Davies v K M Smith Builder Ltd
[2021] NZHC 2865
•2 November 2021
IN THE HIGH COURT OF NEW ZEALAND INVERCARGILL REGISTRY
I TE KŌTI MATUA O AOTEAROA WAIHŌPAI ROHE
CIV-2019-425-000087
[2021] NZHC 2865
BETWEEN JUDITH GAY DAVIES and SIMON BERNARD DAVIES
Plaintiffs
AND
K M SMITH BUILDER LTD
First Defendant
AND
KERRY MICHAEL SMITH
Second Defendant
Hearing: 12, 13, 14 April, 28 May and 28 October 2021 Appearances:
L A Andersen QC for Plaintiffs
A D G Hitchcock and K L Rusher for Defendants
Judgment:
2 November 2021
JUDGMENT OF DOOGUE J
This judgment was delivered by me on 2 November 2021 at 2.30 pm pursuant to Rule 11.5 of the High Court Rules
Registrar/Deputy Registrar Date:
DAVIES v K M SMITH BUILDER LTD [2021] NZHC 2865 [2 November 2021]
TABLE OF CONTENTS
Introduction [1]
Preliminary interlocutory issue [15]
The substantive issues for determination [17]
The background
Early days [18]
Initial engagement with Mr Smith and the company [23]
The contract [26]
November 2014 to December 2015 [28]
Changes made by the Davies [36]
Hard landscaping [43]
Late 2015 to August 2016 [46]
Request for some costs of completion [47]
Letter to the BNZ [49]
Deterioration in the relationship between the Davies and Mr Smith [51]
Did Mr Smith make the representations alleged by the Davies? [56]
Mr Smith’s credibility in the broader context [58]
The letter Mr Smith wrote to the BNZ [67]
When and in what context were the representations alleged to have been made?
[86]
Did Mr Smith represent he had the time and ability to project manage the construction? [90]
Did Mr Smith represent the construction of the house (including landscaping) would cost between $2.5 and $2.8 million (inclusive of GST)? Did Mr Smith represent that the cost of construction would not exceed $3 million? [95]
Did Mr Smith represent to the Davies that construction would be completed by March 2016? [119]
Summary of findings on the alleged representations [126]
Was there an implied term in the contract that the cost of construction of the house would be reasonable? [138]
Did the company and/or Mr Smith fail to properly project manage the construction of the house? [153]
The law [155]
Discussion [156]
Alleged acts or omissions [158]
Failure to account for the ongoing costs of construction [159]
Unauthorised variations [163]
CS Roofing variation [165]
Balustrade variation [167]
Failure to ensure competitive quotes from subcontractors [176]
Delivery of material in excess of requirements and failure to obtain refunds for excess materials [178]
Defective work [183]
Roofing defects [185]
Defective tiling [193]
Defective plumbing [197]
Joinery defect and excessive efflorescence [199]
Defects in the installation of the mudroom and front doors [216]
Powder room and master bedroom [222]
Atrium beams and leakage [226]
Balcony master bedroom/paver staining [228]
Summary of findings on project management [230]
Summary of overall findings [236]
The counterclaim [242]
Result [243]
Introduction
[1] In 2001 the Plaintiffs, Dr and Mrs Davies (the Davies), purchased a property at Closeburn Station, a high-country station in the Queenstown Lakes area (the area). Soon thereafter they commissioned a well-known architect, Mr Scaife, to draw up plans for their dream home (the house) to be built on the property.
[2] In 2014 they entered into a “House Construction Contract” (the contract) with the first plaintiff, KM Smith Builder Ltd, a building company (the company) to build the house. The company has significant experience in the construction of high-end homes in the area. The second defendant, Mr Smith, is the sole director of the company and a 50 per cent shareholder in the company. Mr Smith’s wife is the other 50 per cent shareholder of the company.
[3] The Davies claim Mr Smith made the following representations to them that induced them to enter into the contract:
(a)Mr Smith had the time and ability to project manage the building work;
(b)construction of the house (including landscaping) would cost between
$2.5 and $2.8 million (inclusive of GST); and
(c)construction would be completed by March 2016, namely within 15 to 18 months of commencement of construction (November 2014).
The Davies also claim that the contract contained the following implied terms:
(a)Mr Smith would project manage the building work to ensure the cost of the building work would be reasonable and in accordance with the estimate of costs;
(b)the cost estimate was between $2.5 and $2.8 million inclusive of GST; and
(c)the company would ensure the subcontractors costs were reasonable.
[5] Although not pleaded the Davies say there should be a fourth implied term that the actual cost of the building work would be no more than $3 million.
[6] If the Court finds that Mr Smith did not make the alleged representations and the contract did not include the implied terms, then the Davies’ claim against the company in contract and against Mr Smith in negligence for failing to adequately project manage the construction of the house.
[7] Finally, the Davies claim against both the company and Mr Smith under s 9 of the Fair Trading Act 1986. The misleading or deceptive conduct alleged by the Davies against the company is the estimate of costs given by Mr Smith and the reassurance he gave that the cost would not exceed $3 million. Against Mr Smith, they rely on a letter sent by him to the BNZ in March 2016 wherein he represents he expected the cost of completion of construction at that time to be no more than $700,000.
[8]Mr Smith denies making the representations set out in [3].
[9] Mr Smith and the company accept it is an implied term of the contract that the cost of the construction (including the costs of subcontractors) would be reasonable but denies the existence of any of the other implied terms alleged by the Davies. In respect of the implied term that the charges would be reasonable, he and the company say the company’s costs and those of their subcontractors were reasonable.
[10] The company and Mr Smith say further that it is obvious on the face of the contract this was not an agreement as to a fixed or a maximum price, but rather it was a contract for labour and materials which were to be invoiced on a monthly basis.
[11] Mr Smith and the company dispute the alleged failure to adequately project manage the construction of the house.
[12] Finally, Mr Smith and the company deny they were culpable of any misleading or deceptive conduct under the Fair Trading Act.
[13]The company counterclaims for its unpaid invoices plus interest in the sum of
$99,299.24.
[14] The Davies say that the sum of $15,382.91 owed to CS Roofing should be deducted because Mr Smith agreed to pay it. Mr Smith denies this.
Preliminary interlocutory issue
[15] Mr Andersen QC sought the Court’s leave to amend the second amended statement of claim during his final submissions. He sought to include a fourth alleged representation, namely that Mr Smith had represented to the Davies the cost of construction would be no more than $3 million.
[16] Mr Hitchcock responsibly and appropriately conceded leave should be granted to amend the pleadings to include the fourth representation because the amendment was in the interest of justice, and the company and Mr Smith were not prejudiced given the representation had been the subject of evidence and submission.
The substantive issues for determination
[17]The following are the issues for determination by the Court:
(a)Did Mr Smith make the representations alleged by the Davies? (If he did then do they constitute implied terms of the contract? Alternatively, if they are not implied terms of the contract then were they negligent or do they constitute deceptive conduct by the company for the purposes of the Fair Trading Act 1986?)
(b)Was there an implied term in the contract that the costs of construction would be reasonable and, if so, were they?
(c)Did the company and/or Mr Smith fail to properly project manage the building work?
(d)Did Mr Smith falsely represent to the Davies in March 2016 that the costs of completion would be $700,000 and was that deceptive conduct for the purposes of the Fair Trading Act 1986?
The background
Early days
[18] In 2001 the Davies Family Trust (the Trust) purchased the property at Closeburn. Closeburn consists of 27 individual lots, and ownership of 1/27th of the balance. The purchase also entitled the Trust to have shares in Closeburn Management Ltd (CML), the company that conducts the farming operation on Closeburn and maintains the common areas.
[19] Shortly after purchasing the property the Davies employed Mr Scaife to design their house. As the Davies were overseas at the time and planned to remain overseas for a while, Mr Scaife suggested they build a cottage on the property and defer construction of the house until after they returned to New Zealand. They agreed and built a cottage on the property in 2003.
[20] In 2006 a pricing process for the construction of the house was undertaken by Mr McNee, a licensed building practitioner, and Peter Austin, a quantity surveyor. That process was so detailed and labour intensive that it began in July 2006 and continued through to January 2007. The pricing process itself cost $15,146.17 inclusive of GST.
[21] The estimated cost of construction of the house was $2.5 million exclusive of GST. This was the estimated cost of the house alone. It did not include any associated hard landscaping, driveways, stone patios, outdoor fires or external stairways. The Davies did not ultimately engage Mr McNee and nor did they pay him for the pricing process he had undertaken.
[22] At some point in 2006 or 2007 the Davies engaged another builder to estimate the costs of construction. Neither of the Davies could recollect the details of that engagement.
