Jefferson v Straw Homes Limited
[2017] NZHC 1766
•28 July 2017
IN THE HIGH COURT OF NEW ZEALAND NAPIER REGISTRY
CIV 2016-441-143 [2017] NZHC 1766
BETWEEN JOHN SCOTT JEFFERSON AND
MORAG EILEAN WILSON Appellants
AND
STRAW HOMES LIMITED First Respondent
RICHARD ERNEST NEILL Second Respondent
Hearing: 31 May 2017 Appearances:
D Kerr for the Appellants
P J Shamy for the RespondentsJudgment:
28 July 2017
JUDGMENT OF MALLON J
Introduction
[1] Straw Homes (the first respondent) was employed to build a home for Mr Jefferson and Ms Wilson (the appellants). There were delays and significant cost overruns in the work. The appellants refused to pay for these overruns contending that there was a fixed price contract. They purported to cancel the contract and employed other contractors to complete the house.
[2] Straw Homes brought a claim for its unpaid invoices. The appellants counterclaimed against Straw Homes, and its principal Mr Neill (the second respondent), alleging their actions were negligent and seeking damages in the
amount of the costs it incurred in completing the work on the house.
JEFFERSON v STRAW HOMES LIMITED [2017] NZHC 1766 [28 July 2017]
[3] The District Court Judge (Judge Gibson) found there was no fixed fee contract.1 He found Straw Homes and Mr Neill negligent in that they failed to advise the appellants of the cost implications of building a larger house and of agreed variations. However he found the appellants had suffered no loss. He therefore dismissed their claim.
[4] The appellants appeal against the District Court decision. They also apply for leave to adduce further evidence.
The facts
[5] The appellants wished to build a straw bale house. That form of construction is uncommon in New Zealand. The appellants initially had some difficulty in finding a suitably qualified builder. Eventually they learnt of Straw Homes, a company which had previously built houses using this construction method. Mr Jefferson made enquiries of Mr Neill and inspected houses that Straw Homes were currently building using this method.
[6] On 30 September 2008, having decided to proceed with the build, the appellants and Straw Homes signed an agreement for the work. The agreement was in the New Zealand Institute of Architects’ standard form for “National Building Contracts Small Works”. The agreement was described as being for “managed labour only”. The contract price was not stated. The commencement date for the work was 1 February 2009. Progress payments were to be made every two weeks.
[7] The agreement permitted the appellants to engage other contractors to carry out work on the build. It provided a process for variations (meaning any change to the contract works). Under this process the appellants were permitted to direct Straw Homes to carry out variations. The direction was to be in writing. Unless the appellants otherwise directed in writing, the value of a variation was to be agreed before Straw Homes started work on it.
[8] There was no description of the contract work in the agreement. Nor were plans or specifications attached. The completion date was also not specified. This is because the plans were still a work in progress. The appellants had engaged an architectural draughtsman, Mr Jaycock, who was working on them. Mr Neill gave evidence that the signed agreement was entered into at this point to ensure he would be the builder, as Mr Jaycock had not designed a straw bale house before and needed information from Mr Neill about various details.
[9] The appellants had limited funds available, most of which were to be sourced from borrowings. They had decided on an upper limit for the building of the house of $600,000. The District Court Judge found the appellants made it known to Mr Neill before work commenced on the building that this was the limit they anticipated spending.
[10] In February 2009 there were a number of draft plans which Mr Jaycock had prepared. One of these plans was for a total floor area of 414 m2, comprising 278 m2 for the downstairs area and 136 m2 for the upstairs area. Another draft had the same downstairs area but an upstairs area of 98 m2 giving a total floor area of 375 m2. The size of the upstairs area and the overall design were not settled when Mr Neill obtained prices for the written estimate he prepared for the appellants.
