Mason v Magee
[2017] NZHC 51
•31 January 2017
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
CIV-2014-485-9907 [2017] NZHC 51
BETWEEN STEVEN PHILIP MASON
KATHARINE MARY MASON Plaintiffs
AND
ANDREW HAMILTON MAGEE SHARON LEE MAGEE Defendants
Hearing: 9-11 February 2016 Counsel:
D J S Parker and J W Wollerman for Plaintiffs
M M Freeman and A A McCubbin-Howell for DefendantsJudgment:
31 January 2017
JUDGMENT OF WILLIAMS J
Table of Contents
The issues ..............................................................................................................[1] Introduction ..........................................................................................................[5] The house [5] The Magees [6] The Masons [9] The purchase of 13 Karekare Road ..................................................................[14] The McLeods’ dinner party – 28 October 2011 [16] The visit to 13 Karekare Road, 29 October 2011 [20] Open home – 30 October 2011 [25] The Seaview Road agreement and further visits to Karekare Road [27] Conditional agreement [30] Property inspection [31] Building defects ..................................................................................................[37] Remediation and damages.................................................................................[39] The basics of misrepresentation ........................................................................[41] Submissions – misrepresentation ......................................................................[45] The Masons [45] The Magees [50]
MASON v MAGEE [2017] NZHC 51 [31 January 2017]
Analysis ...............................................................................................................[55] What was said? [55] Fraudulent? [62] Inducement [64] The correct measure of damages – loss of value or cost of cure?...................[75] ABI’s acceptance of liability ..............................................................................[88] Disposition...........................................................................................................[91]
The issues
[1] It is common ground that the plaintiffs, Steven and Katharine Mason, were the unwitting purchasers from Andrew and Sharon Magee (the first defendants) of a leaky home at 13 Karekare Road, Raumati.1 Although liability is contested, it is also common ground that the total loss they suffered as a result was $536,550.21 on a loss of value basis or alternatively $939,528,81 on a cost of cure basis.
[2] Shortly after entering into the agreement with the Magees (and while the agreement was still conditional) the Masons obtained a builder’s report from All Building Inspections Ltd (‘ABI’, the second defendant). The report did not identify any of the weathertightness issues from which the building suffered. ABI subsequently accepted liability and reached an out-of-court settlement with the Masons for the sum of $68,000.
[3] The Masons say that during the course of negotiations leading to the purchase, Mr and Mrs Magee told them that the house was not leaky. They say this statement was false and therefore a misrepresentation in terms of s 6 of the Contractual Remedies Act 1976.
[4] Section 6 provides that if such misrepresentation can be shown to have induced the Masons to enter into the purchase, then this misrepresentation will itself be treated as a term of the contract entitling the Masons to damages for breach of contract accordingly. But if they invoke s 6, the Masons are precluded from suing in
tort.2 The issues therefore are:
1 I refer to the parties by their first names as they themselves did during the hearing.
2 Section 6(1)(b).
(1)Did the Magees falsely represent that 13 Karekare Road was not a leaky home? I have concluded that Katharine Magee did make that representation, albeit innocently, believing the same to be true.
(2) Did the misrepresentation induce the Masons to purchase 13 Karekare
Road? I have concluded that it did.
(3)Are the Masons entitled to loss of value or cost of cure damages? I have concluded that the Masons are only entitled to loss of value damages because cost of cure damages would, in all the circumstances of this case, be unreasonable.
(4)How does ABI’s acceptance of liability affect the quantum that the Magees are required to pay? I find that the settlement quantum is to be deducted from the damages award.
Introduction
The house
[5] 13 Karekare Road, Raumati South is a four bedroom home of some
260 square metres on a 500 square metre title. The exterior cladding of the dwelling is a direct fixed exterior insulation finishing system commonly referred to as EIFS. The dwelling was completed in 2003 with a code compliance certificate issued on
25 March of that year. The age of the building would thus have precluded the Masons bringing proceedings against either the original builder or the local authority.3
The Magees
[6] Andrew Magee is a plumber and has his own plumbing business. Sharon Magee is a qualified interior designer and runs her own interior design business. They buy and sell houses on a relatively regular basis, partly, Sharon said,
because she likes decorating houses for the real estate market. Including Karekare
3 Limitation Act 2010, s 11.
Road, they had sold six homes together with an average stay of three to five years in each home.
[7] The Magees brought 13 Karekare Road on 30 April 2009. Between April
2009 and October 2011 (two months before they sold), the Magees spent between
$30,000 and $40,000 on the dwelling. Andrew Magee replaced the flooring in all bathrooms in order to install walk-in showers. All rooms in the house were progressively repainted as funds permitted and Andrew also installed a fireplace. In February 2011, the Magees had a Nuplast contractor re-coat the house. Andrew said this was consistent with the producer’s guidelines of re-coating every eight to
10 years. The re-coating contractor also replaced some windowsills as they had bowed in the weather. Overall, the recoating alone cost the Magees in the order of
$18,000.
[8] Sharon said she wanted to sell 13 Karekare Road because the garden was not well suited to her circumstances. The section was small and not flat, and the garden was at the rear of the property and required a climb from the dwelling level which was difficult because she had an injured back. The Magees subsequently moved to a large flat section that they already owned at Peka Peka, once they had built on it.
The Masons
[9] Steven Mason is an IT manager. Katharine Mason is a natural health practitioner practising a form of muscular manipulation known as Bowen therapy. Prior to the purchase of 13 Karekare Road they lived in Nikau Valley. Katharine indicated that they wanted to move to Raumati to be close to Kapiti College for the children and to make a fresh start as their daughter had had significant difficulties at her primary school. The Masons were looking for a new home, new school and new friends for their daughter.
