McArthur v Guerin
[2019] NZHC 500
•20 March 2019
IN THE HIGH COURT OF NEW ZEALAND WELLINGTON REGISTRY
I TE KŌTI MATUA O AOTEAROA TE WHANGANUI-A-TARA ROHE
CIV-2018-485-639
[2019] NZHC 500
BETWEEN BRIDGET LOUISE MCARTHUR CRAIG RAYMOND FOSS
RICHARD PETER BAKER
AppellantsAND
PHILIP JAMES GUERIN JACQUELINE HELEN GUERIN
Respondents/Cross-Appellants
Hearing: 11 March 2019 Counsel:
P S J Withnall for Appellants
C J Tennet and F H G Low for Respondents/Cross-Appellants
Judgment:
20 March 2019
JUDGMENT OF CHURCHMAN J
Introduction
[1] On 26 June 2013, the respondents, Philip and Jacqueline Guerin, agreed to purchase a residential property that was occupied by two of the trustees of the Le Fericien Trust (the Trust), Mr Baker and Ms McArthur, as their family home.
[2] On 21 July 2013, about a fortnight before the specified date of settlement of 8 August 2013, an earthquake struck Wellington, damaging two chimneys on the property.
[3] The Agreement for Sale and Purchase was unconditional but the Guerins had not yet arranged insurance and, after the earthquake, potential insurers would not offer cover without a declaration from an engineer that the building had not been damaged
MCARTHUR & ORS v GUERIN & ANOR [2019] NZHC 500 [20 March 2019]
in the earthquake. The damage to the chimneys meant no such declaration could be given. It also led to a dispute as to whether the property has been rendered untenantable.
[4] Settlement did not take place on 8 August 2013. The Trust agreed that the property was, at that point, untenantable.
[5] However, once the damaged chimneys had been partially removed down to the level of the ceiling, this having been paid for by the Trust, the Guerins were able to get insurance cover and, on 26 August, they accepted that the property was no longer untenantable and indicated they were prepared to settle. Settlement took place on 2 September 2013.
[6] Various disputes remained, however, and a hearing was held at the Wellington District Court to determine them in June 2018. The following month, Judge Tuohy issued a decision:1
(a)fixing the diminution of value as a result of the earthquake damage at
$99,802.69;
(b)ordering that the Guerins pay the Trust $6,682.79 in penalty interest and $500 in reimbursement of legal expenses consequent on late settlement; and
(c)dismissing the Guerins’ various claims for damages.
[7] On 7 September 2018, Judge Tuohy issued a second judgment correcting an arithmetical error relating to diminution of value and dealing with interest and costs. 2 Correcting the arithmetical error changed the diminution of value figure from
$99,802.69 to $104,802.39.3
1 Guerin v McArthur [2018] NZDC 11837.
2 Guerin v McArthur [2018] NZDC 18306.
3 At [3].
[8] This judgment also provided that the penalty interest to be paid by the purchasers to the vendors for the period between settlement date originally specified in the contract (8 August 2013) and the actual settlement date of 2 September 2013 should be calculated on the balance of the purchase price after adjustment for diminution of value. The Court also awarded the Guerins the sum of $10,000 for costs, inclusive of GST, together with disbursements and Court filing fees.
The appeal
[9] On 13 August, Ms McArthur, Mr Baker and Mr Foss (the appellants), as trustees of the Trust, gave notice that they were appealing Judge Tuohy’s decision on the grounds that he had erred in fact and law in determining both the diminution in value to be deducted and the level of compensation awarded for legal expenses. This appeal was discontinued on 17 January 2019.
[10] The Guerins, however, are cross-appealing on the grounds that the Judge erred in:
(a)determining the appellants were entitled to penalty interest despite finding the house was untenantable at the relevant time; and
(b)deciding that betterment could be deducted and in setting the level of deduction to be made in the award of compensation under diminution of value.
[11]The appellants oppose the cross-appeal on the grounds that the Judge:
(a)was required in principle and on the true meaning of cl 4.2(2) of the Agreement for Sale and Purchase to adjust the respondents’ claim for “betterment” as part of determining reasonable cost and, in doing so, made reasoned assessments available to him on the facts of the case; and
(b)was correct on the terms of the contract to award the appellants penalty interest and there is neither any basis in policy nor arguable defence of estoppel to the contrary.
Was the cross-appeal brought out of time?
[12] The appellants submit that the cross-appeal was brought out of time, arguing that this was acknowledged by the respondents as long ago as 13 September 2018 in a joint memorandum for a case management conference. The relevant paragraph from that memorandum is as follows:
Directions can be made that the Appellants file and serve their points on appeal clearly starting [sic] the issues on appeal (in accordance with clause 6 of Schedule 6) by 15 October 2018 and that the Respondents file and serve their points on any cross-appeal the Respondents have been given leave to bring, by 31 October 2018.
[13] It is submitted that leave accordingly is required under r 20.11(2) of the High Court Rules (HCR) which provides that:
A notice of cross-appeal must be filed no later than 2 working days before the case management conference relating to the appeal, except with the leave of the court.