[11] This written estimate was provided to the appellants in March 2009. It was for $646,060.63 (excluding GST) for the work.2 The written estimate commenced by saying “[t]he following is a price estimate for [the appellants’] home …”. It set out sums for various items needed for the build. It included a profit margin of
$27,800 calculated on the basis of “278m2 @ $100.00/m2.” A second version of this
estimate was prepared sometime in the same month. It had the same introductory words stating that it was a “price estimate” for the appellants’ home. However it varied from the first version by the inclusion at the end of the document of the words “[t]his is a fixed price estimate of $646,060.63 for the building [of the appellants’ home].”
[12] At around this time, at Mr Jefferson’s request, the sum of $646,060.63 was inserted as the “contract price” on one copy of the agreement which had been signed by the appellants and Straw Homes in September 2008. No other changes were made to the agreement. It continued to describe the contract as “managed labour only”. No plans or other description of the contract works were added to the signed agreement. This copy of the contract was provided to the appellants’ bank to support an application for mortgage finance. The Judge accepted the appellants were still expecting the house could be built for around the $600,000 they had nominated as their upper limit because Mr Jefferson and his father-in-law (a qualified builder) intended to work on the site when practicable.
[13] In March 2009 the application for building consent was lodged. This estimated the value of the building work at $600,000. The consent was sought for the plans with a total floor area of 429 m2. Building consent was granted in May
2009. Work commenced on the property. Invoices were rendered at least once a month for various amounts depending on the work that was covered. The appellants paid these invoices promptly.
[14] There were a number of changes to the design of the house during the building process. The parties did not follow the process in the agreement whereby changes were to be implemented only at the appellants’ written direction and only once the price for them had been agreed in writing. The Judge found that many of these changes were at Mr Neill’s suggestion. It is not suggested the appellants had not agreed to them. They included changes to the internal layout of the house, a change to the design of the staircase, the addition of a climbing wall (at the appellants’ request), window configuration changes, and a change to the roof.
[15] There were also delays. One of those delays occurred towards the end of
2009, when work had to stop due to a problem with the cathedral beams that were to be used in the roof structure. Ms Wilson had noticed gaps appearing in the beams which were found to be a manufacturing fault. While that issue was being resolved, little further happened on the build until the beginning of 2010.
[16] In early February 2010 the appellants enquired as to the costs to finish the project. Mr Neill responded that approximately $100,000 of work was still required (excluding GST) and excluding any estimate for electrical work or for the installation of the kitchen. Mr Jefferson responded on 9 February 2010 as follows:
Forgive me but 350 hours still to go sounds heaps…I’m freaking out a bit as although there’s been additional time re beams etc, I note that the overall labour costs are already 700 or so over the anticipated total labour cost with another 200 to finish.
As it stands we are at $624,289.57 with $104,183.09 unpaid and the further cost to finish around $100,000 (not including kitchen). The bank has agreed to lend us $580,000 which after advances to date leaves an available balance to finish of $111,000. Looks like we are going to be way over. Help!
[17] In the following months the parties’ relationship deteriorated. The appellants were concerned about the additional costs and the financial strain this was causing them. By September 2010 they had already paid $684,000 and the house was not completed. A number of invoices had not been paid and Straw Homes stopped undertaking work at the site and removed its tools. On 16 September 2010 Straw Homes notified the Council that it could not finish the house due to non-payment of accounts and that “the owner has employed other people to finish the house off”. At this time the total amount invoiced was $833,000 of which $149,218.62 had not been paid.
[18] On 30 September 2010 Mr Jefferson wrote to Straw Homes requiring it to provide a finished home for the contract price.3 He gave Straw Homes 10 days to remedy the default or the contract would come to an end. In the same letter he required Straw Homes to return the keys and garage door openers for the property and he revoked Straw Homes’ employees’ authority to enter the property without express permission. The appellants considered the contract was cancelled when the
alleged default was not remedied by Straw Homes within the stipulated time.
[19] After cancelling the contract with Straw Homes the appellants paid an additional $232,000 for their house to be completed. The house finally built was 429
m2. It does not yet have a code of compliance.