[10] It is necessary to mention a different house sale in which the Masons were vendors because it was raised peripherally in this case. In 2005 they sold their (then) home in Murray Court, Paraparaumu to local real estate agent, Paul Berryman. He subsequently had further contact with them in relation to the purchase of
13 Karekare Road as he was the agent for the Magees. Mr Berryman said there was
some tension between himself and the Masons because he had leaky house problems in Murray Court. He contacted the Masons subsequent to the Murray Court purchase about the issue and they told him they were not aware of any leaking issues. Mr Berryman says he had it fixed by a builder, Ron Discombe, who told him that the Masons had contacted him about the same leak. He said the Masons, on being confronted, admitted they were aware of the leak but had not disclosed it.
[11] Katharine Mason said that they did in fact disclose to Mr Berryman at the time that there had been a one-off leak during the Paekakariki floods and that Mr Discombe had repaired the roof and resolved the issue. Katharine said Mr Berryman’s story was completely untrue.
[12] In any event Mr Berryman had the leak fixed and no further action was taken as, he said, the problem was resolved. Mr Berryman said the history between the parties caused him to pass the Karekare Road file to his manager Rachael Steinmetz and she closed the deal as it were.
[13] When the decision was made to move from Nikau Valley, the Masons were initially interested in two properties – 6 Karaka Grove, Raumati and 91 Seaview Road, Paraparaumu Beach. They discovered that the Karaka Grove property had once had weathertightness issues but had subsequently been repaired. They requested a full builders report outlining the repairs. When the vendors refused to supply such a report, the Masons walked away from that prospective purchase. They proceeded instead with Seaview Road and in October 2011 made an offer conditional on sale of their existing home. It was accepted. When, subsequently, they became interested in Karekare Road, that conditional agreement was still in place.
The purchase of 13 Karekare Road
[14] The Masons were interested in 13 Karekare Road soon after it was first advertised. Katharine said she made an email enquiry of Paul Berryman, the real estate agent, in relation to the property on 6 September. At that stage the indication was that the property was listed on a “by negotiation” basis for the first three weeks before going to tender on 26 September 2011. The Masons viewed the property on
open2view but decided that the final price would be out of their range, so they went no further. But on 9 October Steven attended an open home at the property. Accompanying notes to the open home prepared by Mr Berryman included the following comment:
They have a house to sell in Nikau Valley which they have just put onto the market.
[15] Mr Berryman subsequently emailed the Magees advising:
So far my feeling is that Steven Mason will be putting in a tender, should know this weekend.
Steven did not put in a tender and the tender process closed without success on
20 October. The property was then listed at $789,000.
The McLeods’ dinner party – 28 October 2011
[16] As fate would have it, the Masons and the Magees attended a dinner party at the home of John and Lily McLeod on 28 October 2011. The two couples had not met each other and (since, of course the Magees were not present at the open home on 9 October) the Magees did not know that the Masons had shown early interest in
13 Karekare Road. By this stage, as I have said, the Masons already had a conditional agreement in place with respect to Seaview Road, subject to the sale of their Nikau Valley home. The couples met and exchanged chit chat, with the Masons indicating that they were intending to buy into the Raumati South area and the Magees indicating in return that they had their property on the market and were intending to move out. The Magees invited the Masons to visit 13 Karekare Road. The Magees were aware of the prior conditional agreement in relation to Seaview Road, but they also agreed that on the basis that the Masons house may not sell, such visit would not necessarily be wasted. Both sides agreed that the visit the next day would have both a social and a business dimension.
[17] Also present at the dinner party that night was the Magees’ neighbour Steven Hudson from 21 Karekare Road. He said in evidence that he had seen 13 Karekare Road shrouded in scaffolding from the beginning of 2011 and wondered whether the house was being repaired because it was leaky. Katharine said that Steven Hudson
in fact mentioned the scaffolding to Sharon Magee, but Mr Hudson did not recall doing so. In any event Steven Hudson said he asked Sharon directly whether
13 Karekare Road was a leaky home. He said her response was “No no no. It isn’t a leaky house.” Sharon accepted in cross-examination that they may not have been the exact words but the words were to that effect. Katharine confirmed Mr Hudson’s evidence. She said that Mr Hudson asked his question in the context of a discussion at the dining table between her and Sharon over the relative qualities of 13 Karekare Road and Seaview Road, with Sharon suggesting that Karekare Road was the superior property. Sharon denied that this was the sort of thing she would say. According to Katharine, Sharon’s response to the question was a firm “no” and her tone had the effect of shutting down that line of inquiry.
[18] Neither of the Magees remembered the exchange at the dinner table, but
Sharon was frank, and in my view, honest in her narrative.
For the record if I had been asked directly if our house was a leaky home, I would almost certainly have said “no”. That is because until these proceedings, I had no idea that this was a leaky home. I have never noticed anything (other than the leak at the media room window which we fixed and did not appear to be a big deal) that would make me think it was.
[19] Steven Hudson’s recollection of the detail of the conversation varies a little from that given by Katharine. He said the conversation between Sharon and Katharine over the relative qualities of Karekare Road and Seaview Road occurred in the lounge. But, he said, by the time he raised the question of whether Karekare Road was leaky, the conversation had shifted to the kitchen. He noted that in addition to himself and Sharon there were others present but he could not remember who they were. He accepted that Andrew Magee may not have been there. He said that there were eight people present at the dinner party and people were coming and going from different parts of the house. He said that the conversation came up relatively early in the evening.
The visit to 13 Karekare Road, 29 October 2011
[20] According to Sharon, the Masons arrived at 13 Karekare Road at about
4.00pm the next day. It was evening before they left. Katharine’s account provides
the most detail. She said the Magees opened a bottle of Rosé and they laughed about
this because Steven had brought an expensive French wine to the dinner party at the McLeods’ the night before and it tasted terrible. She said Andrew Magee only drank low alcohol beer as he was on call in his plumbing business. She said Sharon took them on a guided tour of the house (wines in hand) discussing its qualities in detail and she showed them a document explaining the timbers incorporated in to the floors and staircase of the house. This had been provided by the developer. Katharine said it was a very sunny day and after the tour, the four of them sat around a table outside chatting about other things. She said:
During our chat I took the opportunity to ask Sharon about the leaky home question that was raised the previous night. I asked Sharon outright if the property was leaky or had any known weathertightness issues. I said “all I want to know is that this property is not a leaky house because we couldn’t cope with that” or words to that effect.
