Kona Estate Limited v Seismic Performance Limited
[2018] NZHC 529
•26 March 2018
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2017-404-1956 [2018] NZHC 529
BETWEEN KONA ESTATE LIMITED
Plaintiff
AND
SEISMIC PERFORMANCE LIMITED
First Defendant
ARTHUR MORGENSTERN
Second Defendant
Hearing: 22 February 2018 Appearances:
W G C Templeton for the Plaintiff R J Lattonp for the Defendants
Judgment:
26 March 2018
JUDGMENT OF ASSOCIATE JUDGE R M BELL
This judgment was delivered by me on 26 March 2018 at 3:00pm
pursuant to Rule 11.5 of the High Court Rules
………………………………………………….
Registrar/Deputy Registrar
Solicitors:
Anthony Thomas, Mangawhai Heads, for the Plaintiff Gregory Simon, Auckland, for the Defendants
Copy for:
Warren Templeton, Auckland, for the Plaintiff Rob Latton, Auckland, for the Defendants
KONA ESTATE LIMITED v SEISMIC PERFORMANCE LIMITED [2018] NZHC 529 [26 March 2018]
[1] In early 2015, Mr Tim Fleming, an accountant, was interested in buying a commercial building at 73-75 The Strand, Parnell, Auckland. It was apparently built in the 1920s. Mr Fleming was aware that it did not meet the earthquake standards of the Auckland Council. He wanted advice as to the costs of upgrading the building to meet the council’s standards. The land agent put him in touch with Mr Morgenstern of Seismic Performance Ltd, which carries on business project managing works to strengthen earthquake-risk buildings.
[2] On 22 April 2015, Seismic Performance Ltd gave Mr Fleming a detailed engineering evaluation (a DEE) which stated the work to upgrade the building to 34 per cent NBS (New Building Standard) and 67 per cent NBS. His report gave a cost estimate of $135,000 (excluding GST) to achieve 34 per cent NBS and a cost estimate of $162,000 (excluding GST) to achieve 67 per cent NBS. With that, Mr Fleming arranged for his company, Kona Estate Ltd, to declare an agreement to buy The Strand property unconditional. The bank that advanced funds for the purchase made it a condition of the loan that Kona Estate Ltd would carry out a seismic upgrade to 70 per cent NBS. The actual costs of the earthquake strengthening work came to $298,700 (excluding GST). Kona Estate Ltd says that Seismic Performance Ltd undertook to provide it with certainty as to cost, but it failed to do so because the actual cost was 85 per cent more than the figure given in the report. Kona Estate Ltd says that this matter is so clear-cut that the court should give it summary judgment.
[3] The statement of claim has four causes of action: breach of contract, misrepresentation, breach of s 9 of the Fair Trading Act 1986 and negligent misstatement. Kona Estate Ltd applies for summary judgment only on the first cause of action. It pleads that it was a term of the contract that the DEE report would provide certainty as to the cost of bringing the property up to 70 per cent NBS. Seismic Performance Ltd breached that term when the cost of the strengthening works went up to $298,700. The breach caused it to suffer a loss of $157,205, being the increased costs for the seismic upgrading work.
A procedural point
[4] The plaintiff is Kona Estate Ltd. The plaintiff’s documents describe the plaintiff as “Tim Fleming Associates as agent for Kona Estate Ltd”. “Tim Fleming Associates” is Mr Fleming’s accounting practice.
[5] The statement of claim shows the plaintiffs as “Tim Fleming Associates as agent for Kona Estate Ltd”. In all the causes of action, only Kona Estate Ltd needs to be named as the plaintiff. It is unnecessary to show “Tim Fleming Associates as agent”. While Mr Fleming initially engaged Seismic Performance Ltd, all parties agree that there was a novation under which Kona Estate Ltd became the client under the consultancy agreement instead of Tim Fleming Associates. Kona Estate Ltd engaged Seismic Performance Ltd. On its case, it incurred the extra costs of construction through the increased borrowings. While Mr Fleming, a director of Kona Estate Ltd, acted as its agent, he does not claim to have suffered any personal loss and does not show any breach of any duty owed to him personally, as opposed to his company. He need not be shown as a party to the proceeding. He is removed accordingly.
