Shen v Ossyanin
[2019] NZHC 135
•14 February 2019
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CIV-2015-404-00855
[2019] NZHC 135
BETWEEN ZHAOWU SHEN
Plaintiff
AND
ANDREY YURIEVICH OSSYANIN AND TATYANA OSSYANINA
First Defendant
HARRINGTON PROPERTY INSPECTIONS LIMITED
Second Defendant
Hearing: 3 – 7, 11 – 12, 14 September and 17 December 2018 Counsel:
A Sharp and C Huang for Plaintiff
R J Macdonald and M Cherrington for First Defendant
Judgment:
14 February 2019
JUDGMENT OF WHATA J
This judgment was delivered by me on 14 February 2019 at 12.00 pm, pursuant to Rule 11.5 of the High Court Rules.
Registrar/Deputy Registrar Date: ………………………….
Solicitors: Jesse & Associates, Auckland
MBC Law Limited, Auckland
SHEN v OSSYANIN [2019] NZHC 135 [14 February 2019]
Introduction
[1] This case is about misrepresentation and mistake. Mr Shen purchased an architecturally designed home from Mr Ossyanin. Mr Shen’s first language is Mandarin. Mr Ossyanin’s first language is Russian. They do not speak English. Immediately prior to purchase, Mr Shen and Mr Ossyanin met. Mr Shen was assisted by Ms Chen. She cannot speak Russian, but she speaks English. Mr Ossyanin was assisted by Mr Naoumov. He cannot speak Mandarin, but he speaks English. Mr Shen said he asked whether the house was leaking or had any problems. He said he was told “no”. Mr Ossyanin denies there was any question about “leaks”. The house leaks (though it is not a leaky home as that term is usually understood).
[2] This judgment determines what was said and whether it amounts to an actionable misrepresentation. An issue of common mistake is also briefly addressed.
Background
[3] Mr and Mrs Ossyanin purchased a Peter Bosley designed home at 3 Wairangi Street, Herne Bay, in 2003. It was their family home for about 10 years before they decided to sell it. The property was then advertised by Barfoot & Thompson on the following terms:
“Waterfront Work of Art” – Herne Bay, Herne Bay Invest in one of Auckland most iconic architecturally inspired residences.
The craftsmanship and attention to detail that has gone into all aspects of construction both external and internal will endure through the years and mark this home as a collector’s piece.
Designed by Pete Bosley, inspired by Frank Lloyd Wright in 1988 on a warm north facing 2049 square metre site provides; 4 x bedrooms, 3 x bathrooms, 4 x car garaging, an indoor spa pool and sauna complex, billiard room and various lounges/living spaces and a large swimming pool all orientated towards extensive inner harbour and Harbour Bridge views!
In addition, there is a fully self-contained apartment above the 4-x car garage suitable for guests or staff.
CV $11.5 million.
[4] Mr Shen expressed interest in the property and then entered into a sale and purchase agreement with the Ossyanins on 10 October 2013 (“the Agreement”). The
sale price was $10,750,000. The Agreement was conditional on Mr Shen confirming within 30 days satisfaction with a Building inspection report on the property to be obtained from a registered builder or qualified building inspector of the Purchaser’s choice.
[5] On 17 October 2013, Harrington Property Inspections Limited produced a report addressed to Mr Shen following an inspection of the property by David Harrington. This was followed by a meeting on 1 November 2013 at the property (“the November meeting”). Those present at the meeting included Mr Shen, a real estate agent Allie Chen, David Harrington of Harrington Property Inspections Limited, Mr Ossyanin and Anton Naoumov who was a Russian/English translator as well as Christopher Cook at the invitation of Allie Chen. What was said at this meeting is a central fact in dispute and is addressed below at [48]. In short, Mr Shen said he specifically asked Mr Ossyanin whether the property was leaking or had any problems. Mr Ossyanin denies this.
[6] On 8 November 2013, Mr Shen’s solicitors confirmed that all conditions had been satisfied. The agreement became unconditional.
