Chapman v Weathertight Homes Tribunal
[2012] NZHC 1377
•19 June 2012
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV 2011-404-3822 [2012] NZHC 1377
BETWEEN DAVID STEVEN CHAPMAN Plaintiff
ANDWEATHERTIGHT HOMES TRIBUNAL First Defendant
ANDLORRAINE TERESA COLACO AND DOUGLAS BONIFACE COLACO Second Defendants
ANDAUCKLAND CITY COUNCIL Third Defendant
Hearing: 7 May 2012
Counsel: E M Bate for Plaintiff
No appearance by, or on behalf of First and Second Defendants
L J Douglas for Third Defendant
Judgment: 19 June 2012
JUDGMENT OF HEATH J
This judgment was delivered by me on 19 June 2012 at 9.30am pursuant to Rule 11.5 of the High
Court Rules
Registrar/Deputy Registrar
Solicitors:
Hansen & Bate, PO Box 235, HastingsHeaney & Co, PO Box 105391, Auckland
CHAPMAN V WEATHERTIGHT HOMES TRIBUNAL HC AK CIV 2011-404-3822 [19 June 2012]
The application
[1] Mr and Mrs Colaco have brought proceedings before the Weathertight Homes Tribunal (the Tribunal) to recover losses they allege that they have suffered as a result of water ingress caused by negligent building work. Mr Chapman is one of those being sued.
[2] Mr Chapman applied to be removed from the proceeding.1 That application was dismissed, on 26 May 2011.2 Mr Chapman seeks judicial review of that decision. His application is opposed by the Auckland Council (the Council), the only other remaining respondent in the Tribunal. Mr and Mrs Colaco have not
entered an appearance in this Court but support the Council’s position.
Background
[3] Between June and October 1998, Chapman Builders Ltd (a company that has since been struck off the register) was engaged to undertake building work at a residential property situated at 489A Hillsborough Road, Auckland. At that time, the property was owned by Mr Bentley and Ms Pikaki. All work was undertaken by Mr Chapman, the sole director and employee of the company.
[4] In 1999, Mr Bentley and Ms Pikaki sold the property to Mr and Mrs Colaco. The purchasers took title to the property on 26 May 1999.
[5] On 8 November 2000, Mr Chapman was adjudged bankrupt. At that time, the controlling legislation was the Insolvency Act 1967 (the Act). Mr Chapman received an automatic discharge from his bankruptcy on 8 November 2003.3 The effect of the discharge was to release him from all debts that were provable in his
bankruptcy.4
1 Weathertight Homes Resolution Service Act 2006, s 112.
2 Colaco v Auckland Council Weathertight Homes Tribunal TRI 2010 100 105, 26 May 2011 (S Pezaro).
3 Insolvency Act 1967, s 107(1).
4 Ibid, s 114.
[6] In 2005, Mr and Mrs Colaco discovered cracks in the cladding of the building. On 14 July 2008, an assessor’s report was requested from the Department of Building and Housing. That report considered the way in which the property had been constructed. Following receipt of the report and after undertaking further investigations, Mr and Mrs Colaco issued proceedings in the Tribunal, on 1 October
2010. At that time, there were six defendants. Four have since been removed.
[7] Mr and Mrs Colaco claim that the building work undertaken under Mr Chapman’s supervision was performed negligently and that, as a result, they have suffered loss in a sum estimated to be about $280,000, due to water ingress. They allege that Mr Chapman is personally liable for damages caused by the negligent work, notwithstanding their contract with Chapman Builders Ltd. Mr and Mrs Colaco also contend that the Council was negligent in providing a code compliance certificate, under the Building Act 1991. Damages are sought to reflect the losses allegedly suffered, together with general damages of $25,000 to compensate them for stress and anxiety from which they have suffered.
The Tribunal’s decision
[8] Mr Chapman applied to be removed from the proceeding on the grounds that any liability that he might otherwise have had was released on his discharge from bankruptcy, in November 2003. His argument was rejected. The Adjudicator, Ms Pezaro, said:
13.It would be inappropriate at this stage of the proceedings to conclude that the claim against Mr Chapman had crystallised at the time of his adjudication or before he was discharged from bankruptcy in 2003 on the basis of Hamlin [Invercargill City Council v Hamlin [1996] 1 NZLR 513 (PC)] principles. To make such a finding requires a full consideration of all evidence and is more appropriately made at adjudication. Even if I was to find that the defects for which Mr Chapman is responsible were apparent or should reasonably have been apparent before his discharge from bankruptcy, I am not satisfied that any ‘debt’ owed by Mr Chapman had crystallised at that time. ... the extent of any liability would not have been clear until, at the earliest, the WHRS report was issued in September 2008. ...
