact that’s why we negotiated a cheaper price. However I recall being concerned about the builder because we knew he was an owner builder and we knew that the premises were not complete.”

50 He said (in a statement in evidence) he was,

“ambivalent about the place initially … because we knew we had to do a lot of work to bring it up to scratch. Our general intention was to move into it and then maybe sell it after 12 months.
I wasn’t anxious about buying it; I could have walked away had there been any apparent problems with it (apart from just being unfinished.) It was convenient and was an opportunity, but I wasn’t hell-bent on buying it:”

51 In his work on the houses he had previously done up, he had performed demolition work, organised tradesmen, and carried out light labouring work.

52 There was no evidence before me that either he or his son had ever made a claim under a building warranty policy.

53 Mr Jonathan Livingstone, who in his first affidavit described his occupation as “property developer”, says he told Mr Mitchell when they consulted him before exchange:

“The house at Caves Beach is not completely finished yet. The vendor is building it but we’re going to finish it and mum and dad will live in it for about twelve months and then sell it.”

54 Mr Jonathan Livingstone said that before this one, he and his father “had engaged in a number of purchases of ‘run down’ properties with the view to refurbishing them and selling them. This occurred on three occasions.” He said that with the Caves Beach property, as his father at that time lived in Sydney, he, Mr Jonathan Livingstone, did all the “legwork” – “I negotiated the price with the vendor, which was less than the standard market price for places in the Caves Beach area because of the fact that the house was incomplete”. He said:

“I considered myself to be [a] relatively experienced property developer and I was familiar with the concept that a Certificate of Insurance had to be attached to the contract.”

55 He had, when aged 18, begun, but had later dropped out of, a construction management degree at Newcastle University. Currently he runs eight optometry shops, has a commercial joinery and shop fitting company with about 50 staff, and has a franchise for a telephone company. He said he was told about the Caves Beach property in about September 2001 through a real estate agent at Swansea. He was told the vendors wanted $450,000, and that “they have had it on the market for a while and have had to drop the price”. After inspecting the property (but before obtaining any building inspection report) he offered $380,000, which was rejected. He suggested $400,000 to the agent. The vendors accepted the offer of $400,000. A short time after this, however, the agent rang and said the vendors wanted more money – $10,000 more. He told the agent they would not buy it. The agent telephoned about a week later. She apologised for the request for more money and said:

“I’ve spoken to the vendors and they are worried they are selling it too cheap but they’d take your $400,000 because they have to sell it.”

56 As I have noted, before exchange the plaintiffs (through the defendants) had the property inspected, resulting in the Jeffs report. The report observed that it was “visual only”. It noted the building had not been completed. It listed a number of items where work was not completed and some that could only be described as defective work. It noted no expansion joints had been constructed into the external walls. It concluded “It may be possible for water to penetrate garage in bad weather”. Under the heading “Comment” it said:

“The dwelling is in good structural condition – although incomplete.
Due to the complexity of the situation and the distraught condition of the vendor – this inspection was very difficult to carry out.

· West and east walls – not completed.

· Timber frame windows – not painted externally.

· External painting – not completed.

· External front entry – not completed.

· Crack in wall on north west corner.

· No expansion joints have been constructed into walls.

· Concrete block retaining walls – have not been filled with concrete – as can be seen.

· Plasterboard ceiling in garage – not completed.

· It may be possible for water to penetrate garage in bad weather.

· Painting in sitting room off bedroom 1 – not completed.

· Painting in walk-in robe in bedroom 2 – not completed.

· Architrave on non-glazed opening off sitting room of bedroom 2 – not painted.

· No handles on built-in robe on bedroom 3.

· Slight crack in north wall of bedroom 3.

· Balustrade on landing and stairs – not to required height.

· Head of entry opening in hall on first floor – not completed.

· Tiling in entry – not completed.

· Tiling in bathroom – not completed.

· Bath tub in bathroom – not completed.

· Handbasin in bathroom – not fitted.

· Painting in bathroom -–not completed.

· Electricity and plumbing in bathroom – not completed.

· Kitchen has no cupboards and is not completed.”

57 Mr Jonathan Livingstone had a builder friend called Mr Chris Jolley. As well as instructing the defendants to obtain the Jeffs report, he asked Mr Jolley to have a look at the property.

58 At T 68.10 Mr Ian Livingstone was asked:

“Q. So what was it, then, that really motivated you to buy this property?
A. That we believed that we could do it up and sell it and make a profit.
…
Q. Did you think it was maybe even a little undervalued in the sense because it was not completed you were getting a discount for that?
A. Yes.”

59 At one point in his evidence Mr Ian Livingstone agreed he had read the Jeffs report before exchange and that having done so he thought the price of $400,000 was “fair”. He agreed the Jeffs report explicitly said concealed areas were not inspected.

60 As to the reference in the Jeffs report to “the distraught condition of the vendors”, he recalled it, but did not know anything about it. He agreed he knew some significant work would be needed once he completed.

