Lee v South

[2019] NZHC 646

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE

CIV-2017-404-2194

[2019] NZHC 646

BETWEEN

BRIAN MIN WOO LEE AND CLARE ELIZABETH LEE
Plaintiffs

AND

DION JAMES SOUTH

First Defendant

SOUTH DEVELOPMENT LIMITED

Second Defendant

Hearing:	25 March 2019
Appearances:	J Wilson and G Garcia for the Plaintiffs No appearance for or by the Defendants
Judgment:	1 April 2019

JUDGMENT OF MUIR J

(On Formal Proof)

This judgment was delivered by me on Monday 1 April 2019 at 12.00 pm pursuant to Rule 11.5 of the High Court Rules.

Registrar/Deputy Registrar

Date:………………………….

Solicitors:
Bell Gully, Auckland.

LEE v SOUTH [2019] NZHC 646 [1 April 2019]

Introduction

[1]    The plaintiffs, Mr and Mrs Lee (the Lees), seek formal proof in respect of their claims against the defendants. Such claims arise out of a building contract (the Contract) for substantial renovations to their home in Auld Street, Torbay (the Property).

[2]    The first defendant, Dion South, is a licensed building practitioner. The second defendant is Dion South’s company, South Development Limited (SDL), of which Mr South is the sole director and shareholder.

[3]    The building contract was for a fixed price for delivery in a fixed term. At the defendants’ insistence, payments were made in excess of that fixed price and when the Lees declined to co-operate further Mr South left the site.

[4]    The Lees referred the matter to adjudication in August 2016. The Adjudicator determined the Lees had been overcharged, the defendants had no right to suspend work, and the outstanding work should be completed at no extra charge (save as to costs permitted by certain clauses in the Contract).

[5]    Works did not recommence despite repeated requests by the Lees. As a result, the Lees cancelled the Contract in April 2017.

[6]    The Lees now seek damages. Their primary claim relates to the anticipated costs of completion. Other claims include for overpayments, loss of rental, business losses and general damages. Three causes of action are pleaded (breach of contract, breach of the Fair Trading Act 1986 and negligence). In oral submissions Mr Wilson indicated that he was content to rely on the contractual cause of action.

The Contract

[7]Key provisions of the Contract include:

·     The work was to commence on 30 March 2015 and be completed within 16 weeks (by 17 July 2015).

·     The scope of work was “renovation to the existing property as per the approved plans and as agreed between both parties”.

· The work was to be done competently, in accordance with the plans and specifications, and would be consistent with the requirements of the Building Act 2004 and the Building Code.

·     The items in Schedule 1 of the Contract were to be undertaken at a fixed price of $331,192.20 (the Fixed Price Component). In respect of the items in Schedule 2, South Development would “work very hard” to achieve a total of $40,832.35 (the Floating Price Component).

[8] Being a “residential building contract” in terms of section 362B of the Building Act, various warranties under section 362I also applied.

Who were the parties to the Contract?

[9]    Counsel for the Lees submits that both Dion South and SDL assumed responsibility under the Contract. I accept that submission having regard to the following facts:

·     The “Builder” is listed in the Contract as “South Development Ltd, Dion South – Licensed Building Practitioner no BP113121”. Mr South’s licensed building practitioner number is BP113121.

·     The invoices that were issued to the Lees identified Mr South’s licensed building practitioner number (BP113121) and directed payment to a bank account in the name of “Dion South”.

·     The Contract refers to SDL and Mr South together in clause 1, stating: “South Development Ltd are current licensed building practitioners valid in New Zealand.” Mr South is a licensed building practitioner, SDL is not.

·     The second sentence of clause 4 of the Contract states: “As the main contractor I will be overseeing all work done on site.”

·     All of the references to “South Development” use the plural verb, which is consistent with both SDL and Mr South being the “Builder” as defined in the Contract.

·     The application for a code compliance certificate listed Dion South under “Head Contractor / Site Manager”.

·     In the 2016 adjudication, Mr South was the first named respondent. He did not dispute his personal responsibility in that context and admitted in his response to the adjudication claim that he was a party to the Contract.

Non-completion

[10]   As indicated, the works were required to be completed by 17 July 2015. They were never completed. Indeed, to this day they have not been. The defendants have not undertaken any work on the site since 30 September 2015.