Initial engagement with Mr Smith and the company
[23] Mr Smith’s wife was employed at Queenstown Medical Centre (QMC) as a receptionist. Through her Mr Smith met Mrs Davies, as they were part of the same
quiz group at the QMC Christmas party in 2013. Mrs Davies mentioned at that party the Davies were intending to build a house at Closeburn.
[24] While there is a dispute (which I am unable to resolve on the evidence before me) as to who initiated contact following on from the QMC Christmas party, the parties are agreed that a few weeks later, on 16 March 2014, they met at the Davies’ cottage at Closeburn (first meeting). They discussed the possibility of the company building the house. The Davies showed Mr Smith the plans drawn up by Mr Scaife. No specifications or other documents were produced to Mr Smith by the Davies at that meeting. Mr Smith looked briefly at the plans and explained to the Davies how the company operated.
[25] Sometime later, but between March and June 2014, it was agreed the company would be contracted by the Davies to construct the house. Excavation of the site commenced in June 2014.
The contract
[26] The parties entered into the contract in August 2014. Although the house was being built for the Trust, the Davies signed the contract as principals.
[27] The most salient clauses of the contract are clauses 2 and 3. They cover the contract price and mode of payment as follows:
CONTRACT PRICE
2.The consideration for the erection of the works shall be undertaken on a labour only hourly rate basis.
Rates: Kerry $60 per hour + gst (Project Management) Foreman $52 per hour + gst
Carpenters $48 per hour + gst Labourers $38 per hour + gst
Additional cost of 8% on materials and all sub contractors will be invoiced monthly.
Additional container hired later in job for storage.
A flat rate of $1200-00 + gst per month for fuel, mileage, and vehicle expenses. Builder will supply own office and smoko facilities in this flat rate as well.
MODE OF PAYMENT
Prompt payment on fortnightly invoicing (invoicing by email if agreeable by Owner)
When issuing an invoice to the Owner, the Builder must provide all relevant documentations, including but not limited to costings and receipts for materials and labour schedules.
Provided that further in the event of the Builder not receiving payments of moneys due such payments shall carry interest at the rate of (15%) per annum from the date of default until the payment thereof.
Payment by the Owner is to be deposited into the Builders nominated Bank Account within 3 working days from receiving the Builders invoice.
November 2014 to December 2015
[28] Between the pre-building preparations in June 2014 and early 2016 the Davies and Mr Smith oversaw a dynamic co-design construction process. Both the Davies (primarily Mrs Davies) and Mr Smith were adding layers of necessary detail to Mr Scaife’s sparse plans, and both parties were adding innovations to the construction in an organic way. The relationship between the parties appeared to be harmonious throughout this time.
[29] As the house plans had minimal detail it took a high level of project management and building expertise to bring the plans to life. There were numerous areas where Mr Smith was required to interpret Mr Scaife’s vision.
[30] In terms of project management, Mr Smith’s average input per fortnight for the entire build was around 25 hours or around 2.5 hours per day. He was at the site nearly every day. The Davies lived on site. Mr Smith committed time to collaborating with Mrs Davies. Later a more formal routine developed that involved Mr Smith meeting with Dr and Mrs Davies most Wednesdays.
[31] Mr Smith’s site foreman usually attended the Wednesday meetings and all details as to fixtures and fittings and specifications were discussed and agreed. Issues of additional work and cost were also discussed at times with Dr Davies.
[32] Mr Smith was also required (by virtue of the scarcity of detail in Mr Scaife’s plans) to audit and alter the specifications when they threatened the integrity of the construction. An example of this was the flashings. Flashings were an important part of the house because it had stone veneer around the windows and double-sided stone walls.
[33] Mr Smith spent a significant amount of time developing flashing designs to ensure the house was waterproof. Mr Smith identified an area on the plans in respect of a dormer window where the plans, as drawn, could potentially have caused a leak. Mr Smith developed a specific flashing to correct this. The Davies refused to pay for the extra flashing cost of $900 but Mr Smith proceeded to make the amendment at his own cost.
[34] Another example of the extra work in bringing Mr Scaife’s plans to life is the many hours Mr Smith spent detailing the exposed timber trusses and brackets (the large pieces of timber on the interior of the roof). The pieces of timber were not only decorative but also structural. Mr Smith created plywood templates that could be made in steel by the engineers, which saved significant time and the cost of engineering.
[35] In addition to time and cost associated with interpreting the plans and divining and improvising solutions for the construction of the house, there were also changes made throughout the construction as a result of the Davies’ requests to change or augment the plans.
Changes made by the Davies
[36] Mr Smith said during the construction the Davies made multiple changes to what had been set out in the original plans. Mrs Davies would spend long periods perusing building and design online and then would come to him with ideas and ask him to achieve various outcomes. She often selected products that would be considered much more expensive than even an average high-end build.
[37] An example of this is that Mr Scaife’s plans had details for three chimneys. The chimney walls were to be plastered and the chimneys were to be capped with coloursteel chimney caps.
[38] The Davies wanted the chimneys to be covered in stone rather than plaster and wanted the chimneys to be capped with steel and mesh. This comprised an increase in cost of $35,000.
[39] Mrs Davies also unexpectedly purchased second hand antique old-style timber shutters to be fitted in a space over the front door. This required a lot of extra time to adjust and fit an antique product to modern window frames.
[40] The lounge fireplace was originally specified as a Rumford Fireplace. The location of the fireplace was drawn in the plans but there was no detail of the fireplace itself. Mrs Davies requested the company replicate a design she had seen for an alternative fireplace in Oamaru stone. The design was complex. Specialist Oamaru stone contractors (Dooleys) were engaged. The cost of the Dooleys’ surround was
$9,000, plus many thousands more to complete everything else around it.
[41] After being in Melbourne and visiting friends, the Davies decided they wished to add a special wine temperature control wall unit to maintain a wine room temperature of 14 degrees. This was decided on quite late in the construction. Adding it in at that time made it more expensive than if it had been in the original plans. It also required special venting and an extraction/ducting system to be added. The cost of the special wine temperature unit was approximately $7,000 to $9,000, not including installation.
[42] These are just some examples of the number of decisions that added to the overall build cost. More importantly, they demonstrate the fluidity with which the Davies approached the interpretation of Mr Scaife’s design. Mrs Davies had many ideas and Mr Smith worked through the practicalities and logistics to make them a reality.
Hard landscaping
[43] One aspect of the build that added a considerable amount of time and materials to the project was the hard landscaping. The plans provided to the company initially did not outline its full extent or complexity.
[44] Mr Smith also spent many hours problem solving and designing other bespoke aspects of the external landscaping that had not been provided for in Mr Scaife’s plans. To be more specific, the following elements were added to the original plans:
(a)wood box at fireplace extension, concrete roof with stone paving, roof stone walls at side and doors to access wood storage;
(b)continuation of north terrace paved area to stairs;
(c)steps from bottom of garage to spa terrace;
(d)patio in front of mud room;
(e)15 metres of stone wall seating 450 mm high by north fireplace and garden; and
(f)10 metres of stone wall approximately 1200 mm high in a circular shape for spa space.
[45] The time required to undertake all this additional work was significant and required a lot of preplanning, as well as a great deal of time for the actual execution of the work due to its complex nature.
Late 2015 to August 2016
[46] The Davies say they believed the house would be completed by 1 March 2016. They became concerned in late 2015 when it appeared the house would not in fact be completed by that date because they had guests coming from the UK to stay with them in the house.
Request for some costs of completion
[47] Between December 2015 and February 2016 Dr Davies asked Mr Smith to advise him of some, but not all, the estimated costs of completion of the house. Dr Davies asked Mr Smith for an itemised list of estimates for certain subcontractors. Mr Smith enquired of Mr Davies whether he would also like an estimate of proposed building costs. Mr Smith was somewhat surprised when Dr Davies replied that he could work those out for himself and did not require Mr Smith to give him those estimates.
[48] On 16 March 2016 Mr Smith provided the Davies with the requested estimate of the costs of completion in a handwritten two-page document. He estimated a further
$448,295.27 for subcontractors’ costs and raised a series of questions about additional matters which had not yet been crystallised between the parties at that time. Because of the earlier exchange between Dr Davies and Mr Smith the estimate did not include the full suite of costs of completion. The handwritten document was as follows:
Letter to the BNZ
[49]On 16 March 2016 Dr Davies sent the following email to Mr Smith:
Hi Kerry,
Could you please provide me with a letter (preferably on headed paper) that the estimated costs of completion of our project will be $700,000 please.
This will be used for the release of funds. Regards,
Simon
PS give me a call if you need to discuss.
[50] Mr Smith provided a letter to the BNZ on 16 March 2016, as requested by the Davies, confirming the “estimated” completion costs were $700,000.
Deterioration in the relationship between the Davies and Mr Smith
[51] The Davies stopped paying the invoices on 15 July 2016, by which stage they had been charged a total of $3,607,429.54. A further $180,355.18 was invoiced by the company on 20 July 2016.