[7]Mr Shen paid the balance of the purchase price to the first defendants of
$9,762,121.56 on 18 February 2014 and took possession of the property. However, Mr Shen did not move into the property. He wanted to modernise some of the interior and repaint the outside of the house. He asked his friend, Mr Lin, to manage this. Mr Lin engaged independent contractors to wash and paint the house and to provide landscaping services.
[8] In late April, a major storm struck Auckland. Mr Lin was told about leaking at the house. He inspected it. He saw water leaking into the house at several locations. This was reported to Mr Shen who arranged for Maynard Marks to inspect the property, which it did on 7, 13 and 14 May 2014. A fulsome report was produced by Maynard Marks, identifying what it said were several defects likely to cause water damage. Mr Shen did not want to move into a house with these defects and on 8 September 2014, Mr Shen’s solicitors gave notice of a claim to the Ossyanins. They replied by their solicitors, Short & Partners, on 18 September 2014, denying the claim.
[9] On 15 May 2015, the plaintiff entered into an agreement to sell the property to a third party for $10,900,000.00, subject to a condition for due diligence. The purchaser then cancelled the contract by email dated 4 June 2015 identifying observed deficiencies including:
(a)The collapsed foreshore and retaining walls.
(b)An assessment to repair the “leaky home” structural elements as identified in reports on the house and garage units.
(c)A minimal cost to upgrade the internal aspects of the house to a more modern and contemporary standard as would be expected of a house of this value.
[10] The letter also noted that foreshore repair is not optional and together with the existing retaining wall collapsing into the neighbour’s property identified that the repair costs would be in the order of $1.2-$1.5M. The letter did however state that they were prepared to make a new unconditional offer of $9.25m. This offer was accepted by Mr Shen.
The Claim
[11] Mr Shen claims contractual misrepresentation. Mr Shen says Mr Ossyanin misrepresented the state and quality of the property to Mr Shen in the way he advertised the property and by saying that the property was not leaking and did not have any major problems. The pleaded misrepresentations are:
(a)The Barfoot and Thompson advertisement described the property as a “waterfront Work of Art” and as being “one of Auckland [sic] most iconic architecturally inspired residences” which had “craftmanship and attention to detail that has gone into all aspects of construction both external and internal and will endure through the years and mark this home as a collector’s piece”.
(b)The oral misrepresentations were made by Mr and Mrs Ossyanin directly to Mr Shen when at a meeting, Mr Ossyanin said that the property was not leaking and in response to Mr Shen’s enquiry as to whether the property had any problems, Mr Ossyanin advised Mr Shen that it did not.
[12] Mr Shen alleges, contrary to these representations, the house suffered from defects, subsequently identified in the Maynard Marks report, resulting in weathertightness issues. The key alleged weathertightness defects are addressed at [21]-[46].
[13] Mr Shen further claims the house does not comply with the New Zealand Building Code and the Building Act 1991 and substantial remedial work was required at the time of sale to bring the house up to Code. He says that because of the misrepresentations he was induced to buy the house at a purchase price of
$10,750,000. He also says the Ossyanins would have been aware of the defects because:
(a)The defects were historical, and they existed at the time Mr Ossyanin occupied the property and several were visible to the naked eye.
(b)Several defects would have been known to a person residing in the property, including the water leak and stained area in the Lounge Ceiling that becomes more pronounced when it rains, leaking and resultant damage in the master bedroom, sewing room and laundry, moisture ingress and damage to the swimming pool change room and the efflorescence on the garage storeroom wall.
[14] Mr Shen alleges that because of the weathertightness defects, the value of the property was reduced from $10,750,000 to $9,250,000, resulting in an economic loss of $1,500,000. He seeks to recover at least part of this pursuant to the Contractual Remedies Act 1979 (CRA),1 together with $30,000 for distress.
1 Now replaced by Contract and Commercial Law Act 2017 (C&CL Act) with similar effect.
Misrepresentation
[15]Section 6 of the CRA states:2
6 Damages for misrepresentation
(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) of this section shall apply to contracts for the sale of goods.