[14] The appellants submit that the absence of leave was raised with the respondents by email on 2 November 2018 and again by letter on 10 December 2018. Despite that, leave has not been sought nor was the matter touched on in the respondents’ submissions in support of the cross-appeal. It is submitted that leave correspondingly has not been granted and there is, therefore, no cross-appeal on foot.
[15] Mr Tennet, for the respondents, made an oral application for leave to appeal out of time. He appeared to concede that the cross-appeal may have been filed a day late. Mr Withnall, for the Trust, acknowledged that he could not point to any disadvantage to the Trust.
[16] The cross-appellants submitted that a cross-appeal was intended and that this was understood by the appellants as evidenced by counsel’s inquiry as to whether leave had been obtained and the reference in the joint memorandum of 13 September 2018 to the need for leave.
[17] The Court has an unfettered jurisdiction to extend the time for doing any act or step in a proceeding on such terms as the Court thinks just.4 Given the minimal period of time involved and the lack of prejudice to the appellants, I grant leave for the respondents to file their cross-appeal.
Fresh evidence
[18] A further procedural matter to be dealt with is the Guerins’ application to adduce fresh evidence in the form of an affirmation of Mr Guerin affirmed on 22 February 2019. This application is made in reliance on r 20.16 of the HCR which provides:
20.16 Further evidence
(1)Without leave, a party to an appeal may adduce further evidence on a question of fact if the evidence is necessary to determine an interlocutory application that relates to the appeal.
(2)In all other cases, a party to an appeal may adduce further evidence only with the leave of the court.
(3)The court may grant leave only if there are special reasons for hearing the evidence. An example of a special reason is that the evidence relates to matters that have arisen after the date of the decision appealed against and that are or may be relevant to the determination of the appeal.
(4)Further evidence under this rule must be given by affidavit, unless the court otherwise directs.
[19] The evidence in question concerns information received from EQC which the Guerins state supports their claim that an adjustment for betterment was not applicable. The information is copies of email correspondence between EQC and Mr Withnall, counsel for the Trust. They show that the claim made to EQC by the Trust calculated the Trust’s loss on the same basis that Judge Tuohy had done in the District Court, and that no deduction for “betterment” had been made with the result that the Trust had received from EQC some $9,047.61 more than the amount for which Judge Tuohy had held the Trust liable. There was also, at least, a theoretical possibility that the Trust could pursue the balance of the claim above the EQC limit with their private insurers. From the bar, Mr Withnall indicated that such a claim had been
4 HCR, r 1.19.
unsuccessful with the private insurers saying that the Trust had not suffered any loss for which they were insured over and above what they had been paid by EQC.
[20] It is clear that this evidence meets the requirement of r 20.16 to the extent that it relates to matters that have arisen after the date of the decision. However, it is also required to meet the test that it is, or may be, relevant to the determination of the appeal.
[21] Mr Tennet submitted that the significance of the evidence was that it supported the respondents’ claim that an adjustment for betterment was not appropriate. It was also said to support an argument of estoppel to the effect that the appellants were said to be estopped from denying the betterment argument.
[22] The appellants oppose the admission of this evidence on the grounds of relevance. Mr Withnall submitted that what the Court was required to construe and apply in this case was cl 4.2(2) of the Agreement for Sale and Purchase dated 26 June 2013. He submitted that this was not a contract of indemnity and the obligations arising under it were substantially different to those upon the EQC in terms of the statutory scheme that it administered.
[23] I accept those submissions. In its task of trying to interpret the meaning of the wording in cl 4.2(2) of the Agreement for Sale and Purchase, the Court is not assisted by having information about how the EQC claim made by the Trust was resolved. The Court is required to ascertain the amount of diminution in value of the property which occurred as a result of the earthquake damage. That concept is further refined in the Agreement for Sale and Purchase as being equivalent to the “reasonable cost of reinstatement or repair”.
[24] The issue for the Court is whether “the reasonable cost of reinstatement or repair” requires the Court to make an adjustment for the fact that the repairs which the Guerins were obliged to undertake resulted in them effectively replacing a heating system that utilised open fires with a heating system using the same fire places and flue cavities but now relied on gas rather than the combustion of wood or coal.
[25] Accordingly, on the basis that it is not relevant, I decline to admit the proposed further evidence.
Betterment
[26] Prior to the earthquake, the property had two chimneys, both located within the house as opposed to being on an exterior wall. Once these chimneys had been taken down to ceiling level after the earthquake, the parties agreed that the property was not then untenantable.
[27] The contract for the sale of the property was in the standard REINZ/ADLS Agreement for Sale and Purchase form, 9th edition (2012). Clause 4.2(2) of that contract, under the heading of “Risk and Insurance”, provides as follows:
If the property is not untenantable on the settlement date the purchaser shall complete the purchase at the purchase price less a sum equal to the amount of the diminution in value of the property which, to the extent that the destruction or damage to the property can be made good, shall be deemed to be equivalent to the reasonable cost of reinstatement or repair.