3 He erroneously stated this as $646,060.63.
The District Court proceeding
[20] Straw Homes issued proceedings against the appellants to recover the unpaid balance of their invoices of $149,218.62. The appellants counterclaimed for
$190,728.26 being the cost they incurred in completing the build after cancelling the contract with Straw Homes less the balance owing if this had been a fixed price contract.4 They alleged breach of contract, negligence, breach of the Consumer Guarantees Act 1993, misrepresentation and misleading and deceptive conduct against Straw Homes. They also claimed the same sum against Mr Neill personally alleging negligence and misleading and deceptive conduct.
[21] The District Court Judge held Straw Homes was entitled to recover its unpaid invoices. He dismissed all of the claims brought by the appellants against Straw Homes and Mr Neill. Of these claims he held Straw Homes and Mr Neill had been negligent only on one aspect. However no loss was proven as a result of this negligence.
Approach on appeal
[22] The appeal is by way of rehearing. While the Court must make its own assessment of the merits of the case, the appellants have the onus of persuading the Court that it should differ from the decision under appeal. The Court will only be justified in interfering with the decision if it is wrong. The Court should have regard where appropriate to such advantages as the lower Court may have had in hearing the evidence and in making findings of credibility.5
Issue 1: was this a fixed price contract
The District Court decision
[23] The District Court Judge held that there was no fixed price contract. This was for the following reasons:
4 The contract price was for $726,818.82. The appellants paid Straw Homes $684,813.70. The District Court Judge calculated the difference between what they paid Straw Homes and the fixed price contract amount as $42,186.30 (having rounded the numbers for the fixed price contract).
5 Austin Nicholls & Co Inc v Stitching Lodestar [2007] NZSC 103, [2008] 2 NZLR 141.
(a) The September 2008 agreement lacked subject matter and consequently its terms were to be deduced from the surrounding circumstances.
(b)The Judge accepted Mr Neill’s evidence that if the contract had been for a fixed price a detailed set of plans and specifications would have been required to allow for accurate costing.
(c) He accepted Mr Neill’s evidence that if the contract had been for a fixed price a building contract, of the more usual type, would have been entered into providing for payments at various stages of construction.
(d)The signed contract specified the form of contract as “managed labour only”. The written estimate was consistent with this, with labour being given at approximate hourly rates and a profit margin of $100 per m2 ascribed for a 278 m2 house.
(e) The written estimate provided by Mr Neill was “overall .. clearly an estimate”. It gave imprecise figures for some items. The words “fixed price estimate” were added by Mr Neill at Mr Jefferson’s request but the Judge accepted Mr Neill did not, by adding those words, agree to commit to a fixed quotation.
(f) Mr Jefferson’s conduct was consistent with there being no fixed price.
His email dated 9 February 2010 did not protest that a fixed price contract had been exceeded. His concern was that the number of hours required to complete the build had escalated over those anticipated.
Appellants’ submissions
[24] The appellants submit that the Judge was wrong to reject their claim that the contract was for a fixed price. They submit the Judge erred by placing undue weight on the “fixed price estimate” document and he effectively ignored the amendment to
the contract in March 2009 to include this price. They say the clear effect of inserting the contract price was to set a fixed price for the build. At that time the plans submitted to the Council were for a house with a floor area of 429 m2. They submit the Judge erred by taking into account Mr Neill’s subjective intention not to be bound by a fixed price. They also submit Mr Jefferson’s subsequent conduct was equivocal and in any event could not override the clear terms of the contract.
My assessment
[25] The appellants’ submission relies on the effect of inserting a “contract price” into the agreement. However the words “contract price” are not to be read in isolation. The question is:6
… what a reasonable and properly informed third party would consider the parties intended the words of their contract to mean… To be properly informed the court must be aware of the commercial or other context in which the contract was made and of all the facts and circumstances known to and likely to be operating on the parties’ minds.