[21] Katharine said:
Sharon replied that the house definitely was not leaky and I recall her responding “absolutely not. We have never had any issues with this house” (or words to that effect).
[22] Sharon, who provided the primary narrative from the Magees’ point of view, said she did not recall being asked whether Karekare Road was a leaky building. But she made it clear that if she had been asked her response would have been emphatic:4
No it’s not a leaky house is exactly what I would have said.
…
I wouldn’t have said I don’t think. I would have said no.
[23] That said, Sharon suggested that the question was unlikely to have been put, as it had been asked squarely and answered the night before.
[24] It is important to reiterate that, as with discussions at the McLeods’ on the
28th, this discussion occurred against the Masons’ pre-existing conditional agreement to purchase 91 Seaview Road. All parties understood the resulting contingent effect of that reality on any discussions between the Masons and Magees about the
purchase of Karekare Road. Nonetheless it seemed to be accepted that the Magees were promoting their house to the Masons despite the contingency. The following passage from the cross-examination of Andrew Magee demonstrates the point:5
Q. And the fact that they had a contract to buy Seaview Road, that didn’t stop you and your wife being interested in promoting your property to the Masons, did it?
A. We would promote it to anyone that was interested in our house. We were selling a house.
Q. And you knew that well their purchase of Seaview Road, until it’s a done deal and confirmed, there is still a possibility they could be there to buy?
A. Of course, of course.
Open home – 30 October 2011
[25] The following day, the Masons attended a further open home at the property. Paul Berryman was present. Interestingly, Mr Berryman’s report of attendances and feedback for that day does not record the Masons’ attendance. Katharine said she asked Paul Berryman at the open home whether the house was leaky and he replied that the house was a quality build designed by a reputable architect and completed by reputable builders. Mr Berryman said he “would have” pointed out the media room leak issue on 30 October but does not specifically remember doing so then or at any other specific time. Mr Berryman denied making any comment about the quality of the build saying that it was not his practice to “talk up houses” and that houses sell themselves. This evidence is difficult to accept. A casual reference to the proposed Property Press advertisement demonstrates just how much Mr Berryman was prepared to talk the property up. The heading was “Incomparable Luxury”. The following narrative included reference to “absolutely sensational views”, “superb indoor living”, with the exterior including “incredible stonework by Kapiti Stonemason Peter Hill.”
[26] Mr Berryman’s evidence was that issues of monolithic cladding were raised and he advised the Masons to get a building report.
The Seaview Road agreement and further visits to Karekare Road
[27] Despite the extensive discussions with the Magees during the course of October, on 25 November, the Masons extended the conditional agreement on Seaview Road for a further two weeks. Their Nikau Valley home had still not sold. The Masons attended an open home at 91 Seaview Road on 10 December 2011 and then the next day returned to an open home at Karekare Road. Paul Berryman’s open home feedback report on Karekare Road for that day recorded that Steven Mason had:
Revisited the property. Their offer on the other property has come to an end and they are showing very strong interest in your property. Kids picking their rooms, mum and dad really enjoying the views. They have been supplied with all of the warranties for the cladding of the property.
[28] This last comment tends to confirm that the Masons had a particular focus on cladding and weathertightness issues.
[29] Meanwhile the Seaview Road agreement formally lapsed two days later on
13 December 2011 and there was no extension. Katharine then had a further private visit to Karekare Road on 15 December. Katharine and Sharon disagreed over how the visit occurred. Sharon said Katharine just drove by and walked in unannounced. Katharine said she and Sharon had in fact met at the supermarket the day before and Sharon invited Katharine back over. The truth of the matter is not material. The fact is Katharine returned unburdened by a conditional agreement on another property. According to Katharine they were, at that point, awaiting an offer on their Nikau Valley home and so were at an important decision point. That was why, she said, she
visited on the 15th of December. According to Sharon, she simply let Katharine look
around the property again by herself.
Conditional agreement
[30] On 20 December 2011, the Masons and the Magees entered into a conditional agreement for the sale and purchase of 13 Karekare Road for $785,000 – $4,000 less than the listed price. The purchase was conditional upon the sale of the Masons’ Nikau Valley property, the provision of a LIM report and title search, and a satisfactory builder’s report within 10 working days.
Property inspection
[31] Ian Hall of ABI completed the inspection of Karekare Road on behalf of the Masons on 28 December and provided a 16 page report together with colour photographs. In relation to the exterior coating the report provided as follows:
The exterior of the dwelling is constructed with EIFS. EIFS [external insulation and finish system] is a cladding system using 40mm or 60mm thick polystyrene boards, plastered with a 3-5mm cement-based base coat and then painted with a waterproof coating.
The cement plaster has polymer modifiers added that make it more flexible and allow a thinner coating to be applied. The base coat [one or two may be applied] is reinforced with glass fibre mesh.
The waterproof coating must be maintained in a very good condition, and will require re-coating long before it loses its decorative appearance. The manufacturers state that paint coatings will weather and wear, often requiring re-coating in the most exposed areas at least every five years.
The paint finish on the cladding is in reasonable condition however one area requires attention now as the paint has started to wear thin. Where the gate closes at the rear of the dwelling the gate has rubbed against the paint finish.
[32] As to the interior, Mr Hall noted the following:
Moisture testing was carried out around the windows, doors and wet areas of the dwelling.
All moisture readings were within acceptable parameters except for the windowsill in the TV room.
It is likely that the window vents have become blocked and condensation has pooled in this area and has over time broken down the integrity of the varnish.