[28] Where the amount of diminution was disputed, cl 4.2(4) provided that the procedure in cl 7.4, under the heading of “Claims for Compensation”, should be followed:
7.4 If the amount of compensation is disputed:
(1)An interim amount shall be deducted on settlement and paid by the purchaser to a stakeholder until the amount of the compensation is determined.
(2)The interim amount must be a reasonable sum having regard to all of the circumstances.
…
(6)The amount of compensation determined to be payable shall not be limited by the interim amount.
[29] As the parties could not agree on the amount of diminution, the procedure in cl 7.4 was followed, and an interim amount was deducted on settlement of $45,000, that sum to be held by a law firm as stakeholder.
[30] The Guerins, upon taking possession of the property, employed contractors to remove the remainder of the chimneys and installed new gas fuelled fires in two of the ground floor fireplaces, removing a fire box from another fireplace downstairs. The remaining parts of the reinstatement and repair plan were to repair damage to the roof, to install replica chimney stacks, and to reinstate a further three fireplaces (two of which were in upstairs bedrooms) along with a TV aerial and cabling. The projected costs for this work was $169,858.65. The Guerins, however, claimed that the amount by which the purchase price should be reduced was $157,265.23.
[31] The Judge found that an offset could be made in the award under cl 4.2(2) of the Agreement for Sale and Purchase through an allowance in respect of betterment:
[46] The lack of any specific reference in cl 4.2(2) to the concept of betterment does not, in my view, mean that it should not be taken into account. Clause 4.2(2) reimburses the purchaser for the cost of reinstatement, not the cost of replacement. As explained above, if practicable, that should result in a property equivalent in quality, functionality and appearance to the property as it was immediately prior to the occurrence of the damage. If, for reasons of practicability, it results in a property which is better than it was in those respects, in principle allowance should be made for the betterment. …
[32] Therefore, in assessing the costs of reinstatement and repair, the Judge determined that there were four matters that needed to be addressed, namely:
(a)the removal of the chimneys;
(b)the replacement fireplaces;
(c)the replica chimney stacks; and
(d)an allowance for betterment.
[33] The removal of the chimneys was held to be properly part of the reinstatement or repair of the damage caused by the earthquake in 2013,5 as was the restoration of those fireplaces used as functioning fireplaces prior to the earthquake, namely the three located downstairs.6 The two upstairs fireplaces were found to be merely decorative
5 At [48].
6 At [51].
and did not need to be reinstated or repaired.7 As to the replica chimney stacks, the Judge was satisfied the originals were “an integral part of the appearance and charm of the house” and replicas would “recapture that appearance and charm almost exactly”, and reinstatement should include the cost for that, the amount sought by the Guerins being substantial but reasonable.8 The Judge arrived at a final total of
$141,526.76 to achieve reinstatement and repair.9
[34] It was, however, determined that the gas fires were functionally superior to unmodified open fires, while the flues would not require the cleaning that a brick chimney serving an open fire would. The Judge therefore fixed an allowance for betterment in respect of the fires and flues at 50 per cent.10 While there was no betterment in terms of the replica chimney stacks’ main function, being their appearance, they were an improvement in terms of longevity and safety, so an allowance of 30 per cent was fixed.11 Taking these allowances into account resulted in the reasonable cost of reinstatement and repair being reduced by some $40,000 to
$104,802.39.12
[35] The Guerins submit that the work they had done and that which had not yet been undertaken but for which a quote had been obtained was accepted by the Judge as falling within “reinstatement”.13 While he only stated that the costs involved in supplying and installing the replica chimney stacks were reasonable, with no explicit mention made of the costs for the fireplaces and flues, they submit that the fact they were included in his calculations means it can be inferred that he found them to be reasonable.
[36] The Guerins submit that, as a matter of law, once they, as the trial plaintiffs, had successfully proved that the works amounted to reinstatement and the costs were reasonable, the onus then fell on the trial defendants to make out betterment, relying
7 At [53].
8 At [60] and [65].
9 At [67].
10 At [69].
11 At [70].
12 At [71] and Guerin v McArthur, above n 2, at [3].
13 At [55], [56] and [60].
on Fisher J’s decision in J & B Caldwell Ltd v Logan House Retirement Home Ltd in which he said:14
At that point the defendant should have to prove both the presence of betterment and its quantum. I do not think that it should be the task of the plaintiff to embark upon the essentially negative exercise of proving the limits of betterment. Rather, the defendant should have to prove that which it affirmatively asserts.
[37] The Guerins note that the trial defendants did not adduce any evidence as to betterment.15 They submit that it was insufficient to point out that the chimney stack replica was expensive because:
(a)the replica is of a standard of elegance befitting the original installation;
(b)evidence was provided that cheaper alternatives had a high probability of being unable to get a Code Compliance Certificate; and
(c)the “like for like” (brick for brick) option in these circumstances would have been more expensive.
[38] As no evidence was adduced as to betterment, the Guerins submit that it was not open to the Judge to make a finding as to the existence or quantum of betterment.