The plaintiff’s evidence
[6] On 5 March 2015, Mr Fleming emailed Mr Morgenstern of Seismic Performance Ltd asking for a quote for a report as to seismic upgrading of the building he was interested in buying. Mr Morgenstern replied by email on 5 March 2015. The email has the heading “Indicative Conditions of engagement, and Fee proposal: DEE Design proposal of remedial measures required to upgrade The 73-75 The Strand, Parnell, Auckland City, Building, up to a minimum level of 70 per cent NBS.” Mr Morgenstern recommended that Mr Fleming:
undertake a (DEE) Detailed Engineering Evaluation Design as to have the Detailed Engineering Evaluation solution, and indicative cost of the seismic upgrade of the 73-75 The Strand, Parnell, Auckland City, Building available to you. The total cost to undertake the DEE is $9,800. The DEE will provide you with certainty as to the cost of the works to bring The Strand building up to 34% NBS, and 70% NBS respectively.
Seismic Performance will provide a Cost Effective Sympathetic Engineering Design Solution to retrofit 73-75 The Strand, Parnell, Auckland City, Building to a minimum seismic strengthening level of 34% NBS and 70% NBS.
…
We believe that a quantitative assessment is more appropriate for the building due to our initial site inspection carried out on the 3rd of March 2015 and our review of the Council property files. The scope of work that is said to be “detailed seismological remedial measures required to improve 73-75 The Strand, Parnell, Auckland City building up to 30% NBS, and 70% NBS.
The fee proposal of $9,200 plus GST was to be “in accordance with the “Short Form Agreement for Consulting Engineer”.
[7] Mr Fleming says that he signed an agreement to buy The Strand property on 19 March 2015, but he has not put the agreement in evidence. He says that the agreement included these dates for conditions: approval of title 2 April 2015, builder’s report 2 April 2015, LIM report 13 April 2015 and due diligence 23 April 2015. He met Mr Morgenstern on 20 March 2015. Mr Morgenstern undertook to provide the DEE report in the time for due diligence under the agreement for sale and purchase. Mr Fleming says that he made it clear to Mr Morgenstern that he would require bank finance and that the DEE report would be important for that.
[8] On the same day, Mr Morgenstern sent his consultancy agreement. The parties are shown as Seismic Performance Ltd, the consultant, and Tim Fleming Associates as the client. The terms include the following:
2.In providing the Services the Consultant shall exercise the degree of skill, care and diligence normally expected of competent professional.
…
9.The liability of the Consultant to the Client in respect of the Services shall be limited to the greater of five times the value of the fees (exclusive of GST and disbursements) or the sum of $100,000. The Client acknowledges that the Consultant currently holds a policy of Professional Indemnity Insurance for the greater amount of NZ$100,000 or five times the value of the fees (exclusive of GST and disbursements). The Consultant undertakes to take all reasonable endeavours to maintain a similar policy of insurance for 6 years after the completion of the services.
…
11.The Consultant shall only be liable to the Client, in contract or in tort, for direct loss or damage suffered by the client as the result of a breach by the Consultant of his obligations under this Agreement and shall not be liable for any loss of profits. If either party is found liable to the other (whether in contract, tort or otherwise) and/or a third party
has contributed to the loss or damage, the liable party shall only be liable for a proportional extent of its own contribution.
The services to be provided under the agreement are described in the schedule, which reproduces Mr Morgenstern’s email of 5 March 2015. Mr Fleming says he signed the consultancy agreement, although the copy in evidence does not show his signature.
[9] Mr Fleming emphasises that it was important to him that he obtained “certainty as to costs of upgrading works”. He made Mr Morgenstern aware of his reliance on him to provide that certainty. Seismic Performance Ltd sent Mr Fleming an invoice for a deposit of $4,900 plus GST. Mr Fleming asked for the client to be changed from “Tim Fleming Associates” to “Kona Estate Ltd”. There were tax reasons for this change, but they are not relevant to this case. I was informed Seismic Performance Ltd sent an amended invoice showing the client as “Kona Estate Ltd”.
[10] During April, Mr Morgenstern contacted Mr Fleming’s office while Mr Fleming was away. Mr Morgenstern was proposing a design change so that the strengthening of the building would be independent of the cliff to the rear of the building.