It is recommended that any decay is removed, the windowsill repaired and then repainted with polyurethane/varnish.
It is difficult to determine how long a job of this nature would take until all the areas of decay have been opened up and the damage assessed.
This is a common issue in many homes with aluminium joinery. Fortunately the damage appears to be minor at this stage.
[33] Overall, the inspection report was positive. The summary included as follows:
My inspection found that 13 Karekare Road has been well maintained with only a few areas that require attention and such (sic) my report is a refreshingly short one.
I recommend that a roofer assess the extent of the surface corrosion and make the necessary repairs to the roof and flashings. I feel that addressing this promptly would be prudent.
Repairs to the varnish on the windowsill, is required before decay has a chance to take hold and to prevent more progressive and costly damage.
I recommend that any moisture damage is sanded off and two coats of enamel varnish applied to all windowsills to ensure that the sills are sealed.
I recommend that an electrician identify the cause of the fault and carry out the appropriate repairs. Also the socket could be adjusted to sit level in the downstairs bathroom.
[34] On 10 January, the agreement for sale and purchase was declared unconditional subject to minor repair work to the roof, a broken water feature and two electrical sockets. On 14 January the Masons again visited the Magees, this time to go over the building report. Katharine said she took that opportunity to again mention to Sharon how important weathertightness was to them as they were operating at the top end of their affordability. Katharine said Sharon again advised that the house was not leaky and it had never had any problems. Sharon has no recollection of any such representation and says it is inherently unlikely that the matter would be raised yet again in this way.
[35] There was also discussion of the problem of the windowsill in the media room. Andrew said that once the drainage hole at the top of the window had been cleaned, the problem had gone away. Katharine said Sharon also explained that they had spent a great deal of money recoating the exterior and repainting the interior.
[36] On 8 February 2012, with all the outstanding items having been resolved, the
Masons settled the purchase of 13 Karekare Road.
Building defects
[37] As I have said it is common ground that 13 Karekare Road is a leaky building. The parties are agreed on the defects that have caused water ingress. They are:
(a) poor installation of the EIFS cladding system;
(b) lack of adequate protection of joinery/cladding junctions; (c) inadequate detailing of deck membranes and balustrades; (d) lack of adequate detailing of roof cladding and flashings; (e) inadequate sub-floor clearances; and
(f) ground issues.
[38] As a result of the foregoing defects and the water ingress caused thereby,
13 Karekare Road has suffered extensive damage as follows:
(a) decay of timber framing and carpet smooth edge; (b) elevated moisture contents in timber framing;
(c) premature corrosion of structural steel members; (d) water damaged internal plasterboard linings;
(e) decayed particle board flooring;
(f) decay of some external timbers such as fascia boards;
(g) water damaged carpet and corroded carpet smooth edge; (h) cracking to EIFS plaster system; and
(i) presence of stachybotrys.
Remediation and damages
[39] According to the agreed statement of facts, like for like remedial work is estimated to take 22 weeks during which the Masons must vacate the site. The cost of remediation as at 14 July 2015 is $811,835.60 including GST, subject to cost inflation of 2.38 per cent until June 2016. The consequential costs of repair also include construction insurance, consultants’ costs, costs of alternative accommodation, and post remediation stigma of five per cent. Finally, the Masons claim $25,000 general damages for the serious stress and anxiety they have suffered. The total quantum of damages claimed on this basis is $939,528.81.
[40] In August 2015, the property was valued on a “as if undamaged” basis at
$785,000. The value of the property on an as is basis is $315,000. The diminution in value is therefore $470,000. The “loss of value” basis for damages accordingly includes the $470,000 diminution in value, as well as consultants’ costs, moving costs, real estate agent fees, legal fees and general damages of $25,000 referred to above. This totals $536,550.21.
The basics of misrepresentation
[41] Section 6 of the Contractual Remedies Act provides as follows:
(1) If a party to a contract has been induced to enter into it by a misrepresentation, whether innocent or fraudulent, made to him by or on behalf of another party to that contract—
(a) he shall be entitled to damages from that other party in the same manner and to the same extent as if the representation were a term of the contract that has been broken; and
(b) he shall not, in the case of a fraudulent misrepresentation, or of an innocent misrepresentation made negligently, be entitled to damages from that other party for deceit or negligence in respect of that misrepresentation.
(2) Notwithstanding anything in section 56 or section 60(2) of the Sale of Goods Act 1908, but subject to section 5 of this Act, subsection (1) shall apply to contracts for the sale of goods.
[42] A misrepresentation is a statement of past or present fact that is untrue.6
Opinion does not generally qualify except to the extent that it implies past or present fact. The statement must be construed as it would reasonably be understood in its particular context by the representee.7
[43] The misrepresentation must in fact induce the representee to enter into the contract, the meaning relied on must be reasonably available,8 and the reliance must itself be reasonable.9 The misrepresentation may be one of multiple causes,10 but it must be a material cause of the decision to enter into the contract (rather than one of no real consequence). In short, the misrepresentation must operate in its own right as a real and substantial inducement into the contract, even if there are other inducements. According to Burrows Finn and Todd:11
The law now is that, despite the wording of s 6 there is no “inducement” to contract unless the representor intended such a result, or at least unless the representor wilfully used language which would induce a normal person.
[44] If these requirements are met, then the misrepresentation will merge with and become a term of the contract.
