Whitaker v Paxad Pty Ltd

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: WHITAKER -v- PAXAD PTY LTD [2009] WASC 47

CORAM: BLAXELL J

HEARD: 24 - 28 NOVEMBER 2008

DELIVERED : 27 FEBRUARY 2009

FILE NO/S: CIV 1197 of 2005

BETWEEN: JULIE ELIZABETH WHITAKER
PAUL ANDREW SMITH
Plaintiffs
AND
PAXAD PTY LTD (ACN 009 049 147)
First Defendant
LIONEL MICHAEL HOAD
Second Defendant

Catchwords:

Trade Practices Act 1974 (Cth) - Misleading or deceptive conduct - Sale of house property to plaintiffs - Defendants acting as real estate agents for vendor - Second defendant also the son of the vendor - Representation by second defendant that a particular room could be used as a bedroom - Whether or not a further representation that the garage could be used as an office - Room and garage in fact unsuitable for such uses by reason of seasonal ground water flooding and rising damp - Whether defendants liable for damages

Legislation:

Fair Trading Act 1987 (WA), s 10
Trade Practices Act 1974 (Cth), s 52, s 84

Result:

Plaintiff entitled to damages

Category: B

Representation:

Counsel:

Plaintiffs:     Mr M D Cuerden
First Defendant              :     Mr P G McGowan
Second Defendant         :     Mr P G McGowan

Solicitors:

Plaintiffs:     Macdonald Rudder
First Defendant              :     Minter Ellison
Second Defendant         :     Minter Ellison

Case(s) referred to in judgment(s):

ACCC v Top Snack Foods Pty Ltd [1999] FCA 752
Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 79 ALR 83
Henville v Walker (2001) 206 CLR 454
Houghton v Arms (2006) 225 CLR 553
HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640
Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564
Jones v Dunkel (1959) 101 CLR 298
Nea Pty Ltd v Magenta Mining Pty Ltd [2007] WASCA 70
Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191
Pine River Pty Ltd v Scorda [2001] WASC 105
Sellars v Adelaide Petroleum NL (1994) 179 CLR 332
Sutton v AJ Thompson Pty Ltd (1987) 73 ALR 233
Taco v Taco Bell Pty Ltd (1982) 42 ALR 177
Wardley Australia Ltd v Western Australia (1992) 175 CLR 514
Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649
Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445
Zuvela v Geiger [2007] WASCA 138

BLAXELL J: The claim in this matter arises from the purchase of a house property by the plaintiffs from the second defendant's mother (Mrs Hoad). The second defendant (Mr Hoad) is a real estate agent and a director and shareholder of the first defendant (Paxad) which had been retained by Mrs Hoad to sell the property. Mr Hoad conducted all of the negotiations with the plaintiffs which resulted in the sale.
The house consisted of two levels and was constructed on sloping ground. The lower level included a room which Mr Hoad presented to the plaintiffs as a fourth bedroom, as well as a garage which the plaintiffs indicated they would use as an office. However, following the completion of the sale, the plaintiffs were unable to use the lower level room and garage for those purposes because of ground water flooding and rising damp. Because of these problems the plaintiffs re‑sold the property.
The plaintiffs contend that all material times Mr Hoad was aware that the lower level of the house was susceptible to seasonal ground water flooding and rising damp. Accordingly, they claim that Mr Hoad engaged in misleading or deceptive conduct for which he is personally liable under s 10 of the Fair Trading Act 1987 (WA), and for which Paxad is liable pursuant to s 52 and s 84(2) of the Trade Practices Act 1974 (Cth).
The plaintiffs further claim to have suffered loss and damage as a result of the alleged misleading or deceptive conduct. They claim damages for the alleged difference between the true value of the house property and the price they paid, an alleged loss of opportunity in obtaining a capital gain, costs incurred in investigating the water problems, costs incurred in purchasing and reselling the property, as well as damages for distress, inconvenience and anxiety.
The defendants admit that at the time of Mr Hoad's dealings with the plaintiffs, he was aware that the house property had been subject to water and damp problems in about 1991. However, they say that those problems were addressed by the installation of a new drainage system, and that there was no reason for Mr Hoad to suspect that there was any continuing problem at the time of the sale to the plaintiffs.
The defendants further say that any loss and damage sustained by the plaintiffs was not caused by Mr Hoad's alleged conduct. They contend that such loss or damage was caused, or contributed to, by the plaintiffs' own conduct in failing to adequately inspect the house prior to purchase, crushing a sub‑soil drain outlet (by parking heavy trucks above it), failing to take adequate steps to rectify the water problems prior to reselling the property, failing to obtain a reasonable price on resale, and failing to purchase an alternative property sooner than they did.

The facts which are common ground

The house property which was purchased by the plaintiffs was situated at 36 Brookton Highway, Kelmscott. The land had an area of approximately 1 acre which sloped downwards from the highway towards the southern bank of the Canning River. Because of that slope, the upper level of the house was at ground level at the front, and the lower level was at ground level at the rear.
The house was of brick construction and had been built by Mr Hoad's father during the 1960s and 1970s. During his teenage years, Mr Hoad had provided limited assistance to his father in building the house, particularly by digging footings. As I understand the evidence, the construction of the house was a fairly long‑term project, and Mr Hoad ultimately lived there for only a relatively short time before leaving the care of his parents. After Mr Hoad's father died in 1991, his mother lived in the house alone until it was sold to the plaintiffs in 2002.
The main living areas in the house were on the upper level, which included two bedrooms as well as a 'sunroom' capable of being used as a third bedroom. The layout of the lower level matched the rooms above, but most of the enclosed spaces were simply cavities with dirt floors which were not put to any particular use. However, some areas had concrete or slab flooring, and these comprised a garage, passageway, laundry, storeroom, as well as a 'games room' which was sometimes used as a bedroom.
It is clear that much of the lower level had had to be excavated at the time of construction, and that the natural surface had been clay soil. Consequently, Mr Hoad's father had installed a sub‑soil drainage system across the front of the house which had redirected ground water to outflows on the downward slope on either side.
However, by 1991, this drainage system ceased to be effective, and there were problems with water and rising damp in the lower level of the house. For this reason (in about 1991) Mrs Hoad arranged for the installation of a new sub‑soil drainage system.
Throughout the period that Mrs Hoad lived alone in the house, she was blind, and therefore unable to care for the property on her own. Accordingly (and as I understand the evidence) she relied upon the services of a contractor, Mr Eddie Calvert, to carry out all physical maintenance on the property. Mrs Hoad also received regular visits and occasional household assistance from a nearby neighbour, Mary Carroll.
At all material times Mr Hoad was aware that there were water and damp problems prior to 1991 but he denies that he had any knowledge of them reoccurring thereafter. In this regard, it is relevant to note that Mr Hoad was a regular visitor to the house (perhaps about once a month) throughout the period that his mother was living there alone. He also lived at the house for a four or five month period from about April 1996 while separated from his wife. Furthermore, at all material times, Mr Hoad used the lower level of the house to store personal belongings including items in cardboard boxes in the games room (or 'fourth bedroom') and vintage cars in the garage.
Sometime prior to May 2001, Mr Hoad was asked by his mother to sell the house on her behalf. A valuation was then obtained, and on 30 August 2001, Mrs Hoad entered into a formal agency agreement with Paxad for it to sell the house at an initial asking price of $295,000.
The property was regularly advertised in newspapers between September 2001 and February 2002. These advertisements sometimes referred to the house as a 'three bedroom property' but more often as a 'three/four bedroom property'. It was initially advertised for sale at the asking price of $295,000, but by February 2002 that price had dropped to $239,000.
The property came to the notice of the plaintiffs when they saw the 'for sale' sign while driving by. Consequently, they searched for, and found, the most recent newspaper advertisement for the property.
At that time the plaintiffs were living in a four bedroom house in Huntingdale which was inadequate for their needs. In that regard (apart from themselves) they had to accommodate up to five children and sometimes Ms Whitaker's two parents. They were also partners in a small trucking business which required the availability of office space at home. Consequently, they wished to purchase a replacement house which would provide them with more room.
It was Mr Smith who first made telephone contact with Mr Hoad on 23 February 2002. During that telephone conversation, Mr Smith enquired how many bedrooms were in the subject property, and was told by Mr Hoad that it had 'three to four bedrooms'. Arrangements were then made for the plaintiffs to inspect the property on the following day, Sunday 24 February 2002.
On 24 February the plaintiffs attended at the property and were guided on a tour of inspection by Mr Hoad. It is not in issue that the plaintiffs told Mr Hoad that they required a four bedroom house to meet their family requirements and that while inspecting the lower level, Mr Hoad identified the former games room as the 'fourth bedroom'. At that time the furniture in the room included two single beds with bedspreads.
In the course of the inspection, the plaintiffs also indicated that they would be using the garage as an office if they purchased the house. It is common ground that Mr Hoad did not comment on, or in any way respond, to this proposed use of the garage.
Immediately following their inspection, the plaintiffs decided that they would offer to purchase the property. Later that same day they met with Mr Hoad and signed a formal offer for $230,000. This resulted in a counter offer from Mrs Hoad for $235,000 which was accepted. The agreement was conditional upon the sale of the plaintiff's existing property, which condition was subsequently met. The settlement of the sale occurred on 24 May 2002.
The plaintiffs moved into their new house on 1 June 2002. It is not in issue that on 18 June 2002, Ms Whitaker discovered large puddles of water on the floor of the garage (which was then being used as an office). They then arranged for inspections by a number of experts who discovered that water was flowing as a stream through some of the cavity spaces, and also pooling under the linoleum in the fourth bedroom. The unchallenged evidence is that these problems rendered the fourth bedroom unfit for its intended purpose and the garage unfit to be used as an office.
A consulting engineer (Mr Wilkie) advised the plaintiffs that they should attempt to divert the ground water by installing a (new) sub‑soil drainage system on the upward slope in front of the house. However Mr Wilke also advised that there was no guarantee that this would resolve the problem, and that there was a risk that drying of the sub‑soil following installation of the drain would cause the footings to settle and the brickwork of the house to crack.
In response to this advice, the plaintiffs obtained estimates of the likely cost of the recommended work. They also obtained a valuation of the house in its then current state with the lower level of the house subject to water problems. Subsequently, they decided that they would not proceed with the recommended drainage works but would resell the property for the highest possible price. Ultimately, the plaintiffs were able to sell the property for $200,000 (which price was higher than the valuation figure of $185,000). They entered into the agreement for sale with the purchasers (Michael and Alison Shields) on 27 April 2003.
Prior to their decision to resell the property, the plaintiffs met with Mr Hoad (at the latter's office on about 25 July 2002). They showed him photographs of the water under the house and the estimates of the costs for the work recommended by Mr Wilkie. Evidence has been led without objection that Mr Hoad subsequently offered (on behalf of his mother) to pay $15,000 to the plaintiffs in respect of the costs of the proposed work. However, the plaintiffs rejected this offer.
Before Mr and Mrs Shields agreed to purchase the property, the former carried out a very thorough inspection of the lower level of the house. He observed that there was a significant amount of ground water present and that there were obvious signs of rising damp in many of the walls. Nevertheless, the house appeared to have been built very well and Mr Shields correctly assumed that sub‑soil drains had been installed at the time of construction. For this reason he considered that the most likely cause of the water problems was that the drainage system had become blocked.
Accordingly, Mr and Mrs Shields went ahead with the purchase on the basis that they would attempt to locate and unblock the existing drains, or alternatively (at worst), install a new sub‑soil drainage system After moving into the property in June 2005, Mr Shields successfully located an outlet for an existing sub‑soil drainage system, and ascertained that it was in fact blocked. In this regard, after exposing a length of concrete pipe which led to the outlet, Mr Shields discovered that a section of it had been crushed and flattened from above.
Mr Shields was able to clear and repair the blockage to the sub‑soil drainage outlet. He also carried out some minor works inside the lower level cavities under the house which drained most of the water into a sump hole. He then installed a small pond pump in the bottom of the sump which discharged this water into the external stormwater system. These measures considerably reduced the amount of water and dampness present in the lower level of the house.
Approximately two years later (on 8 September 2005), a public water main under the verge of Brookton Highway in front of the house burst. After the Water Corporation had repaired the burst water main, Mr Shields noted that the flow of water into the sump under the house had further reduced. He also observed that an open drain along the boundary of the property which had previously had running water (flowing very heavily all year round), had ceased to flow.
In the period since 2005, there has been a significant reduction in the ground water build‑up and dampness under the house. After heavy rain in winter, ground water still enters and settles in the sump installed by Mr Shields. However, the water in the sump no longer requires pumping as its level slowly recedes once the heavy rain has stopped.
The residual water and damp that has been present since Mr and Mrs Shields purchased the house, has not interfered with their use of the lower level. From January 2004 they were able to convert the garage into use as an office, and since August 2008, it has been used as a bedroom. They used the 'fourth bedroom' as an office up until January 2004, and then subsequently as a bedroom.
After the plaintiffs sold the property in 2003, they lived in rented accommodation for approximately three years. In September 2005 they purchased a block of vacant land and entered into a building contract with a builder for the construction of a house. They eventually moved out of their rented accommodation and into their newly constructed house in May 2006.