[26] Subsequent conduct of the parties can also be taken into account. The focus must be on the parties’ objective conduct rather than expressions of subjective intention or understanding. It is not settled whether the conduct must be that of all parties to the contract or whether unilateral conduct by one party which is
inconsistent with the interpretation that party advances to the Court suffices.7
[27] With one possible exception the Judge adopted this approach. The possible exception is that the Judge accepted Mr Neill’s evidence that “he had no intention of committing to a fixed quotation for the work” on the basis of the “fixed price estimate” wording or by inserting the contract price figure into the September 2008 agreement. In saying this the Judge appears to have placed reliance on Mr Neill’s subjective intention rather than assessing the objective meaning of the parties’
agreement.
6 Vector Gas Ltd v Bay of Plenty Energy Ltd [2010] NZSC 5, [2010] 2 NZLR 444 at [19] per
Tipping J.
7 Wholesale Distributors Ltd v Gibbons Holdings Ltd [2007] NZSC 37, [2008] 1 NZLR 277 and the discussion in Burrows Finn and Todd Law of Contract in New Zealand (5th ed, Lexis Nexis, Wellington, 2016) at 190.
[28] However putting that to one side, the Judge’s approach was otherwise correct and I agree with his conclusion. A reasonably and properly informed third party would consider the parties intended the words “contract price” to mean this was the estimated price of the build for a floor area of 278 m2 as per the written estimate provided at around the same time. The third party would be aware that Mr Neill was not in a position to commit to a fixed price at that stage. The Judge had found that the plans were still fluid at this time (while the larger plan (429 m2) was submitted to Council for consent, there were other versions being considered at this time). The estimate also gave imprecise figures for a number of items. A third party would be aware the written estimate was, as the Judge found, clearly one based on a floor area of 278 m2 which was the area on which the estimated cost of labour was based. The words “fixed price estimate” were ambiguous and did not alter what was apparent from the whole of the document that an estimate for the build was being provided. The third party would understand the parties had agreed on a managed labour contract, with the hope the build could be completed for less than the amount specified with Mr Jefferson and his father-in-law carrying out some of the work.
[29] The Judge was also correct to find the parties’ subsequent conduct supported this interpretation. Mr Neill had continued to invoice the appellants once the “contract price” had been exceeded. If the parties had agreed to a fixed price the appellants would have been expected to protest the moment the price was exceeded on that basis. Instead Mr Jefferson’s concern was about the number of hours that were still left to complete the build. He did not assert there was a fixed price until he gave the notice on 30 September 2010. Mr Neill’s conduct in continuing to invoice after the estimate was exceeded and the appellants’ lack of protest is objective evidence of what the parties had agreed. (Mr Jefferson’s email in February 2009 can also be viewed as unilateral conduct inconsistent with the position he now advances.)
[30] I am therefore not persuaded the Judge erred in his conclusion. This ground of appeal is dismissed.
Issue 2: had the appellants proven loss caused by negligence
The negligence claim
[31] The negligence claim as pleaded against Straw Homes and Mr Neill was as follows:
19.The Contractor owed the Principals a duty of care to manage and carry out the building work with reasonable care and skill, and to complete the work within a reasonable time and for no more than the agreed fixed ceiling cost for the build.
20.In breach of those duties the Contractor charged the Principals more than the fixed ceiling cost for the build.
21. As a result, and under duress, the Principals have overpaid the
Contractor $38,753.07.
22.The Contractor further breached its duties to the Principals by failing to carry out the building work to the standard of a reasonable building contractor, including as follows:
22.1.The Contractor failed to complete the building work in a timely fashion.
22.2The Contractor recommended and used an unsuitable roofing material which could not be made weather-tight.
22.3The Contractor failed to properly manage and supervise sub- contractors and suppliers of materials, in particular the suppliers of Douglas Fir beams and of joinery for windows and doors.
23.As a result of the breaches described in the preceding paragraph and sub-paragraphs, and following their cancellation of the contract, the Principals have had to engage alternative contractors to complete and remedy the Contractor’s work, and have had to purchase replacement materials from alternative suppliers. This has caused the Principals to suffer loss in the sum of $184,723.00
[32] The negligence claim against Mr Neill was materially the same.
The District Court decision
[33] The Judge rejected the pleaded claims of negligence:
(a) The allegation there was negligence in failing to complete the work for no more than the agreed fixed ceiling cost failed because there was not an agreed fixed price.