[52]Although the house was not completed, the Davies moved in on 1 July 2016.
[53] The company withdrew its services from the Davies in August 2016 without any discussion with the Davies.
[54] Mr Smith gave a further estimate for completion in 2017 of $280,520.12. This was not accepted. The Davies used other contractors to complete the house at a cost of $183,620.15, almost $100,000 less than Mr Smith’s quote.
[55]I turn now to discuss the issues for determination as set out in paragraph [17].
Did Mr Smith make the representations alleged by the Davies?
[56]To recap, the Davies say Mr Smith represented to them that:
(a)he had the time and ability to project manage the building work;
(b)construction of the house (including landscaping) would cost between
$2.5 and $2.8 million (inclusive of GST); and
(c)construction would be completed by March 2016 (within 15 to 18 months of commencement of construction in November 2014).
[57] Before I come to examine whether these specific representations were made by Mr Smith it is necessary to examine Mr Smith’s credibility in the broader context.
Mr Smith’s credibility in the broader context
[58] The Davies want the Court to find that Mr Smith is a dishonest man who both generally and in relation to the specific allegations in this case acts in bad faith. As
their counsel, Mr Andersen QC, put it in his closing submissions, the specific representations “confirms [Mr Smith’s] lack of honesty and his preparedness to lie to obtain the result he wanted”. The Davies rely not only on the identified causes of action in this case but three specific matters to impugn Mr Smith’s honesty, the first two subsidiary matters and the third a substantive matter namely:
(a)the AON insurance contract;
(b)the Closeburn Station Building Committee application; and
(c)the letter to the BNZ wherein Mr Smith confirms the estimate for completion costs in March 2016 to be estimated at $700,000.
[59] First, Mr Smith obtained AON insurance for the construction of the house. In the application form he estimated the cost of construction to be $2 million. He conceded under cross-examination by Mr Andersen QC that he did not believe that
$2 million would in fact be the cost of building the house.
[60] While conceding that he was incorrect in the information he gave the insurers, he explained the $2 million was sufficient because, “it is very seldom the case the full build is put at peril by some building activity”. In giving the insurers incorrect information he explained he was only motivated to keep costs down for the Davies.
[61] In addition, whilst he also advised the insurers that the duration of the construction would be 15 to 18 months, he said it was his common practice to estimate the shortest possible period for construction and then obtain three-month extensions for the client as required as this also keeps costs down for the client. He explained further that the timeframe for the insurance policy is not indicative of how long the build will take but rather the minimum period of time the insurance is sought for.
[62] Second, the Closeburn Station Building Committee wanted a figure to compensate the owners for any damage done to the road as a consequence of the company’s construction activities. Mr Smith stated in that application the house was valued at $2 million. Mr Smith said he discussed the matter with the manager of
Closeburn who advised him to put in a low figure because the likely damage to the road would not be significant and, again, the costs to the Davies would be lower.
[63] Mr Smith said there is a practice in the building industry that low prices are quoted in this sort of context to keep costs down for the client. He pointed to the building permit application submitted by Mr Scaife as an example of this industry practice. In the building permit application Mr Scaife estimated the house value at
$1.2 million and this saved the Davies significant building consent fees.
[64] In this case I have been assisted by the evidence of the architect who designed the house, Mr Scaife. Mr Scaife was at pains to explain that he was on good personal terms with both parties and that he was not taking sides in this dispute. Somewhat unusually in recognition of his stance, he was called by both parties.
[65] Mr Scaife has worked with Mr Smith and the company on numerous projects over the last 20 years. He described Mr Smith’s work and his company’s modus operandi as follows:
5.Kerry’s work is of the highest standard and he runs a very capable and successful building company. My clients have always given him the highest praise for his work, attention to detail, service, and honesty. Kerry’s company has an excellent reputation and is much in demand as a builder in our district.
6.Kerry has not allowed this demand for his services to expand his company to a point where his control over his team, or the quality of its work, is compromised. Managing subcontractors in the busy Queenstown building industry is a very difficult and often frustrating job, but from what I have observed over the years, Kerry has nurtured a good relationship with his subcontractors and as a result they perform well. They may not be the cheapest subcontractors, but they do good work and turn up when needed.
7.On all the projects that I have been involved in with Kerry’s company, he has worked on a “labour plus materials” contract, rather than a fixed price quote. This type of arrangement is common for bespoke, high-end residential work in our district, especially for clients who live in the area and can monitor work on site, or what flexibility and control over the work and scope of work.
8.This type of flexible, open-ended contract depends on a client’s trust in the builder, and is a testament to Kerry’s reliability and honesty that he has successfully operated on this basis throughout his building career.
…
15.I was not involved in any of the pricing or contractual arrangements, so am unable to comment on the reasons for the dispute. However, I do not believe that Kerry would deliberately mislead the Davies about the cost. Nor do I believe he would negligently mislead them, as he has always proven diligent and attentive to his clients’ needs, and it would not be in his own interest for a situation to arise where a client would be unable to pay for work, or even to complete the project.
[66] This is the best independent evidence I have of Mr Smith’s character and integrity in his business dealings. Those observations underpin my own assessment of Mr Smith in determining the credibility and reliability of his evidence. I accept Mr Smith’s evidence that the assessments given to AON and the Closeburn Station Building Committee were reflective of industry practices undertaken to keep costs down for clients. When put in this context, these practices in and of themselves do not prove that Mr Smith is a dishonest person who would take advantage of his clients or that he would deliberately mislead them.
The letter Mr Smith wrote to the BNZ
[67] I turn now to the letter Mr Smith wrote to the BNZ at the behest of Dr Davies. The Davies claim the company represented to them in March 2016 the cost of completion of the building work would be $700,000. The company did provide a letter to the Davies’ bank (BNZ) stating the “estimated” cost of completion of the construction of the house from 16 March 2016 would be $700,000.
[68] The Davies say it is clear the representation was misleading when the actual costs of completion were almost twice that amount.
[69] Mr Smith acknowledges he sent the letter to the bank as a result of Dr Davies’ request to do so. He says, however, the Davies knew full well the company and Mr Smith had not made a full estimate of completion costs. Mr Smith said he regretted sending the letter but did so because the company was owed a significant amount of money by the Davies at that time.
[70] A review of the contemporaneous documents is instructive here. On 14 February 2016 Mr Smith sent an email to Dr Davies:
… this week I will try and get a close estimate on all subbies as to what may be left …
[71]On 18 February Dr Davies sent Mr Smith an email stating:
… I do need an estimate of the remaining costs please for financial planning purposes.
[72]Dr Davies sent another email to Mr Smith on 2 March 2016. It reads:
… I need estimates on the following for financial planning purposes please by next week (either totals or amounts owing or some information that will help in working these costs out) –
Joinery Painting Stonemason
Stone fireplace + bricklayer for firestones Plumbing
Electrical Diesel tank Boiler
…
[73] It is apparent from this list that Dr Davies had itemised costs for certain subtrades only.
[74] Mr Smith subsequently provided Dr Davies with the handwritten document set out at [48].
[75] This document appears to summarise a number, but not all, the finishing trades with outstanding works necessary to complete the construction. It does not include labour costs generally nor the labour and material costs for trades to complete the cobblestones, decks, terraces, driveway works, landscaping tiling, carpets, timber, pavers, the spa and steps. These items are all major components of the overall building and would have been of significant cost.
[76] Perhaps even more importantly, it does not contain an assessment of the costs of labour for the company employees because Dr Davies did not want those calculated by Mr Smith, preferring to undertake that aspect of the exercise himself. Mr Smith
not surprisingly found that response from a client highly unusual, so unusual that it stuck in his mind.
[77] It is evident on the face of the document that Mr Smith was raising as many questions as he was providing answers.
[78] Initially Dr Davies insisted in cross-examination that the document Mr Smith had provided was a list of all outstanding work and an estimate of all completion costs. He did subsequently concede that a large number of quite fundamental building elements were not included in the document. Dr Davies was questioned by Mr Hitchcock on the document as follows:
Q. This is just his attempt to respond to your request, isn’t it?
A. And my request was unfortunately inaccurate.
[79] Thus the estimate was already compromised by three significant omissions. It did not contain the full complement of subcontractor costs, nor did it contain the labour costs. The parties were also yet to settle on the full extent and design of the hard landscaping so that was not costed either.
[80] In cross-examination, Dr Davies accepted that he sent the email asking Mr Smith to write the letter to the BNZ and he explained how the $700,000 figure was arrived at. The evidence established that the figure of $700,000 was a figure devised by Dr Davies and his banker, not by Mr Smith.
[81] It is unfortunate Mr Smith sent the letter, but it was commissioned for the purpose of assisting the Davies and the bank with financial planning. It was not commissioned for the purpose of Mr Smith undertaking and crystallising the actual costs of construction. That would have been obvious to both parties because of the exclusion of the major components identified in [75] hereof.