[11]   The Adjudicator held that Mr South and SDL were not entitled to suspend the works for alleged non-payment of invoices. That finding was clearly correct. In its terms, the Contract required the Schedule 1 works to be completed for a fixed price and by 17 July 2015. In any event, it is an implied term in fixed price construction contracts that the contractor will carry out and complete all work necessary for the completion of the scope of works.

Cancellation of the contract

[12]   The right to cancel a contract is provided for in ss 36 and 37 of the Contract and Commercial Law Act 2017. These sections provide:

36Party may cancel contract if another party repudiates it

(1)A party to a contract may cancel the contract if, by words or conduct, another party (B) repudiates the contract by making it clear that B does not intend to—

(a)perform B’s obligations under the contract; or

(b)complete the performance of B’s obligations under the contract.

(2)This section is subject to the rest of this subpart.

37Party may cancel contract if induced to enter into it by misrepresentation or if term is or will be breached

(1)A party to a contract may cancel it if—

(a)the party has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made by or on behalf of another party to the contract; or

(b)a term in the contract is breached by another party to the contract; or

(c)it is clear that a term in the contract will be breached by another party to the contract.

(2)If subsection (1)(a), (b), or (c) applies, a party may exercise the right to cancel the contract if, and only if,—

(a)the parties have expressly or impliedly agreed that the truth of the representation or, as the case may require, the performance of the term is essential to the cancelling party; or

(b)the effect of the misrepresentation or breach of the contract is, or, in the case of an anticipated breach, will be,—

(i)substantially to reduce the benefit of the contract to the cancelling party; or

(ii)substantially to increase the burden of the cancelling party under the contract; or

(iii)in relation to the cancelling party, to make the benefit or burden of the contract substantially different from that represented or contracted for.

(3)Subsection (1) is subject to the rest of this subpart, but does not limit section 36.

[13]I accept that the Lees were entitled to cancel the Contract. In particular:

·     On 24 February 2017, which was six weeks after the Adjudicator’s Determination, the Lees’ solicitors made time of the essence for completing the outstanding works. No effort had in the interim been made to resume construction.

·     At the time of cancellation, 24 weeks had elapsed since the Adjudicator’s Determination, and 20 months since the works under the Contract were due

for completion. The defendants’ persistent default and inaction permitted only one realistic conclusion – they did not intend to complete the performance of their obligations under the Contract.

·     Such default also substantially reduced the benefit of the Contract to the Lees, substantially increased the burden of the Contract to them, and made the benefits and burdens of the Contract substantially different from what they contracted for.

What losses are recoverable?

Charges above the fixed price component

[14]    The Contract  provided  for  payment  in  three  instalments.  Despite  this,  Mr South invoiced the Lees for labour and materials on a weekly basis. He stated that unless the invoices were paid weekly, the defendants would refuse to complete the work. The Lees paid the weekly invoices under protest.

[15]   The Lees’ case is that between 30 March 2015 and 2 November 2015, the defendants rendered and received payment in respect of 33 invoices totalling

$398,390.56. They say that at the defendants’ direction they also paid subcontractors’ accounts directly to the extent of $90,749.25. They therefore calculate the total amount paid in respect of the Fixed Price Component to be $436,685.14 with the result, they say, that they paid a sum of $105,492.94 more than they were contractually obliged to. They acknowledge that of this sum $23,358.24 was repaid as a result of the Adjudicator’s Determination. Their net claim is therefore for $82,134.70.

[16]   The difficulty with this aspect of the claim is that the experienced Adjudicator determined as at 17 October 2016 (a date which captures all relevant accounting between the parties) that the amount overcharged (having regard to a number of variations identified by him) was $62,640.83 only, as to which $39,282.59 comprised the defendants’ final invoice which was unpaid. He therefore identified the required repayment as $23,358.24.

[17]   In their amended statement of claim dated 7 December 2018, the plaintiffs plead that “notwithstanding the Adjudication Determination” they made overpayments of net $92,287.02 (reduced to $82,134.70 in their submissions in support of formal proof).