Further evidence as to the issue of liability

Mrs Mary Carroll and her husband, Norman Carroll, moved into a house on the opposite side of Brookton Highway in 1996. Mrs Carroll soon developed a friendship with Mrs Hoad and regularly visited the latter's property approximately twice a week. Consequently, Mrs Carroll came to know Mrs Hoad's house reasonably well.
During most of these visits, Mrs Carroll visited Mrs Hoad in the upper level of the house. She only went to the lower level when there was some particular reason to do so, such as to help Mrs Hoad move an item that was stored down there, or to assist her in the laundry. On the first such occasion, it was summertime, and Mrs Carroll did not notice anything untoward, other than that the lower level was dank, and had 'coolness and dampness in the air'. However, Mrs Carroll's second visit to the lower level was during the winter of 1997, and she observed that there were puddles on the garage floor.
Mrs Carroll cannot recall each and every one of her subsequent visits to the lower level up until the sale of the property in 2002. However, she does remember particular occasions, including when Mrs Hoad showed her some lobster pots belonging to Mr Hoad, and when she assisted Mrs Hoad to prepare for a garage sale of various stored items prior to the house being sold.
In the course of these various visits between 1997 and 2002, Mrs Carroll made some general observations about the condition of the lower level of the house. Her evidence in this regard can be summarised as follows:
(a)The passageway running through the lower level was often damp and Mrs Carroll had to be careful not to slip. During the winter months moss would grow on the concrete slabs in the passageway. Whenever Mrs Carroll was in the passageway with Mrs Hoad, the latter would hold on to her hand for support.
(b)The passageway had entry holes through the walls into the dirt floor cavity areas but Mrs Carroll did not pay much attention to them. However, she sometimes noticed puddles on the floor areas of these cavities. These puddles were 'quite large' and were present even when it had not rained for some days.
(c)Whenever Mrs Carroll looked into the storeroom during the wintertime, the concrete floor was generally wet and its surface would glisten. Puddles also formed in dips or depressions in the concrete floor, and there were water droplets on the walls and ceiling. On most occasions (particularly in the winter) the air in the storeroom felt particularly thick with dampness and it was generally musty.
(d)The 'fourth bedroom' had linoleum flooring, resting on a concrete pad. The room contained two large beds and was also used for storage purposes. Mrs Carroll never observed any water in the fourth bedroom but it always felt cold and damp. There were also dark mildew stains in a 'continuous band just over one foot high' along at least three of the walls. While assisting Mrs Hoad to prepare for the garage sale, Mrs Carroll shifted cardboard boxes which had been used to store items in the fourth bedroom. These cardboard boxes were badly warped and mottled in colour as though they had been once wet but had since dried.
(e)After the garage sale, and before the property was sold, Mrs Carroll noticed that the walls in the fourth bedroom were clean and that the mildew stains were no longer visible. It appeared to her that the walls had been 'whitewashed' with thin plaster.
It is also Mrs Carroll's evidence that on some occasions while visiting the lower level of the house, Mrs Hoad would ask her whether she could see any water on the floors of particular rooms. When Mrs Carroll would answer 'yes' to this question, Mrs Hoad 'did not seem to be too worried or concerned'.