[39] The appellants, however, point out that J & B Caldwell Ltd concerned a claim for damages due to failure to deliver chattels when had already been paid for and, so, was a claim for compensation under a contractual entitlement. They argue that it is for the Guerins to establish their contractual entitlement and part of that is establishing that the costs of replacement they are claiming is reasonable. The onus falls on the Guerins accordingly.
[40] The appellants point to the fact that, had the earthquake on 21 July 2013 not occurred, the Guerins would have taken possession of a home with:
14 J & B Caldwell Ltd v Logan House Retirement Home Ltd [1999] 2 NZLR 99 (HC) at 110.
15 Guerin v McArthur, above n 1, at [68].
(a)chimneys on the ground floor that had been built in 1880 (so were 133 years old at the time of the earthquake);
(b)chimneys that had been extended when the upper level was added in 1896 (these extensions were therefore 117 years old);
(c)chimneys made of brick and held in place with lime mortar which, by 2013, was known to lose its capacity to hold bricks together over time with the result that bricks could be just stacked on top of each other;
(d)chimneys that stood on a hardened earth base beneath the floor of the house with no concrete foundations;
(e)chimneys that had been subject to all the earthquakes which had rattled Thorndon over 133 years, meaning there was significant wear and tear;
(f)fireplaces, apart from the more modern fire box in the dining room, that were small open fires burning wood and/or coal typical of their time; and
(g)fireplaces in the two bedrooms upstairs that were not used/usable.
[41] The appellants submit that this was essentially chimney infrastructure that was over 110 years old and that sooner or later it would have required upgrading by replacement. The Guerins chose to replace brick and lime mortar chimney infrastructure with open fires that were over 110 years old and in need of inevitable replacement, with new efficient gas fires and infrastructure that met modern safety and environmental standards which would last for many years to come. This did not place them in the position they would have been in had the earthquake of 21 July 2013 not occurred but put them in a much better position, not just compensating them for the diminution of value from the damage to the chimneys but increasing value and relieving them of the associated cost. Therefore, to be reasonable in terms of cl 4.2(2), the Guerins’ claim for the full cost of replacing the chimney infrastructure in the way
they chose needed to be adjusted accordingly. Clause 4.2(2) was not a means for them to fully fund looming capital expenditure to remedy deferred maintenance.
[42] The appellants submit that, at the end of the day, the trial Judge had to determine what the reasonable cost of replacement or repair of the chimneys was, such an assessment requiring experience and judgement, based on the material before him in the circumstances.
Analysis
[43]The objective of contract damages is said to be:16
Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.
[44] The purpose of contract damages is therefore to put the plaintiff in the position they would have been in if the contract had not been broken.17
[45]Maree Chetwin in Chapter 1 of Civil Remedies in New Zealand says:18
Damages are designed to compensate the injured party for pecuniary loss, that is, the loss of the value of the promised benefits and in certain cases for non- pecuniary loss.
[46]She also says:19
In certain special cases, a plaintiff may recover more than his or her loss. A plaintiff may need to restore or replace an item and the replacement item may be more efficient or have a longer lifespan than the original.
[47] The issue of betterment is closely tied to the plaintiffs’ obligation to mitigate their loss. However, sometimes there will be circumstances where the only way to remedy the loss will result in a benefit for the plaintiff. This can be the case when a structure or piece of machinery is damaged, and a defendant is unable to convey to the plaintiff a properly functioning structure or machine. In those circumstances, repairing
16 Robinson v Harman (1848) 1 Ex 850 at 855; Peter Blanchard (ed) Civil Remedies in New Zealand
(2nd ed, Brookers, Wellington, 2011) at [1.3.1].
17 See Bloxham v Robinson (1996) 7 TCLR 122 (CA) at 133.
18 Above n 16, at [1.3.1].
19 At [1.3.2].
or reinstating the building or machine, of necessity, involves substituting new parts for old or worn parts.
[48] Initially, the cases which addressed this issue adjusted the damages to allow for betterment.20 However, more recent cases have not so readily accepted that there should be a deduction for betterment. In Harbutt’s “Plasticine” v Wayne Tank and Pump Co, a contractual breach had resulted in the destruction of a factory, but the UK Court of Appeal refused to allow any deduction from the damages, which were based on the costs of rebuilding on the basis that:21
… to do so would be the equivalent of forcing the plaintiffs to invest their money in the modernising of their plant which might be highly inconvenient for them.
[49] However, this observation may be confined to reinstating commercial premises. McGregor on Damages states:22
On the other hand, where the necessity of the case does not demand reinstatement, claimants may find themselves limited to claiming for the diminution of the value of the property in question. This is so, for instance, where a house has been purchased in reliance on a negligent surveyor’s report, the cost of putting the property into the condition described in the report not being required to put the purchaser into the position he would have been in had the surveying contract been properly fulfilled.