[18]   It is well recognised that an adjudicator’s determination does not bring into play the doctrine of res judicata and a party who wishes to challenge legal or factual conclusions may institute de novo proceedings in the appropriate court.1 However, in the context of a formal proof hearing, this Court must be satisfied that some other result is appropriate. In the present case Mr Lee’s evidence in that respect is sparse.

[19]   He disputes that the new garage door was a variation, for the reason that it was only necessary because of a measurement error by the defendants. That was not, however, the position advanced before the Adjudicator. In that context Mr Lee is recorded as submitting that “there was supposed to be a new door from day one”.2

[20]   He says further that “minor modifications in the bathroom should have resulted in cost savings overall. They were not a reason for a budget blowout”. However, he does not engage with the Adjudicator’s specific finding that there were changes made to tiling details which on Mr South’s evidence resulted in a requirement to raise the floor.3

[21]   Finally, he says that although he did delete a ranch slider and substitute a cavity slider this resulted in a “minimal difference in cost and thickness”. However, he adduces no evidence on which this Court can safely rely to rebut the Adjudicator’s conclusion that this change “increased the cost of this work”.4

1      See Marsden Villas Ltd v Wooding Construction Ltd [2007] 1 NZLR 807 (HC) at [67]; Donovan Drainage and Earthmoving Ltd v Halls Earthworks Ltd [2008] NZCA 135 at [4]; and Laywood v Holmes Construction Wellington Ltd [2009] NZCA 35. The relevant principles are comprehensively discussed in Esther Thode “Finality of adjudication under the CCA” [2014] NZLJ 309.

2 Determination of Andrew Skelton, Adjudicator dated 17 October 2016 BDT 2016-09756 at [56].

3      At [60]-[61].

4 At [72].

[22]   Even more significantly, Mr Lee does not engage with the Adjudicator’s findings5 that there were multiple other changes that resulted in cost increases. These included changes to windows (with a consequential partial reconstruction of level 1), installation of recessed bathroom mirrors, multiple changes to gas fire dimensions and installation of a gas infinity unit not provided for in the Contract. In total the Adjudicator found that the plaintiffs were responsible for eight out of 17 items in dispute. These included changes which increased the cost of the work and/or resulted in delay for which the plaintiffs were responsible.

[23]   He considered a broad approach necessary, whereby the plaintiffs were required to meet the full cost of the new garage door ($1,656 inc GST) and 50 per cent of the increased costs for schedule 1 items.

[24]   Having carefully considered the evidence in support of the formal proof application, I am not persuaded to depart from the Adjudicator’s Determination. In the result, I disallow this aspect of the claim.

Cost to complete

[25]   The Lees’ claim for the costs of completion, including remediation of defective works, is uncontroversial. The following extracts from the leading texts capture the relevant principles.

1.Hudson’s Building and Engineering Contracts:⁶

the measure of damages recoverable by the building owner for the breach of a building contract is … the difference between the contract price of the work or building contracted for and the cost of making the work or the building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach.

2.Construction Law:⁷

Substantial damages will usually be calculated on the basis of the cost of repairing the defect to the standard required by the relevant construction contract, provided that the repair of the defect is a reasonable course of action

5      At [52], [54], [74] and [76].

6      Nicholas Dennys and Robert Clay Hudson’s Building and Engineering Contracts (13th ed, Sweet & Maxwell, London, 2015) at [7-006].

7      Julian Bailey Construction Law (2nd ed, Informa Law from Routledge, Oxfordshire, 2016) vol II at [14.99], citing Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253 at [43].

to take. The diminution in value (if any) of a property as a consequence of there being defective works is not the appropriate measure of loss or damage. The position, therefore, may be summarised as follows:

“In a contract for the performance of building work, the plaintiff can recover the cost of rectifying defective or incomplete work because, by receipt of the money in substitution for performance, it is given the means of putting itself in the position it would have been in had the contract been performed.”

3.Kennedy-Grant and Weatherall on Construction Law: Construction Contracts and Dispute Resolution:⁸

Where the employer is entitled to recover damages for the contractor’s failure to complete the works it will be entitled to recover the additional cost of completing the works together with any properly recoverable consequential and general losses. Where the contractor’s breach consists in failure to progress the works or to complete them in time, the employer will be entitled to recover damages for any loss which was within the reasonable contemplation of the parties at the time of entering the contract as a likely result of the breach. Thus it will be able to recover the additional financial cost of delay and loss of profits known to the parties to be likely to result from delay.