61 Later in his evidence he seemed not so sure he had read the Jeffs report, insisting he had relied on his son and Mr Mitchell to look at it. It is to be recalled that the Jeffs report had drawn attention to the possibility that the garage might flood. In cross-examination he said “Sir I got a shock with the water penetrating the garage”. He conceded he could not have been shocked if he had read the Jeffs report. I think it probable he looked through the Jeffs report but did not read it thoroughly.

62 Mr Jonathan Livingstone said he had originally been interested in buying the property for himself but that as his mother had grown up at Caves Beach she wanted to go and live there, so his parents had bought it. He agreed he had considered $400,000 was “a little bit under” the market. He said that his inspections were only “walk through”, because the owner was there, making it “quite awkward” to inspect the property. He had read the Jeffs report but before reading it had done some costs estimates. He did not think his figures changed after he read the Jeffs report. He said he had his friend Mr Jolley look at the property for him, to give a second opinion. He said this inspection was “to check out, to second what was in [the Jeffs] report”. Asked why he needed another opinion he said:

“I think it was just appropriate, due diligence.
…
Q. Because you didn’t want to buy it and then discover that it needed a whole lot more work than you costed for?
A. That’s right.”

63 Mr Jolley did not give evidence.

64 Asked if he was aware the vendors were in financial trouble at the time of the sale, Mr Jonathan Livingstone conceded only that he knew they were keen to sell and that that appealed to him.

65 Mr Jonathan Livingstone spoke to his father after he had received the Jeffs report and Mr Jolley had gone through the property. He told his father $400,000 was a good price. Though he did not recall telling his father that Mr Jolley had been through and inspected it, I think it very likely he did.

66 Mr Jonathan Livingstone gave evidence that he had read the Jeffs report well. But, when giving evidence he appeared to recall little of it. Mr Downing put to me, in the end, that the plaintiffs and their son seemed to have given scant regard to the Jeffs report and were very confident in their own assessment.

67 I conclude the plaintiffs were motivated to buy the property by reason of a firm conviction, based substantially on Mr Jonathan Livingstone’s opinion and recommendations, that the property was a bargain, and that they could make a good profit by doing some work on the property, and selling it in about a year.

After settlement

68 According to Mr Ian Livingstone, he noticed from early 2002 that the garage flooded, and he observed some cracks had appeared in the walls. His son commissioned the Mathew report in mid-2002. The author concluded that the property had been poorly constructed, and that major repairs and finishing off were required to complete it in an acceptable tradesman-like manner. As had the Jeffs report, the Mathew report described itself as a “visual report only”. In June 2003 the plaintiffs obtained an engineering report from John C Coren (Civil Engineers) Pty Ltd recommending work to be done.

69 According to Mr Jonathan Livingstone, it became apparent to him “around about six months after we moved in that the defects in the property were far more serious than the original building report and our observations.”

70 It appears that Mr Jonathan Livingstone inspected the council file in 2002 and formed the view that the council inspectors had not done their job properly in passing the property. During that year he consulted Mr Mitchell about suing the council. Mr Mitchell says that on 31 March 2003 Mr Jonathan Livingstone discussed with him for the first time the possibility of suing the vendors. Although Mr Jonathan Livingstone insists that was in 2002 I prefer and accept Mr Mitchell’s evidence on this and other factual matters where his evidence differs from that of Mr Ian Livingstone and his son.

71 Mr Mitchell had notes – not especially good – which support his recollection. Further, I observed Mr Ian Livingstone and his son, and Mr Mitchell, give evidence. I have the impression Mr Mitchell was a careful historian, which is not surprising, given his occupation. Mr Jonathan Livingstone and Mr Ian Livingstone were, I consider, doing their best but Mr Ian Livingstone seemed to have a poor recollection for dates and events and Mr Jonathan Livingstone, who had a better one, was, I think, mistaken on some matters, such as when he first consulted Mr Mitchell about suing the builder. Unsurprisingly he had no notes of these conversations.

72 At a stage in early 2003, Mr Mitchell realised the plaintiffs would need the services of a litigation solicitor. He handed the matter to Mr Coren, then an employed solicitor, but now a partner in the defendant firm. Mr Mitchell said, and I accept, that the possibility he had been negligent did not occur to him before that handover.

73 Mr Coran recalled learning in June 2003 there was no insurance certificate. In late 2003 he instructed enquiry agents to find the vendors. They found an address for the female vendor but not the male vendor. In early 2004 Mr Coren realised the firm had a potential conflict and ceased to act for the plaintiffs.

What would the plaintiffs have done if properly advised?

74 A highly experienced and qualified conveyancing solicitor, Mr Neville Moses, prepared an opinion for the plaintiffs for this case. He was not required for cross-examination. In his report (part of Exhibit “A”) he said inter alia:

“20. In my opinion the provisions of the Home Building Act relating to owner builders are well-known to practitioners in conveyancing and if the solicitor was aware of the fact that there was a possibility that work had been done on the property by an owner builder, it was standard practice for the solicitor, if no home building insurance certificate were attached to the Contract for Sale, to advise the client of the ability to escape from the contract.
21. … If no certificate could be produced, then it would be usual practice for the solicitor to advise the client of the dangers of proceeding without a certificate namely that if the building work proved to be defective and the vendor to be impecunious or untraceable or for some other reason unable to rectify the work, the purchaser, without the certificate, would have no recourse to any party of substance.
…
25. The question of whether in those circumstances the purchasers would have proceeded with the purchase in the present case is a matter for the Court and not one for expert opinion.”