[11] Mr Morgenstern gave Mr Fleming the DEE report on 22 April 2015. It is not necessary to go through the report in detail. The report recommended steel portal frames to be inserted at every second bay and at the front wall of the building. Steel ties would be connected to the exterior wall, to tie the front wall back to the proposed steel portal frames. To upgrade the building to 34% NBS, the work was described as:
·Add 4 x 200UC52 steel portal frames to be connected to the timber beams and concrete pilasters.
·Add 89SHS5 ties to connect the front wall back to the steel portal frames.
·Add 50 x 5 steel diagonal braces under the two floors and roof framing.
·Add 16 concrete foundation pads at the bases of the steel portal frame columns.
The work to upgrade to 67% NBS was the same, save that the steel portal frames were identified as 250UC73. The report gave a cost estimate of $135,000 for upgrade works
to 34% NBS, excluding GST and contingencies, and a cost estimate of $162,000 for 70% NBS, again excluding GST and contingencies. The report has schedules, but these were not put in evidence.
[12] Kona Estate Ltd borrowed funds from a bank to buy the property and upgrade it to 70% NBS. The loan documents contain a condition for earthquake strengthening to the property to bring it up to 70% NBS within 12 months of completing the purchase. Mr Fleming says that Kona Estate Ltd relied on the report by Seismic Performance Ltd in obtaining finance from the bank and in declaring the agreement for sale and purchase to be satisfied, confirming that the conditions for the purchase of the property had been satisfied and completing the purchase. Title was taken in the name of Strands of Kona Ltd, a subsidiary of Kona Estate Ltd. Settlement of the purchase took place on 31 July 2015.
[13] Mr Fleming says that in December 2015, Mr Morgenstern told him that he had made an error in the costings. Mr Fleming attaches to his affidavit an email by Mr Morgenstern to Kona’s bank, which includes the following:
… I confirm that there was an error in our preliminary costing’s prepared for Tim Fleming on the 22nd of April 2015 for the Seismic up-grade of the 73-75 The Strand building, Parnell, to 70% NBS level of service. The error was in item 4.0 of the preliminary costings (Portal Frames) our estimator provided for 4 units and there are in fact 12 units. This has increased the costs of the works from our preliminary budget of $162,000 to the Contract price for the works in the amount of $298,700. I confirm we have now reached agreement with all of the tenants in relation to our works programme and have scheduled to start construction on 5th of January 2016 within the ground floor tenancy.
[14] Strands of Kona Ltd entered into a construction contract with Seismic to carry out the upgrade work. Mr Fleming says that the difference between the cost stated in the April 2015 report of $186,200 ($162,000 plus GST) and the actual costs of construction of $343,505 ($298,700 including GST) is $157,205). That is the amount of the claim for breach of contract. Mr Fleming notes the clause in the consultancy agreement limiting any claim to $100,000 and considers that it does not apply here.
The defendants’ evidence
[15] Mr Morgenstern says that the DEE report advised an indicative cost of a seismic upgrade but is not a cast-iron guarantee as to what the work will cost. The purpose of the report was to provide an engineering solution for a seismic upgrade. Only indicative costs can be given because seismic upgrades include variables including:
[a]inspections for a report are often not fully intrusive;
[b]buildings requiring seismic upgrades are often old and detailed construction plans are not available;
[c]the scope of work can change once detailed investigations are carried out; and
[d]a building consent authority may impose conditions on the grant of building consent which may add to the work and increase costs.
[16] He says that he explained this to Mr Fleming before Mr Fleming engaged Seismic Performance Ltd to provide the DEE report. Mr Fleming appeared to understand that the report would give him only an indicative cost. Because Mr Fleming did not own the building, it was not possible to carry out intrusive investigations which would be required to come up with a definitive cost for a structural upgrade. Mr Morgenstern also says that he explained to Mr Fleming that there needed to be a separate construction contract to carry out the upgrade work. That construction contract would specify the actual costs. Mr Morgenstern makes the point that the DEE report recorded that:
[a]no intrusive site investigation was carried out;
[b]detailed structural and architectural drawings were not available;
The drawings that had been found did not necessarily represent the as-built state of the building. While the DEE report is not recognised for the New Zealand Building Code, it is widely used for preliminary seismic investigations. The report included a cost estimate.