Furthermore, Mrs Carroll recalls that she was present while Mrs Hoad had a telephone conversation with a person referred to as 'Mike' (and whom Mrs Carroll assumed to be Mr Hoad). Although Mrs Carroll cannot recall the precise words used during the telephone conversation they were to the effect that Mrs Hoad was concerned that Mike's vintage cars in the garage would be exposed to damp because of recent rain. Mrs Hoad also told Mike that she wanted him to remove the cars and to store them elsewhere.
Mr Norman Carroll visited Mrs Hoad's house much less frequently than his wife. He went to the lower level of the house only about three times, one of which was in July or August 2001 (shortly after his wife had returned from a trip to the United Kingdom). On that occasion, Mr Carroll went to Mrs Hoad's house at his wife's request in order to assist with the garage sale. While looking for Mrs Hoad and his wife, he walked past a dirt floored cavity area in the lower level and noticed a large puddle.
The puddle was approximately 2 ‑ 3 metres long and 1 ‑ 2 metres wide. It was not a rain puddle because the area was under cover, and there was no obvious source for the water from above. Because Mr Carroll was alarmed that this was a problem that needed to be immediately addressed, he expressed his concern to Mrs Hoad as soon as he saw her.
On another occasion, Mr Carroll helped his wife to shift some cardboard boxes which were sitting on the floor of the 'fourth bedroom'. He remembers that the bottoms of the boxes were water damaged, in that the cardboard was out of shape and had the appearance of having been wet but then dried.
It is also Mr Carroll's evidence that when he first visited the lower level of the house the brick walls were not plastered. However, after the house was placed on the market by Mrs Hoad, he noticed that 'plastering had been done that had not been there when I had previously visited'.
Ms Whitaker has given a fairly detailed account of the conversations between the parties during their tour of the property on 24 February 2002. It is her evidence that Mr Hoad explained that it was his mother's property, and that in the course of the inspection he spoke about his father building the house many years before, his childhood, and generally about his association with the Brookton Highway property.
When Mr Hoad asked the plaintiffs about their intentions, Ms Whitaker explained the difficulties that they were experiencing with their Huntingdale house, and the reasons why they were in need of four bedroom accommodation. It was in this context that Mr Hoad showed them the room in the lower level which he described as 'the fourth bedroom'. Ms Whitaker then commented that the room would be perfect as 'our fourth bedroom' as it could be used by Mr Smith's children on access weekends, and by her parents when they next visited from the United Kingdom. The room contained two beds, and Mr Hoad did not say anything, nor was anything observed by Ms Whitaker, to indicate that it was unsuitable for use as a bedroom.
It is also Ms Whitaker's evidence that when the plaintiffs were earlier shown the garage, she told Mr Hoad that she was pleased with the layout of the house 'since I could use the garage as my office'. Mr Hoad did not say anything when she told him this.
In order to reach the fourth bedroom from the garage, the party walked along the lower level corridor which appeared to have been freshly painted. Mr Hoad pointed to the walls and said that the downstairs area had been recently repainted because his mother was fussy and 'did not want people going through the house with it looking messy'.
After the plaintiffs had been shown the fourth bedroom they were taken to the storeroom which contained a fireplace surround and other items which Mr Hoad indicated were his belongings. Mr Hoad said that he would be removing all of his belongings before the property was sold.
At one stage the party went into the laundry and Ms Whitaker noticed that the washing machine had been placed on top of a wooden pallet. She asked Mr Hoad why the machine was on a pallet and he replied that he did not know.
After the plaintiffs had inspected the lower level of the house they were taken outside by Mr Hoad. According to Ms Whitaker while the plaintiffs were inspecting a shed located behind the house, she said that it would make a great 'granny‑flat' for her parents. Mr Hoad then told her that the shed contained asbestos and that it could not be used as accommodation.
It is also Ms Whitaker's evidence that throughout their tour of the property, Mr Hoad was very conversational and friendly. He indicated considerable familiarity with the property, and when asked about traffic noise, said that he had not noticed it while living at the property the previous year. (In this regard, Mr Hoad explained that as a result of marital problems he had lived at his mother's house for about a month during the previous year).
It was put to Ms Whitaker during cross‑examination, that at the time of the inspection, Mr Hoad told the plaintiffs that 'there had been water and damp problems but they had been resolved in about 1991'. Ms Whitaker denied that this was ever said. It is also her evidence that Mr Hoad first informed the plaintiffs to this effect when they met him at his office on about 25 July 2002 and after the water problem had manifested itself.
Mr Smith's evidence of the inspection on 23 February 2002 is largely consistent with that of Ms Whitaker, but is not as detailed. While he does not recall any particular conversation in the fourth bedroom, he does remember discussing with Ms Whitaker in Mr Hoad's presence, 'how we could use the garage as our home office'. In this regard, Mr Smith specifically suggested that the garage's tilt‑door could be replaced with French doors. Mr Hoad did not say anything at this time which 'questioned our plans to use the garage as a home office'.
Mr Smith confirms that the tour was informal and relaxed, and that Mr Hoad told the plaintiffs many stories about his parents' and his own association with the properties. It was in this context that Mr Hoad told the plaintiffs that he had lived at the property temporarily while separated from his wife. However, Mr Smith cannot recall precisely what Mr Hoad said as to the time when that this had occurred.
Mr Smith also confirms Ms Whitaker's evidence that while touring the property Mr Hoad did not say anything about any pre‑existing water problems, or about Mrs Hoad installing a sub‑soil drainage system in 1991. It is his evidence that he first had cause to consider whether there was a drainage system when the plaintiffs experienced water problems themselves. It was in the course of seeking advice on how to deal with these problems, that someone (he cannot recall who) told him to 'clean out the drains'. Mr Smith then lifted the grates on various stormwater pits in the driveway around the house in order to investigate the drainage system.
Mr Smith also noticed an area of ground off to the side and downhill from the house which appeared to be wet. He dug around this area and discovered a broken drain outlet. He then cleaned out as much of the debris as he could and left the outlet uncovered for the remainder of the time that the plaintiffs lived at the property. However, Mr Smith's evidence is to the effect that he did not realise that this outlet might be part of a sub‑soil drainage system as distinct from the stormwater system.
Mr Hoad has testified that although the house at 36 Brookton Highway was built during his childhood, he lived there for only very limited periods. For most of his childhood he lived at Jarrahdale where his mother ran a nursing post. He first resided at the property in 1966 and 1967 while attending university, and during that period used a bedroom on the upper level. (At that time the games room or 'fourth bedroom' on the lower level was predominantly used for storage).
During 1968, Mr Hoad worked in the country and he only returned home on weekends. In 1969 he moved away from his parents to live at Mount Lawley. Thereafter, there was a period of 'several weeks, possibly months' commencing in August 1976 when he stayed in the fourth bedroom. Also, for a four to five month period from about April 1996, he lived in an upstairs bedroom while separated from his wife. According to Mr Hoad, he has not lived at the property at any other time.
Mr Hoad's evidence‑in‑chief is to the effect that he had only limited knowledge of any water or damp problems in the house prior to it being sold to the plaintiffs. In that regard:
22.My mother had additional agricultural drains installed in the latter part of 1991. She had discovered moisture herself in 1991 and called in a tradesman to install the drains. These were in addition to the agricultural sub-soil drains that had always been there.
23.My mother told me that there had been damp at the house prior to and immediately following my father's death. I personally had never seen damp in any part of the house and I believed that it had been resolved by the installation of the drains. My mother had never mentioned any problem of damp or water ingress to me after the drains were installed.
However, during cross‑examination Mr Hoad acknowledged that his father had told him before 1991 of an existing damp problem. His father had also believed that a realignment of Brookton Highway 'many years' before, had caused the damp and water problems in the lower level of the house. (In this regard, Mr Hoad cannot recall whether his father discussed this with him or whether he heard his father expressing this belief to other people). Mr Hoad also knew before 1991 that the problem had been longstanding since the modification to Brookton Highway (ts 257), and he was told by his mother that his father had approached the Main Roads Department in an attempt to have it accept responsibility (ts 253). However, Mr Hoad had not himself seen damp in the house (ts 257).
Mr Hoad was also cross‑examined as to the basis of his belief that the drains installed by his mother in 1991 had resolved the problem. It is his evidence that he did not ever ask his mother or Mr Calvert whether the problem had been resolved. However, he made this assumption because neither of them 'made any further comment' and it was 'never raised as an issue again' (ts 257 ‑ 258, 264 ‑ 265).
Mr Hoad has testified that 'for a lot of the time' up until his mother sold the property, it was his practice to store one of his vintage cars in the garage. (A friend, James Ride, had also stored a vintage car there in about 1997 or 1998). During cross‑examination, Mr Hoad acknowledged that his responsive statement (tendered in evidence‑in‑chief) had failed to rebut Mrs Carroll's evidence that she overheard Mrs Hoad on the telephone requesting 'Mike' to remove his vintage car because of damp in the garage. Nevertheless, it is Mr Hoad's evidence that he 'does not accept' that that conversation took place (ts 250). Mr Hoad also acknowledges that at all material times up until the sale of the property, he had various items (including a fireplace surround as well as items stored in cartons in the 'fourth bedroom') in the lower level of the house (ts 245).
Mr Hoad denies that cosmetic repair work was done to the lower sections of the house prior to sale. However, in about 2001, there was plaster rendering to the 'bottom entrance' or 'walkway to the garage' (which I understand to refer to the corridor). This was not done to cover up water damage, but because Mrs Hoad considered the area to be dark and unsightly. To the best of Mr Hoad's knowledge, the walls of the fourth bedroom and the walls of the laundry had not been painted since his father's death in 1991 (par 24, 87 and 88 of exhibit 21).
It is Mr Hoad's evidence that he has only a 'hazy' recollection of his conversations with the plaintiffs during the tour of inspection of the property on 24 February 2002 (ts 286). He agrees that the 'fourth bedroom' was presented to the plaintiffs as a bedroom. He did so because 'they needed four bedrooms' and 'were talking about putting one of their children in it as a bedroom'. The room had been used as a bedroom at times previously, and he presented the room to them 'in a way that was consistent with their needs' (ts 269 ‑ 270).
Mr Hoad also agrees that the plaintiffs said that they 'needed a home office' (ts 269) and that during the tour, they told him that 'they intended to use the garage as their home office' (ts 287). However, he was 'really amazed those people want to use the garage as an office' because it did not have a window and access was by a tilt‑a‑door. Accordingly, 'it just didn't seem appropriate to be an office in the context in which it existed at the time' and Mr Hoad thought that 'they are obviously going to have to convert it (ts 288 ‑ 289).
It is also Mr Hoad's evidence that it was not his place to tell the plaintiffs what they could and could not do and in that regard:
The only comment that I did make where … they made the comment they were going to put their children in the asbestos shed, and I certainly raised that issue as being inappropriate. (ts 289)
It was Mr Hoad's evidence‑in‑chief that he believed he did tell the plaintiffs that there had been water and damp problems prior to 1991 and that he said this while showing them the (stormwater) drains beside the driveway (pars 43 and 84 of exhibit 21). However, during cross‑examination Mr Hoad acknowledged that he never mentioned to the plaintiffs 'the existence of sub‑soil drains on the property' and that he had 'no reason to believe that they knew there were existing sub‑soil drains there' (ts 308 ‑ 309).
Although Mr Hoad does not recall Ms Whitaker asking him why the washing machine in the laundry was on a wooden pallet, he does not deny this conversation. It is his evidence that it did not occur to him that the washing machine was on a pallet because of water problems and in that regard:
It may have had something to do with locating it there … because it used to get out of balance from time to time. Whether that had something to do with the way it was anchored, I have no knowledge. (ts 287)
It is the firm evidence of Mr Hoad that at the time of negotiating the sale to the plaintiffs, he had not observed any evidence of recent water and damp problems and that his mother had not told him of any. Accordingly, when the plaintiffs met with him in July 2002 and showed him photographs of the water under the house, he was 'horrified' at what he saw. It was apparent from the photographs that it was a 'pretty serious' problem, and Mr Hoad has 'never denied that' (ts 303).
Mr Martin Rankin is a quantity surveyor and registered builder who carried out inspections of the property in June 2002 and September 2003 at the request of the plaintiffs. At the time of the first inspection he observed that the entire dirt floor area in the lower floor cavities was slimy and wet. In one particular area there was a stream of water flowing at right angles to the highway. There were also droplets of water on the ceilings of the cavities. In the 'fourth bedroom', Mr Rankin lifted the edge of the lino and observed that the floor was visibly wet underneath with water 'actually flowing'. When he pressed down the edge of the floor covering, water would squelch up over the top.
Mr Rankin also used an instrument known as a protitmeter to measure dampness in the walls of the fourth bedroom and he found that they were damp up to four or five brick courses high. In the garage, the walls were damp up to 14 brick courses high.
Consistent with the requirements of Australian building codes, it was Mr Rankin's advice to the plaintiffs that the fourth bedroom was 'totally inappropriate for human habitation'. He also suggested that they try to divert the water that was flowing underneath the house by installing an agricultural drain 'much deeper than usual'. He further advised the plaintiffs that this would be a 'major job' and that they needed further advice from an expert qualified to deal with drainage problems.
Mr Anthony Wilkie is a consulting engineer who inspected the property at the request of the plaintiffs on 4 July 2002. He observed that there was a rising damp problem which was 'quite extensive', and recommended the installation of a sub-soil drain as the only possible solution. Although Mr Wilkie considered that the sub-soil drain would greatly reduce the rising damp problem, he advised the plaintiffs that there were no guarantees that it would do so. Even if the sub-soil drain was successfully installed, there was a potential for cracking in the brickwork as a result of the soil around and under the house drying out at different rates. In the event of such cracking, it was unlikely to affect the structural integrity of the house but would be cosmetic in nature.
David Wills is a consulting engineer who inspected the house on 30 May 2007 at the request of the defendant. Mr Wills was specifically commissioned to investigate the cause of water intrusion into the lower level of the house. Due to the extremely dry winter in 2006, the ground water levels at the time of inspection were very low and this inhibited Mr Wills' ability to establish the cause or causes of the previous problems. However, based upon the site inspection and on information obtained from Mr Shields, Mr Wills came to the following conclusions:
1 .The fractured Water Corporation main on Brookton Highway created a large volume of water which saturated the surrounding areas. Due to the geological formation in the area, this water would flow over the top of the bedrock strata which is prevalent in various parts of the site. Due to the fall of the ground, the natural flow path for this infiltrated water from the location of the burst water main would be toward the southwest corner of the house, and in particular the garage area due to its lower elevation.
2.The outlet of the sub-soil drainage system had been blocked due to the action of the previous Owners, Ms Whitaker and Mr Smith. who knew the pipe had been crushed by the action of their trucks driving over it, but did not repair the pipe to create a free flowing outfall. This would have exacerbated the drainage problem.
There may have been other contributing causes to the water infiltration into the property. However, as the house has been constructed for more than 30 years and the water intrusion was not an issue until recently, the indication is that the water intrusion into the garage was probably not a fault of the original construction.
Sub-soil drains do require a degree of maintenance to continue their effective operation. It is highly unlikely that there has been any maintenance undertaken for many years which would have reduced the effectiveness of the system.
The impact of the fractured water main has probably exacerbated the rate of infiltration into the property. Whether the natural groundwater flows would have still infiltrated the garage due to the blocked sub-soil drainage outlet cannot be determined. (Exhibit 25)
It should be noted that there is simply no evidence of the alleged primary facts which would support the opinion expressed by Mr Wills in the second numbered paragraph above. Not only does Mr Shields deny having provided Mr Wills with the information on which that opinion is based, but there is unchallenged evidence that a tree and other obstructions would have prevented the plaintiffs from driving their trucks over the area where the outlet pipe had been crushed.
Mr Michael Shields has given extensive and detailed evidence of his inspection of the house prior to purchasing the property, his subsequent investigations of the existing drainage systems, and the work that he carried out to address the water problems in the lower level.