14. I conclude that Mr Chapman had incurred an obligation prior to
being adjudicated bankrupt but this obligation had not ‘created a
debt or liability certain or contingent’ because the potential liability was too remote and uncertain to be deemed a contingent liability. The obligation will only become a liability if and when there is a determination against Mr Chapman which will be after Mr Chapman’s discharge from bankruptcy. I conclude that it would be inappropriate to remove Mr Chapman was a party to these proceedings pursuant to the Insolvency Act 1967 as the claim against him does not satisfy the requirements of a provable debt or liability. (my emphasis)
[9] In his application for judicial review, Mr Chapman seeks an order quashing the decision of the Tribunal on the grounds that the Tribunal erred in law. A consequential direction is also sought, requiring the Tribunal to remove him as a party to the proceedings in that jurisdiction.
Analysis
[10] Mr Chapman’s argument is based on the proposition that a person who is adjudged bankrupt is entitled, on discharge, to a fresh start,5 having had all of his or her debts extinguished. Mr Bate, on his behalf, submitted that the claim against Mr Chapman comes within the definition of “provable debts” in s 87 of the Act. As a result, he contended, any liability arising from such a claim was released on discharge.
[11] Sections 87(1), 98 and 114 of the Act state:
87. Provable debts
(1) Except as provided in subsections (2) and (3) of this section, all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the time of his adjudication, or to which he becomes subject before his discharge by reason of any obligation incurred before the time of his adjudication, shall be debts provable in bankruptcy.
98. Assignee to estimate value of contingent debt
An estimate may be made by the Assignee of the value of any debt or liability proved under the bankruptcy which, by reason of its being subject to any contingency or contingencies or for any other reason, does not bear a certain value but which the Assignee considers may be fairly estimated. If the Assignee considers that the value cannot be fairly estimated he shall reject the proof.
5 Re Jones [1926] NZLR 318 (SC) at 320 (Ostler J). See also Heath and Whale on Insolvency
(loose-leaf edition) at para 1.3.
114. Debts from which discharge releases bankrupt
A discharge shall release the bankrupt from all debts provable in the bankruptcy except the following:
(a) Any debt or liability incurred by means of any fraud or fraudulent breach of trust to which he was a party:
(b) Any debt or liability whereof he has obtained forbearance by any fraud to which he was a party:
(c) Any judgment debt or any amount payable under any order for which he is liable under section 45 or section 110 of this Act:
(d) Any amount payable under a maintenance order under the Family
Proceedings Act 1980:
(e) Any amount payable under the Child Support Act 1991. (my emphasis)
Neither s 87(2) or (3) apply in the present case.
[12] Mr Bate submitted that s 114 releases Mr Chapman from any liability to Mr and Mrs Colaco because their claim could have been made at the time that Mr Chapman was adjudged bankrupt. He asserted that all elements of the tort of negligence were present at that time and the only reason why proceedings had not been issued was the deferral of the otherwise applicable limitation period through the “reasonable discoverability” doctrine approved by the Privy Council in Hamlin v
Invercargill City Council.6
[13] Because Mr Bate contended that the purpose of the release of debts provision was to provide a fresh start to a debtor, he submitted that interpretation of s 87 ought to be approached from the debtor’s perspective.
[14] Ms Douglas, for the Council, submits that no provable debt existed because no cause of action had accrued as at the date of Mr Chapman’s bankruptcy. She contended that use of the “reasonable discoverability” test meant that no claim could be made until such time as it was reasonably discovered by a plaintiff. In those
circumstances, she submits that there was nothing for which Mr and Mrs Colaco
6 Hamlin v Invercargill City Council [1996] 1 NZLR 513 (PC) at 525–526.
could prove in the bankruptcy, as at the date of his adjudication or before his discharge.