[50] In English cases against building surveyors where the cost of repairing a house wrongly represented by the building surveyor to be free of defects was greater than the difference of the purchase price for the house and the value of the house with the defects, the Courts have been unwilling to allow the plaintiff more than the diminution in value.23 In Smith and Smith v Peter North, Lord Parker said:24
[T]o apply the cost of repairs measure … would be to place the appellants in a substantially better position than they would have been in had [the respondent surveyor] given a proper report … [A]n award of damages which enabled the appellants in effect to carry out repairs to the property to a minimum pleaded cost of £130,000 entirely at the respondent’s expense would mean that the appellants had acquired the property, with the benefit of the
20 See, for example, Lukin v Godsall (1795) Peake Add Cas 15 at 16, per Lord Kenyon and James Edelman McGregor on Damages (20th ed, Sweet & Maxwell, London, 2018) at [2-007].
21 Harbutt’s “Plasticine” v Wayne Tank & Pump Co [1970] 1 QB 477 (CA) per Widgery LJ at 473.
22 Above n 20, at [2-007] (citation omitted).
23 See Watts v Morrow [1991] 1 WLR 1421 (CA); Smith and Smith v Peter North [2002] Lloyd’s Rep PN 111 (CA).
24 Smith and Smith v Peter North, above n 23, at [50].
repairs, for a net outlay of (at most) some £200,000 – that is to say, some
£130,000 less than the market value of the property at the date of the purchase …
[51] Clause 4.2(2) of the Agreement for Sale and Purchase specifically proceeds on the basis that if the property is not untenantable on settlement date, the purchaser is obliged to complete the purchase at the purchase price less a sum equal to the amount of the diminution in value of the property. That obligation comes immediately before the wording which provides that to the extent the damage to the property can be made good, it shall be deemed to be the equivalent to the reasonable costs of reinstatement or repair.
[52] The particular question before the Court in this case does not appear to have been considered directly by the High Court previously. However, in the case of Herbert v Duncan, Fogarty J was faced with the situation where a property had been damaged by fire after the sale had become unconditional. The parties had not been able to agree on the quantum of “diminution in the value of the property” under cl 4.2(2) of the 9th edition of the REINZ/ADLS Agreement. The parties had appointed an independent experienced conveyancer to fix the quantum of the sum to be retained on settlement. In fixing that sum, the lawyer had made an allowance for betterment. The case came before the Court on an application for interim injunction by the purchaser to stop the settlement (and thereby remove the vendor’s option of cancelling the agreement).25
[53] Fogarty J accepted that, under common law, the equitable title to the property passed to the purchaser once the sale became unconditional but that cl 4.2(2) reversed that presumption with the practical consequence being that the purchaser buying the property relied on the vendor maintaining the vendor’s insurance policy until settlement. He noted that under the previous editions of the standard form contract, the diminution in value was just that with no reference to the reasonable cost of reinstatement. He also accepted the view of the expert conveyancer who had fixed the diminution amount in that case. He had said: “it is commonplace that diminution in value following damage is not necessarily equal to the cost of repairing the damage”.
25 Herbert v Duncan (2013) 14 NZCPR 379.
[54]Fogarty J concluded:26
In summary, I think there is some doubt as to the meaning of cl 4.2(2). For that reason, there is a serious argument that reinstatement might include reinstating a shelterbelt and the other uninsured improvements. There is, however, an argument the other way, that proper weight should be given to the phrases in this clause “can be made good”, “reasonable cost of reinstatement or repair”, and the very heading of the clause “Risk and insurance”, and the opening, cl 4.1:
The property and chattels shall remain at the risk of the vendor until possession is given and taken.”
[55] In the present case, some assistance can be gained from looking at the structure of the agreement and the place of cl 4.2(2) under the heading “Risk and insurance”.
[56] Where the cost of repair greatly exceeds any diminution in value, it cannot have been the intention of the drafters of the standard form of contract to confer a windfall on purchasers.
[57] The real issue in this case is whether the reasonable cost of reinstatement or repair is directly related to the diminution in value of the property. If it is not, then the plaintiffs arguably receive a windfall gain which results in them being compensated in an amount greater than the diminution in value of the property. That is what would occur if the Guerins’ contentions were correct. The use of the word “reasonable” therefore permits the Court to have regard to the issue of diminution in value.
Quantum of betterment
[58] Neither party led any evidence in the District Court as to the value of “betterment”. That made it impossible for the Judge to deal with the matter other than in very general terms.
[59] On appeal, the cross-appellants submitted that if I accepted there should be a deduction for betterment, then the percentage figures used by the District Court Judge were excessive. Such a submission places this Court in an invidious position. There
26 At [17].
is no evidence that can assist the Court one way or the other in assessing whether the discount for betterment was excessive.
[60] I accept the submissions made on behalf of the Trust that cl 4.2(2) is compensatory in the same way as damages for breach of contract at common law are compensatory. The purpose of cl 4.2(2) is not to put the purchaser in a better position in terms of value than they would have been in had the event not occurred. Had the earthquake not occurred, on settlement, the Guerins would have taken possession of a house with upstairs fireplaces which did not work and downstairs fireplaces which did work but served an open fire in the lounge and a Jetmaster steel firebox in the dining room. Those fireplaces were served by chimneys, the bottom halves of which were 133 years old and which still had the original degraded mortar.