Submissions – misrepresentation
The Masons
[45] The Masons say Sharon Magee misrepresented at the dinner party on the
28th of October 2011 that 13 Karekare Road was not leaky. The Masons say that the representation is actionable even though made to Mr Hudson, and they rely on it. But in any event it is, they argue, corroborative of the subsequent representation made by Sharon at Karekare Road the next day. The Masons say there is some evidence that the Magees fraudulently suppressed the true state of the house. This,
they suggested, is reflected in the undue haste of the sale following completion of the
6 Ware v Johnson [1984] 2 NZLR 518.
7 Closurepac NZ Limited v WS 2014 Limited [2015] NZHC 1587 at [98]–[104].
8 West v Quayside Trustee Limited [2012] NZCA 232, [2012] NZCCLR 16 at [30].
9 Vining Realty Group Limited v Moorehouse [2010] NZCA 104, (2011) 11 NZCPR 879 at [46].
Note this decision was appealed and became Marlborough District Council v Altimarloch Joint
Venture Ltd [2012] NZSC 11, [2012] 2 NZLR 726, but this principle remained undisturbed.
10 See generally John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand
(5th ed, LexisNexis, Wellington, 2016) at 364–365.
11 At 366.
renovations, but the Masons say it is unnecessary to prove that, because the misrepresentations are actionable whether innocent or fraudulent.
[46] The Masons say it was reasonable in context for them to rely on these representations. They say the ABI report did not displace that reliance.
[47] The Masons say the Magees intended to induce entry into the contract. The only reason for such statements could be to encourage the Masons to purchase Karekare Road because they could be confident it was watertight. It is true that the Masons placed some reliance on the ABI report but, it was submitted, that is not all they relied on. Rather the evidence is that the Masons asked questions of the Magees (and their agent Paul Berryman) both before and after the report was received and this indicated continued reliance on the Magees’ representations despite the ABI report.
[48] The Masons submit that the sale to Paul Berryman of 24 Murray Court and the inquiry in respect of 6 Karaka Grove is relevant only in the sense that it underscores that the Masons were sensitive to leaky building issues.
[49] The Masons submit further that the existence of the conditional contract in respect of Seaview Road when the key misrepresentations were made does not displace their inducement power. The Magees, it was submitted, plainly hoped that the Seaview Road contract would lapse leaving the Masons to purchase Karekare Road. While that hope remained, it is only possible to interpret the misrepresentations as directed toward drawing the plaintiffs to that objective.
The Magees
[50] The Magees submit that any comments made at the McLeods’ dinner party on the 28th of October must be interpreted from Steven Hudson’s point of view. He was simply seeking an explanation for the scaffolding he had seen earlier in the year. And Sharon Magee was simply discounting weathertightness issues as a reason for that scaffolding. In context it should not be interpreted as a representation about weathertightness. Further, the Magees submitted, there is no proof that whatever was said to Steven Hudson was also said generally to the Masons at the same time.
Katharine Mason simply overheard it (if her evidence is believed) and the evidence in relation to Steven Mason is not entirely clear anyway. His evidence does not suggest in clear terms that Sharon’s comment was intended to be to the group generally rather than to Steven Hudson. This, the Magees submitted, oughtn’t simply to be inferred and in any event, it would be a significant development in the law to take an off-hand comment made in an entirely social context and turn it into a term of a subsequent contract.
[51] The Magees further do not accept that the statements alleged to have been made on 29 October at Karekare Road were in fact made, and that caution is required. Katharine Mason’s evidence was that Sharon Magee replied to the relevant question “absolutely. We have never had any issues with the house.” This comment, seen in context, is factually correct. The evidence was that the Magees had in fact never had issues with the house. In addition, the Masons knew, the Magees submitted, that Sharon was not a builder or an expert and they always intended to have ABI conduct an independent expert investigation. In those circumstances, it would not have been reasonable for them to rely on the representation of someone without expertise or experience in the relevant field. Effectively it was submitted, the ABI report was a supervening event that made any reliance on Sharon’s comments unreasonable.
[52] In addition, the Magees submitted that caution is required in the reconstruction from four years in the past when forming a view as to whether the Magees intended to induce the Masons’ entry into the contract. All discussions, whether on the 28th or 29th, were informal, accompanied by alcohol and social chit chat, and undertaken in the context of a pre-existing conditional contract for the purchase of a different property. These contextual clues greatly reduce the potency of any representation. The Magees submitted that Sharon was responding to questions rather than making representations by her own initiation. The Magees
submitted:
It would be concerning ... if intention to induce could be readily imputed. These are ordinary people having a conversation – that sort of interaction has its own dynamics. It would have been very difficult for many people in that context to:
- Not give an immediate answer.
- To reflect on the question and formulate an answer that is entirely accurate devoid of underlying assumptions.
- To understand the legal consequences of giving an honest but inaccurate answer.
[53] Further, such discussions as did take place were too early. Nobody, the Magees submitted, was serious enough to have considered themselves in negotiations. They were hopeful, but not serious. Despite that submission, the Magees accepted that the representations (if made) occurred “on the continuum of contractual negotiations”:
However, the statements were made at events that were social or, had a social aspect to them. The Magees had real estate agents to [negotiate] for them. In our submission, they cannot have understood the events on
28 October 2011 or 29 October 2011 to be a forum to formally discuss
13 Karekare Road. In contrast the open home on 30 October 2011 was such an occasion.
[54] The Magees submitted that it would be very difficult for the principle of caveat emptor to endure in residential real estate transactions if buyers could achieve contractual assurances in these circumstances. There must be many unsuspecting and inexpert vendors who would honestly say there was nothing wrong with their home when asked intending to say that “there was nothing wrong that they knew of.” They submitted:
The point being that when people know they are in contractual negotiations, they ought to know to be careful about what they say or engage professional agents to represent them in those negotiations.
Analysis
What was said?
[55] The evidence demonstrates that the Masons were sensitive to weathertightness issues. Though they were newly arrived in New Zealand when they purchased 24 Murray Court and were generally unaware of the problems monolithic cladding presented to the New Zealand housing market, their experience in the sale of the property to Paul Berryman underscored that it was a potentially important issue. Similarly, the refusal to proceed with consideration of 6 Karakara
Grove when the vendors would not produce the necessary remediation report, made it clear that by the time the Masons were back in the market in September-October
2011, they were highly sensitised to the issue.