[16] A misrepresentation is a representation of past or present fact that is false or misleading, and excludes statements of intention, opinion and law. What matters is the meaning that the words convey, in context.3 Helpfully, the Court of Appeal recently restated the legal frame for misrepresentation in a case with some similarities to the present case. In Magee, a vendor told the purchaser the building “isn’t a leaky house”.4 The majority stated, to be actionable, the representee must show that:5
(a)The representor intended that he or she would be induced by the misrepresentation to enter the contract; or
(b)The representor used the language that would induce a reasonable person in the same circumstances to enter the contract; and
(c)The representee relied on the representation when entering the contract and that such reliance was reasonable.6
2 Now s 35 of C&CL Act.
3 Jeremy Finn, Stephen Todd and Matthew Barber (6th ed, LexisNexis, Wellington, 2018) at 369.
4 Magee v Mason [2017] NZCA 502, (2017) 18 NZCPR 902 at [33].
5 At [42], citing Savill. I discuss the elements of inducement below at [86].
6 At [51].
[17]The majority also made the following points about inducement:7
(a)There may be more than one factor inducing entry. The test for any single inducement is whether it had a material effect on the decision.
(b)In New Zealand conveyancing practice, it is usual to reduce the material terms to writing, meaning to be bound by the document, but each case turns on its own facts.
(c)A purchaser’s independent inquiries may bring reliance to an end, so negating the effect of a misrepresentation, but that need not be so.
[18] The Court in Magee did not, however, address at any length the significance of statements of opinion, an issue raised by the defendants in this case. A mere statement of opinion cannot be a misrepresentation; but a statement of opinion can imply statements of fact. An opinion of the latter kind can amount to a misrepresentation if it is dishonestly held, or if it is honestly, but not reasonably held.8 As the Court of Appeal stated in Premium:9
So, consistently with the common law as to misrepresentation, a person is liable as a result of the expression of an opinion which subsequently proves to be incorrect only where he or she does not honestly hold the opinion at the time it is expressed or (possibly) there is no reasonable basis for it. That is, an expression of opinion may be said to involve two representations of fact – one that it is honestly held and another that there is a reasonable basis for it.
The issues
[19] Given the foregoing legal frame, and with the benefit of the evidence and argument, the issues to be resolved are:
(a)Does the house leak?
(b)Did Mr Shen ask Mr Ossyanin about whether the house was leaking or had any problems?
7 At [48].
8 Above n1 at 372-373, see also Root v Badley [1960] NZLR 756.
9 At [51].
(c)If the answer to the above questions is yes, did Mr Ossyanin answer no?
(d)If Mr Ossyanin answered no, what is the meaning and significance of this answer?
(e)Did Mr Ossyanin know or reasonably ought to have known his answer was untrue?
(f)Was Mr Ossyanin’s answer an actionable innocent misrepresentation?
(g)Was Mr Shen reasonably induced to buy the property because of Mr Ossyanin’s answer?
(h)Was Mr Shen’s reliance on Mr Ossyanin’s answer reasonable? And;
(i)What is Mr Shen’s loss (if any)?
[20] At the hearing, I raised common mistake as an alternative basis for claim, referring to an article by Professor McLauchlan about the Magee decision. The parties filed submissions on this raising a further issue for consideration, namely whether the parties made a common mistake about leaks. This issue is separately addressed below at [100].
Does the house leak?
[21] Mr Ball for the plaintiffs and Mr Bayley for the defendants gave expert evidence about the alleged defects. Mr Ball is a building surveyor with more than 30 years’ experience in the construction industry. Mr Bayley is a quantity surveyor with comparable experience. Their qualification to give expert evidence was not challenged. However, their briefs of evidence were unduly prolix and misdirected in many respects to issues that were only marginally relevant to the proceedings. Both also engaged in speculation at times. Nevertheless, their opinions on two key issues were substantially helpful to me, namely:
[a]Whether a specified defect exists; and
[b]Whether Mr Ossyanin would have been aware of the existence of the defect.