(b)The allegation there was negligence in failing to complete the work within a reasonable time or in a timely fashion also failed. The work was not completed because the appellants had brought the contract to an end. For some time previously Straw Homes was not working on the project because the appellants failed to pay outstanding invoices which caused it difficulty with cash flow. There was no expert evidence as to what might have been a reasonable time to complete the home. The appellants did not attempt, prior to September 2010, to give notice requiring completion within a specified time. When they did give notice they required the work to be completed within 10 days. There was no evidence as to whether this would have been possible. The appellants also insisted the work be completed for the fixed price they wrongly contended had been agreed.
(c) The allegation that Straw Homes/Mr Neill recommended and used unsuitable roofing material failed. The appellants failed to adduce evidence to show a prudent and competent builder would not have made this recommendation. Mr Jaycock had made his own inquiries and was satisfied the roofing material could be used. There was also no evidence establishing the loss arising from this recommendation.
(d)The allegation that Straw Homes/Mr Neill failed to properly manage and supervise subcontractors and suppliers of materials failed. They were not responsible for joinery delays caused by the joiner’s liquidity issues, nor for the manufacturing defects in the cathedral beams and Straw Homes did not pass on all costs of the repairs. Mismeasurement errors were minor and it was not shown they caused the appellants any loss.
[34] Written closing submissions were filed in the District Court sequentially after the hearing. Although it was not pleaded, in their written closing submissions the appellants submitted Straw Homes and Mr Neill were negligent in failing to give them reliable information about the building costs before and during the project. No objection appears to have been taken to this although Straw Homes and Mr Neill’s written submissions did not specifically address this allegation.
[35] The Judge held that Straw Homes and Mr Neill were aware the appellants, given their financial situation, wished to spend no more than $600,000 on the house and that they had used this estimate to obtain finance from the bank. This gave rise to a duty on Straw Homes (in contract and tort) and Mr Neill (in tort) to ensure that accurate cost estimates were given before the work commenced or variation was undertaken. This would have enabled the appellants to make decisions to ensure they remained within their financial limit.
[36] The Judge considered there was difficulty in assessing the loss. He accepted that, had the appellants known the true cost of the project, they would have likely arranged for the construction of a more modest house. Also many of the additional costs incurred were due to difficulties in the building process that were neither party’s fault. However the house that was built was much larger than that initially envisioned. The Judge was not satisfied that the cost of constructing that house was unreasonable in terms of the hourly rate applicable for a managed labour contract or the materials used for the size of the building. There was no valuation evidence of the property. The property was “presumably” an appreciating asset. The Judge was not able to award any damages as he was not satisfied any loss had been proven by the appellants.
[37] In addressing this issue, the Judge considered what was really at the heart of the dispute. An estimate had been given. That estimate was consistent with the appellants’ budget which they had made known to Mr Neill. Mr Neill knew the estimate was based on a floor area of 278 m2. He knew from the building consent that the house was to be much larger than this. He suggested a number of the variations and knew the price of those had not been agreed when he implemented
them. There is nothing to suggest Straw Homes and Mr Neill were prejudiced by the
Judge considering this unpleaded allegation and they do not contend they were.
Submissions and further evidence
[38] The appellants submit their loss is the additional amount they ended up having to spend, over and above the sum they were led to believe they would have to spend. They say they were not required to prove the total cost of constructing the house was unreasonable. They say the Judge’s statements about the appreciating value of the house essentially amounted to a betterment argument, implying they had received a positive advantage or value for money as a result of the additional sum they spent to complete the house, thereby offsetting any loss. They say it was for Straw Homes and Mr Neill to prove betterment and they provided no evidence to do so. They say that the Judge was wrong to assume, in the absence of evidence, the house had increased in value. Therefore they should not have been ordered to pay the $149,218.62 outstanding under the invoices and should have received damages of $190,728.26.