75 Although it was the plaintiffs’ contention that if properly advised, they would have exercised their right to rescind, I am not so persuaded. I consider it far more likely they would have proceeded, eventually, to settlement.

76 I am satisfied that, on learning there was no policy of insurance, the plaintiffs would have been told of, and examined, a number of options. The first, and most obvious, was to insist the vendors obtain insurance and provide evidence of the policy before settlement. Had a policy been obtained, settlement, though delayed, I find, would have occurred, and the plaintiffs, on later learning the property was far more defective than they had thought, would have had available to them the possibility of recovering a sum under the policy. Mr Raphael submitted that had the plaintiffs learned there was no insurance and an application was made by the vendors for a policy, many of the “defects” would have been exposed then, and the plaintiffs could have negotiated to pay considerably less for the property. However, for the reasons given below, I think it unlikely the vendors would have been able to arrange insurance. Further, there was no evidence to support the proposition that the insurer would have made available to the plaintiffs any report it may have obtained about the building in the event an application for insurance had been made.

77 Although at various times through the trial Mr Raphael submitted otherwise, by the time of final addresses I took him to concede that had the defendants properly advised the plaintiffs, and a policy been issued before settlement, his clients could at most recover as damages such sum as I find they would have recovered under the policy. The maximum sum, I took the parties to agree, is $199,500, that being the policy limit on such insurance at the time of settlement.

78 According to the evidence of Mr Barker, a highly experienced engineer with a great deal of experience in the building insurance field, there was in 2001 a two-stage process in obtaining insurance. First there was an inspection by a building inspector acceptable to the insurance company and a report in accordance with “a prescribed form”. The cost of the inspection, depending on location and building size, was between $400 and $1,000. Additionally, there was the cost of the premium. For this property he estimated the premium would have been between $3,000 and $3,500. He said the job of the inspector was to identify work not done in an acceptable manner, but which could be repaired, and work that was not acceptable but which could not be repaired. He continued:

“The insurance company then invariably requires that the repairable work be repaired and it will excise from the cover the work that is not acceptable, unrepairable. As a result, the policy on its face, you can’t take the fact that you have a policy as being the be all and end all. You need to look behind that and see what the policy is covering in the actual building. In fact, it has been the situation where policies have been refused totally, that you could not get an owner warranty insurance because the building was in such poor condition. So, it can be total cover or very limited cover.”

79 This process of arranging for an approved inspector to go to Caves Beach, inspect and report on the property, and then having a policy issued would, I am satisfied from his evidence, have taken quite some time.

80 Mr Barker said items identified in a pre-purchase report would not be covered by a policy, as the policy covers only latent conditions. He accepted that items such as water penetrating the garage, identified in the Jeffs report, may, absent any repair, have been excluded from any cover. I took him to say the same may have applied to other items as well. He said also that when claims are made under these policies, insurers will sometimes compromise them, paying some money, having initially declined liability.

81 There was in evidence an opinion from an experienced solicitor, Mr Mark Harrowell. He has practised extensively in the field of building insurance law. He drew attention to a policy requirement that a claimant lodge a claim within six months after the claimant first becomes aware, or ought reasonably have become aware, of the fact or circumstance from which the claim arises. I consider that if there had been a policy, the plaintiffs would probably have made a claim under it within the time limited for such claims.

82 When considering whether the vendors, had they been pressed, would have obtained a policy, their financial circumstances at the time of settlement are I think relevant. I am persuaded they were, at the time, in straitened financial circumstances. First, the agent told Mr Jonathan Livingstone, they “had to sell”. Second, as the settlement sheet shows, on settlement there was an apparent surplus of only $20,420. Third, there was in evidence a letter from Kemp Strang to the vendors’ solicitors on 31 August referring to an agreement that the mortgagee forebear commencing proceedings to obtain possession for mortgage default until after 3 September 2001, so they could sell. Fourth, it seems that the occupants of a neighbouring property were contemplating taking proceedings against the vendors for not paying a sum of $900 or so as their contribution to a dividing fence. (The letter of demand concerning this debt was marked for identification and not tendered. However, I took Mr Raphael (T 393.55) to concede the vendors had failed to pay their share of a dividing fence.) Fifth, there was in evidence a letter from the vendors’ solicitors to Kemp Strang on 3 October 2001, offering to pay $30,000 from a mortgage debt. Finally, there was in evidence a statement of claim (apparently in draft form) in which their bank was seeking possession, payment of $322,749.09, and indemnity costs.

83 I consider it unlikely, given their financial position, that the vendors could or would have obtained insurance before settlement. Given a reference to the need for insurance in an Owner Builder Permit issued to them by the local council, I infer it is likely the male vendor at least, knew of the need for such insurance.