[22] They prepared a “Scott’s schedule” which identified the position taken by each of the experts on these issues, and the areas of agreement and disagreement. This provided a very helpful frame for the assessment of the alleged defects. A hot tubbing exercise at the hearing then provided a useful overview of their respective positions. The following is a summary of the position taken by the experts on each of the alleged defects and my corresponding finding on the first issue. I address the second issue below at [72].
Defect A – inadequate cladding clearances
[23] This defect relates to the distance between the bottom of the external stucco plaster and the weatherboard cladding and the adjacent horizontal surface in several directions. It is alleged that insufficient clearance between these two elements may result in the uptake of moisture into the cladding and timber substrate by capillary action.
[24] Mr Ball states that this defect exists at various locations around the property. He says there are numerous examples of external wall cladding in direct contact with roofing and paved ground, which are documented and photographed in a report prepared by him in 2014 (the Maynard Marks 2014) report. He says that investigation, indicative moisture readings and timber sample laboratory testing confirms the presence of decay. Mr Bayley accepts that there are inadequate clearances and that there is the presence of damage to the timber bottom plate at the left-hand side of the eastern ground floor plant room door. But he does not consider that this damage is related to the alleged defect.
[25] In my view, Mr Ball established a cogent basis for the existence of this defect. The moisture testing suggests that there is damage associated with inadequate clearance at various locations.
Defect B – poorly weatherproofed balustrades
[26] This alleged defect relates to the inadequacy of the waterproofing of the deck balustrades and the use of flat timber capping which is penetrated by nail fixings, unsealed junctions between sections of balustrade and the unsealed junctions between the underside of the timber capping and the cladding directly below.
[27] Mr Ball states that the balustrade caps are inadequately waterproofed. He says water testing to the balustrade on the east facing first floor balcony determined that it allowed moisture to flow into the games room adjacent to the roof light. He further says that elsewhere visibly decayed framing was found, together with elevated indicative moisture readings underneath the timber balustrade capping. Moisture is able, he says, to flow around the nail fixing penetrations, through the timber balustrade cap. In addition, the moisture can be blown by wind pressure under the edges of the timber balustrade caps where there are inadequate down stands at the edges.
[28] Mr Bayley confirms the presence of a leak but only in relation to the games room under certain conditions. He says the most probable cause of any leak to the games room is from the delamination of the curved epoxy or timber fillet at the south end of roof light. Alternative causes for a leak may be from the crack to the external stucco cladding of the balustrade, pre-existing nail fixings in the timber capping or deterioration of the timber capping themselves. He also expresses doubt about the viability of the testing done by Mr Ball, noting that the process of the testing may have affected the weathertightness of the timber capping, particularly as the lifting of the balustrades may have dislodged sealant around the nail fixing, therefore allowing water to penetrate.
[29] I prefer Mr Ball’s evidence on this alleged defect. The testing he undertook logically reveals that the timber balustrades were constructed in such a fashion as to enable water ingress. Using dye, Mr Ball showed that water travelled from the balustrade through into the interior of the property. This explains the observed wetness to the interior following the April storm event.
Defect C – poorly weatherproofed pergola penetrations
[30] This defect relates to the way in which the steel pergola structures on the north facing side of the property penetrate through the external cladding and allow moisture to enter the cavity and flow down within the interior wall structure. Mr Ball says that his investigations reveal a leak exists and that this is the consequence of poorly sealed penetrations between steel work and the timber cladding. Mr Bayley does not accept the defect or any damage exists. Timbers fixed through and penetrating the cladding system, as here, are known to cause moisture ingress to framing elements over time. Nevertheless, I prefer Mr Bayley’s assessment insofar as the testing undertaken using dye did not conclusively show any migration of water from the pergolas to the interior wall.