On 27 April 2003, Mr Shields spent approximately two hours under the house investigating the extent of the water problem. There was a significant amount of ground water present with varying degrees of severity throughout the lower level. The problem was most severe on the western side (front of the house) and in particular the north‑west corner. In one of the cavities water was drained by means of a trench 100 mm wide and 50 mm deep which ran below the floor slab of the corridor into another adjoining cavity. In this latter cavity, a trench 200 ‑ 250 mm wide and 150 ‑ 200 mm deep ran to the external wall of the house and contained a significant amount of water. (It should be noted that in light of all of the evidence these trenches were necessarily dug prior to the plaintiffs' purchase of the house).
Many of the walls on the lower level showed signs of dampness and in the corridor there were visible 'tide marks' between 200 mm and 400 mm from ground level. In one of the cavities there were steel columns which showed visible signs of corrosion at or near ground level. The corrosion in one of these columns was so severe that it collapsed approximately 12 months after Mr Shields moved into the property.
Mr Shields assumed that a sub‑soil drain had been installed when the house was constructed, and that at some time this system had failed. As previously noted, when Mr Shields moved into the property he successfully located and cleared out what he believed to be the outlet of this sub‑soil drainage system. He also dug a sump and installed a small pump to drain water from the lower level. These measures alleviated the problem which further improved in September 2005 once the burst water main pipe on Brookton Highway had been repaired.
Neither Mrs Hoad nor Mr Eddie Calvert were called as witnesses, notwithstanding that they could obviously throw light on some of the critical issues at trial. No explanation was advanced for Mrs Hoad's absence. With regard to Mr Calvert, it is Mr Hoad's evidence (based on hearsay information) that he is interstate.

Factual findings

There is overwhelming evidence to show that the water and damp problems in the lower level pre‑existed the plaintiffs' purchase of the house in 2002. In this regard, Mr and Mrs Carroll were independent and very credible witnesses, and their evidence was neither challenged nor contradicted in any material respect. Mrs Carroll's evidence that the problems had reoccurred each winter since 1997 is corroborated by the presence of trenches (presumably dug by Mr Calvert) to drain the water, and the long‑term corrosion of steel columns observed by Mr Shields in 2003.
Mr Hoad's reluctant admission during cross‑examination that there had been a water and damp problem in the lower level for many years prior to 1991 is also significant. This leaves a gap in the evidence between 1991 and 1997 which could have been filled by Mrs Hoad or Mr Calvert. Either or both of those witnesses also could have contradicted the evidence of Mr and Mrs Carroll if they were in a position to do so. In my view, it is reasonable to assume that Mrs Hoad and Mr Calvert were available to the defendants and that they would have been called if they could assist the latters' case. In the absence of an adequate explanation for the failure to call these witnesses, I infer (pursuant to the rule in Jones v Dunkel (1959) 101 CLR 298) that their evidence would not have assisted the defendants.
For these reasons I find that the water and damp problems discovered by the plaintiffs on 18 June 2002 were a continuation of the same problems that had been reoccurring during wintertime from before 1991. It is unnecessary for me to determine the cause or causes of those problems, but it is reasonable to assume that they were the result of an ineffective sub‑soil drainage system. It is also probable that the problems were contributed to by a longstanding leakage from the water main under the verge on Brookton Highway.
An important issue is whether Mr Hoad was aware of the water and damp problems at the time that the house was sold to the plaintiffs. In this regard, I have no hesitation in finding that his mother was well aware of the situation. Notwithstanding that Mrs Hoad was blind, it is the unchallenged evidence of Mrs Carroll that she would sometimes ask whether there was water on the floors of particular rooms in the lower levels. On one particular occasion Mrs Hoad was informed by Mr Carroll of the presence of a large puddle, and on another occasion during a telephone conversation she was heard to ask 'Mike' to remove his vintage car from the garage because of the damp.
Mrs Carroll's evidence of that telephone conversation was not challenged, and Mr Hoad did not lead any evidence in rebuttal. It was only in answer to a specific question in cross‑examination that Mr Hoad proffered any form of denial. As Mr Hoad was the only 'Mike' who ever stored vintage cars in the garage, I have no hesitation in finding that he was the person at the other end of the telephone line when spoken to by his mother.
I am also unimpressed by Mr Hoad's failure to disclose in evidence‑in‑chief, the full extent of his knowledge of prior water and damp problems in the house. In light of his admission during cross‑examination that the problems had been present for many years prior to 1991, it strains credulity for him to assert that 'I personally had never seen damp in any part of the house'. Furthermore, given the extent of the problems as observed by Mrs Carroll and Mr Shields, Mr Hoad's storage of items including vintage cars in the lower level, the regularity of his visits to the house between 1991 and 2002, and the degree of familiarity shown by his knowledge that the washing machine got out of balance, a finding by way of inference that he was necessarily aware of the problem is not only compelling, but in my view, inevitable. Such an inference is also consistent with Mr Hoad's lack of surprise and his immediate acceptance that the problem existed when confronted by the plaintiffs in July 2002.
Accordingly, I reject Mr Hoad's denial of knowledge, and find that he was fully aware that there were reoccurring water and damp problems in the house at the time it was sold to the plaintiffs on 24 February 2002.
The plaintiffs' evidence as to what occurred between the parties on 24 February 2002 is not substantially challenged or contradicted. I am satisfied that they are honest witnesses and that their recollections of the tour (and particularly those of Ms Whitaker) are reasonably accurate.
There is only one aspect of this area of the evidence where I consider that the plaintiffs might be mistaken. This relates to the alleged statement by Mr Hoad that he had lived in the property for about a month during 'the previous year' (or according to Mr Smith, during the previous year or the year before). Clearly, this is evidence by the plaintiffs as to the effect of what Mr Hoad said rather than the exact words used. It seems unlikely that Mr Hoad would have told (what would necessarily be) a deliberate lie in response to a question about a minor matter such as traffic noise. In my view, it is more probable that there was some misunderstanding by the plaintiffs as to what Mr Hoad said.
In any event, it is common ground that the plaintiffs made known to Mr Hoad that a four bedroom house was essential to their needs and that they would be using the garage as an office if they purchased the house. It was in that context that Mr Hoad presented the former games room to the plaintiffs as the 'fourth bedroom', and by such conduct, conveyed a representation that it was suitable for such use. Although Mr Hoad did not expressly present the garage to the plaintiffs as an office, he remained silent when they commented on its suitability for, and their intention to put it to, such a use.
I find that Mr Hoad deliberately refrained from informing the plaintiffs that the fourth bedroom, garage and lower level generally were subject to seasonal ground water flooding and rising damp. He also failed to so inform the plaintiffs in circumstances where they had no reasonable opportunity of discovering that problem for themselves. In that regard, the plaintiffs were inspecting the property at the height of summer, and there had been recent plastering and/or painting of lower level walls which had concealed the signs of water damage.
The plaintiffs' evidence that they relied upon Mr Hoad's statements and conduct at the time of inspection in deciding to purchase the property, is unchallenged. I find that they had a reasonable expectation that Mr Hoad would inform them of any potential problems affecting their ability to use the garage and fourth bedroom for the purposes that were indicated to him.
I also find that if the plaintiffs had been aware that the fourth bedroom and garage were subject to seasonal water ingress and rising damp (thus rendering them unsuitable for the intended uses), they would not have gone ahead and purchased the property.