84 For the following reasons, I consider it highly likely that the plaintiffs would have settled without insurance:

· the vendors’ were in a difficult financial position;

· the vendors needed to sell quickly;

· the plaintiffs had inspected the property;

· Mr Ian Livingstone and Mr Jonathan Livingstone were experienced property developers;

· the plaintiffs had received the Jeffs report;

· the plaintiffs had received an oral report from Mr Jolley;

· the plaintiffs had prepared their own costs estimates;

· the plaintiffs intended to do up the property and sell it in about a year or so;

· the plaintiffs, as I am satisfied was the case, thought they were getting a bargain.

85 Whilst I have no doubt they had some regard for the Jeffs report, they were very confident, I find, that they could make money from the property. Although Mr Raphael submitted there was no evidence his clients were aware in November 2001 how desperate the vendors were to sell, I am satisfied they knew they were very keen to sell. Further, and much more importantly, had they been informed there was no policy, and of their right to rescind, I consider the plaintiffs would have realised they were in a powerful position to negotiate a reduced price.

86 I find that had they been properly advised, the plaintiffs would have negotiated a lower price with the vendors and taken the risk there might be defects not disclosed by the Jeffs report or the inspections by the plaintiffs and Mr Jolley. Counsel for the plaintiffs submitted that, just as they had walked away from the purchase when the price went up $10,000, they would also have walked away from the purchase if any policy obtained by the vendors excluded cover for significant defects or if there were no policy. However, for the reasons appearing in [84] above, I do not accept that submission. For the same reasons, I reject Mr Jonathan Livingstone’s evidence that if his parents had been properly advised he would have advised his parents not to proceed.

87 Mr Raphael put to me that counsel for the defendants did not cross-examine Mr Jonathan Livingstone to the effect he would still have advised his parents to buy the property, even if he had known there was no builders insurance. But although he did not put that question to him, his cross-examination raised squarely the plaintiffs’ assertions about what they would have done had they been properly advised. See also my observations on this issue at [47].

88 Although there was evidence the plaintiffs had some knowledge of building insurance policies, and that an owner-builder had to annexe a certificate to a contract, there was no evidence they had ever made a claim under such a policy or to show how they saw the value of such a policy. Mr Raphael submitted (T384) their previous knowledge of such policies made it more likely they would have wanted to rescind. I agree that their knowledge of this form of insurance is a relevant factor and I take account of it, but see it as a neutral factor rather than one with the weight Mr Raphael contended for.

89 Mr Raphael submitted that if the plaintiffs could only have negotiated a small reduction in price for an

“unfinished, defective, uninsured, owner built property, … it is more likely than not that rational, commercially minded people with some experience in developing properties would have walked away from, let alone opened such a ‘Pandora’s box’ and looked for a bargain elsewhere.”

90 However, for the reasons I have given, I reject that submission.

91 It follows from my findings of what, on the balance of probabilities, would probably have occurred had there been no breach of duty, that the damage suffered by the plaintiffs is the sum they could, had they known of their rights, have negotiated off the price. At the very least it would, I consider, have been $3,500, the approximate minimum cost of obtaining insurance. The defendants submit that is all the plaintiffs would have negotiated off. However, as I have noted, the vendors apparently had up to $20,420 equity. The sum I estimate the plaintiffs would have negotiated off would have been $10,000. That, I consider, represents the value of their lost opportunity. It follows that that is the sum I consider restores the plaintiffs to the position, so far as money can do so, they would have been in, absent the breach of duty. They should have interest on that sum from the date settlement occurred. I propose to enter judgment for the plaintiffs in that sum.

92 In deference to the arguments, I shall deal with the alternative methods of assessment contended for.

What if the diminution in value method had applied?

93 Mr Downing’s primary proposition was that, assuming the plaintiffs proved they would not have settled if properly advised, on the evidence of Mr Langley, and applying the “diminution in value” method of calculating damages, no loss was demonstrated, and the plaintiffs are entitled only to nominal damages. Mr Langley (whose evidence on valuation is the only such evidence before me) said the property’s fair market value as at September/November 2001 was $390,000, and in 2007 was $480,000. He was cross-examined extensively. He had assumed that in 2001 the property would have presented in “as new condition”. Asked to assume the vendors had lived there for two years as at that time, he said he would still have expected it to be in “as new condition”. He said he had taken latent defects into account but agreed he did not say that in his reports. He said he took the Jeffs report into account, and agreed that it referred only to patent defects. He agreed latent defects reduce value.

94 He conceded he had not gone inside the dwellings on the properties he used as comparables, but relied on an “educated estimate” for sizes and ages. He agreed he did not necessarily know the number of bedrooms and bathrooms the “comparable” properties had, but said overall size was what was more important than the number of bedrooms. He said:

“The use of comparable sales is a check method of valuation … it is not a science but the idea of looking at comparable sales is to see if you are within realms”.

95 He went on:

“I think that I have enough experience to be able to look at dwelling from the outside and draw some comparison between the comparable dwelling and the subject property. But I agree with you, without knowing the bedrooms, bathrooms, interior layout and the exact size. But I do think I have experience to be able to look at a property and determine whether it is superior or inferior or comparable to the subject property.”

96 He conceded that his information about comparable properties was obtained from a website called “Red Square Wild Fire”, linked to the Valuer-General’s office. He conceded he would not necessarily have known if the houses had swimming pools or were in a state of dilapidation, and that he had not had available to him Mr Ring’s report when preparing his valuation.