[17] Mr Morgenstern says that after the purchase, there was a full structural design to obtain a building consent and negotiate a construction contract. At that stage, there were changes to the scope of work. While the DEE report had anticipated that there would be four independent portal frames installed in the ground floor, the ground floor tenants did not want to give access. There was a design change to replace the four individual portal frames with one architectural three-storeyed frame. That added significantly to the cost. He discussed this with Mr Fleming who agreed to it, and did not raise any objection that the contract price should be the same as the estimate in the DEE report. There was no complaint about the contact price. He has attached a building contract between Seismic Performance Ltd (as contractor) and Strands Kona Ltd (as building owner) for seismic building works costing $298,700 plus GST. A schedule of contract works does not provide for four portal frames, or for 12 portal frames but for “a steel portal brace frame”. While Strands of Kona Ltd did not sign the contract, it was carried out. The contract price was paid. He says that Mr Fleming did not raise the matters on which Kona Estate now sues until December 2016.
[18]Mr Fleming’s reply affidavit contains more by way of argument than fresh
evidence.
Does Seismic Performance Ltd have no defence?
[19] For this summary judgment application Kona Estate Ltd needs to show that Seismic Performance Ltd has no defence to the cause of action for breach of contract. Its case is that Seismic Performance Ltd breached the consultancy agreement when it provided a report stating that the costs to bring the property up to 70 per cent NBS was
$162,000 excluding GST. Kona Estate Ltd’s evidence as to the breach of the agreement is the statement by Mr Morgenstern to Mr Fleming in December 2015 that he had made an error in the costings, which was recorded in his email to Kona Estate Ltd’s bank on 23 December 2015. Kona Estate Ltd does not rely on any other evidence of breach of contract. Kona Estate Ltd has not adduced any evidence from an independent expert. The calculations by which Seismic Performance Ltd reached its costing of $162,000 have not been put in evidence. There is no assessment whether that figure was appropriately calculated.
[20] This is a professional liability case. Kona Estate Ltd engaged Seismic Performance Ltd to provide expert advice as to how much the seismic upgrade would cost. Mr Fleming says that Kona Estate Ltd needed “certainty as to cost”. There was some difference between the parties as to what that meant, with Seismic Performance Ltd emphasising that it was required to provide only an indicative cost. I put it to counsel that under the contract Seismic Performance Ltd was to provide a figure that Kona Estate Ltd could rely on with confidence. Any cost estimate is of its nature conjectural. It could never be an exact costing. There would be some margin. Neither counsel seemed inclined to disagree with that. It left the plaintiff free to argue that 85 per cent increase over the estimate gave a ground for complaint. Nor did it detract from the defence of Seismic Performance Ltd. While Seismic Performance Ltd was required to provide an estimate that could be relied on with confidence, the contract specified a standard of performance– “the degree of skill, care and diligence normally expected of a competent professional” (cl 2).
[21] The courts often observe that it is difficult to obtain summary judgment on liability in professional liability cases.1 On the evidence, I cannot say that Seismic Performance Ltd has no defence to any allegation that it did not reach the required level of contractual performance when it gave its report in April 2015. While Mr Morgenstern’s email to the bank is some evidence against Seismic Performance Ltd, there is evidence going the other way. That is Mr Morgenstern’s explanation of the design change from four-portal frames to one three-storey frame and the schedule to the contract for the upgrade works specifying “a steel portal brace frame”. If Kona Estate Ltd were to discredit Mr Morgenstern’s evidence, I would have expected the reply evidence to show that instead of a single frame described by Mr Morgenstern, the building has 12 panel frames as described in the email on which Kona Estate Ltd filed. There is no such rebuttal evidence.
[22] Mr Morgenstern has an explanation for the email of December 2015. He says that Mr Fleming put him up to it. All the same, the letter presents a difficulty for his defence, but at this stage I cannot say that his unsworn statement in his email to the
1 Economy Services Ltd v Smith & Hughes (1989) 2 PRNZ 657; Ghent v Brinkman HC Wellington CP379/87, 11 September 1987; Ball v NZ Debt Repay (in liq) HC Auckland CP490/02, 5 August 2003.
bank is to be preferred over his sworn evidence. Those are trial matters which cannot be resolved on a summary judgment application. Accordingly, liability for breach of contract is contestable. That is enough for the summary judgment application to fail.