[82] I note further that it would not have been possible to ascertain an accurate estimate of the trades excluded from the estimate, as the parties were still working through what was required in respect of these elements as part of their organic collaborative interpretation and co-design.
[83] I consider it is disingenuous of the Davies in these circumstances (which they created) to assert Mr Smith represented to them the actual costs of completion in March 2016 were $700,000 and to rely on it to allege he acted in bad faith and misled them.
[84] For the reasons I have set out above, I also do not consider this letter is proof that Mr Smith represented to the Davies the actual costs of completion to be $700,000. I find that he was obviously misguided in sending the letter to the bank, but I do not consider the letter proves in and of itself that Mr Smith has been dishonest in his dealings with the Davies.
[85] Having made those observations concerning the three specific matters the Davies rely on to say Mr Smith generally acts in bad faith and lies, I return to consider the likelihood of Mr Smith having made the remaining representations.
When and in what context were the representations alleged to have been made?
[86] The evidence on this is a little scant but I find it was during the first meeting that the Davies say Mr Smith represented to them he had the time and ability to project manage the building work.
[87]The Davies say the representation as to the estimate of costs being between
$2.5 and $2.8 million was made after the first meeting but before the contract was signed. They say this was after Mr Smith had taken them to see houses the company had built at Millbrook.
[88] The Davies say the representation that the construction would be completed within 15 to 18 months was also made at the first meeting.
[89]Mrs Davies says she told Mr Smith the Davies could not spend more than
$3 million on construction of the house before the documents were signed and he reassured her the construction cost would not exceed the Davies’ budget.
Did Mr Smith represent he had the time and ability to project manage the construction?
[90] The Davies say that at the meeting the parties discussed the need to engage a project manager to oversee the construction of the house. The Davies say Mr Smith told them he was very experienced in project management and the Davies need not engage an independent project manager as he would project manage the construction himself.
[91] Mr Smith denies that any discussion ever took place between him and the Davies about engaging an independent project manager. Mr Smith says he made it clear at the first meeting that he traded though a company, the Davies were contracting with the company and his role in the company would be to project manage the construction. He also denies ever suggesting to the Davies he would project manage the construction in his personal capacity. He says at all times the negotiations were premised on what was ultimately recorded in the contract, namely that as one member of the team of builders in the company he was assigned responsibility for the project management.
[92] Dr Davies conceded under cross-examination that Mr Smith may well have told the Davies he traded through a company and that his role in the company would be to project manage the construction.
[93] I am satisfied that at that meeting Mr Smith expressly said he traded through the company and outlined what the company’s general modus operandi was and had been for 20 years or so. That included that the project management would be undertaken within the company framework and would be cemented by a contract between the company and the Davies to this effect. I am satisfied that the contract reflects the negotiations between the parties in this respect. I find Mr Smith did not represent he would project manage the construction of the house in his personal capacity.
[94] However, this finding is not determinative of the issue of whether or not Mr Smith owed the Davies a duty of care in his personal capacity to ensure the
construction of the house was properly project managed. I return to this point when I come to the fifth cause of action.
Did Mr Smith represent the construction of the house (including landscaping) would cost between $2.5 and $2.8 million (inclusive of GST)? Did Mr Smith represent that the cost of construction would not exceed $3 million?
[95] There are two elements to the alleged representations as to cost. First, both Dr and Mrs Davies say Mr Smith represented to them that the construction of the house (including landscaping) would cost between $2.5 and $2.8 million. Second, Mrs Davies alone says she “made it very clear to Kerry Smith before the documents were signed that there was a limit on what we could spend” and “we would be in trouble if we spent more than $3 million”. She says Mr Smith assured her the costs of construction would not exceed the Davies budget.
[96] Both elements are denied by Mr Smith. He says he would never give a fixed-price estimate in circumstances such as this. He also says no upper limit was ever mentioned to him before or after the contract was entered into by the parties. Mr Smith says he knew the costs of construction would likely exceed $3 million, and if Mrs Davies had in fact stipulated the Davies could not financially exceed a budget of $3 million he would not have contracted with them to construct their house.
[97] As to the first element, the Davies say they discussed the square metre price of the proposed construction with Mr Smith. They say Mr Smith represented to them that construction would cost between $4,000 and $5,000 x 433 square metres, meaning the total cost would be between $2.5 and $2.8 million. Mrs Davies says it was always understood that would include landscaping. Further, Mrs Davies says there was never any mention of GST and that she simply assumed the price given was inclusive of GST.
[98] Mr Smith acknowledged the Davies had asked him at the first meeting how much per square metre the house would cost. He says he told them that an architectural design like theirs was almost impossible to put a square metre price on. He says he explained there was a wide range of matters that have a bearing on the ultimate cost, and it was often the case that bespoke construction of this type evolves and is
significantly amended throughout the course of the construction particularly where the architectural plans are as light on detail as Mr Scaife’s were.
[99] Mr Smith acknowledged he advised the Davies that other similar housing had cost between $4,000 to $5,000 plus GST per square metre. Mr Smith states he stressed the ultimate cost was dictated by the client design and material choice and he was not giving them an estimate of the construction cost. He says there was absolutely no discussion about the cost of landscaping. Further, he says the construction of the house was nearer to 600 m2 so even at $4,000 to $5,000 per square metre the build would have been $3 million. He also stressed that his pricing per square metre was exclusive of GST and he did not understand on what basis Mrs Davies had simply assumed the price was inclusive of GST.
[100] Mr Smith says at the first meeting he explained to the Davies the company always worked on a labour and materials as opposed to a fixed-price contract basis. He explained to them a complex architectural build will generally throw up a number of issues (particularly in the detail) that are not immediately obvious from the initial plans and it was always very difficult to price every detail of such a project from the outset.
[101] Mr Smith also said that at the meeting the Davies were attracted to the idea of being able to make changes to both the design and detailing as construction progressed. This was later borne out by the numerous changes made by both the Davies and Mr Smith throughout their highly collaborative co-design process.
[102] Mr Smith says he explained the monthly invoicing regime to the Davies at the first meeting and said that would let them be in control of the process, so they knew exactly at any given time where they were on the cost of construction. He explained to the Davies that sometimes clients needed to either slow down the pace of the work or, in some relatively rare cases, stop work for a month or so altogether because of cash flow or funding issues and that he and the company had been open to that in respect of previous clients.
[103] The parties are agreed that at the first meeting Mr Smith dissuaded the Davies from engaging a quantity surveyor. Mr Smith said there were so many variables in the plans as to what might ultimately be built and what landscaping might ultimately be required that it would have been a waste of money for the Davies to engage a quantity surveyor.
[104] The Davies say that after the first meeting and prior to the contract being executed Mr Smith took the Davies to see a property at Millbrook and another at Stonebridge. They say it was to show them what they could expect for a cost of up to
$5,000 per square metre (inclusive of GST) and landscaping.
[105] Mr Smith said the visit to other homes took place after the contract was signed, that it was to give them an idea of the sorts of things that could be done with their house and the level of craftsmanship they could expect from the company, and was not to show them what they could expect for a certain cost per square metre.
[106] I am unable to resolve on the evidence when these visits took place but resolving that issue is not critical to any ultimate finding in this case.
[107]The property at Millbrook was a 600 m2 house built on a flat section. It cost
$4 million inclusive of GST and landscaping. Mr Smith said the Davies’ house was superior to the Millbrook house. The Davies’ house also had more complex geographical challenges and therefore more complex and expensive construction requirements.
[108]The house at Stonebridge was in a different league all together, costing
$10 million to construct at a cost of $6,000 per square metre.
[109] I refer first to the evidence of Mr McNee, a licensed building practitioner, who had priced the cost of constructing the house in 2006. He said it took the best part of seven months to conduct the costing process for the house. As Mr McNee said:
13.… This demonstrates the scale of the exercise to work out a robust build cost with provisional sums and contingencies …
…
19.I recall there were numerous provisional sums included in the costing due to lack of design detail. This had made close pricing significantly more difficult.
20.While those provisional sums meant the cost could go up or down the build cost we had estimated was in the region of $2.5 million excl of GST. That was house build cost only. That cost did not include any landscaping or driveways or anything else of that type.
[110] It was also Mr McNee’s evidence that the build cost he estimated back in 2006 could not usefully be compared to today’s market prices for materials and labour.