97 It was put to him that if Mr Ring had said there were $40,000 to $50,000 worth of “defects” in the property, then, in performing his valuation, he would have reduced the value otherwise reached by that sum. He said:

“I would have had some regard to the report, whether I would have specifically reduced it by the exact amount that the report stated, that I couldn't say in all honesty …

HIS HONOUR

Q. Had you finished your answer Mr Langley?
A. I was just going to say your Honour two different engineers will have two completely different, which I think we will see today, two different ideas on costing, so I would have to make a judgment call.
…
Mr RAFAEL

Q. When you did have access to Mr Ring's report at that time let it be supposed that he said there is $40,000 worth of defects which he acknowledged, you would as a fair minded valuer have reduced your valuation report by at least $30,000, assuming it is forty you would have reduced it by at least thirty, is that fair to say?
A. Again I would have to read the report and gauge what the report said, I would definitely reduce it I would think I would definitely reduce it based on that report, by what amount I couldn't say.

Q. Of course that calls into question, doesn't it, the value which you attributed in your valuation, does it not?
A. Possibly, yes.

Q. So, let it be assumed for a moment, to continue the analogy, that it was $40,000 was what he estimated, is it fair to say that you would have reduced your value had you read it, considered it, you would have reduced your valuation by at least $30,000?
A. Very similar to the last question. My answer is the same. I would have to see the report, the individual report. I wouldn't like to say that I would reduce it by any figure until I saw the report and made that judgment call.”

98 He said he had recently received a copy of Mr Barker’s report. He agreed that without reading the Ring and Barker reports and re-examining his own notes, he was unable to say to what extent, if at all, they would reduce his valuations. But he agreed had the reports been given to him there may well have been a reduction in his valuation. He was then asked:

“Q. You would agree with me the defects or incomplete work would have impact on the value?
A. Yes.

Q. What would you say that impact would be, that value would be?
A. On the subject property?

Q. Yes, this property?
A. I estimate it to be approximately $135,000.

Q. So that means you would put the value of this property on the open market in 2001 as about 550,000 is that right?
A. 525 I think.”

99 He said he estimated the building to be 90% complete and had made a reduction in value for that but was not a qualified estimator so his reduction had a very real possibility of inaccuracy. He said he began with a 2001 valuation of $550,000 and reduced it by 10% for the fact that it was only 90% complete. Then he removed a further percentage because:

“… a buyer wouldn't just pay the amount for the property plus what needed to make it good they would expect a reduction on that, a risk or profit factor for arguments sake.”

100 As he said, otherwise there would be no incentive to buy – “you would be better to go and buy the house already completed”. In re-examination he said when valuing as at 2007 he took into account the deterioration which would have occurred since 2001. He had assessed the property’s vacant land value in 2001 as $200,000.

101 In his submission on Mr Langley’s evidence, Mr Raphael submitted his client was entitled to damages of $200,000, being the difference between the purchase price of $400,000 paid by the plaintiffs and the vacant land value in 2001, namely, $200,000. He submitted his clients were also entitled to $199,500 for the loss of chance of claiming under a home building insurance policy. Alternatively, he submitted the plaintiffs were entitled to $199,500, the maximum they could have received had there been a policy to claim against.

102 Mr Raphael submitted in connection with the argument that his clients if properly advised would still have proceeded, that it would be dangerous to speculate that they would have elected to proceed with the purchase of an incomplete and partially defective owner/builder constructed house, in the absence of building insurance, in circumstances where the plaintiffs were already paying $10,000 more than what Mr Langley suggests was the fair market value and at least $200,000 more than the true market value,

“and where the evidence is that the plaintiffs were prepared to walk away from the purchase if the price was unpalatable; see affidavit of Jono Livingstone of 20 November 2007. To speculate that the plaintiffs would have acted in an irrational manner and not taken steps to protect their interests either by –
(a) insisting on a policy of insurance; or
(b) obtaining a more detailed building inspection and renegotiating the price in light of it;
would be to treat the plaintiffs as both gullible and foolish, which patently they were not. Rather, they were victims of their advisor’s admitted negligence.”

103 That submission assumed, incorrectly in my view, that the “true market value” of the property in 2001 was only $200,000. I am not persuaded it was. I did not take Mr Langley to say that was its value. His concession was that if one accepted an opinion of Mr Barker that it would be cheaper to knock down the building and start again, then that would have been its market value in 2001.

104 Mr Downing submitted that to award damages in the sum Mr Raphael submitted for, would be to give the plaintiffs the property for nothing. They paid $400,000 and seek $399,500. That opportunity was never available to them, regardless of any negligence by the defendants. A plaintiff is not permitted both to keep the property and insist on the defendant’s making good the damage leading from a defect or restriction: Kyrakou at 68,723; Thomas at [23]-[25]; Ford at 888; Watts at 1435C and 1436A.

105 I accept the defendants’ submission that Mr Langley’s opinion is good evidence of what price the plaintiffs might have obtained had they attempted to sell the property shortly after settlement. I also accept his opinion as to the property’s value in 2007.