[61] The focus of cl 4.2(2) has historically been the diminution in value. Indeed, as the trial Judge noted,27 prior to the 9th edition (2012) of the Standard Agreement for Sale and Purchase, cl 4.2(2) had read:
If the property is not untenantable on the settlement date the purchaser shall complete the purchase at the purchase price less a sum equal to the amount of the diminution in value of the property.
[62] The particular formulation of words would have necessitated the calling by each side of valuers to express an opinion on diminution in value.
[63] The concept of diminution in value was extended in the 9th edition with the addition of the words:
...to the extent that the destruction or damage to the property can be made good, shall be deemed to be equivalent to the reasonable cost of reinstatement or repair.
[64] In this case, the Guerins did not insist on reinstatement of the downstairs fireplaces so that one had a cast iron firebox and the other an open fireplace.
27 Above n 1, at [35].
[65] They took the option of changing the type of fireplace from one that burnt wood or coal to modern gas fire units which did not need the original brick chimneys to be replicated.
[66] As set out above, I accept the appellants’ submission that inherent in the concept of “reasonable cost of reinstatement or repair” in cl 4.2(2) is the proviso that, where a purchaser elects to reinstate not by replacing like with like but, in this case, with a different heating system, the vendors’ obligation to compensate, does not extend so far as to meet the full cost of the new system where it involves, as here, a significant element of betterment. Such a claim would not amount to the “reasonable cost of reinstatement or repair”.
[67] Having determined that the trial Judge was entitled to make an allowance for betterment, the issue then arises as to whether there is any basis to interfere with his finding as to the appropriate level of discount for the betterment.
[68] The Guerins have submitted that, if it was open to the Judge to make a finding as to betterment, then he erred in determining that betterment in the case of the fireplaces and flues amounted to 50 per cent, and in the case of the replica chimney stacks amounted to 30 per cent.
Quantum of fireplaces and flues
[69] The Guerins submit that reinstatement required a working fireplace and a working flue and, while it was accepted by the Judge that a metal flue was “essential”,28 it does not follow that, simply because the function of the flue remains the same whether gas or woodfire is used, that its value can be assumed to be divided evenly between those two functions. The fireplaces required the installation of a gas- component in order for that functionality to be available, the cost of which was specifically excluded from those sought. Therefore, the Guerins submit, the Judge’s observations at [69] as to the benefits of the gas function were irrelevant to the question of betterment as, if there were improvements in value, they were gained at their
28 At [56].
exclusive cost. It is submitted that the longer life span of the flue and the ease with which it would be cleaned could not account for a 50 per cent allowance.
[70] The Guerins further submit that the Judge also did not take into account the evidence that the reestablishment of a brick chimney stack would have necessitated a brick structure (and therefore a brick flue) with other support materials underneath in order to support its weight which would have cost more than the combination of a metal flue and the replica stacks. In all likelihood, this would not have obtained consent. In light of this evidence, it is submitted, an allowance of 50 per cent betterment was essentially disadvantaging the Guerins for choosing the most cost- effective and practical of the options available, which had the effect of putting the Trust in a better position than if the Guerins had sought like for like.
Quantum of chimney stacks
[71] In terms of the Judge’s allowance of 30 per cent for the replica chimney stacks being on the basis of longevity and safety, the Guerins repeat their argument that these qualities were incidental to the replica being the most cost effective and practical of the options available to them, given the evidence that reinstating a brick chimney stack would have necessitated a support structure running through the entire house and would have cost considerably more than the fibreglass replica which required no such structure. The Guerins accordingly submit that, if the Court finds betterment, that any calculation as to quantum should start at the bare minimum cost of reinstatement and not be calculated by deducting from the minimum costs and any such finding should, on the evidence adduced, be nominal.
Conclusion on quantum
[72] It is my view that, although the Guerins appear to have taken the most practical and cost-effective option in effecting the repairs to the fireplaces and flues, and the chimney stacks, the fact remains that they still benefitted substantially from the repairs. To express it another way, a house with modern flues and new gas fireplaces is more valuable than a house with 133-year-old chimneys and original fireplaces that burn wood or coal. In these circumstances, the quantum of the deductions for betterment were open to the trial Judge.
Penalty interest
[73] Penalty interest was claimed by the appellants under cl 3.12 of the agreement. This clause provides as follows:
Purchaser Default: Late Settlement
3.12If any portion of the purchase price is not paid upon the due date for payment, then, provided that the vendor provides reasonable evidence of the vendor’s ability to perform any obligations the vendor is obliged to perform on that date in consideration for such payment:
(1)The purchaser shall pay to the vendor interest at the interest rate for late settlement on the portion of the purchase price so unpaid for the period from the due date for payment until payment (“the default period”); but nevertheless this stipulation is without prejudice to any of the vendor’s rights or remedies including any right to claim for additional expenses and damages. …
[74] Although the trial Judge found that the property, as at 8 August 2013, was untenantable,29 he did not accept that this finding disentitled the appellants to penalty interest from that date, stating:30
[77] The only place in the agreement in which the concept of tenantability features is cl 4.0. Pursuant to that clause, untenantability on the day of settlement caused by prior destruction or damage serves as the contractual criterion for determining whether or not the purchaser has available to them the two options given by cl [4.2(1)], one of which is to cancel the contract. The use of the word “may” in the clause makes it clear that the purchaser is not required to exercise either option. The criterion is met if the property is untenantable at the date of settlement not at some other date. That makes sense because the contractual obligation to settle applies at that date.