The defendants' liability for misleading or deceptive conduct

In light of all of the facts and circumstances as found, the question is whether Mr Hoad's course of conduct as a whole was misleading or deceptive. That is a question of fact which is to be determined objectively, having regard to the particular positions of the parties, their knowledge and experience, all the circumstances of their communications, and the particular characteristics of the person to whom the conduct was directed (Nea Pty Ltd v Magenta Mining Pty Ltd [2007] WASCA 70 [125] ‑ [127]).
Conduct will be characterised as misleading or deceptive if it induces or is capable of inducing error (Parkdale Custom Built Furniture Pty Ltd v Puxu Pty Ltd (1982) 149 CLR 191, 198). Accordingly, conduct which contains or conveys a misrepresentation will be categorised as misleading (Taco v Taco Bell Pty Ltd (1982) 42 ALR 177). A misrepresentation can be express or it can be implied by what is said or done (Johnson Tiles Pty Ltd v Esso Australia Pty Ltd (2000) 104 FCR 564 [64]). However, the conduct impugned by s 52 is not limited to misrepresentations (Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31, 38).
On the facts as found, Mr Hoad's presentation of the 'fourth bedroom' to the plaintiffs as a room suitable for use as a bedroom was clearly a misrepresentation, and is thus conduct which is caught by s 52. However, his conduct in respect of the garage will only be caught by the section if his silence in all of the circumstances can be characterised as misleading or deceptive.
It is clear that silence in circumstances where there is a duty to disclose material facts may constitute misleading or deceptive conduct (Henjo Investments Pty Ltd v Collins Marrickville Pty Ltd (No 1) (1988) 79 ALR 83, 95). Silence in other circumstances can also breach s 52. The essential question is whether, in all of the circumstances constituted by acts, omissions, statements or silence, there has been conduct which is, or is likely, to mislead or deceive (Demagogue v Ramensky at 41). In Winterton Constructions Pty Ltd v Hambros Australia Ltd (1992) 111 ALR 649, 666, Hill J stated:
Obviously, it is difficult to see how a mere silence could, of itself, constitute conduct which is misleading or deceptive … However, if the circumstances are such that a person is entitled to believe that a relevant matter affecting him or her would, if it existed, be communicated, then the failure to communicate it may constitute conduct which is misleading or deceptive because the person who ultimately may act to his or her detriment is entitled to infer from the silence that no danger or detriment existed.
Put another way, silence or nondisclosure can be misleading or deceptive where the circumstances give rise to a reasonable expectation that if some relevant fact existed it would be disclosed (Demagogue v Raamensky at 40 ‑ 41).
The circumstances to be considered in determining whether there was a reasonable expectation of disclosure include the defendant's knowledge of the true facts (Johnson Tiles Pty Ltd v Esso Australia at [66]). Furthermore, a disclosure that some particular defects are present may imply that no other defects exist (Zuvela v Geiger [2007] WASCA 138 [19]).
In the present instance, the plaintiffs were the ordinary purchasers of a modest house property. Mr Hoad was not only the selling agent, but the son of the vendor, and he indicated to the plaintiffs that he had an intimate knowledge of the property. He also told the plaintiffs that the back shed was unsuitable for use as a granny flat because it contained asbestos. The plaintiffs trusted Mr Hoad, and it was reasonable for them to expect that if the garage was not suitable for their intended use as an office, he would have told them so.
Mr Hoad was well aware that the fourth bedroom and the garage were subject to seasonal ground water flooding and rising damp. This being so, it should have been obvious to him that each room was unsuitable for the plaintiffs' intended use.
In all of these circumstances, I find that Mr Hoad's conduct towards the plaintiffs in respect of both the fourth bedroom and garage was misleading or deceptive. He is personally liable for that conduct under s 10 of the Fair Trading Act 1987 (WA) notwithstanding that he was acting in a representative capacity (Houghton v Arms (2006) 225 CLR 553). That conduct was also contrary to s 52 of the Trade Practices Act 1974 (Cth) and Paxad is liable for the same pursuant to s 84(2).

The damages claimed

The plaintiffs claim that as a result of the defendants' misleading or deceptive conduct, they sustained a capital loss in the value of the property that they purchased. The quantum of this loss is said to be the difference between the price paid ($235,000) and the true value at the time ($170,000 - based on valuation evidence), namely $65,000.
The plaintiffs also claim the transaction costs including stamp duties, settlement fees and legal fees that they incurred on the purchase, namely $10,780. The defendants do not dispute the quantum of this claim but deny that they are liable.
Following their discovery of the water problem, the plaintiffs contend that they did all that was reasonable towards resolving it. As the property in its then current state was unsuitable for their needs, they were obliged to sell it, and to move into rental accommodation. They claim $845 for the costs of investigating the water problem and other associated costs, as well as $921.50 for the costs of the sale. The quantum of these claims is not in issue, but the defendants dispute liability.
It is the plaintiffs' case that but for the misleading or deceptive conduct, they would have purchased a house property other than that at 36 Brookton Highway, Kelmscott. They would have purchased that other property in or about March 2002 for about $235,000, and it would have been situated in the Huntingdale, Orange Grove, Wattle Grove, or Kelmscott areas. They claim damages for the capital gain that would have accrued on such a property between 1 March 2002 and 1 January 2005, when they actually acquired a substitute property (or alternatively the loss of opportunity to obtain such capital gain).
For the purpose of quantifying this aspect of their claim, the plaintiffs have led expert evidence as to the relevant valuations of a sample property in Huntingdale which the plaintiffs would have hypothetically purchased if they had not proceeded with the purchase of 36 Brookton Highway, Kelmscott. Based on this evidence, they claim to have sustained the loss of a gain of $67,000 in the value of an alternative property. From this sum they have deducted the costs of mortgage payments that would have been made in respect of the alternative property less the actual rent that they paid during the same period. The net sum thus arrived at is $63,392.
Interest is also claimed at the rate of 6% per annum on each of the amounts said to be recoverable. The total of that claim for interest was $28,355 as at 1 December 2007.
Finally, the plaintiffs seek an award of damages for distress, inconvenience and anxiety arising from:
(a)not being able to use the fourth bedroom as a bedroom;
(b)not being able to use the garage as a home office;
(c)reselling the land for less than the price it was purchased at;
(d)being precluded from re‑entering the property market;
(e)having to move house on three occasions.
The defendants plead that if, which is denied, the plaintiffs sustained the loss and damage claimed, then the same was caused, or alternatively contributed to by their own conduct. That conduct is said to include the plaintiffs' action in parking or driving their trucks over the outlet to the sub‑soil drainage system, thus causing the pipe to flatten and to cease discharging ground water. However, as already noted, there is simply no evidence to support these assertions. Accordingly, the defendants' contention that there were alternative or contributing causes for the alleged loss or damage, falls to be considered in light of the following pleaded particulars of the plaintiffs' conduct:
(a)not making any adequate inspection of the house prior to purchase, including obtaining a building report;
(b)not taking any, or any adequate steps to rectify the water and damp problems prior to selling the property;
(c)not taking any, or any adequate steps to obtain a reasonable sale price for the property;
(d)not purchasing an alternate property sooner than January 2005.
The defendants also dispute the valuation evidence which has been led on behalf of the plaintiffs. They have called their own expert valuer (Mr Eaton) who has expressed differing opinions as to the true values of the Kelmscott property at material times.

The proper measure of damages

The plaintiffs are entitled to recover 'a sum representing the prejudice or disadvantage they have suffered in consequence of altering their position under the inducement' of the misleading conduct or 'the actual damage directly flowing from that conduct' (Wardley Australia Ltd v Western Australia (1992) 175 CLR 514, 526). In most cases where contravention of the Act induces a person into a course of conduct which results in loss or damage, an award of damages that compensates for the actual losses incurred in embarking on that course will best serve the purposes of the Act (Henville v Walker (2001) 206 CLR 454 [135]).
When there is a claim for capital loss on an asset acquired as a result of misleading or deceptive conduct, the usual measure of damages will be the difference between the purchase price and the true value of the asset at the date of acquisition. However, that approach to assessment is no more than a guide and other methods of assessment may well be permissible (HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640 [34] ‑ [35], [65] ‑ [67]).
In addition to capital loss, damages are recoverable for loss of opportunity (Sellars v Adelaide Petroleum NL (1994) 179 CLR 332, 355). There may also be an award for wasted expenditure such as stamp duties and other transaction costs paid in acquiring land under the inducement of misleading or deceptive conduct (Pine River Pty Ltd v Scorda [2001] WASC 105 [111] ‑ [112]). In an appropriate case, damages can also be awarded for inconvenience, distress, vexation or anxiety (Zoneff v Elcom Credit Union Ltd (1990) 94 ALR 445, 467 ‑ 469; ACCC v Top Snack Foods Pty Ltd [1999] FCA 752 [93] ‑ [94]).
When there is said to be an alternative or contributing cause for the loss and damage claimed, the critical question is whether the contravening conduct materially contributed to the same. If so, there will be a valid claim, even if the other act or event played a greater role in producing the loss or damage (Henville v Walker [14], [61], [106], [163]). In such circumstances the burden is on the person whose contravening conduct materially contributed to the loss to establish that some component of that loss is attributable to the other act or event (Henville v Walker [70]).

In determining the issue of causation, there is no place for the doctrines of contributory negligence or apportionment of damages. However, if part of the loss would not have occurred but for unreasonable conduct by the claimant, it is appropriate under s 82 to apply notions of reasonableness in assessing how much of the loss was caused by the contravention of the Act (Henville v Walker [140).
When a defendant alleges that a plaintiff failed to exercise reasonable care in entering into the transaction induced by the contravening conduct, the relevant question is whether the latter in fact relied upon that conduct in taking the step which caused the loss (Nea v Magenta Mining Pty Ltd [128]; Lockhart: 'The Law of Misleading or Deceptive Conduct', 2nd ed [10.16]). If a plaintiff actually relied on the breach, he is not to be deprived of his remedy simply because he failed to check the accuracy of the misleading statements (Sutton v AJ Thompson Pty Ltd (1987) 73 ALR 233, 241).