106 That is because:

(a) He based his opinions, to a significant degree, on the Jeffs report, including the defects and incomplete work to which the report referred;

(b) His opinions were based also on his own observations of the property in October 2006 and his attempt to assess the condition in which the property would have been in 2001;

(c) His valuation method was orthodox – he estimated land value and improvement value and cross-checked with what he judged as comparable properties;

(d) I am not persuaded there was anything unusual about his not looking inside comparable properties;

(e) He built in a substantial discount for the cost of completion and the nuisance value of having it done, bringing down the 2001 value from $525,000 to $390,000;

(f) There was no evidence from any valuer to say the property should be valued on the basis of land and slab value only, nor was Mr Langley asked if, based on the reports of Messrs Barker and Ring, it was appropriate to value it in that way. Of course, he was not provided with them when doing his valuation, but that does not, I think, detract from the argument;

(g) There is no other valuation evidence. Of course, even where expert evidence is uncontradicted, it does not follow that a court should accept it: Taylor v R (1978) 22 ALR 599 at 61; 45 FLR 343 at 364. The burden of factual persuasion in a case where the court does not accept the opinion is ordinarily heavy: Lowns v Woods (1996) Aust Torts Reports 81-376 at 63-160 to 63,161 (Mahoney JA); and

(h) It seems to me quite unrealistic to assume a potential buyer in 2001 would have obtained a report as detailed and thorough as those used for these proceedings prepared by Mr Ring and Mr Barker. Thus, I reject the plaintiffs’ submission Mr Langley should have had regard to the Ring and Barker reports.

107 Mr Raphael argued that Mr Langley had failed to follow the approach in the judgment of Isaacs J in Spencer v The Commonwealth (1907) 5 CLR 418 at 441. He submitted that I should infer the vendors intended to deceive the plaintiffs about insurance. He also submitted the vendors must have known about the many defects in the building, since they had built it and lived there for three years. He submitted that Spencer imputed to the plaintiffs the vendors’ pre-sale knowledge for the purpose of deriving the fair market value. But I reject the argument. The evidence does not persuade me the vendors intended to deceive the plaintiffs about insurance, or knew of the many defects not identified by the Jeffs report. Further, the Jeffs report is precisely the kind of report I would expect the hypothetical Spencer buyer to obtain.

108 There are two other matters I refer to on the issue of value. First, Mr Downing submitted that once the property was sold to the plaintiffs, the lack of insurance became irrelevant as they had no obligation to obtain insurance before they sold: Festa Holdings Pty Ltd. That is true. However, while it was still in the vendors’ hands, the property, I consider, was potentially less valuable given they had no policy.

109 Secondly, I give little weight to Mr Ian Livingstone’s evidence of what he said was his unsuccessful effort to interest an agent in selling the property. He could not identify the agent, and the agent’s response if recalled correctly was of a hearsay nature and impossible to test. More importantly, the plaintiffs never once appointed an agent to look at the property with a view to selling it, let alone trying to sell it.

110 Given Mr Langley’s opinions, the application of the diminution in value method of assessment would have had the result that the plaintiffs would have been entitled at most to $10,000, the difference between Mr Langley’s 2001 valuation, and the sum they paid.

111 Mr Raphael submitted that if I should come to assess damages on the assumption his clients, if properly advised, would have rescinded, I would not adopt the diminution in value method. He referred me to, and relied on, a line of authority including Paper Australia Pty Ltd v Ansell Ltd [2007] VSC 484 (Bongiorno J). He submitted the circumstances of this case require the application of a variation to the diminution method. But the plaintiffs, according to the case put for them, only bought the property to do it up quickly and sell it. Though they say Mr Mitchell later advised them to leave the building as it was, they have not pleaded this as a breach of duty and I do not understand them to rely on it as a breach of duty. I reject the argument.

What if the finding had been that a policy would have been issued?

112 Had I found that if properly advised the plaintiffs would have successfully persuaded the vendors to obtain a policy of insurance before completion, I would have found the plaintiffs, by the defendants’ negligence, lost the chance of making a successful claim under the policy. That is the way both parties agreed that alternative assessment should be performed.

113 I accept the submission of counsel for the defendants (and I did not take counsel for the plaintiffs to disagree) that this assessment is akin to the assessment of a lost chance to bring a common law claim in damages for personal injuries: Walmsley v Cosentino [2001] NSWCA 403 at [46]; Chamberlain at [111].

114 The plaintiffs relied in support of their argument on this issue on a report from Mr Barker. He identified what he regarded as building defects (not merely unfinished work) which he said would cost about $460,000 to fix. The defendants relied on a report from an experienced builder, Mr Ring. He also found some defects, which could not be classed as “unfinished” work. Mr Ring’s repair estimate was much less than that of Mr Barker.

115 Mr Ring annexed a Scott Schedule to one of his affidavits. Both Mr Barker and Mr Ring, especially Mr Ring, made a number of concessions when cross-examined. By the close of the defendant’s case the area of dispute between them had narrowed considerably, leaving me to resolve only one significant issue, though there were 34 items on the Scott Schedule.