[56] I also accept the evidence of Steven Hudson (an independent witness whose objectivity was reflected in the way he gave his evidence) that he asked Sharon directly whether the house was leaky. And I accept his evidence that Sharon replied emphatically that it was not. Indeed although Sharon could not recall making the statement, it was, she freely admitted, the sort of thing she would say. I accept too that Katharine Mason was present when the statement was made and heard it. I accept her interpretation that Sharon responded to Mr Hudson firmly and that the effect of her response was to shut down that conversation. It is to be remembered that the context within which the comment was made was a discussion between Katharine and Sharon about 13 Karekare Road being for sale while Katharine already had a conditional agreement in place with respect to Seaview Road. It was that context which caused Steven Hudson to raise the issue. I infer that the question was put directly and intentionally within earshot of Katharine. I infer also that the firm response was intended to allay any concerns Katharine might have had as much as it was to reply to Steven Hudson directly. As Sharon and Andrew Magee both accepted, they were trying to sell their house. Even in the very informal setting of the McLeods’ dinner party, and in the context of a pre-existing conditional contract on another property, any interest being shown by the Masons was to be encouraged.
[57] I find also that Katharine, still sensitive to weathertightness issues, put the question again to the Magees the next day when she visited 13 Karekare Road with Steven. The detail of her recollection of events that early evening very much added to the credibility of her narrative. In addition, the combination of her prior experience with weathertightness issues and the question posed the night before by Steven Hudson, makes this significantly more probable than not.
[58] According to Katharine, Sharon’s reply was “absolutely not. We have never had any issues with the house” (or words to that effect). Sharon accepts that if she was asked she would have been very black and white: “I wouldn’t have said I don’t think. I would have said No.”
[59] This was my impression of Sharon also. Within the limits of having to recall events from some years earlier and the subtle effect that inevitable self interest can have on recall, Sharon was a straightforward and direct witness whose overall outlook on events was positive. I find that it is significantly more probable than not that Sharon replied to Katharine’s question in direct and clear terms denying that
13 Karekare Road was a leaky home and supporting that statement with the further statement that in the time the Magees owned the home, they had experienced no weathertightness problems with it.
[60] I find therefore that on 28 October 2011 Sharon Magee misrepresented to Steven Hudson intending that misrepresentation to be heard by (at least) Katharine Mason, that 13 Karekare Road was not a leaky home. In this sense, the misrepresentation was to Katharine Mason as much as it was to Steven Hudson.
[61] I find further that on the 29th of October 2011, in response to a direct question this time from Katharine Mason herself, Sharon Magee repeated that misrepresentation.
Fraudulent?
[62] While the Masons have proved that misrepresentations were made, they have failed to prove that they were fraudulent. There are grounds for suspicion. For example the Magees put Karekare Road on the market within 18 months of purchasing having spent between $30,000–$40,000 on the property, yet they claimed no super profit by way of capital gain when they set the purchase price; the dwelling was re-coated at considerable cost only a few months before being put on the market; and significant problems of leaking occurred in the garage during the first winter of the Masons’ ownership. But these factors alone do not elevate suspicion to proof. On the contrary, Sharon Magee impressed as a refreshingly frank and open witness and any suspicions aroused by these coincidental events must be put to one side.
[63] I find that the misrepresentations were not proved to be fraudulent, and should therefore be treated as innocent.
Inducement
[64] The ABI report identified no weathertightness issues except for that relating to the media room window and that was put down by Mr Hall to blocked window vents creating pooled condensation. Katharine said that following receipt of the report, she phoned Mr Hall and asked him directly whether the house had weathertightness issues and Mr Hall said it did not. Such statement is hearsay, and that, at least goes to weight, but ABI has admitted the claim, and the Magees offered no objection to the evidence. Plainly, a great deal of reliance was placed on Mr Hall’s knowledge and expertise. As already noted however, a proven misrepresentation need not be the sole inducement. Provided it can be established that it was a material cause for entry into the contract, this will be sufficient. I find that the ABI report and subsequent conversation with Mr Hall are not such powerful supervening events that they remove, of themselves, any possibility of reliance on prior misrepresentations by the Magees.
[65] I turn now to the context of the misrepresentations on the 28th and 29th in order to determine whether that context affects either Sharon Magee’s intention in making the misrepresentations and/or the reasonableness of the Masons’ reliance on the misrepresentations.
[66] I accept that the McLeods’ dinner party on 28 October was an entirely social setting and that it involved the consumption of alcohol. In addition, at that time, the Masons were already tied into a contract for the purchase of a separate property subject only to the sale of their Nikau Valley home. These are unquestionably indicators that any inducing effect of a statement made in that context will be limited. I accept also that the context of the Masons’ visit to 13 Karekare Road the next day was informal, friendly (again involving alcohol) and had multiple objectives. As Paul Berryman recorded in his standard written report of the
transaction following execution of it:12
Vendors and purchasers became good friends during negotiations and often met to discuss the property. We weren’t present during any of these meetings and they appear to get on well.
12 Sales information form dated 21 December 2011 and signed both by Rachel Steinmetz and Paul
Berryman.
[67] Clearly the relevant discussions occurred at an extremely early stage in the development of the relationship between these two couples that led two months later to the agreement for sale and purchase. The Magees are right that the parties were not in formal negotiation at this stage, indeed very far from it. On the 28th, both parties’ interest was piqued and on the 29th they were doing no more than exploring possibilities. But as Tipping J said in Mt Pleasant Estates Co Ltd v Withell:13
In most cases entry into a contract is not a single discrete event but rather a process whereby terms are negotiated and conditions are fulfilled. Any misrepresentation materially influencing a party along that continuum is in my view capable of being a misrepresentation inducing that party to enter into the contract.