[111] Mr McNee was cross-examined by Mr Andersen QC about his recollection and whether it might be hazy, and the fact that he had not produced any supporting documentation for his estimate. Mr McNee was unshaken under cross-examination and had a clear recollection because at that time it was of real significance to him, as a relatively new building practitioner, that he had the possibility of a significant construction project. He recalled in considerable detail (including peripheral detail) why the pricing exercise was so difficult. The fact he did not have any supporting documentation was readily explicable, owing to the time that had elapsed and his not needing to keep the records as his company obviously did not subsequently enter into any contractual arrangement with the Davies. I found Mr McNee to be a very credible witness and I accept his evidence that the build cost that he estimated back in 2006 could not usefully be compared to the market prices for materials and labour some seven years later. It therefore does not seem likely that, some seven years later, a competent builder would give a quote in the same region as Mr McNee.
[112] Second, it does not seem likely that a specific cost estimate would be given in the negotiation between the Davies and Mr Smith when no detailed costing process, such as had been undertaken by Mr McNee, had occurred in this instance. Mr Scaife’s plans were sparse on detail and required a lot of interpretation with significant detailing to be undertaken. It was clear there was much in the design to be created as between the Davies and Mr Smith at a future date. Only a very imprudent builder would have agreed to a fixed price when they did not know what the cost of the construction would be for these reasons.
[113] Third, I accept the evidence of Mr Scaife that he and Mr Smith have always worked on “labour plus materials” on all their projects together. I accept it was Mr Smith’s practice not to enter into fixed-price contracts for builds of this nature for the very sound reasons he gave. I refer to Mr Andersen’s unforgiving cross-examination of Mr Smith on this topic, during which Mr Smith remained steadfast and plausible in his evidence. By contrast, Mrs Davies conceded under cross-examination by Mr Hitchcock that no builder they approached, including Mr Smith, was prepared to enter into a fixed-price contract at that time. Dr Davies also conceded it was likely Mr Smith had explained the company always worked on a labour-and-materials basis and the reasons why.
[114] No reason or motive is evident as to why Mr Smith would have departed from the custom of a successful lifetime in building and entered into a fixed-price contract or agreed to a maximum expenditure. He knew the inherent capacity in complex builds for there to be unforeseen difficulties and therefore unexpected costs. He also knew that clients can change their mind throughout the evolution of the construction with associated cost uncertainties. This is amplified where the builder and clients are effectively in a co-design situation.
[115] I come now to the second element in the Davies’ narrative as to the cost negotiations. That is that Mrs Davies told Mr Smith the Davies could not exceed
$3 million on the costs of construction and he reassured her the construction could be achieved within that budget. I consider it is highly unlikely that she did so for two primary reasons.
[116] First, Mr Smith is an experienced and highly-regarded builder who would not have been so imprudent as to have embarked on any building project if he thought his client may not be able to fund the construction. I am satisfied he would not have entered into the contract with Davies as the complexity of the build and the uncertainties arising were such that it would have been unwise in his own interests for him to do so.
[117] Second, I found some aspects of Mrs Davies’ evidence implausible. For instance, although acknowledging this was their dream house she could not remember
what price estimate Mr McNee had given them. She also attempted to assert, half-heartedly, there was another version of the contract in existence. When it was put to her that she and Dr Davies had never complained about cost overruns throughout the project she asserted that whilst she had not perhaps Dr Davies had. No evidence to that effect was produced. Mrs Davies also gave no plausible reason for her assumption that any estimate given was inclusive of GST. Similarly, I find it implausible she told Mr Smith they could not exceed a budget of $3 million.
[118] The evidence satisfies me that the Davies made a series of unfortunate assumptions from what they observed in the other buildings they saw, the previous costings they had from Mr McNee, about GST and about the extensive, as yet unsettled, landscaping being included. The evidence fortifies Mr Smith’s version of events. It demonstrates that no builder, in the circumstances that prevailed in the area at that time, would have entered into a fixed-price contract in respect of the construction of this bespoke house let alone have represented that the build would be capped at any particular sum, including $3 million or some other figure. I find Mr Smith did not make the alleged representations to the Davies.
Did Mr Smith represent to the Davies that construction would be completed by March 2016?
[119] The Davies say Mr Smith told them at the first meeting that construction of the house would take between 15 and 18 months and “should” be completed by 1 March 2016. Dr Davies recollects that Mr Smith told him he had knee surgery booked for March 2016 and he expected the house would be built by that time.
[120] Mr Smith says he was very qualified in what he told the Davies, saying he said, “a house of this type might take something in the region of 15 – 18 months but could be more”. Mrs Davies says she told Mr Smith they needed the build completed by March 2016 because they had guests arriving from the UK.
[121] Mr Smith agrees the parties did discuss the duration of the construction. He says he told the Davies there were variables that would affect the duration and he could not be entirely certain of how long the construction would take. For instance, he specifically mentioned the significant rock excavation that was necessary. He also
stressed it was always difficult to calculate the precise timeframe, particularly when so many of the building decisions were still to be made.
[122] Mr Smith said, “In the same way that building work and materials cost what they cost, building work takes the time it takes”.
[123] The Davies point to the fact that Mr Smith took out building insurance for 15 months (November to March 2016). I have already discussed that representation at [59] to [61] herein.
[124] It is significant in my view that Mrs Davies used conditional language in explaining what was agreed on duration. She used the word “should” and not “would”, which accords with the conditional language Mr Smith says he used when he said the build “may” be finished within the Davies aspirational timeframe.
[125] I find that Mr Smith probably did say that March 2016 was an indicative date by which the construction may have been completed, but that he qualified that indication heavily so as to fall short of the representation that construction would definitely be completed by March 2016.
Summary of findings on the alleged representations
[126] In summary, I find Mr Smith did not represent that he would be personally responsible for project managing the build. Mr Smith made it clear from the outset that he traded through the company and the company would be responsible for the project management of construction.
[127] I find Mr Smith did not represent that the company would build the house (including the enlarged landscaping required) for between $2.5 million and
$2.8 million inclusive of GST. I also find Mrs Davies did not tell Mr Smith the Davies could not exceed a budget of $3 million.
[128] Finally, I find Mr Smith did not represent that construction would definitely be completed by March 2016.
[129] The consequence of these findings is that the first, second, third and seventh causes of action must fail. Having said that, I think it is useful to give even more context as to why I find that the alleged implied terms which are based on these alleged representations cannot be read into the contract.
[130] It is simply not credible that if some price arrangement had been reached that it would not have been expressly written into the contract. Similarly, if there had been an agreed completion date it would ordinarily be expected that would be recorded in the contract, with ancillary clauses for penalties in the event of overrun and for retention of monies in that event.
[131] Further, as the contract does not contain reference to an estimate, a price or a guaranteed maximum price, nor any reference to a completion date, the usual inference is that no such contractual agreements were made.1
[132] Counsel for the Davies say that implying such a term as to price (BP Refinery criteria) would not contradict any express term of the contract.2 I cannot accept that submission. It would clearly and unequivocally change the entire nature of the contract which is expressly stated to be for “labour and materials”.
[133] The contract makes it clear that the Davies were contracting with the company, the company would provide project management services and construction would be undertaken by a team of workers (Mr Smith included) with a site foreman and a number of qualified carpenters and labourers, assisted by subcontractors when necessary for specialist works.
[134] There is no reference to $2.5 to $2.8 million or even $3 million in any contemporaneous documentation, including the voluminous exchanges of emails between the parties. With the focus Mrs Davies, in particular, says she had on price it is inconceivable that the price or upper limit of $3 million would not have been recorded in the contract or in any other documentation.
1 Bathurst Resources Ltd v L&M Coal Holdings Ltd [2021] NZSC 85 at [116].
2 BP Refinery (Westernport) Pty Ltd v President, Councillors and Ratepayers of the Shire of Hastings (1977) 180 CLR 266 (PC) at 283.
[135] Significantly, the contention a price was agreed between the parties was not mentioned when the construction costs exceeded $2.8 million and was not referred to in the various email exchanges between the parties after the company stopped work in August 2016.
[136] The first time there is any written reference to price estimates for the construction as between the parties is in the first correspondence from the Davies’ solicitor to the company and Mr Smith on 16 November 2018. It belies the Davies’ position that they would not make any reference to the agreement (if there had been one) until two years after the company withdrew its services.
[137] Nor was there any evidence the Davies were wishing to reduce or downgrade the specifications of the house, even when there were significant overruns. Ordinarily someone conscious they had a budget, on seeing it threatened or even exceeded, would have taken some remedial action at the time and challenged the company and Mr Smith as to why the agreed price was being exceeded. Nothing of that sort happened here, despite ample opportunities at the regular meetings for that to occur and despite a continuous stream of emails between the parties throughout the entirety of the construction process.
Was there an implied term in the contract that the cost of construction of the house would be reasonable?
[138] There is no dispute in this case that there is an implied term in the contract the cost of construction of the house would be reasonable.
[139] The Davies say the costs were not reasonable and effectively they have been overcharged by in excess of a million dollars. The company and Mr Smith say the costs charged were reasonable and the proof of that is that the Davies are the owners of a bespoke high-quality home of international standard.