Defect D - failing butyl rubber membrane/membrane junctions
[31] This defect relates to the water penetration that occurred through the butyl rubber membrane. This defect is located:
(a)To the west facing side of the property membrane roofing over the master bedroom and en-suite bathroom;
(b)To the west facing side of the property at first floor level, directly over and to the front of the floor laundry;
[32] Mr Ball says there was evidence of a leak over the master bedroom/en suite entranceway with damage to the paint finish. Similarly, he says there was physical moisture damage to the exterior wall lining of the ground floor laundry and damage to the ceiling. He therefore concludes that leaks exist in this location because of external moisture penetration. Supporting his observations were measured moisture levels exceeding 50 per cent at one location and 40 per cent at another location. He also recalls that when he revisited the property in June, the damage in these areas was worse.
[33] Mr Bayley accepts that there is damage in the laundry and in the master bedroom but says the damage was not caused by the alleged defect. He notes, for
example, that the damage in the laundry chute was likely caused by wet towels or clothing and the absence of sealant at the base of the lining. He says that the moisture damage then moved from the base upwards. He also notes that the damage in the master bedroom has no relationship to the damage in the laundry chute (from the bedroom). He says that when he visited the property two years later, the L-shaped gutter above the bedroom was blocked with debris, in effect, creating a dam which caused the gutter to fill which, in turn, caused water to enter the roof inside the ceiling space. This, he says, is directly above the area where deterioration occurred.
[34] Mr Ball replied saying that had the guttering been the cause of the leakage, then one would have expected it to have shown itself on both sides of the master bedroom where the relevant guttering can be found.
[35] In my view, both explanations are plausible and may, in fact, not be mutually exclusive. There being no dispute as to the presence of water damage because of leaking, I proceed on the basis that there was a defect in the design, including failing butyl rubber membrane and membrane junctions.
Defect E – poor weatherproofing to high-level joinery to lounge
[36] This defect relates to what appears to be a leak between the upper storey steel joinery over the ground floor lounge and a folded metal flashing under the external corner.
[37] Mr Ball states there is evidence of a leak to the lounge ceiling directly below the external corner to the clerestory glazing. He noted there is an open joint to one of the window flashings where wind-driven moisture could easily penetrate this location, particularly given the exposed location. At the time of his investigation the gutters over this location were recorded as being entirely free of debris or vegetation. In his view, therefore, this leak is not the result of deferred maintenance but rather a localised deficiency of the flashing system. Mr Bayley accepts damage exists but attributes the probable cause of the damage to poor maintenance in the period leading up to the major storm event. In any event, I proceed on the basis that the house leaked at this location.
Defect F – poorly weatherproofed garage deck
[38] This defect relates to the elevated deck on the west facing side of the stand- alone garage/accommodation block.
[39] At the time of his inspection, Mr Ball identified a significant leak from the garage deck which was causing damage to the floor framing and the plasterboard ceiling directly below. He says the cause of the leak is likely to be from the failed waterproofing membrane under the tiles to the deck directly above. Mr Bayley accepts this leak exists. I proceed on the same basis.
Defect G – poorly waterproofed terrace
[40] This defect relates to the main terrace on the north facing side of the dwelling where a failure in the waterproofing membrane has resulted in visible damage to the lower ground floor swimming pool changing room.
[41] Mr Ball believes that the waterproofing membrane to the terrace over the swimming pool changing/shower room has failed resulting in the visible damage in the shower room, including discolouration, staining, blistered and cracked paint and the localised outward bulging wall. He says the appearance and localised nature of the staining and damage is not consistent with internal moisture (condensation). It was noted also that the shower/changing room has a fully ventilated external screen door as well as wall vents at the rear of the shower room. This cross-ventilation would have mitigated the build-up of any internal moisture. Mr Ball also identified that much of the terrace, waterproofing membrane and tiling had been replaced at the time that the property was owned by the first defendant. This is confirmed by the presence of compressed fibre-cement sheet tile substrate date-stamped ‘17/08/06’ observed in the crawl-space adjacent to the shower/changing room. There is also correspondence recorded between the first defendant representative and the Territorial Authority discussing the replacement of the terrace dated around the same time.