[68] In that case the misrepresentation occurred after entry into the contract but before the contract was made unconditional. This case is at a much earlier and greyer stage in the process. Nonetheless, and subject to the reasonableness test to which I will return, whether a party has been induced to enter into a contract will be a question of fact and degree taking into account all of the circumstances of the case. There can be no automatic cut-off prior to which inducement cannot be argued. Rather, the evidence must be assessed in a commonsense way.
[69] In this case I find that the Masons were induced to enter into the contract despite the informality of the settings in which the misrepresentations occurred and, despite also the fact that there was a separate contract already in place for another property at the time. First, the Magees clearly intended to draw the Masons into the purchase of their property albeit, and necessarily, on a highly contingent basis in the circumstances. As Andrew Magee pointed out, they were trying to sell their house and they were committed to promoting it to anybody who showed some interest in it.
[70] Secondly, in both cases the questions posed to Sharon Magee were direct, pointed and precise: “Is this a leaky home?” In Mr Hudson’s case, the implied subtext was, “are you hiding something given the fact that the house was surrounded by scaffolds only a few months earlier”; and in the case of Katharine’s question, the sub-text was “please don’t sell me a leaky home, I want to rely on your personal
word in that regard.” In short, despite the social and pre-negotiation context, both
13 Mt Pleasant Estates Co Ltd v Withell [1996] 3 NZLR 324 at 329.
Mr Hudson and the Masons made it very clear (especially on the 29th) that the answer to this question was important. It must have been obvious that the Masons were going to place great store on the answers if matters progressed further. Why would the law require the Masons to forget the earlier statements when serious negotiations eventually got started? In some sense, the social setting made the answers more powerful. There were greater expectations of honesty between parties that were also exploring the prospects of friendship as well the possibility of purchase. That made reliance more likely.
[71] My overall conclusion as to inducement in this case may be contrasted with the decision of Katz J in Weaver v HML Nominees,14 where a factor in finding that a fraudulent misrepresentation about the quality of remedial works was found not to have induced entry into an agreement for sale and purchase of a dwelling, was that the building was inspected by a builder the purchaser knew and trusted. But in that case, other factors were equally if not more significant. The misrepresentation itself
related to build quality rather than any specific aspect of the remediation; the purchaser was sophisticated and not easily taken in by sales exaggeration; and one of the plaintiffs accepted in cross-examination that access to the LIM and Code Compliance Certificate was the real comfort in this case. None of these factors was important on the facts before me.
[72] The defendant referred to the oft cited decision in Ware v Johnson, to the effect that contracts for the sale of land are in a special category in the sense that caveat emptor applies with particular stringency in such transactions and will generally exclude any warranty as to fitness or quality.15 That case related to the purchase of a kiwifruit orchard in which, due to the vendors negligent spraying practices, all of the kiwifruit vines died shortly after purchase. Prichard J accepted that, in an agreement to purchase a kiwifruit orchard, the future productivity of the vines went to the fundamental character of the contract. An implied term to that
effect was necessary because in its absence the plaintiffs were compelled to accept
something fundamentally different from that for which they contracted.16 In that
14 Weaver v HML Nominees Ltd [2016] NZHC 476; [2015] NZHC 2080.
15 Ware v Johnson above n 6, at 534.
16 At 535-536.
sense Prichard J held that implying such a term did not offend the principle against implying terms as to quality or fitness. Prichard J found further that a representation as to future productivity carried with it a representation of present fact – that the vines were in such condition that they would produce a crop at a particular time and season. Such representation was actionable.
[73] The case before me is different to Ware v Johnson because the debate is not about an implied term in an agreement for the sale and purchase of land, rather it is about a misrepresentation of fact which, if the terms of s 6 are made out, is by law merged with the contract as a term of it. But in any event, a representation as to the weathertightness of a dwelling goes just as much to the fundamental nature of the bargain as does a representation about the productivity of kiwifruit vines in the purchase of a kiwifruit orchard. The restriction argued for has no application to this case.
[74] I find accordingly that the misrepresentations induced the Masons to enter into the contract, and that such inducement was reasonable in the circumstances.
The correct measure of damages – loss of value or cost of cure?
[75] The parties are agreed that the damages on a cost of cure basis are of the order of $940,000. They are also agreed that the loss on a diminution of value basis is of the order of $537,000.17 This is a significant difference. Indeed the cost of cure measure is $155,000 more than the purchase price while the loss of value figure is almost exactly half the higher standard.
[76] The Masons seek the greater measure of damages and the Magees argue for the lesser if liability is found.
[77] The Masons argue for cost of cure. The Masons accepted that there “are no absolute rules in this area … the key purpose when accessing damages is to reflect
the extent of loss actually and reasonably suffered by the plaintiff.”18 Relevant
17 As noted above, these are for the total amount claimed, including consequential loss and general damages.
18 Altimarloch, above n 9, per Tipping J at [156].
factors include the nature of the property and the plaintiff’s relationship with it; the defendants’ connection with the property; the nature of the wrongful act and the conduct of the parties subsequent to the wrong; whether it is reasonably possible to recreate what has been unsoundly constructed; and the general principle that it must always be reasonable for the plaintiff to seek to have his property reinstated if that is
determined to be a genuine intent.19
[78] The Masons say they intend to repair 13 Karekare Road. Steven Mason says they have been living in the area for several years and have grown fond of it, they have established friendships with neighbours and have become very much attached to the location. He continues:
My daughter Alice has been suffering with severe depression for the past two years. She has been seeing a psychologist and a psychiatrist at Kapiti Child and Adolescent Mental Health Service (CAMHS). She developed an eating disorder earlier this year and was under the support for the Central Region Eating Disorder Services (CREDS). During her treatments it came to light that part of the reason for her depression was the situation we are in dealing with the leaky home. She felt very vulnerable and the uncertainty and pressure the house is putting on the family has contributed to her illness. Alice is now in a very good mental state and is now coping a lot better with things. Saying that, she is on medication. I feel very strongly that should we be forced to move home there is a high chance that Alice would not cope with another move and could take a huge mental dip.