[78] Accordingly, the fact that the property may have been untenantable on the date of settlement did not remove the Guerins’ obligation to settle unless they chose to exercise the option to cancel. They did not do so. Indeed, Mr Guerin’s evidence was that they never even considered it. It follows that the Trust is contractually entitled to penalty interest from 8 August until actual settlement.
[75]The relevant clause of the agreement is as follows:
(1)If the destruction or damage has been sufficient to render the property untenantable and it is untenantable on the settlement date the purchaser may:
29 At [112].
30 Footnote omitted; emphasis in original.
(a)complete the purchase at the purchase price, less a sum equal to any insurance moneys received or receivable by or on behalf of the vendor in respect of such destruction or damage, provided that no reduction shall be made to the purchase price if the vendor’s insurance company has agreed to reinstate for the benefit of the purchaser to the extent of the vendor’s insurance cover; or
(b)cancel this agreement by serving notice on the vendor in which case the vendor shall return to the purchaser immediately the deposit and any other moneys paid by the purchaser, and neither party shall have any right or claim against the other arising from this agreement or its cancellation.
[76] The Guerins submit that the Judge erred in applying penalty interest from 8 August and that the penalty provision of the contract should not apply where an election is made under cl 4.2(1). The election to continue or cancel the contract under cl 4.2(1) does not need to be made on the day of settlement but does, as a prerequisite, require the property to be untenantable on that day. Where the election to continue the contract is made under cl 4.2(1), the purchaser becomes obliged to settle on that day. The point at which the election must be made is when all available information as to tenantability is disclosed so the purchaser can make an informed decision. While this will ordinarily coincide with the original settlement date, the election can be made before this point.
[77] The Guerins submit that, in this particular case, the point of election under cl 4.2(1) never came to be, in part due to the actions of the appellants in actively withholding information which would have clarified the nature of untenantability (and obliged the purchasers to make their election there and then), but primarily because on 26 August 2013, once the chimney tops had been removed, the parties agreed that the property was tenantable, and consequently the requirement to make an election under cl 4.2(1) became unnecessary because the rights and obligations of the parties were no longer governed by that provision and instead became governed by cl 4.2(2).
[78] The Guerins therefore submit that, in the limbo period between the original settlement date and 26 August 2013, there was no obligation to settle and therefore no penalty interest to accrue. If that submission is accepted, it is further submitted that the Judge erred in finding that penalty interest applied from 26 August 2013 to
2 September 2013 as, at the time tenantability was determined, it was reasonable to allow some time for the purchasers to marshal their resources and effect settlement. The time in which they effected settlement was not only reasonable but within the minimum possible period they could have been expected to do so.
[79] The appellants, however, note that settlement on settlement date did not have to mean that the Guerins moved in the same day, something that Mr Guerin himself accepted. The real reason the agreement between the parties did not settle was because the Guerins were unable to get insurance to borrow the funds needed to settle because of the approach insurers had taken to new insurance after the earthquake of 21 July 2013.
[80] The appellants submit that certainty in contracts is of paramount importance, especially in transactions involving settlement on an agreed date. Relief from the normal consequences of failure to do so, namely penalty interest in the case of a defaulting purchaser, is only available in very limited circumstances. It is submitted that the policy to be encouraged in agreements for sale and purchase is that of “settle now and argue later”, this being reflected in the terms of the standard form Agreement for Sale and Purchase and in decisions at the highest level.31
[81] The appellants submit that the election under cl 4.2(1) must be made, contrary to the Guerins’ submissions, at least by settlement date. They highlight the following relevant provisions of that clause:
4.2If, prior to the giving and taking of possession, the property is destroyed or damaged, and such destruction or damage has not been made good by the settlement date, then the following provisions shall apply:
(1)If the destruction or damage has been sufficient to render the property untenantable and it is untenantable on the settlement date, the purchaser may:
(a)complete the purchase at the purchase price …; or
(b)cancel this agreement by serving notice on the vendor …
31 See, for example, Otago Station Estates Limited v Parker [2005] NZSC 16, [2005] 2 NZLR 734.
[82] The appellants submit that, as the fundamental obligation on the purchaser to pay the balance of the purchase price on settlement date continues to subsist and is not ousted by the right to make the election conferred by cl 4.2(1), that election must accordingly be made by settlement date.