Factual findings as to damages

The plaintiffs in fact relied on the conduct of Mr Hoad in relation to the fourth bedroom and garage when deciding to purchase the property. Accordingly, there is no basis for the plea in par 37A(a) of the defence, that the plaintiffs caused or contributed to their loss by failing to make any adequate inspection of the house prior to purchase.
Once the water problem was discovered on 18 June 2002, the plaintiffs acted reasonably in engaging a number of experts to identify the source of the problem, and to advise on the manner in which it could be resolved. In the end, the expert advice to the plaintiffs was that the problem could only be resolved by installation of a sub‑soil drainage system at an estimated cost of at least $11,000. They were also advised that there was no guarantee that such a system would work, and that it might cause cracking of the brickwork in the house. Faced with this advice, and in circumstances where the plaintiffs had very limited finances, they decided to resell the property at the best possible price.
The defendants contend that the plaintiffs should have made a greater effort to remedy the water problems before reaching that decision. In essence, the defence case is that the plaintiffs should have adopted the measures later taken by Mr Shields to significantly reduce the amount of water entering the lower level. However, Mr Shields' success was in large measure an outcome of completely fortuitous events. But for the bursting and subsequent repair of the water main in 2005, it would never have been known that prior leakage from that source had been a major contributor to the problem.
Furthermore, the plaintiffs had no understanding of the existing sub‑soil drainage system at the time that they decided to sell the property. None of their experts had suggested that they should take the measures that were later taken by Mr Shields, and the only advice they could rely upon was that it was necessary to install a new drainage system, without there being any guarantee that that would resolve the problem. It is also relevant that when the plaintiffs consulted Mr Hoad about the problem, he offered to meet the estimated costs of the proposed drainage works and did not suggest any alternative action.
It was because of Mr Hoad's conduct that the plaintiffs found themselves in the difficult situation that they were in. They did not have the wisdom of the hindsight that the defendants now say they should have had, and given the uncertainties of the proposed remedial work, I find that they acted reasonably in deciding that it was in their best interests to sell the property.
Before proceeding with the sale the plaintiffs obtained a valuation from a reputable valuer (Mr Cooper) that the property in its then current state with the water problems had a value of $185,000. The plaintiffs were entitled to rely upon that valuation as being accurate, and it was not put to them in cross‑examination that they should have rejected it. They advertised the property for sale at $200,000 and successfully achieved that price. I find that in all of the circumstances, they took adequate steps to obtain a reasonable sale price for the property.
I make this finding notwithstanding the expert evidence from the defendants' valuer (Mr Kevin Eaton) that the property at the date of sale had a market value of $260,000. Mr Eaton's valuation was made retrospectively, and was based upon the condition of the property as he saw it in 2007. For the purposes of the valuation, Mr Eaton was also instructed to assume that:
(a)the damp problems described by Mr Shields and Mr Wills' report were present as at 25th February 2002 when the plaintiffs purchased the property; and
(b)it was possible to rectify the damp problems by taking the action Mr Shields took at the time the property was purchased by the plaintiffs.
In light of the factual findings I have made, both of those assumptions were wrong. With regard to the first assumption, Mr Wills' report had referred to the damp problems as being of only 'recent' origin (when in fact they were of long‑standing duration). With regard to the second assumption, the damp problems have never been completely rectified, and the significant improvement that has occurred was not due to the actions of Mr Shields alone.
Any purchaser of the property in 2003 would not have known that the leaking water main was contributing to the problem, nor that in two years time that main would be repaired. The second assumption also ignores the facts that at the time of sale in 2003, the only available expert advice was that it was necessary to install a new sub‑soil drain, that the likely costs of that work were only estimates, and that there was no guarantee that the problem would be resolved.
It necessarily follows that Mr Eaton's valuation is of no assistance in determining the market value of the property at the time of the sale to Mr Shields. In any event, the central issue is not the true market value at that time, but whether the plaintiffs acted reasonably in selling it at the price they did. In that regard, I have found that the plaintiffs did act reasonably.
Mr Eaton has also provided a valuation of the property at the time it was purchased by the plaintiffs on 25 February 2002. On the basis of the same two assumptions, Mr Eaton is of the opinion that the market value of the property at that date was $235,000. I have no hesitation in rejecting that valuation for the same reasons as outlined above.
The plaintiffs' valuers (Messrs Cooper and Elsbury) have testified that in their opinion the market value of the property to a purchaser with knowledge of the water problems as at 25 February 2002 was $170,000. This represents a deduction of $65,000 from the price of $235,000 actually paid by the plaintiffs (which sum in my view reflected the market value to a purchaser without knowledge of the problems). Messrs Cooper's and Elsbury's assessment of the true value appears to be consistent with my findings as to the magnitude of the water problems, and there was no substantial challenge to their method of valuation. I accept their evidence that the true value of the property on 25 February 2002 was $170,000.
After selling the Kelmscott property, the plaintiffs did not re‑enter the housing market until January 2005. Based on the very detailed evidence of the finances of the plaintiffs during that period, I am satisfied that they were in no position to purchase a replacement property any earlier than they did. In this respect, they had lost their equity in the Kelmscott property, and there is no challenge to their evidence that they were only able to acquire a substitute property as a result of a gift from Ms Whitaker's father.
The evidence also establishes (what in any event is a notorious fact) that between February 2002 when the plaintiffs purchased the Kelmscott property, and January 2005 when they once again acquired a house, there was a significant increase in property values generally. I am satisfied that but for Mr Hoad's misleading or deceptive conduct, the plaintiffs would have purchased a house property other than 36 Brookton Highway, Kelmscott, that the price of that property would have been approximately $235,000, and that there would have been a significant appreciation in the value of that property by January 2005. It follows that the plaintiffs have lost the opportunity to acquire a capital gain.
This loss directly flows from Mr Hoad's conduct, but there are obvious difficulties in making a precise assessment of the quantum of the same. In my view, the only feasible approach to assessment is to adopt the plaintiffs' suggested method of determining the increase in value of a hypothetical property that the plaintiffs would have purchased but for that conduct.
By way of quantifying this aspect of their claim, the plaintiffs have called evidence from their two valuers (Messrs Cooper and Elsbury) in accordance with the report which is exhibit 18. This report details actual sales (up to 5 July 2004) of properties in the suburb of Huntingdale which had the same characteristics as the house that the plaintiffs were seeking at the time they first met Mr Hoad. From these sales, the valuers have identified the house at 10 Pilot Road, Huntingdale (the hypothetical property) as being the closest to the relevant characteristics.
The hypothetical property sold on 17 February 2002 for $210,000 (which is lower than the approximate $235,000 that the plaintiffs were willing to pay). It is the evidence of the valuers that as at 1 January 2005, the market value of the hypothetical property had increased to $270,000 (viz. an increase of $60,000 or approximately 28.5%). On this basis, the plaintiffs submit that their lost opportunity of a capital gain can be valued at $67,000 (viz. 28.5% of $235,000). From this figure, appropriate adjustments have been made for the mortgage interest they would have incurred less the rental that they actually paid over the relevant period. The net figure thus arrived at is $63,392.
In my opinion, the methodology adopted by the valuers in identifying the hypothetical property is reasonable and appropriate in all of the circumstances. I accept their evidence as to the market value of that property on 1 January 2005. I also find that the alternative property that the plaintiffs would have actually purchased but for Mr Hoad's conduct, would have had a similar proportionate rise in value.
There is abundant evidence from the plaintiffs as to the inconvenience which resulted from Mr Hoad's conduct, but very little as to any consequent distress and anxiety. Nevertheless, it is implicit in what the plaintiffs had to say that at all material times they were anxious about their finances, and dismayed by the situation that they found themselves in. I also accept Mr Shields' evidence that when he first met Ms Whitaker, she was 'very distressed about the water issue', and appeared to be 'resigned to the fact that they were going to be stuck with a house that was impossible to sell' (par 41, exhibit 24).

Assessment of damages

On the basis of the findings above, the difference between the market value and the true value of the subject property on 25 February 2002 was $65,000. However, in my opinion, in circumstances where the plaintiffs in fact resold the property, it cannot be said that they sustained a loss of this difference in value. Their actual loss was the difference between the price they paid and the price they obtained on resale ($35,000) plus the wasted expenditure on transaction costs ($11,701.23). The plaintiffs are also entitled to damages for the costs of investigating the water problem and of the valuation obtained before resale ($845).
The loss of $35,000 on the resale of the subject property does not reflect the capital gain that the plaintiffs would have accrued during the interim period if there had not been a water problem. However, that is not a lost opportunity that the plaintiffs are entitled to claim, because they would have acquired an alternative property if they had not purchased the Kelmscott property. It follows that the plaintiffs will be fully compensated for all aspects of their claim for loss of a capital gain if the damages for that loss are assessed for the period commencing on 25 February 2002. In my view, the appropriate assessment of damages for the plaintiffs' loss of a capital gain is the sum of $60,000.
I am satisfied that the plaintiffs are also entitled to a relatively modest but reasonable award of damages for the distress, inconvenience and anxiety they suffered as a result of Mr Hoad's conduct. I consider that an appropriate award in that respect would be the sum of $7,500 to each plaintiff.

Conclusions

The plaintiffs are entitled to damages in the following amounts:

(1) Capital loss on the subject property	$ 35,000.00
(2) Wasted transaction costs	$ 11,701.23
(3) Other costs in respect of the subject property	$ 845.00
(4) Loss of the opportunity of a capital gain	$ 60,000.00
(5) Distress, inconvenience and anxiety	$ 15,000.00
TOTAL	$122,546.23

The plaintiffs are also entitled to interest at the rate of 6% per annum on all but the last of the above amounts. The dates from when such interest should be calculated are 6 June 2003 in respect of item (1) and for $921.50 of item (2), 25 February 2002 in respect of the balance of $10,779.73 of item (2), 14 February 2003 in respect of item (3), and 1 January 2005 in respect of item (4). I calculate the total interest as at the date of judgment to be $32,065.81, but there will be liberty to apply in the event that I have made any error.
Accordingly, the plaintiffs are entitled to judgment against the defendants in the total sum of $154,612.04.