[26]   To date, the Lees have incurred invoiced costs of $47,146.70. These essentially comprised necessary works to make the building (barely9) habitable.

[27]   In terms of costs to complete, the Lees have had considerable difficulty in obtaining a quotation given the understandable reluctance of other builders to assume a part-completed project, elements of which have now been exposed to the weather for an extended period. Twenty construction companies have been approached. The only party to submit a fixed price is TNS Construction Limited. Its updated quotation (allowing for the period of time which has elapsed since it was first approached) is

$371,693.34. Mr Seohyun Park, a quantity surveyor in the employ of that company, confirms the quote to represent the cost of completion of the works set out in the detailed designs dated 17 April 2014. I accept that aspect of the claim as adequately established.

[28]In the result, I allow total costs of completion of $418,840.04.

8      Thomas Kennedy-Grant and Michael Weatherall, Kennedy-Grant & Weatherall on Construction Law: Construction Contracts and Dispute Resolution (LexisNexis, Wellington, 2016) at [211,460].

9      I have reviewed extensive photographic evidence. The property can still fairly be described as a construction site. The circumstances in which the Lees have been required to live for the last three years appear to me to have been far from satisfactory.

Rental losses

[29]   The plaintiffs claim a loss of rental on the investment property which they moved to while the works were being undertaken (1/32 Rewi Street, Torbay). The claim is from the due date for completion of the works (17 July 2015) to 20 June 2016. It covers two distinct periods:

(a)From 17 July 2015 to 14 October 2015.

(b)From 14 October 2015 to 20 June 2016.

[30]   The first period is that during which the plaintiffs resided in Rewi Street themselves. They returned to the uncompleted Auld Street property on 14 October because they said they could not afford to forgo a rental return on Rewi Street any longer.

[31]   The second period is that in which Rewi Street was untenanted because, on Mr Lee’s evidence, agents advised that it would be necessary to do work on it to obtain the rental expected. He said that with the distractions of the Auld Street project (emotional and financial) he was unable to do that for some time.

[32]   I regard recovery in the first category as orthodox under the second limb in Hadley v Baxendale.10 Whether the Lees chose to live in their own rental property (on which Mr South had previously done work in 2010) or to rent on the open market, it was reasonably in the contemplation of the parties that a failure to complete the works within the scheduled time would result in financial loss to the Lees.

[33]   Mr Lee deposes that the monthly rental on Rewi Street was $2,240 prior to their occupation. He annexes a bond repayment form consistent with that statement. The potential claim under this head is therefore $6,421.33. I do, however, consider some reduction from this claim is required because, as the Adjudicator found, there were a number of variations to the Contract which resulted in delay. I must necessarily adopt a broad brush approach in this respect, because there is no evidence linking

10     Hadley v Baxendale [1854] EWHC Exch J70.

specific variations to specific delays. In the circumstances I am not persuaded to depart from the Adjudicator’s approach, which was to adopt a 50 per cent discount. I therefore allow this aspect of the claim to the extent of $3,210.66 only.

[34]   The second aspect of the claim is more contentious. As Mr Lee acknowledged in supplementary oral evidence, it was not until after he had left the property that he became aware of the need to undertake work on it if it was to be satisfactorily re-let. It follows that when the Contract was entered into it was not in the reasonable contemplation of anyone, let alone the defendants, that a delay in completing the contracted words or a cost overrun in that respect would result in a protracted period when the Lee’s investment property would remain untenanted.

[35]   I therefore disallow the claim for $18,666.67 for lost rental during the period 14 October 2015 to 20 June 2016.

Business interference losses

[36]   The plaintiffs claim “interference of business losses” totalling $83,674.88. There are two components to the claim:

(a)Loss of the client Picsolve Korea in August 2016 – that client having accounted for revenue of $71,974 in the 2014/2015 financial year.

(b)Costs of two additional staff members totalling $11,700.78 as a result of Mr Lee’s stated requirement to commit his personal time and energy to the Property.

[37]   The factual foundation for the claims is said to be Mr South’s knowledge that the Property was used to carry out Mr Lee’s consulting business and accordingly that delay would result in business losses.