[39] In support of their submission the appellants apply for leave to adduce further evidence, namely an affidavit sworn by Mr Jefferson on 14 March 2017. The affidavit attaches a valuation dated 11 February 2014. This gives a market value of the property of $874,000 of which $586,000 is for the improvements (ie, the house). The appellants submit there are special reasons for the Court to admit this evidence. They say the issue of betterment had not been raised in the pleadings, evidence or submissions at the hearing, but was introduced by the Judge in his reserved decision. They say the evidence may assist the Court in determining the appeal.
[40] Straw Homes/Mr Neill submit the Judge’s approach was not about betterment but about what loss the appellants suffered. It was for the appellants to prove their loss. They say the appellants failed to provide relevant available evidence of loss caused by the negligence at the time of the hearing. This is not capable of rectification by fresh evidence on appeal. Straw Homes/Mr Neill also submit the evidence is solely directed to the value of the finished home, not to the reasonableness or otherwise of the cost of the work done by the respondents. It is
not comparing apples with apples (that is, it does not provide a comparison with the value of the house if it had been built with an area of 278 m2 as per the estimate). They say it is hearsay.
My assessment
[41] I do not accept the appellants’ submission that the Judge’s approach to assessing loss incorporated a betterment issue. The “object of an award of [compensatory] damages is to give the claimant compensation for the damage, loss or injury he [or she] has suffered.”8 The measure of damages is the sum of money that will put the injured party in the same position she would have been in had the wrong not been sustained.9 There are, however, some circumstances where the claimant will recover more than her loss applying this approach. One situation is betterment. This classically refers to a situation where damaged property is repaired or reinstated and this can only be done by putting the property in a better condition than it originally was before the damage was inflicted.10 In that situation a deduction might be made from the amount recovered by the claimant to repair or reinstate, but taking into account any disadvantage to the claimant in making the involuntary investment.11 The onus is on the defendant to prove the claimant has benefitted from
the repair or reinstatement.12
[42] In this case the Judge considered what loss the appellants had actually suffered by being deprived of owing a smaller house at a lower cost.13 Their loss was not simply the additional expenditure they were forced to incur. Some of the additional expenditure was required because of difficulties which were not the fault of Straw Homes/Mr Neill. Moreover, for the additional expenditure the appellants received a larger asset. Absent any evidence the additional expenditure was charged at an unreasonable level or any other valuation evidence, the Judge’s assumption was
that the appellants received commensurate additional value from the larger house for
8 Harvey McGregor McGregor on Damages (19th ed, Sweet & Maxwell, London, 2014) at [2-
001].
9 At [2-002] citing Livingstone v Raywards Coal Co (1880) 5 App Cas 25 at 39.
10 At [2-007] and Stephen Todd (ed) The Law of Torts in New Zealand (7th ed, Thomson Reuters, Wellington, 2016) at 1318.
11 Todd above n 10 at 1318.
12 At 1318.
13 The Judge’s finding was that, if the contract had been performed without the breach of duty/the tort had not occurred, the appellants would have built a smaller house.
their expenditure. The appellants had therefore failed to prove they suffered any loss.
[43] The Judge’s approach was correct on the evidence before him. The appellants had the burden to prove they had suffered loss. They proved only that they incurred additional expenditure. They did not prove what portion of that was the fault of Straw Homes/Mr Neill. And they adduced no evidence that they did not receive commensurate value for that expenditure.
[44] There are not special reasons to admit Mr Jefferson’s affidavit attaching the valuation. First, the evidence is not fresh. The valuation is from 2014 and the District Court hearing took place in 2016. It was therefore in the appellants’ possession at the time of the hearing. In any event, the appellants were able to obtain valuation evidence for the hearing if they had wished to do so. Secondly, the evidence does not materially assist. It indicates the value of the house was less than the cost to build it, but it does not address whether that would have also been the case with a smaller house and by a comparable proportionate amount.
[45] This ground of appeal is also dismissed.
Result
[46] The appeal is dismissed. Scale costs should follow the event. If any issue arises about costs, the parties have leave to file brief submissions (no more than three pages) confined to the particular issue in dispute within one month of the date of this judgment.
Mallon J
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