JURISDICTION : SUPREME COURT OF WESTERN AUSTRALIA
IN CIVIL

CITATION: WHITAKER -v- PAXAD PTY LTD [2009] WASC 47 (S)

CORAM: BLAXELL J

HEARD: 24 - 28 NOVEMBER 2008 & 17 APRIL 2009

DELIVERED : 27 FEBRUARY 2009

SUPPLEMENTARY
DECISION :5 JUNE 2009

FILE NO/S: CIV 1197 of 2005

BETWEEN: JULIE ELIZABETH WHITAKER
PAUL ANDREW SMITH
Plaintiffs
AND
PAXAD PTY LTD (ACN 009 049 147)
First Defendant
LIONEL MICHAEL HOAD
Second Defendant

Catchwords:

Practice and procedure - Costs - Indemnity costs - Calderbank offer to compromise - Whether offer unreasonably rejected

Legislation:

Legal Practice Act 2003 (WA), s 215(2)
Legal Profession Act 2008 (WA), s 280(2)
Rules of the Supreme Court 1971 (WA), O 24A r 10, O 66 r 12

Result:

Order for indemnity costs

Category: B

Representation:

Counsel:

Plaintiffs:     Mr M D Cuerden
First Defendant              :     Ms J K Condon
Second Defendant         :     Ms J K Condon

Solicitors:

Plaintiffs:     Macdonald Rudder
First Defendant              :     Minter Ellison
Second Defendant         :     Minter Ellison

Case(s) referred to in judgment(s):

Brymount Pty Ltd v Cummins [2005] NSWCA 69
Calderbank v Calderbank [1975] 3 All ER 333
Colgate‑Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225
Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122(S)
Gove v Black [2006] WASC 298(S)
Gretton v Commonwealth of Australia [2007] NSWSC 149
Lo Presti v Ford Motor Co (No 2) [2008] WASC 12(S)
MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236
Unioil International Pty Ltd v Deloitte Touche Tohmatsu (1997) 18 WAR 190

BLAXELL J: On 27 February 2009, I delivered a judgment awarding damages to the plaintiffs against the defendants in the total sum of $152,612.04. The defendants were ordered to pay the plaintiffs' costs of the action, which were to be taxed if not agreed. I also granted the plaintiff liberty to apply for special costs orders.
The plaintiffs then applied for orders that their costs be taxed on an indemnity basis, or alternatively that such costs be taxed without regard to the limits for discovery and getting up for trial, as imposed by the Legal Practitioners (Supreme Court) (Contentious Business) Determination.
I heard oral submissions from the parties on 17 April 2009 and, by leave, there were subsequent written submissions.

The basis of the application for indemnity costs

The plaintiffs seek indemnity costs on the basis that the defendants unreasonably rejected several offers of compromise in the course of proceedings. The affidavits before me show that the relevant offers from the plaintiffs were as follows:
-31 July 2006: An O 24A offer in the sum of $140,000.
-16 October 2006: An O 24A offer in the sum of $70,000, together with a simultaneous 'without prejudice save as to costs' offer of $100,000 inclusive of costs.
-5 April 2007: A 'Calderbank' offer in the sum of $70,000 plus costs to be taxed if not agreed.
-7 January 2008: A 'Calderbank' offer in the sum of $51,000 plus costs (which costs were estimated by the plaintiffs to be $55,000 inclusive of disbursements).
Although the defendants rejected each of these offers, they have made the following counter offers:
-28 December 2006: An O 24A offer in the sum of $10,000 plus costs.
-29 March 2007: A 'without prejudice save as to costs' offer of $45,000 inclusive of costs.
-9 October 2007: A reduced 'without prejudice save as to costs' offer of $25,000 inclusive of costs.
-21 January 2008: A 'without prejudice save as to costs' offer of $60,000 inclusive of costs.
The plaintiffs contend that the defendants' rejections of their offers were unreasonable because of numerous circumstances, which include the following:
(a)Because of the nature of the alleged representations by Mr Hoad (most of which were admitted) there was always a high probability of a finding that he held himself out as a person with special or intimate knowledge of the property.
(b)On 17 March 2006 the plaintiffs provided the defendants with an audio tape of an interview with Mary Carroll, together with a written statement by Mrs Carroll. Mrs Carroll was an independent witness and her evidence established that there had been persistent water problems in the lower level of the property for five years up until the sale to the plaintiffs.
(c)There was always a real risk of a finding that Mr Hoad had actual knowledge of those pre‑existing problems, because he had regularly visited the property, and the presence of water as described by Mrs Carroll would have been apparent to anyone who went to the lower level in the wintertime.
(d)The likelihood of that finding was enhanced by the fact that at all material times Mr Hoad stored personal possessions in and around the lower level of the house including a vintage car or cars.
(e)As a matter of commonsense and experience, it was likely that Mr Hoad's mother had informed him of the water problems given their severity as described by Mrs Carroll.
(f)The defendants did not lead evidence at trial to materially contradict the evidence of the plaintiffs or their witnesses (and in particular, Mrs Carroll) and must have known beforehand that much of that evidence was likely to be accepted.
(g)The defendants must have known that Mrs Hoad and Eddie Calvert would not be called as witnesses, notwithstanding that they were each uniquely placed to contradict the plaintiffs' witnesses if they were in a position to do so.
(h)At the time the plaintiffs made their O 24A offers, the terms of O 24A put the defendants on notice that (if the offers were not accepted and were matched or exceeded by judgment at trial), they faced an order for indemnity costs.
(i)Notwithstanding all of these the circumstances, the defendants passed up a number of opportunities to settle the action for amounts which were substantially less than the damages ultimately awarded.

The affidavit from the defendants' solicitor explains in considerable detail the reasons why the plaintiffs' offers were rejected. At all material times the solicitor was acting for the defendants' insurer, but when advising the insurer to reject each offer, relied on assertions by Mr Hoad that he was unaware of any water problems in the house at the time of the sale to the plaintiffs. These assertions were corroborated by a written statement from Mrs Hoad (dated 27 December 2007) and by statements that she and Eddie Calvert had previously made in connection with an inquiry by the Real Estate and Business Agents Supervisory Board. On counsel's advice, Mrs Hoad and Mr Calvert were not called as witnesses at trial. At the time of trial, Mrs Hoad was 92 years of age, and Mr Calvert was resident in Victoria.
The defendants' solicitor's affidavit also shows that the insurer's rejection of each of the plaintiffs' offers was not in any way peremptory, but was based upon detailed and reasoned advice from the defendants' solicitors.

The principles governing the discretion to order indemnity costs

The courts will usually order that the unsuccessful party to an action pay the successful party's costs on a party to party basis. This is so notwithstanding the notorious fact that those costs are almost always a fraction of the costs actually incurred in successfully pursuing or defending the action. As Sheppard J stated in Colgate‑Palmolive Company v Cussons Pty Ltd (1993) 46 FCR 225, 227, this situation has come about because:
[M]embers of the profession, both solicitors and counsel, and also professional witnesses, have refused to accept as a proper or sufficient guide to their costs and fees the provisions of [the prescribed] scales of costs and charges.
The policy reasons underlying the reluctance of courts to make orders which fully indemnify successful litigants for their costs have been said to be the following:
[T]he law for reasons which it considers to be in the public interest requires a litigant to exercise a greater austerity than it exacts in the ordinary way, and which it will not relax unless the litigant can show some additional ground for reimbursement over and above the bare fact that he has been successful (Berry v British Transport Commission [1062] 1 QB 306, Devlin LJ at 323).
Litigation is already expensive. The limited indemnity provided to a successful represented litigant for expense incurred and time lost reflects a compromise between the interests of successful and unsuccessful litigants (Cachia v Hanes (1991) 23 NSWLR 304, Handley JA at 318).
Accordingly, orders for indemnity costs are only made in cases where there is some special or unusual feature which justifies a departure from the ordinary practice. When the justice of a particular case requires a departure from the ordinary practice, the court has a discretion to order indemnity costs. The discretion is a wide one, and the categories of circumstances in which it may be exercised are not closed (Unioil International Pty Ltd v Deloitte Touche Tohmatsu (1997) 18 WAR 190, 191; Flotilla Nominees Pty Ltd v Western Australian Land Authority [2003] WASC 122(S)).
One category of cases where the discretion is sometimes exercised is when the unsuccessful party has unreasonably rejected an offer of compromise. Such offers are often in the form of a 'Calderbank' letter, which if unaccepted and of an amount less than that achieved by the offeror at trial, can be used in support of an application for indemnity costs as from the date of the offer (Calderbank v Calderbank [1975] 3 All ER 333).
However, the rejection of an offer of settlement which was more favourable to the offeree than the outcome at trial, does not (in itself) raise any prima facie entitlement to indemnity costs (MGICA (1992) Pty Ltd v Kenny & Good Pty Ltd (No 2) (1996) 70 FCR 236, 240; Gove v Black [2006] WASC 298(S) [44]; Lo Presti v Ford Motor Co (No 2) [2008] WASC 12(S) [17]). In this regard, Goldberg J held in Dr Martens Australia Pty Ltd v Figgins Holdings Pty Ltd (No 2) [2000] FCA 602 [17] that:
[W]henever a Calderbank offer is made, and is enlivened by a result more favourable to the offeror and less favourable to the offeree, it is necessary to look at all the surrounding circumstances and not simply the fact that an offer was made and rejected and the offeree has achieved a less favourable result than the offer. It is necessary to look at the genuineness of the offer, whether it was realistic, the point of time at which it was made and that whether, in all the circumstances, it was such a reasonable offer as required the offeree to give careful consideration to it. If, in all the circumstances, it was unreasonable for the offeree to reject the offer and not accept it then there are strong grounds for the Court ordering indemnity costs on the basis that the offeror has made a fair and reasonable attempt to resolve the proceeding and has given the offeree the opportunity at a relevant point of time in the proceeding to consider the reasonableness of the offer. The Full Court (Neaves, Ryan and Lee JJ) underscored this approach in Donnelly v Edelsten (1994) 121 ALR 333 where it said at 345:
'The foundation for the order is the need for the costs order to do equity where a party who has succeeded in the proceeding has made a reasonable attempt to terminate the proceeding by an offer of compromise shown to have been a fair offer in all the circumstances and to have provided appropriate opportunity for the offeree to consider and deal with the offer.'
Similar observations were made by the New South Wales Court of Appeal in Brymount Pty Ltd v Cummins [2005] NSWCA 69 (at [14]) where it was said that the relevant factors were:
(a)whether the rejection of the compromise offer was reasonable in the circumstances. While the rationale of Calderbank offers is to promote settlement of disputes, 'an offeree can reasonably fail to accept an offer without suffering in costs';
(b)the timeframe in which the offeree had to consider the offer. This factor is relevant as it usually accords with a party's legal advisers being given sufficient time to weigh up the prospects of a case and the potential value of any damages sought, as against the likely costs should the claim fail;
(c)whether the letter of compromise explicitly stated that the offer was made in Calderbank terms, the exact conditions of the offer, and whether indemnity costs would be pursued if the offer was rejected.
In the end, the essential issue to be determined is whether the rejection of the Calderbank offer was so unreasonable in all of the circumstances that an order for costs on the usual basis would not do the successful party justice (Gove v Black [44] ‑ [46]; Lo Presti v Ford Motor Co (No 2) [19]) .
This determination is not to be made with the benefit of the hindsight which has been gained as a result of the outcome at trial. In this regard, the circumstances relevant to the question whether the failure to accept the offer was unreasonable include an assessment of the strength and weaknesses of the unsuccessful parties' case, when viewed prospectively at the time that the offer was made (Gretton v Commonwealth of Australia [2007] NSWSC 149 [24]).