[38]   I consider there to be a number of difficulties with regard to this aspect of the claim:

(a)The relevant business was conducted through a corporate entity Perceptive Solutions Ltd (PSL). This company was not a party to the proceedings. The loss of the Picsolve contract and the additional labour costs were matters impacting the company’s profitability, but there is no necessary equivalence in terms of the plaintiffs’ loss. Significantly, the plaintiffs are not even the shareholders of PSL.11 There was no expert evidence identifying the extent to which PSL’s alleged reduction in revenue or increase in costs reflected a loss to the Lees.

(b)Although PSL’s accounts for the year ending 31 March 2016 support Picsolve revenue in the previous year of $71,974, the measure of loss arising out of PSL’s alleged “inability to complete a job for [it]” and subsequent “lost contract” is not defined by gross revenue. Clearly costs would have to be apportioned against the relevant revenue stream. There is no evidence as to what they might be. But, as a general guide, direct and indirect expenses in that year totalled approximately 90 per cent of the company’s gross profit.

(c)Significantly, the loss of the Picsolve contract through the extended unavailability of Mr Lee’s home office is not, in my view, a loss within the reasonable contemplation of the parties at the time they entered into the contract. It can be contrasted, for example, with a claim for temporary business accommodation which may in certain circumstances have been recoverable.

(d)There is not, in my view, adequate evidence linking the additional wages costs to specific calls on Mr Lee’s time in respect of the Property project. Indeed, at one point in his affidavit he states that, having moved back to the Property, he was working in the business for up to

20 hours a day, so the business was obviously receiving his full attention at that time.

[39]I therefore disallow these aspects of the claim.

11     The shares in PSL are held by a holding company of which the plaintiffs are the shareholders.

General damages

[40]The Lees claim general damages in the amount of $25,000.

[41]   Such damages are available in contract for mental distress and loss of amenity where the object of the contract is peace of mind, enjoyment or the prevention of distress.12

[42]   For example, in Watts v Morrow the plaintiffs had purchased a defective building in reliance on a building surveyor’s report. They sued for damages, including in relation to their distress and inconvenience. The English Court of Appeal held that general damages were claimable in connection with the physical discomfort and inconvenience associated with the defendant’s breach, including for the fact that the plaintiffs were required to reside in the property whilst repairs took place.13

[43]   In O’Hagan v Body Corporate 189555 (Byron Avenue) the New Zealand Court of Appeal confirmed the availability of general damages for negligence in leaky building cases, holding that $25,000 was an appropriate award for each occupant in the unit development.14 As indicated, the plaintiffs also claim in tort in these proceedings which would, if required, have provided an alternative route to recovery.

[44]   In the present case the object of the Contract was clear and known to the defendants – to provide a substantially expanded and enhanced home for the Lees and their children and to meet Mr Lee’s work requirements.

[45]   I accept that the Lees have endured a significant loss of amenity as a result of the defendants’ failure to complete the work. Nearly four years after the scheduled completion date the property remains a construction site. Most of the outdoor area remains unusable, the driveway is unusable, and the house is inadequately sealed from the wind.

[46]In addition, I accept that they have suffered considerable distress and anxiety.

12     Jarvis v Swan’s Tours Ltd [1973] QB 233, [1972] 3 WLR 954 (CA).

13     Watts v Morrow [1991] 1 WLR 1421 (CA) at 1439-1141.

14     O’Hagan v Body Corporate 189555 [2010] 3 NZLR 445 at [153].

[47]   I am satisfied that the claim for $25,000 in general damages is appropriate and proportionate in the circumstances.

Result

[48]   I give judgment against the defendants jointly and severally for the following sums:

(a)	Costs of completion	$418,840.04
(b)	Rental losses	$    3,210.66
(c)	General Damages	$ 25,000.00
Total	$447,050.70

[49]   Interest is payable at the prescribed rate on part item (a) (being those completion costs already paid) and on item (b). The plaintiffs are to submit for the Registrar’s approval an interest calculation based on the date of payment of the individual components under (a). Interest calculations on loss of rent should assume a start date of 23 September 2015, being a midpoint in respect of the losses I have allowed.

[50]I award costs on a 2B basis, in an amount again to be approved by the Registrar.

Muir J