[140] The Davies say a reasonable charge for the building work would be no more than $3 million. They rely on an assessment by Mr Green, their expert quantity surveyor, that a cost estimate for a property of that size being built at that time,
excluding external items such as landscaping and retaining walls, would be $2,108,017 including GST.
[141] Mr Green undertook a desktop review to give an estimate for the property. He calculated the price at $4,225 x 433.86 m2, resulting in his opinion that a reasonable cost of construction of the house would be $2,108,017.25 (inclusive of GST).
[142] The company and Mr Smith rely on the evidence of their quantity surveyor, Mr Andrew Ballantyne. Mr Ballantyne’s conclusion, having reviewed the company’s invoices, was “what has been invoiced is reflective of the true cost of this build”. Mr Ballantyne said the labour and materials charged to the Davies appeared reasonable and he could find no sign of inefficiency or lack of proper co-ordination of the construction.
[143]The Davies criticise Mr Ballantyne’s conclusions because he:
(a)relied on the contract being one for reimbursement of costs for labour and materials and made no consideration of the value provided;
(b)did not review the specifications which are essential to determine what needed to be done;
(c)could not accurately calculate the square meterage from the drawings that were provided to him;
(d)did not do any independent calculation as to what the normal building cost for high-end homes at the time actually was;
(e)did not challenge Mr Green’s methodology; and
(f)did not consider what a fair price for the construction would have been because he was not instructed to do so.
[144] This was a labour and materials only contract. That said, Mr Ballantyne did not need to prove (a), (d) and (f). It was for the Davies to establish that the labour and
materials claimed by the company were somehow inflated or improperly charged. As to (b), a review of the specifications would not have assisted this exercise as so much had to be elaborated and innovated upon throughout the course of the build. As to (c), Mr Ballantyne gave good reasons for his not undertaking his exercise on the basis of costing on a square meterage basis and had chosen not to reference the plans for that purpose. It is not clear to me how (e) could be advanced on the evidence available to me.
[145] I have real difficulties in accepting that Mr Green’s evidence can be used in the way the Davies seek to. The first difficulty I have is the assertion that the reasonable cost of this construction can be calculated purely on a square meterage basis. It may be commonplace for some homeowners to expect the cost of proposed construction to be undertaken on this basis, which is particularly so where “group home builders” (like GJ Gardner) build to a common style and standard specifications. However, this is because those types of construction are generally for mass housing designed for flat sites and basic standard specifications. This was a bespoke house to be built on a property that required significant excavation in advance of construction. It was also to be built to the highest level of specification as to fittings and materials.
[146] The second difficulty I have with Mr Green’s evidence is that, having elected to base his calculation on a square meterage basis, he did not correctly identify the applicable square meterage in this case. An examination of the plans shows that it is more in the order of 560 m2 and that does not include the hard landscaping.
[147] The third difficulty I have is that, under cross-examination by Mr Hitchcock, Mr Green accepted that he had no basis on which to challenge the evidence given by Mr McNee that the estimated build cost as at 2007 was $2.5 million exclusive of GST, and that the estimated cost was purely for the house and did not include any hard landscaping.
[148] Mr Green also accepted the price for the house would be significantly more if the build took place in 2014 rather than 2006/2007. Further, he accepted he had not visited the house for a site inspection before he gave his estimate and had not reviewed the company’s invoices.
[149] Mr Green did not contradict Mr Ballantyne’s evidence that what the company had produced was a high-quality bespoke building of international quality at very competitive market cost. In response, he said his own desktop review had always been proffered as a high-level budget estimate and did not represent the cost of the actual build. He also conceded he did not provide detail sufficient to represent the actual cost of construction.
[150]Mr Scaife observed:
13.I was saddened to hear about the dispute that has arisen over the Davies house. The house is exceptional in its design and construction, set over four levels into a rocky hill, opening to natural ground and terraces at numerous levels and different aspects. The construction is exceptional in that it is entirely in reinforced masonry, plastered on the inside with insulation and schist veneer on the outside, so as to maximise internal thermal mass. The finishes, construction details, waterproofing and joinery are all of the highest level.
14.There are very few houses like this in the country, and it is a massive credit both to Kerry and Dr and Mrs Davies, who have been involved in every detail, to have pulled this off. They all deserve a pat on the back, rather than the dispute they have landed in.
[151] Dr Davies accepted under cross-examination that he had no evidence of wasted labour or wasted materials to support the contention the cost of construction was not reasonable.
[152]In summary, I find:
(a)there was an implied term that the cost of construction would be reasonable; and
(b)the Davies have failed to establish that the cost expended was not reasonable.
Did the company and/or Mr Smith fail to properly project manage the construction of the house?
[153] The company clearly contracted to properly project manage the construction of the house. The Davies say the company failed to project manage the house contract resulting in an unreasonable cost of completion. I have already found that the Davies
have not proven their allegation that the cost of construction was not reasonable. Therefore the alleged failure to adequately project manage the construction is largely confined to examining alleged defects in construction.
[154] Before I discuss this issue, I need to determine whether or not Mr Smith owed the Davies a duty of care in his personal capacity to properly project manage the construction.
The law
[155] In Hsu v Mahoney, I reviewed the authorities on the personal liability of a director for their torts.3 I concluded the Court of Appeal had left no general requirement that a director assume responsibility for their torts unless it was an element of the tort alleged.4 Instead, the question is whether, considering the director’s role in the business and their personal actions,5 there was a sufficient relationship of proximity. As Gendall J recently identified in Queenstown Lakes District Council v Dent, the primary question is likely to be whether the director exercised a sufficient degree of control over the relevant acts or omissions.6
Discussion
[156] The evidence satisfies me that Mr Smith was very closely involved in the project management of the construction. Mr Smith held responsibilities for management of all aspects of the build, including contract management, cost management, programme management, site management, health and safety provisions and legal compliance. He was plainly responsible for overseeing the general procurement of materials and assignment of labour. He did all the liaison with the subcontractors. He was integrally involved in the interpretation, amendment and elaboration of Mr Scaife’s plans, including making his own custom-made innovations.
[157] Whilst the company had a site foreman whose express responsibility was to ensure the physical building work was undertaken properly and competently,
3 Hsu v Mahoney [2021] NZHC 1611 at [182]-[206].
4 Body Corporate 202254 v Taylor [2008] NZCA 1611, [2009] 2 NZLR 17 at [32].
5 Stephens v Barron [2014] NZCA 82, (2014) 21 PRNZ 734 at [30].
6 Queenstown Lakes District Council v Dent [2019] NZHC 2140 at [51].
Mr Smith was the creative director of the design and the work programme for the construction. I find Mr Smith had significant control of the project and made many of the key decisions on design and construction. I therefore find he owed a duty of care to the Davies to ensure the construction was properly project managed.
Alleged acts or omissions
[158] The alleged acts or omissions on which the Davies rely for the claim the company breached the contract and Mr Smith breached his duty of care to the Davies in failing to adequately project manage the construction are as follows:
(a)a failure to account for a running total of expenditure, past and future, for the project;
(b)unauthorised variations;
(c)delivery of materials in excess of what was required (pavers);
(d)failure to account for refunds for excess product (pavers);
(e)failure to get competitive quotes from potential subcontractors to secure the most cost competitive rate;
(f)requiring the Davies to deal directly with subcontractors;7 and
(g)some defective work (which is relatively minor having regard to the total cost of construction).
Failure to account for the ongoing costs of construction
[159] The Davies were critical of the company and Mr Smith in his role as project manager because they say he did not keep them appraised of the ongoing costs of the construction. Mr Smith says he did, by the production of the monthly invoices.
7 Mr Andersen QC acknowledged in closing the Davies were unable to identify any loss to them occasioned by this.
However, that was a retrospective exercise. It is clear he did not, in accordance with good practice, also provide running estimates of future costs.
[160] Dr Davies accepted in cross-examination that the invoices provided were accompanied by all the relevant invoices for subcontractors and material suppliers. He accepted that he himself completed running totals. The Davies could not, in those circumstances, have claimed they were misled in any way by Mr Smith as to costs that had been expended.
[161] This way of operating did not appear to trouble the Davies until December 2015, when the Davies say they became concerned that the costs were becoming “out of control”. That led to the exchanges between Dr Davies and Mr Smith that I have already traversed at [47] to [50] and [67] to [85].
[162] The Davies have not produced any evidence of loss associated with the company or Mr Smith’s practices in this regard.
Unauthorised variations
[163] Mr Smith acknowledged there were no written variations when variations were requested by the Davies, despite variations being required to be reduced to writing by clause 10 of the contract.
[164] Neither the Davies, Mr Smith nor the company observed their respective obligations under this clause. Instead they all operated in a dynamic process over the best part of 18 months, where variations instigated by all parties were discussed and implemented and where the costs were paid without the requirement by either party for documentation concerning the variations over and above the variations being reflected in the invoices themselves.