116 There were items of work on the Schedule where I took Mr Ring to defer to Mr Barker or where he made no comment. I accept the submission of Mr O’Sullivan for the plaintiffs that I should accept Mr Barker’s assessments as to those items. I did not understand Mr Downing to argue to the contrary. Mr Barker’s assessment of all the work to be done to make good defects latent and patent, and to complete the incomplete, was $460,175. Mr Ring’s assessment was $273,345. Mr Ring’s assessment does not cover some items covered by Mr Barker’s. I took Mr Ring to concede these items (cleaning up site, and professional advice from engineers), which total $22,000, ought be added, together with a percentage – 15% to 18% – for profit, and 10% for GST. His total with those items would be $301,901. Each of Mr Barker and Mr Ring was an impressive witness and I accept each of them did his best to be objective. The items of substance where their views differed, following cross-examination of them both, and calling for my adjudication, concerned item (a) in the Scott Schedule. This concerned a water penetration problem in the garage of the building. Mr Ring disagreed with Mr Barker’s view that the garage retaining wall was intended to be a “dry” wall. Mr Barker expressed the view that it was so intended because of the presence (according to plans, which until cross-examination Mr Ring had not seen) beneath the relevant slab and behind the wall, of a “vapour membrane”; the presence of a certain kind of wall; the presence of a drain to disperse water; and the presence of reinforced steel in the concrete which if ungalvanised (on the evidence, a reasonable assumption, which I make) could rust. I accept Mr Barker’s interpretation of the plans and his reasoning that these matters showed the retaining wall was designed to be a “dry” wall. It follows that I accept Mr Barker’s assessment that $33,000 is the appropriate allowance for that item. And I reject Mr Ring’s assessment that the only allowance should be $2,100.

117 On this alternative method of assessment, what would have been lost is the chance of compensation under a home warranty insurance policy up to a limit of $199,500. The policy required claims to be made within six months after discovery. At the latest, that was, I find, 1 January 2003. I consider it probable, given the plaintiffs obtained a report on the property in mid-2002, they would have had available to them evidence to support a substantial insurance claim. I infer from what Mr Barker and Mr Ring have said that the plaintiffs would have had available to them in 2003 a list of defects, not as extensive (as less time had gone by), but still very substantial. I am satisfied there would have been disputes between the plaintiffs and the insurer about whether certain defects were latent ones, or merely incomplete work. I am also satisfied the insurer’s inspection would have revealed some defects for which it would have excluded liability or which would have been fixed before settlement.

118 Mr Downing conceded that given Mr Ring’s concessions in cross-examination, the total sum to remedy defects would, even on his evidence, exceed $199,500. However, he submitted that the sum they would have recovered, would have been less than that. As I have noted, Mr Barker’s evidence shows that an insurer would have been expected to insist defects be fixed or they would be excluded from cover. Mr Downing submits some defects currently seen as such by Mr Barker and Mr Ring would have been identified at the insurance inspection stage, and cover for them excluded. Some, as Mr Downing noted, were identified by Mr Mathew in July 2002. Further, the policy excludes cover for any defects in the work which would have been reasonably visible at the time any successor in title acquired the dwelling (see exhibit 1, Tab 8, cl 9).

119 Mr Downing next submitted that it is possible some items would have been found to be merely “incomplete”. Such an item is the staircase between the garage and the living room, which Mr Barker said “appear to have been installed as temporary stairs”. Finally, it was put that as Mr Barker’s figures are on 2007 values, some discounting should occur. As to the last point, Mr Raphael agreed – but submitted I could award the 2007 values and make no award for interest. Mr Downing submitted that taking all of those matters into account I would discount by 10-20%. He referred me for a similar valuation exercise to Feletti v Kontoulas [2000] NSWCA 59 at [34]-[37].

120 I accept Mr Raphael’s submission that on this alternative basis of assessment, if it had been applicable, the award would have been $199,500. The reason is that allowing for concessions made by Mr Ring, and the considerations in [117]-[118] above, the range of sums he and Mr Barker assessed as appropriate on 2007 figures to have the defects remedied was $273,000 to $460,000.

121 Even allowing what I regard as a reasonable deduction of 20% from that range, for the various factors referred to in [117]-[118], the new range would be $218,676 to $368,000. Thus, whether one accepts the figures of Mr Ring or Mr Barker, the plaintiffs would have been expected to recover $199,500. As I have found that I prefer Mr Barker’s figures, that conclusion is even stronger.

Contributory negligence

122 I am not persuaded the defendants have made out this defence. The defendants submit the plaintiffs failed to read the Jeffs report properly or make better enquiries. They say they should have obtained a far more detailed report such as the Mathew report. But as it was Mr Mitchell who recommended that the plaintiffs obtain the Jeffs report they were entitled to rely on that alone. Further, the plaintiffs had Mr Jonathan Livingstone’s friend, Mr Jolley, inspect the property. Both Mr Ian Livingstone and Mr Jonathan Livingstone have had some experience as property developers. I do not consider either plaintiff exposed himself or herself respectively to a risk of injury which might reasonably have been seen and avoided: Joslyn v Berryman [2003] HCA 34; (2003) 214 CLR 552 at [16]; 558-559 per McHugh J.