Whether the plaintiffs should be awarded indemnity costs

An unusual feature of the present case is that at all material times the main factual contest (relevant to liability) was not between Mr Hoad and the plaintiffs, but between him and the independent witnesses, Mary Carroll and Norman Carroll. It is therefore highly significant for present purposes that the plaintiffs took the step very early in the proceedings of serving the defendants with (the recorded) oral and written statements of Mrs Carroll.
The critical issues of fact on which liability turned were:
(1)whether the water problems experienced by the plaintiffs two weeks after taking possession of the property, were present prior to the sale;
(2)if so, whether Mr Hoad was aware of those problems at the time of the representations made to the plaintiffs prior to sale. (In this regard there was no substantial issue as to what was said between the parties).
Without the evidence of Mrs Carroll, the plaintiffs were not in the position to adduce direct evidence as to the first issue. All they had was the evidence of their expert's inspection of the property soon after the water problem manifested itself. This showed that channels had been dug in the dirt floored cavity areas of the lower level to drain water away from the house. The presence of those channels supported an inference that it was a pre‑existing problem.
As to the second issue, the only evidence that the plaintiffs could rely on was the inference as to Mr Hoad's knowledge to be drawn from the following facts:
-the statements made by Mr Hoad while showing the plaintiffs around the property prior to sale, which indicated that he had a special or intimate knowledge of the property;
-his storage of personal items in the lower level for a number of years up until sale;
-his regular visits to the property to meet with his mother and to attend to his personal items including vintage car(s) stored in the lower level.
Based upon the above evidence alone, the plaintiffs' case, and their prospects at trial could not have been regarded as being very strong.
However, when Mrs Carroll's evidence became available, the plaintiffs' prospects greatly improved. She was a neighbour who had been very friendly with Mrs Hoad, and had regularly visited the property between 1997 and 2002 when it was sold to the plaintiffs. During that period she had observed seasonal flooding in the lower level and had discussed the presence of the water with Mrs Hoad. She also had been present with Mrs Hoad when the latter had telephoned Mr Hoad and asked him to remove his vintage car(s) because of the dampness and flooding. Mrs Carroll had also assisted in moving cardboard cartons (containing Mr Hoad's personal items) from the lower level prior to sale, and had noticed that these were water damaged.
At the time of rejecting each of the plaintiffs' offers of compromise, the defendants, their insurer, and their solicitors were aware of the evidence that Mrs Carroll would give at trial. However, the insurer and the solicitors did not give great credence to Mrs Carroll because they accepted at face value the assurances from Mr Hoad that he was unaware of any water problems at the material time (and implicitly that he would have been aware of those problems if they had been there).
They also doubted Mrs Carroll's credibility because her written statement referred to Mr Hoad having 'two of his old antique cars' stored in the lower level at the time that Mrs Hoad had told him to shift them out. The defendants' solicitor had inspected the garage at the lower level and concluded that there was insufficient room for two vintage cars. However, I infer that at all material times the defendants did not place great weight on this discrepancy because it was not a matter that was put to Mrs Carroll during cross‑examination at trial.
It was significant that Mrs Carroll's evidence as to the existence of seasonal flooding of the lower level between 1997 and 2002, was corroborated by the presence of the drainage channels which had been dug under the house at sometime prior to the sale. The defendants had photographs of these drainage channels, and given that Mrs Hoad was blind, they could only have been dug by her maintenance contractor Mr Calvert. However, it would appear that the defendants made no effort to contact Mr Calvert notwithstanding that his address in Victoria was known.
Furthermore, Mrs Carroll's evidence was of such a nature that she could not possibly be mistaken about seeing water in the lower level of the house. It was also very unlikely that she would be mistaken about the telephone conversation that she claimed to have overheard. Accordingly, the issue that the defendants', their insurer, and their solicitors needed to consider was whether Mrs Carroll was telling lies in circumstances where she was very friendly with Mrs Hoad and had no connection with the plaintiffs.
I think that it is a fair inference from these circumstances that at all material times, the defendants, their insurer, and their solicitors, chose to disregard the potential of Mrs Carroll's evidence to greatly strengthen the plaintiffs' case at trial. This inference is supported by the facts that Mr and Mrs Carroll's evidence ultimately went unchallenged, that the only witnesses who were be in a position to contradict them were not called, and that no explanation was offered for the absence of those witnesses.
In the course of the trial I heard a great deal of evidence as to the plaintiffs' financial circumstances and difficulties at the material times. I also heard evidence as to the distress, inconvenience, and anxiety that they experienced as a result of the events that gave rise to the proceedings. In light of this evidence, I can be readily satisfied that at all material times the plaintiffs were very keen to settle the proceedings short of trial. I can also be satisfied that each of their offers was a genuine attempt to compromise their action on a mutually satisfactory basis.
In my opinion, the issues as to damages were never as clear cut as those in respect of liability. Nevertheless, at all material times the defendants faced the real prospective risk of a judgment against them in a sum at or about the amount that was ultimately awarded.
Having made these general observations, I now turn to the question whether the defendants' failure to accept any of the offers of compromise was so unreasonable as to justify the exercise of my discretion to award indemnity costs.
The plaintiffs' first offer on 31 July 2006 was made under O 24A and was for the sum of $140,000. This sum was not far short of the amount ultimately awarded, and the plaintiffs do not contend that the defendants' failure to accept that offer entitles them to indemnity costs.
At the time of the second set of offers on 16 October 2006, a plaintiff making an offer under O 24A had a prima facie entitlement to indemnity costs in the event that the result at trial was less favourable to the defendant than the terms of the offer. However, amendments to O 24A as from 1 March 2007 have had the retrospective effect that the plaintiffs can no longer claim indemnity costs by reason of the defendants' failure to accept such an offer. It follows that the focus for present purposes must be upon the offer made 'without prejudice' save as to costs' which accompanied the O 24A offer on 16 October 2006.

It is a very relevant circumstance that shortly prior to this offer, the parties had participated in a mediation conference on 9 October 2006. It follows that the defendants had had the opportunity to fully assess the relative strengths of the respective cases, as well as their prospects for a successful defence at trial. The plaintiffs, on the other hand, would have been well aware at the time of the offer that the decision on whether it would be accepted would be made by the defendants' insurer. It is therefore very surprising that the plaintiffs' solicitors' letter of 16 October stipulated that the 'alternative offer' was open only until 'noon 23 October 2006 unless earlier withdrawn in writing'.
The offer was faxed to the defendants' solicitors at 3.45 pm on 16 October, which left less than seven days to provide appropriate advice to the insurer and obtain instructions on whether it should be accepted. In fact, it was not until 24 October that the defendants' solicitors discussed the offer with the insurer and received instructions that it should be rejected.
It is clear that the time allowed by the plaintiffs was insufficient for the defendants to properly consider the prospects of their case and the potential value of the damages sought, as against the likely costs should the claim fail. For this reason alone, the defendants' rejection of the offer of 16 October 2006 cannot be characterised as unreasonable.
The plaintiffs' third offer was a 'Calderbank' offer to accept the sum of $70,000 plus costs to be taxed if not agreed. That offer was left open for 21 days unless earlier withdrawn by notice in writing. It was also explicitly stated that if the offer was not accepted, the plaintiffs reserved the right to rely on the letter in support of an application for indemnity costs against the defendants.
In my view, the period of 21 days was sufficient for the defendants' insurer to be properly advised and to make an informed decision whether or not to accept the offer. In any event, on 17 April 2007, the defendants' solicitors were in a position to respond to that offer and advise that it had been rejected.
The defendants submit that the question whether the offer was unreasonably rejected should be viewed from the perspective of the insurer rather than that of the defendants generally. They contend that the insurer was the 'real party' or 'true litigant', and that the reasonableness of the relevant conduct should be measured against the matters then known to the insurer. These matters included Mr Hoad's assurances that he had been unaware of the water problems. I understand the effect of this submission is that the insurer was entitled to rely on the accuracy of Mr Hoad's assurances in deciding to reject the offer.
However, the insurer of a litigant must take that litigant as it finds him. In defending the action, the insurer stood in Mr Hoad's shoes for all purposes connected with the proceedings. In my opinion the question of reasonableness in relation to rejection of the offer must be looked at from the point of view of the defendants and not limited to a consideration of matters as they appeared to their insurer.
This is so, even though the insurer acted responsibly in accepting the advice of its solicitors that the offer should be rejected. The basis of that advice was the assumption that, at trial, Mr Hoad's evidence would be accepted and Mrs Carroll would not be believed. However from an objective point of view, the logic of the surrounding circumstances showed there was a need to take Mrs Carroll's evidence seriously, and to question the reliability of Mr Hoad's assertions. Unfortunately, neither of these things occurred.
In my view the offer was a very realistic one at the time it was made, and it was also a fair, genuine, and reasonable attempt by the plaintiffs to achieve a compromise. To this end, they had taken the unusual step of providing early disclosure of the evidence of Mrs Carroll. The defendants had ample time to weigh their prospects and to carefully consider the offer, but failed to do so. In all of the circumstances, I consider that their failure to accept the offer was so unreasonable that the usual order as to costs would not do the plaintiffs justice.

Conclusions

For the above reasons there will be an order that the plaintiffs' costs of the action be taxed on an indemnity basis as from 5 April 2007. I further order that such costs be taxed on the basis that they include all costs incurred by the plaintiffs except insofar as they are of an unreasonable amount or have been unreasonably incurred.

[2009] WASC 47

27 FEBRUARY 2009

Key Legal Topics

Areas of Law

Consumer Law

Legal Concepts

Misleading or Deceptive Conduct

Breach of Contract

Compensatory Damages