CS Roofing variation
[165] The Davies say the company charged them $15,382.91 for work carried out by CS Roofing that were unauthorised variations. They also say the company failed to
ensure defects in work completed by CS Roofing at a cost of $4,348.3, being $7,820 less $3,471.68 the balance of the quote.
[166] The company and Mr Smith say that while there was a small variation, in the order of $1,200, the other items that appear as variations in the invoices are in fact not variations to the roofing materials but rather are a variety of flashings to ensure the stonework and windows were completely waterproof in terms of the external wall flashing and water-tightness issues. I am satisfied on the evidence that the disputed costs were not in fact variations to the roofing but were rather necessary for waterproofing the building.
Balustrade variation
[167] The Davies complain about the installation of non-specification flashings being present on the balcony or parapet. What had been specified was a paint-on membrane for the deck and parapets. Mr Smith did not believe that was either sufficient in terms of design or that it would be adequately durable.
[168] Mr Smith arranged for a Torchon membrane to be applied as a continuous waterproof lining across the deck, then into the gutter continuing up the inside of the block wall and over the top of the balustrade and down the other side of the block wall. This provided a continuous waterproofing layer over the different building elements. This membrane was heat sealed onto the mud sealed blocks.
[169] Mr Smith then placed a Coloursteel metal parapet capping over the blockwork. This was put over the top of the Torchon membrane as a secondary backup to prevent the entry of moisture. It was installed in order to protect the membrane from puncturing in the event of the schist stonework vibrating, such as would occur during an earthquake.
[170] If Mr Smith had done what Mr Scaife had specified on the plans he says there would have been water leakage throughout the house by now, as even one slight earthquake (and there have been many since the schist was installed) would very likely have cracked the very thin waterproof paint-on membrane system which had been specified.
[171] It is Mr Smith’s belief the waterproofing that has been achieved is superior to what was specified. The flashing and caps were constructed on an angle to allow for water to run off. In combination with the measures outlined previously, this made it very unlikely that moisture would penetrate the internal walls of the house.
[172] As a further improvement to the building specifications, Mr Smith added a 50 mm overhang of the stone caps on both sides of the balustrade stonewalls so that water would be directed away from running straight down the face of the stone walls.
[173] Mr Smith says he discussed these changes with the Davies during the build, providing clear reasoning and a full explanation for them. He said it was always his practice to talk through with his clients any requirements of suggestions that he made. He believed these changes have been successful in improving the durability of the building and protecting it from moisture ingress.
[174] Mr Scaife himself said under cross-examination that Mr Smith’s design was superior to his and more durable. Mr Ivey, a director of CS Roofing (the roofing subcontractor), who was experienced in weathertightness issues, agreed.
[175] I find this variation was discussed by Mr Smith with the Davies. I also find the variation improved the construction of the house. I do not consider any negligence is proven as a result of what are in fact improvements to the balustrade.
Failure to ensure competitive quotes from subcontractors
[176] Mrs Davies says that despite the assurance before the contract was signed that Mr Smith would seek competitive quotes for subcontractors this rarely happened. Mrs Davies said Mr Smith repeatedly demonstrated a reluctance to approach alternative contractors for quotes. She said there was no prior consultation with the Davies before Mr Smith engaged subcontractors and that she and Dr Davies did not know who they were or what their cost was until they were invoiced. That may very well have been the case on occasion but, as Mr Andersen QC acknowledged in closing, the Davies are unable to point to any loss occasioned by this.
[177] While the company had a contractual duty to keep the costs of subcontractors to a reasonable level and Mr Smith had a duty of care in negligence to seek competitive quotes from subcontractors and may not have done so, the Davies have been unable to point to any loss occasioned by this failure.
Delivery of material in excess of requirements and failure to obtain refunds for excess materials
[178] I will deal with these two alleged failures together because they relate to one item of the materials the Davies were charged for, namely the pavers for some of the hard landscaping.
[179]The Davies claim for the wasted cost of some bullnose pavers costing
$3,228.88 which could not be returned and were sold for $700, giving a loss of
$2,570.88.
[180] I refer to the email of 11 March 2015 between Mr Smith and Southern Lakes ITM about the procurement of bullnose tiles. This is precisely what was supplied on site. There certainly does not appear to be procurement of pavers of the wrong specification causing loss to the Davies.
[181] The pavers were required to complete a circular staircase. Some of the tiles were always going to be cut to make them suit the specific contours of this stonework. Further, all tiles supplied could have been returned by the company for a full refund from Southern Lakes ITM. Mr Smith’s uncontested evidence was that any pavers left over could be returned for a credit from his supplier. Mrs Davies’ evidence was that they did not attempt to return the pavers to the supplier.
[182] I find there is no evidence of breach of contract by the company or Mr Smith in negligence in respect of the pavers.
Defective work
[183] The Davies only notified Mr Smith of one or two minor defects immediately following the company ceasing work on the house. They now claim for a host of
defects. These defects were not identified until after the Davies had consulted their lawyer in late 2018.
[184] The company and Mr Smith say the defects are not as a result of breach of contract by the company or negligence by Mr Smith but rather are:
(a)incomplete items/works;
(b)fair wear and tear;
(c)damage caused through no fault of the company or its subcontractors; and/or
(d)the Davies failure to mitigate loss or damage by taking proactive steps to ensure the subcontractors fixed minor defect issues.
Roofing defects
[185] The Davies say the company and Mr Smith failed to ensure the roof was constructed properly.
[186]The Davies claim that the roofing was defective in the following respects:
(a)inferior or absent clips that attach to the guttering to the roof;
(b)damage to the guttering as a result of the absent clips;
(c)a leaking spreader; and
(d)inappropriate alignment of two downpipes being too close to the doorframe and edge of the wall, meaning it was not possible to drill effectively to install support brackets for securing the downpipes without causing damage/cracking/crumbling of the stonework and so that realignment of the downpipe is required to avoid the sunshade.
[187] The Davies originally claimed $7,820 to remedy these defects, being $5,405 and scaffolding costs of $2,415.00. However, they now claim $4,348.30 as their original accounting was incorrect.
[188] As far as the claim for inferior or absent clips is concerned, I rely on the evidence of Mr Ivey. He has vast practical and administrative experience in all matters to do with roofing and weathertightness issues. The Davies tried to suggest he was partial towards the company and Mr Smith and his evidence was therefore unreliable. I find no demonstrated evidence of impartiality in his evidence.
[189] Mr Ivey explained that insofar as the first alleged roofing defect is concerned the Building Code requires that in snow areas the gutters have brackets at a maximum of 600 mm. On the Davies’ roof the brackets are installed at approximately 520 mm. This installation complied with the Building Code and the claim for this defect and associated damage must fail.
[190] Mr Ivey accepted evidence that the gutter pipe leaked and the downpipes were poorly aligned. He said both could be easily fixed.
[191] As far as the scaffolding is concerned, Mr Smith’s evidence was the repairs could have been done without scaffolding. This was reaffirmed by Mr Ivey.
[192] Because of the state of the evidence it is not clear precisely what the cost of remedying the acknowledged defects is. Having regard to Mr Ivey’s evidence that these are simple matters to fix, I allocate a notional sum of $1,000.00 as the figure owed by the company and Mr Smith in relation to these defects.
Defective tiling
[193] The defect identified here is defective drainage from the balcony. The deck tiles near the south facing French doors from the office/den were apparently raised and the waterproof membrane underneath was found to be in reasonable condition except in one area near the south-east corner which required a minor repair. If the membrane required a minor repair that is something the company’s waterproofing subcontractor
should have attended to. The company should be responsible for the cost of a different contractor completing that work.
[194] For the guest en suite, the grouting was not finished when the company left site. The company is not responsible for work that was not complete.
[195] The tiler was still working onsite after the Aga splashback grout was completed. I consider Mrs Davies would have been proactive and let the tiler know if the grouting was defective at the time.
[196] Notwithstanding my finding that the waterproofing on the deck was defective, the Davies have not provided any independent evidence of what it would cost to remedy that defect.
Defective plumbing
[197] The fridge-freezer was not plumbed in at the time the company left site. There was provision made for the fridge-freezer to be connected inside the kitchen joinery. The Davies claim $780.00 for the cost of making that connection.
[198] The company and Mr Smith are not responsible for work that was not completed when they left the site.
Joinery defect and excessive efflorescence
[199] The Davies claim the cost of repairing damage to the aluminium joinery as the required additive was not added to the mortar (contrary to the specifications) and the exterior was not sealed, amounting to $3,346.50.
[200] There are two alleged defects here. The Davies say there should have been plastic liners to the drain holes so the natural lime leeching (efflorescence) would not have affected the joinery, and that the walls were not properly sealed by the company so as to prevent excessive efflorescence.