[15] There are two relevant policy factors that inform the interpretation of s 87(1). The first, as Mr Bate submitted, is the need to discharge a bankrupt’s existing debts in order for him or her to make a fresh start to economic life, untrammelled by past debt. However, equally importantly, a creditor must have sufficient knowledge that facts exist which could justify the issue of proceedings. In my view, if a claim has not accrued at the time of adjudication (or before discharge, if based on a pre- adjudication obligation), there is no debt or liability for which the putative creditor can prove under s 87(1).
[16] Mr Bate accepted that, in order for the debt to be provable under s 87(1), it was necessary to classify it as a “contingent” debt or liability. The meaning of the term “contingent” in this context was considered by both this Court and the Court of Appeal in Commissioner of Inland Revenue v Duncan.7 In that case, the question was whether a GST output tax was provable in a bankruptcy, an input credit having been claimed before Mr Duncan was adjudged bankrupt.
[17] The underlying supply that gave rise to the input and output credits was undertaken by Mr Duncan in his capacity as sole trustee of the Duncan Family Trust. Unless released by s 114 of the Act, on the basis that the output tax liability was provable in the bankruptcy, s 57(3) of the Goods and Services Tax Act 1986 operated to make Mr Duncan personally liable.
[18] The Court of Appeal agreed with Chisholm J that there were two limbs to s 87(1):8
[10] ...
(a) First, there are “all debts and liabilities, present or future, certain or contingent, to which the bankrupt is subject at the time of his adjudication”. Section 98 of the Insolvency Act requires the Official Assignee to estimate the value of “debts” and “liabilities” which are “contingent” or for some
7 Commissioner of Inland Revenue v Duncan [2007] 2 NZLR 369 (HC) and [2007] 3 NZLR 360 (CA).
8 Commissioner of Inland Revenue v Duncan [2007] 3 NZLR 360 (CA) at para [10].
other reason do not “bear a certain value”. If the Official Assignee considers that the value of such a liability or debt cannot be fairly estimated, he is to reject the proof. It is arguably implicit in s 98 that if the value of a debt or liability cannot be fairly estimated it is not provable, even though on the strict wording of the section that consequence applies only if the Official Assignee has subjectively reached that conclusion.
(b) Secondly, there are “debts and liabilities” to which the bankrupt becomes subject before discharge “by reason of any obligation incurred before the time of his adjudication”.
[19] A test to determine whether something was a “contingent liability” had been
developed in the speech of Lord Reid, in Winter v Inland Revenue Commissioners.9
Lord Reid said:
No doubt the words ‘liability’ and ‘contingent liability’ are more often used in connection with obligations arising from contract than with statutory obligations. But I cannot doubt that if a statute says that a person who has done something must pay tax, that tax is a ‘liability’ of that person. If the amount of tax has been ascertained and it is immediately payable it is clearly a liability; if it is only payable on a certain future date it must be a liability which has “not matured at the date of the death’ within the meaning of s
50(1). If it is not yet certain whether or when tax will be payable or how much will be payable why should it not be a contingent liability under the same section.
It is said that where there is a contract there is an existing obligation even if you must await events to see if anything ever becomes payable, but that there is no comparable obligation in a case like the present. But there appears to me to be a close similarity. To take the first stage, if I see a watch in a shop window and think of buying it, I am not under a contingent liability to pay the price: similarly if an Act says I must pay tax if I trade and make a profit, I am not before I begin trading under a contingent liability to pay tax in the event of my starting trading. In neither case have I committed myself to anything. But if I agree by contract to accept allowances on the footing that I will pay a sum if I later sell something above a certain price I have committed myself and I come under a contingent liability to pay in that event. This company did precisely that, but its obligation to pay arose not from contract but from statute. I find it difficult to see why that should make all the difference.
[20] Both Chisholm J and the Court of Appeal applied Lord Reid’s dictum. The
Court of Appeal agreed with Chisholm J, in holding that the potential liability for output tax was not, as at the date of adjudication, a contingent liability. However, it
9 Winter v Inland Revenue Commissioners [1961] 3 All ER 855 (HL) at 858.
disagreed with the High Court Judge’s view on the application of the second limb of s 87(1). Delivering the judgment of the Court, William Young P said:
[23] In our view the first and second limbs of s 87(1) must be read together. Mr Duncan can only rely on the second limb if the output tax liabilities which came to charge while he was bankrupt were “debts and liabilities” to which he became subject “by reason of any obligation incurred before the time of his adjudication”. In our view the section requires that the relevant debt or liability be to the party to whom the pre-adjudication obligation was owed. As a consequence the output tax liabilities were not provable in Mr Duncan’s bankruptcy.