[83] If, as appears to have been the appellant’s view at the time, the property was, in fact, tenantable at the settlement date, the Guerins would have been obliged under cl 4.2(2) to complete the purchase. On the other hand, if the property was untenantable, then under cl 4.2(1) the Guerins needed to either complete the purchase or cancel the agreement by the settlement date. Either way, the evidence appears to suggest that the Guerins were planning to complete the purchase regardless and, so, were required to effect the purchase on the settlement date. As they failed to complete the purchase, they are therefore liable for penalty interest from 8 August 2013.
Estoppel
[84] In the alternative, the Guerins submit that the Judge erred in applying penalty interest by not finding that the respondents were estopped from claiming it from 8 August, relying on the principle developed in Central London Property Trust Ltd v High Trees House Ltd.32 The question as to the application of estoppel is:33
… whether in the particular circumstances it would be inequitable for a party to be allowed to deny what he knowingly or unknowingly has allowed or encouraged the other party to assume to his detriment.
[85] As stated by Barker J in Andrews v Colonial Mutual Life Assurance Society Ltd:34
… it would be unconscionable for a party to be permitted to deny that which knowingly or unknowingly he has allowed another to assume to his detriment rather than inquiring whether the circumstances can be fitted into some preconceived formula. I consider that, knowingly or unknowingly, the defendant allowed the plaintiffs to assume that they had security of tenure for a lease of three or six years to commence at the expiry of the Swallow lease.
32 Central London Property Trust Ltd v High Trees House Ltd [1947] KB 130, [1956] 1 All ER 256.
33 Westland Savings Bank v Hancock [1987] 2 NZLR 21 (HC) at 36 per Tipping J.
34 Andrews v Colonial Mutual Life Assurance Society Ltd [1982] 2 NZLR 556 (HC) at 570.
[86] The Guerins argue that the appellants denied that the property was untenantable and unsafe, claiming that they had an engineer’s report proving this. They submit that, by wilfully withholding the report from them, the appellants knowingly allowed them to assume that tenantability was equivocal, a situation analogous to that in High Trees. At trial, Mr Guerin gave evidence that, as a result of the actions of the defendants prior to and on the original settlement date, there was considerable confusion and pressure placed on the Guerins, with little to no information on tenantability. It is therefore submitted that it would be surprising and inequitable that the appellants should be entitled to penalty interest in the circumstances as they existed.
[87] The appellants, however, note that estoppel was not pleaded by the Guerins as a defence to the appellants’ counterclaim for penalty interest and, on this basis alone, this submission must fail. In any event, it is submitted that the law of estoppel has evolved in New Zealand to the stage where it can now be said to have four requirements:35
[T]he principles for inference of an equitable estoppel were set out by this Court in Wilson Parking NZ Ltd v Fanshawe 136 Ltd. Four elements must be established by the party asserting such an estoppel:
(a)That the party to be estopped has acted in a clear and unequivocal manner which has caused the claimant to have a certain belief or expectation;
(b)That the claimant has relied reasonably upon that belief or expectation;
(c)That the claimant has suffered detriment by relying on that belief or expectation; and
(d)That it would be unconscionable for the party to be estopped to depart from the belief or expectation.
[88] The appellants submit that, accordingly, even if estoppel had been pleaded by the Guerins, they would need to have established that:
(a)the appellants had by words clearly and unequivocally expressed or, by conduct, created a belief or expectation that if the Guerins failed to
35 Pollard v Pollard [2016] NZCA 186 at [33], citing Wilson Parking New Zealand Ltd v Fanshawe 136 Ltd [2014] NZCA 407, [2014] 3 NZLR 567 at [114] (footnotes omitted).
settle on 8 August 2013, the appellants would not claim penalty interest against them under the agreement;
(b)the Guerins took some step or action in reasonable reliance on this expectation or belief;
(c)the Guerins suffered some detriment as a result of taking that step or action; and
(d)as a consequence, it would be unconscionable to permit the appellants to now claim penalty interest under the agreement.
[89] The appellants submit that none of those elements is able to be established by the Guerins, the evidence being entirely to the contrary as the correspondence from the appellants consistently insists that the property is tenantable, and settlement is due on 8 August 2013. Conversely, at no point is there any correspondence from the Guerins protesting that penalty interest is not payable because the appellants had created a belief or expectation it would not be payable in the event the Guerins failed to settle. The only reason given by the Guerins was that the property was not tenantable as at 8 August 2013, an argument that the trial Judge found was not available as a matter of contract.
[90] It is difficult to see how the Guerins hope to succeed with their argument for estoppel. As the appellants have noted, there does not seem to be anything in the evidence to indicate that they acted in such a way as to cause the Guerins to believe they would not pursue penalty interest. In any event, estoppel was not pleaded and so cannot be raised as a defence.
Conclusion
[91]For the reasons given above, the cross-appeal is dismissed.
[92] The parties are invited to settle costs but, failing agreement, the appellants have 14 days to file a memorandum with the cross-appellants having 14 days to reply. Costs will then be dealt with on the papers.
Churchman J
Solicitors:
Gawith Burridge, Masterton for Appellants
Strachan O’Connor, Wellington for Respondents/Cross-Appellants
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