[201] The Davies secured the services of Technicote International (TI) to review the damage to the aluminium joinery of the French door set and two window units. It was
TI’s opinion that what they describe as “scale contamination” on the French door set and two associated window units is as a result of water run-off from the deck directly passing through the stone/mortar onto the doors and windows below.
[202] TI suggested the cause of the run-off and ensuing damage could have been avoided by the insertion of a plastic liner in each of the drain holes noted in the wall above the doors. This would have avoided the water passing through the wall and would have picked up the lime deposits naturally present in the stone/mortar.
[203] TI suggested that to remediate the damage the French doors should be replaced and, if feasible, the door leaves replaced, the frame cleaned and re-dyed. TI quoted the cost of repairs as being $3,364.50.
[204] Mr Smith does not address the suggestion TI made concerning the plastic liners of the drain holes directly. What he says is simply that the installation of the drain holes in the stonework above the aluminium joinery is standard practice and an approved building detail that has been consented on many occasions by Queenstown Lakes District Council, and apparently on this house. He did concede that, in this case, potentially some sort of pipe leading out from each of the required drainage holes so the moisture does not migrate to the joinery would be advisable. He classified this work as maintenance but did not give a reason for classifying it that way.
[205] As far as efflorescence is concerned, Mr Smith says the efflorescence should be cleaned off the joinery and the joinery protected by way of applying a sealant on a case-by-case basis and that this is a maintenance issue.
[206] Finally, he says the damage to the aluminium joinery is not a defect as it has arisen in part as a consequence of the fact the building work was not complete when the company ceased work and the stonework had not been sealed. It appears the Davies did not properly finish the house and ensure that the stonework was sealed. I refer to the evidence of the stonemason, Sonny Pointon, in this regard.
[207] Secondly, he says the damage to the finish also represents a failure by the Davies to properly maintain the house. All stonework (sealed or otherwise), and
indeed brickwork, experiences leaching and efflorescence to some degree or another. Where the leaching starts affecting finishes it is relatively straightforward to clean off the efflorescence with a special wash and then take steps to ensure the leaching is controlled by the stonework being sealed and/or the joinery protected in some manner. Mr Smith says the Davies should have taken steps to prevent the leaching and ongoing damage a long time ago. Mr Smith, in summary, says the defects are constituted by incomplete work and a failure to maintain the house and not poor workmanship.
[208] Further, Mr Smith says the affected doors and windows do not need replacement. They can be refinished and there are a number of people in the South Island who refinish windows and doors.
[209] Sunny Pointon (the stonemason) was not able to apply sealer to the stonework in certain areas of the building during the winter of 2016 because the stonework needed to be properly dry. By the end of August 2016 work had stopped on the site.
[210] There had been a challenge about whether Mr Pointon should have put an efflorescence product in the mortar. Mr Pointon said that requirement did not appear in the part of the specification that applied to his works. More importantly, he gave evidence the efflorescence did not just come from the mortar but also came from the stonework.
[211] Efflorescence protection is an ongoing job involving sealing the stonework and the mortar. Mr Pointon’s evidence was that once the stonework and the mortar were dry it needed to be sealed. That was not the end of the process. The stonework and the mortar would need to be resealed every few years.
[212] When efflorescence gets onto aluminium windows the evidence of both Mr Pointon and Mr Smith was that there is a proprietary product that can be used to clean the efflorescence off. The second step, according to Mr Smith and Mr Scaife, was to find a way to prevent or minimise the efflorescence causing difficulty in that area of the property.
[213]Dr Davies also accepted efflorescence is not a building defect.
[214] Dr and Mrs Davies took no steps to prevent or minimise the efflorescence, despite being aware of that requirement from their previous experience in building the cottage. In other words, they have not maintained the building properly.
[215] In summary, the damage to the aluminium French doors and windows appears to be a combination of failure to line the pipes with plastic in the first place, the failure by Mr Pointon to add the sealant to the mortar and the subsequent failure of the Davies to properly maintain the stonework. I consider the first two causes of the problem are more operative of the damage than the failure of the Davies to properly maintain the house. As a result, I find the company and Mr Smith are liable to the Davies for the sum of $3,364.50.
Defects in the installation of the mudroom and front doors
[216] The mudroom stable door shrank and gaps appeared between it and the doorframe after installation. The door had been manufactured by Coronet Woodware. Coronet agreed to replace this door at no cost to the Davies.
[217] The Davies had made Mr Smith aware of their concerns about the mudroom door. Mr Smith had spoken with both subcontractors. The ball was in the Davies’ court to arrange convenient times for those contractors to complete and rectify the work of concern. Coronet Woodware simply asked that the Davies contact them to arrange a suitable time to rectify the issue.
[218] The Davies did not do so. Dr Davies said in cross-examination he now intended to.
[219] There were no issues with the front door when the company left site although the site foreman, Phil Kingsbury, did adjust the front door at no charge to the Davies.
[220] The Davies never advised Mr Smith of the asserted issue. If the Davies had raised this issue with Coronet, who supplied the door, Mr Smith was confident they would have sorted any actual problem.
[221]Again, the Davies have failed to establish their case in respect of these defects.
Powder room and master bedroom
[222] The Davies seek damages for cracked plaster in the powder room and their bedroom. These defects were not notified to the company immediately after they ceased work.
[223] Mr Smith’s evidence was that any such cracks will likely have been as a result of the normal settlement and movement in a new house.
[224] I find that it is more likely than not that the asserted defects of inadequate finish on the powder room and bedroom walls reflect normal shrinkage that has occurred over time as the house has settled.
[225] The rectification work required is respectively no more than filling any gaps and then applying paint. I find this is a minor expected maintenance item, not a defect for which the company is responsible.
Atrium beams and leakage
[226] The Davies allege that the beams installed in the atrium have shrunk and become warped.
[227] The company and Mr Smith say the atrium beams are large pieces of timber and would be expected to shrink and move as a natural consequence of the settlement of new construction. The beam connections were checked in as well as physically connected. There is no evidence of any structural issue here, nor is there any independent evidence of what remedial action is required nor the cost of any such remediation.
Balcony master bedroom/paver staining
[228] There was to be a drainpipe installed from the balcony off the master bedroom to drain water away.
[229] At the time the company left site this item had not been completed. The company is not responsible for uncompleted work.
Summary of findings on project management
[230] As far as the alleged unauthorised variation to the balustrade is concerned, I find the Davies authorised it in advance. I also find that the balustrade variation improved the structural integrity of the construction.
[231] As far as the allegation that the company and/or Mr Smith had ordered materials in excess of requirements and had failed to obtain refunds for the excess materials, I find had the company gone on to complete the works the pavers would have been returned and the refund would have been paid. The difficulty arose as a result of the non-completion and the fact the Davies did not seek the relevant refund in a timely enough manner.
[232] The Davies have not proven any loss associated with the allegation that the company and Mr Smith did not seek the most competitive quotes from subcontractors. Nor were they able to point to any loss associated with their having to deal with subcontractors themselves from time to time.
[233]I find the company and/or Mr Smith liable to the Davies in the sum of
$1,000.00 for the roofing defects.
[234] I find for the reasons articulated at [199] to [215] that the company and Mr Smith should be liable for the costs of remediating the aluminium joinery damage. The company and Mr Smith are liable to the Davies for $3,364.50.
[235] I do not find there is any evidence of other building defects. Any such imperfections were as a result of non-completion, fair wear and tear and a failure by the Davies to properly maintain the property after the company had left the site.
Summary of overall findings
[236] Mr Smith did not make the alleged representations set out in [3], nor did he make the representation set out in [15].
[237] There was an express term in the contract that the company would project manage the construction and they breached it.
[238] Mr Smith owed the Davies a duty of care to adequately project manage the construction and he failed to discharge that duty.
[239] There was no implied term in the contract that the cost of construction would not exceed $3 million.
[240] There was no implied term in the contract the building would definitely be completed by March 2016.
[241] There was an implied term in the contract that the cost of construction would be reasonable. The Davies have failed to prove it was not.
The counterclaim
[242] It was agreed between the parties that should the Davies fail in their causes of action against the company and Mr Smith the amount owing to the company by the Davies is $75,334.74 (inclusive of GST), plus interest of $23,964.50, totalling
$99,299.24. From that sum the amount of $4,364.50 must be deducted, being the cost of work that was not properly project managed and was defective.
Result
[243] I grant leave to the plaintiffs to amend the second amended statement of claim to include the alleged fourth representation.
[244]The Davies shall pay the sum of $94,934.74 plus interest to the company.
[245] I reserve the question of costs. Counsel shall confer and make a joint submission on proposed timetabling directions for the filing of memoranda as to costs.
Doogue J
Solicitors:
AWS Legal, Invercargill
Teresa Chan Law Ltd, Dunedin CC:
L A Andersen QC, Dunedin
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