[21] In my view, the authorities to which Mr Bate referred do not establish the proposition that Mr and Mrs Colaco could have proved for the tortious claim against Mr Chapman personally. Although relevant work was undertaken in 1998, the cause of action had not accrued by the time Mr Chapman was discharged from bankruptcy. That view is based on the time at which a cause of action of this type accrues. In Invercargill City Council v Hamlin,10 Lord Lloyd of Berwick, giving the advice of the Board, said:
Once it is appreciated that the loss in respect of which the plaintiff in the present case is suing is loss to his pocket, and [not] for physical damage to the house or foundations, then most, if not all the difficulties surrounding the limitation question fall away. The plaintiff's loss occurs when the market value of the house is depreciated by reason of the defective foundations, and not before. If he resells the house at full value before the defect is discovered, he has suffered no loss. Thus in the common case the occurrence of the loss and the discovery of the loss will coincide.
But the plaintiff cannot postpone the start of the limitation period by shutting his eyes to the obvious. In Dennis v Charnwood Borough Council [[1983] QB 409 (CA)], a case decided in the Court of Appeal before Pirelli [[1983] 2
AC 1 (HL)] reached the House of Lords, Templeman LJ said at p 420 that time would begin to run in favour of a local authority:
. . . if the building suffers damage or an event occurs which reveals the breach of duty by the local authority or which would cause a prudent owner-occupier to make
10 Invercargill City Council v Hamlin [1996] 1 NZLR 513 (PC) at 526. The “reasonable discoverability” test has been reconsidered by the Supreme Court, in different contexts. Nothing said in those decisions affects the approach taken by the Privy Council in Hamlin, which is the controlling authority for the purposes of the type of claim made against Mr Chapman. For example, see Murray v Morel & Co Ltd [2007] 3 NZLR 721 at paras [69]–[74] (Tipping J), with whom Blanchard J (at para [2]), McGrath (at para [101]–[102]) and Henry J (at para [148]) agreed Gault J dissented on the point (at paras [115]–[118]). See also, in the present context, North Shore City Council v Body Corporate 188529 [2011] 2 NZLR 289 (SC) at para [3]
(Elias CJ) and [71]–[75] (Blanchard, Tipping, McGrath and Anderson JJ, in a judgment given by
Tipping J).
investigations which, if properly carried out, would reveal the breach of duty by that local authority.
In other words, the cause of action accrues when the cracks become so bad, or the defects so obvious, that any reasonable homeowner would call in an expert. Since the defects would then be obvious to a potential buyer, or his expert, that marks the moment when the market value of the building is depreciated, and therefore the moment when the economic loss occurs. Their Lordships do not think it is possible to define the moment more accurately. The measure of the loss will then be the cost of repairs, if it is reasonable to repair, or the depreciation in the market value if it is not: see Ruxley Electronics and Constructions Ltd v Forsyth [1995] 3 WLR 118. (my emphasis)
[22] On Mr and Mrs Colaco’s pleading, the cracks in the cladding of the building
were not discovered until 2005, after Mr Chapman’s discharge from bankruptcy.11
Pending trial, Mr and Mrs Colaco’s allegations must be taken as true. To that extent, I agree with the Adjudicator’s finding that to hold that the claim had crystalised between adjudication and bankruptcy was premature, as determination of that issue would turn on a “full consideration of all evidence” and was “more appropriately made” following trial in the Tribunal.12
Result
[23] For those reasons, I conclude the claim as presently formulated cannot be characterised as a debt that was provable in Mr Chapman’s bankruptcy. In those circumstances, the application for judicial review is dismissed.
[24] The point may need to be reconsidered at trial, if it were proved that the cause of action accrued before discharge, from work undertaken before aMr
Chapman’s adjudication.
11 See para [6] above.
12 Colaco v Auckland Council Weathertight Homes Tribunal TRI 2010 100 105, 26 May 2011, at
13, set out at para [8] above.
[25] The Council is entitled to costs. On the application for judicial review, costs are awarded in favour of the Council against Mr Chapman, on a 2B basis together
with reasonable disbursements. Both are to be fixed by the Registrar.
P R Heath J
Delivered at 9.30am on 19 June 2012
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