Failure to mitigate

123 The defendants argue that had the plaintiffs sold the property promptly once they discovered it was far more defective than they had thought it was, they would have reduced their losses considerably.

124 Mr Ian Livingstone was cross-examined about why he and his wife had made no attempt to sell the property. He said he was informed by an agent, whom he could not name, that the property was “unsaleable”. He said the unnamed agent told him:

“Everybody knows about that house. The property is unsaleable.”

125 In fact, as he agreed, he never had an agent attempt to market it. Nor had he ever sought a valuation. He was asked:

“A significant reason why you have not sold the property or attempted to sell the property is because you really want someone to pay to fix all of the defects?
A That the … defects are resolved ... I don‘t want them to pay for the incomplete work but for the, for the defects.
Q. You are aware that Mr Barker has done a report where he has identified about $460,000 worth of defects?
A. Yes.
Q. You want someone to pay for those defects to be fixed and that is why you haven’t attempted to sell the property, is that true?
A. Because the property until the $460,000 is spent is not saleable.
…

Q. Do I take from what you have said then you agree that a significant factor in not actually appointing an agent to sell it is that you actually want someone to pay to fix all of those defects that Mr Barker costed at $460,000?
A. Yes.

Q. Or in the alternative you would like someone to pay to actually knock it down and rebuild it?
A. Correct.

Q. That is also a factor in your decision not to attempt to actually appoint an agent and sell the property?
A. Yes.”

126 Mr Downing conceded the possibility that if the plaintiffs had sold the property they would have sold for less than what they paid. I took him to concede they would have had to pay $20,000 to $25,000 for stamp duty and legal fees, and commission, as well as suffer a loss in the region of $10,000. I am not persuaded the plaintiffs failed to mitigate. The plaintiffs say that in 2002 Mr Mitchell advised them to leave the property in its then state. Mr Mitchell did not deny having said that. Another solicitor told them the same thing in 2005. It was not advice not to sell but I conclude it was, at the least, confusing advice. I do not consider they were unreasonable in not selling earlier.

127 The defendants next contend the plaintiffs should have sued the vendors for deceit, and for breaches of s 42 Fair Trading Act. They argue that the vendors must have misled knowingly when giving instructions to answer requisition 24C. It is put that the plaintiffs did little or nothing to find the vendors until well after defects were identified.

128 However, the defendants themselves tried unsuccessfully to locate the builder. Though they did find his estranged partner, I have already pointed to the vendors’ straitened financial circumstances. It is true there was in evidence material showing the vendors had another property and that they sold it in mid-2002, receiving after repayment of a mortgage, and payment of expenses, $100,000.

129 However, I do not regard the plaintiffs as having acted unreasonably in not suing the vendors. A wronged party is not required by the rules of mitigation to pursue risky litigation: Pilkington v Wood [1953] Ch 770. In my view, the litigation would have been risky. First, though there was apparently $100,000 in funds available to the vendors in mid-2002, either then or later, the vendors appeared to have separated. It may have been necessary to obtain Mareva relief. It by no means follows such an application would have been successful. The vendors in 2001 had grave financial difficulties. That litigation, assuming it was meritorious (and it does appear at least to have been a solid s 42 claim), was so uncertain in its outcome, in the sense that the plaintiffs could have hoped for recovery of their losses, it was not unreasonable of them not to sue: see Sacher Investments Pty Ltd v Forma Stereo Consultants Pty Ltd [1976] 1 NSWLR 5 at 9; T C Industrial Plant Pty Ltd v Roberts Qld Pty Ltd (1963) 180 CLR 130 at 138.

130 After I had reserved my decision, counsel for the plaintiffs sought leave to provide a further submission. The defendants opposed the application. I had the matter listed for mention and accepted the additional submission

131 The defendants had, in anticipation of that course, prepared a written submission in reply, which I received. As I noted in [17], the defendants pleaded a failure to mitigate by, inter alia, not suing Daryl and Liz Jeffs for not inspecting the property properly. In their supplementary submission the plaintiffs argued that was inconsistent with the defendants’ argument that Mr Langley valued the property in an appropriate manner by taking account on the quality of the building of the Jeffs report: see [107]. They also relied on res ipsa loquitur in connection with that report.

132 In his response, counsel for the defendants put to me that the defendants no longer maintained as a defence or partial defence, any failure to sue Daryl and Liz Jeffs.

133 Further, in any event, he submitted that the principle of res ipsa loquitur does not apply: it cannot be inferred from the mere fact of loss by the plaintiffs that it was attributable to some negligence by Daryl and Liz Jeffs: Schellenberg v Tunnel Holdings Pty Ltd [2000] HCA 18; (2000) 200 CLR 121.

134 Finally in the course of the trial Mr Raphael made submissions, to meet the “failure to mitigate” defence, that the defendants had permitted the plaintiffs to sign the contract when it contained a special condition (3) excluding inter alia claims for compensation arising from defects latent or patent. However, I do not now see the need to consider that argument.

Orders

135 There will be a judgment in favour of the plaintiffs for $10,000 and interest from 9 November 2001, the date of settlement.

136 I will hear the parties on costs.

**********