Our home is very much loved by all our family. We all love the location and the design of the home is perfect for a teenage family (we all have our own bathrooms). All of us regularly wander to the local café for quality time together. I quite often spend time with my son fishing with long lines on the beach which is only a 50 metre walk from the property. Katharine runs her business in Raumati Beach so can take Alice to school and go to work five minutes’ walk from the school. The set up is perfect especially because Alice knows her mum and our home are always close by.
Our preference is to remediate and remain in the property. I think this is the best option for reducing the stress of the situation and avoiding further disruption and uncertainty of moving house for Alice. I understand that having the house repaired would be disruptive, however I feel this would be seen as a positive disruption that would not impact Alice as much as the uncertainty of moving to a new home.
[79] The Magees say that the cost of cure damages measure would be unreasonable as it would exceed the initial purchase price of the house. They submit
19 See generally Tipping J in Dynes v Warren and Mahoney HC Christchurch A242/84,
16 December 1987 at 68-73.
that the evidence the Masons intend to remediate and stay should be treated with considerable caution. They are not, the Magees say, emotionally wedded to the house. In fact their daughter hated it from the outset. This case is not like Altimarloch where the property was not substitutable. The standard loss of value measure is therefore the appropriate measure as the evidence supporting a move to an alternative measure is not at all compelling.
[80] In addition, the Magees argue that even if the Masons genuinely intend to stay, measuring damages on a cost of cure basis would be objectively unreasonable as it is out of all proportion to the benefit obtained. That is because the value of the property if remediated on a like for like basis would be $790,000 and if remediated with weatherboard, cladding, $825,000. That can be contrasted with the construction costs alone for like-for-like remediation, which are $812,000. In other words, if remediated, the house will be worth less than the costs of remediation. The Magees argue that the higher measure is akin to unfair betterment in tort.
[81] The starting point in assessing the appropriate measure for damages is as follows:20
It is well to remember at the outset that what damages are appropriate is a question of fact. There are no absolute rules in this area, albeit the courts have established prima facie approaches in certain types of case to give general guidance and a measure of predictability. The key purpose when assessing damages is to reflect the extent of the loss actually and reasonably suffered by the plaintiff. The reference to reasonableness has echoes of mitigation. A plaintiff cannot claim damages which could have been avoided or reduced by the taking of reasonable steps.
[82] As Tipping J identifies,21 the essential question is reasonable substitutability. If the flawed asset is reasonably substitutable then loss of value damages will be the appropriate measure. But if not so reasonably substitutable, then the measure of damages must be “designed to require the defendant to pay the plaintiff enough money to enable the plaintiff to have the contract performed as fully as is reasonable
and possible.”22
20 Altimarloch, above n 9 at [156].
21 At [157]–[166].
22 At [158].
[83] While I have no reason to disbelieve Steven Mason’s avowed preference for remediation, the question is whether remediation is reasonable in all of the circumstances of this case. A nice house suitable for a teenage family and close to the beach in Raumati South is, prima facie, substitutable. There will be many such houses. Other factors also support a loss of value measure. The Masons have not been able to prove that Sharon Magee’s misrepresentations were intentional and so it must be assumed that they were innocent. Also, highly relevant of course is the fact that remediation would exceed the purchase value of the house by a considerable margin. Against that is the mental wellbeing of young Alice and the general equilibrium of the Masons who have, due to the faults in the construction of
13 Karekare Road, been under considerable stress for some years.
[84] Taking all of these factors together, I am not prepared to award the cost of cure damages. While I have real sympathy for the circumstances the Masons find themselves in, and particularly those of Alice, I do not think it reasonable to double a damages award on the basis, primarily, of Steven’s fears for his daughter’s wellbeing unsupported by greater detail and/or expert psychological evidence.
[85] I accept that the Masons very much love where they are (who wouldn’t?) but their relationship with this house might best be described as one of love/hate. Steven also complained in his evidence of the stress that the house has created for himself, and Katharine pointed out that the children did not actually like the house when they first moved in. There must be many houses in the Paraparaumu area that approximate the elements of 13 Karekare Road which the Masons now say they love. It would in those circumstances be oppressive and unreasonable to the Magees to require them to pay damages in such an inflated sum.
[86] The appropriate measure is therefore loss of value damages accordingly.
[87] As noted, the measure of damages claimed by the Masons includes $25,000 general damages for the stress and anxiety suffered as a result of their purchase of the property. The Magees did not dispute the quantum of each measure of damages, which both include the general damages award. As I have set out, the purchase of the property has caused great distress to the Masons, and I am satisfied that general
damages should be part of the quantum awarded. Accordingly, I order $25,000 general damages. That brings the total quantum to $536,550.21.
ABI’s acceptance of liability
[88] As noted above, the Masons settled with ABI for $68,000. Both counsel considered that the damages accepted by ABI should be deducted from the Magees’ liability, although counsel for the Masons argued that the costs of settlement should be deducted from the $68,000 figure. It is difficult to see the logic of that submission or the relevance of Heslop v Cousins.23 The $68,000 should be deducted.
[89] The Magees did not argue for co-ordinate liability contribution from ABI beyond the $68,000. It is not entirely clear in any event whether greater contribution could be justified on the basis of the way in which that issue is discussed in the multiple Altimarloch judgments. 24
[90] The damages award is accordingly $468,550.21.
Disposition
[91] Judgment is granted to the plaintiffs in the sum of $468,550.21. They will be entitled to costs on a category 2B basis. Brief memoranda may be filed if that proves necessary.
Williams J
Solicitors:
Parker & Associates, Wellington for Plaintiffs
Thomas Dewar Sziranyi Letts, Lower Hutt for Defendants
23 Heslop v Cousins HC Christchurch CIV-2005-409-2833, 6 August 2007.
24 Altimarloch, above n 9.
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