Other issues
[23] Mr Latton submitted that causation was also in issue. His argument ran that after Kona Estate Ltd received the report of 22 April 2015, it had the choice whether to make its agreement for sale and purchase unconditional, after having carried out due diligence. The report made it clear that an estimate only was being supplied. There seems to be little in that point. There is at this stage no evidence testing Mr Fleming’s evidence that he relied on the report to make the agreement for the purchase of The Strand property unconditional, and to seek finance from the bank.
[24] There is a question as to the measure of damages: whether Kona Estate Ltd can include a GST component in its damages. It is arguable for Seismic Performance Ltd that any damages should be exclusive of GST. I would expect Kona Estate Ltd to be registered for GST. It would be entitled to claim input credits for supplies made to it. Its loss is accordingly the difference between the estimated costs (exclusive of GST) and the actual cost (exclusive of GST). That is some $136,000. There may be no taxable supply in any damages which Seismic Performance Ltd must pay. There is an explanation for this in an Inland Revenue article, “GST Treatment of Court Awards and Out of Court Settlements”:2
For a supply to take place, something of value must be “furnished or provided” (Databank). The supply must additionally involve enforceable reciprocal obligations (Chatham Islands). If something has been used, but there was no agreement for its supply between the relevant parties, any payment subsequently received by the aggrieved party is not consideration for the supply. The receipt of payment does not involve any reciprocal obligations between the parties, and cannot be retrospectively linked to there having been a “supply” for GST purposes. Any payment received relating to a previous use of an item where there has been no agreement to supply will be by nature compensatory, and thus outside the scope of GST.
2 “GST Treatment of Court Awards and Out of Court Settlements” (September 2002) Inland Revenue Interpretation Guidelines and Interpretation Statements at 28.
[25] Seismic Performance Ltd relies on the $100,000 limitation under cl 9 of the agreement. Mr Templeton submitted that the parties made a binding contract before the consultancy agreement was signed on 20 March 2015 and that contract did not contain the limitation clause. One difficulty for Kona Estate Ltd is that Mr Morgenstern’s email of 5 March 2015 recorded that any engagement would be in accordance with the “short form agreement for sale with the consulting engineer” which did contain the limitation provision. An agreement in terms of the email of 5 March 2015 was an agreement to contract according to the short form of agreement. Moreover, it is arguable for Seismic Performance Ltd that it would not be contractually bound until the short form agreement was signed. That approach may be available on authorities that show that while parties may have reached apparent agreement, they did not intend to be bound until a contract was been signed.3
Result
[26]For the above reasons, the summary judgment application is dismissed.
Following NZI Bank Ltd v Philpott, I reserve costs.4
[27] In the hearing, I canvassed with counsel whether this proceeding should stay in this court. The amount of the claim is clearly inside the monetary jurisdiction of the District Court. Under s 94 of the District Court Act 2016, the case is suitable for transfer. Since the hearing, I have made informal enquiries which suggest that if this case were transferred to the District Court, a hearing might be available within six to nine months. A hearing in this court would not be so prompt. I ask counsel to file submissions on the point. If they agree, I will make a consent order for transfer under s 94. In the absence of agreement, the plaintiff is to file a memorandum within five working days and the defendants are to file a memorandum in response within a further five working days. If the case is not transferred to the District Court, I will direct a case management conference.
3 Carruthers v Whitaker [1975] 2 NZLR 667 (CA); Concorde Enterprises Ltd v Anthony Motors (Hutt) Ltd [1981] 2 NZLR 385 (CA); Shell Oil New Zealand Ltd v Wordcom Investments Ltd [1992] 1 NZLR 129 (CA); Smada Group Ltd v Miro Farms Ltd [2007] NZCA 568, (2008) 6 NZConvC 194,588; FBN Holdings Ltd v Kim (2010) 11 NZCPR 296 (HC) at [40].
4 NZI Bank Ltd v Philpott [1990] 2 NZLR 403 (CA).
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Associate Judge R M Bell
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