[42] Mr Bayley agrees the damage exists, but the defect does not. He says the damage is attributable to unmaintained paintwork. He noted that photos of the terrace were in fact remote from the shower room and there was no destruction inspection. I
consider Mr Bayley’s explanation for the moisture damage to be the most plausible. This is a shower room where water damage is to be expected over time without proper maintenance.
Defect H – garage retaining walls
[43] This defect relates to inadequate waterproofing to the retaining wall at the rear of the stand-alone garage/accommodation block.
[44] Mr Ball observed that moisture is migrating through the masonry wall at the rear of the storage shed. This is evidenced, he says, by the presence of efflorescence (white crystalline deposits on the face of the exposed masonry) and is likely to be the consequence of a failing tanking membrane. There is also an adjoining stone retaining wall close to this location which could also be a contributing factor. The moisture is visible in this location because there is no internal plasterboard wall lining. Mr Bayley agrees the damage exists, but the defect does not. I am satisfied that the identified damage exists and most likely for the reasons explained by Mr Ball.
Summary
[45] In summary, I am satisfied following defects were likely to be present at the time of purchase:
(a)There were inadequate cladding clearances at specified locations which caused moisture damage;
(b)There were poorly weatherproofed balustrades;
(c)There was water ingress caused by failing butyl membrane and membrane junctions.
(d)The high-level steel joinery failed in the main lounge;
(e)There was a significant leak from the garage deck;
(f)The shower room was water damaged – although I prefer Mr Bayley’s explanation for this damage;
(g)The garage retaining wall was inadequately water proofed.
[46] The house therefore leaks. The experts agreed however this was not a “leaky home” in the usual sense. In addition, persons with direct knowledge of the home including Mr Colcord (a registered valuer), Mr Clapham (Chief Executive for the Building Officials Institute of New Zealand from 2004 to 2010) and Mr Mitalauskas (a builder who renovated the house in 2007) all testified to the fact that the home was a very high-quality home without any of the features that normally characterise a “leaky home”.
Did Mr Shen ask Mr Ossyanin about whether the house was leaking or had any problems?
[47] Mr Sharp submits that I should prefer the evidence of Messrs Shen and Harrington, and Ms Chen about this, namely that the questions about whether the house leaked were asked and the answer was invariably no. He says their account is consistent with the wider narrative – Mr Shen had a report emphasising weathertightness issues and had a bad experience with a leaky home. Thus, if he was going to ask questions about the house, it would be about leaks.
[48] Mr Macdonald submits one of the principal problems for Mr Shen is that there is no record of him raising his alleged concern about leaks with Mr Ossyanin at the time and no mention was made of it when the notice of his claim was first given. He says the absence of discussion about leaks is supported by the mutually supportive evidence of Messrs Ossyanin and Naoumov who maintained no mention was made of “leaks’ in the meeting. He also submits that issues of leakage were addressed prior to the November meeting. He points to evidence of a second inspection of the property on 27 October 2013 of the leaks in the garage and this was followed by an email from Ms Chen on 30 October raising only two issues – the office door and the skylight glass breakage.
Assessment
[49] It is common ground that a meeting took place on 1 November 2013 involving Mr Shen, Ms Chen, Mr Harrington, Mr Ossyanin and Mr Naoumov. Immediately prior the meeting Mr Shen, Ms Chen and Mr Harrington walked around and through the house discussing various aspects of his building report. The report noted that the property “is highly specified, among other things, and a well-built building, however some of the cladding design and detailing has now been proven to be suspect and deficient”. Further testing of external framing was recommended. Significant/known default or defects that required remedial works or immediate action were identified, including:
(a)The timber pergolas were fixed through the cladding and the rafters were over flashed, with two feature beams deflecting water back to the cladding.
(b)The tiled balcony was no longer compliant and there did not appear to be any viable capping or saddle flashings to the handrails, and there was evidence of leaking into the garage and raised moisture reading into the garage door.
(c)Various non-complaint ground level issues and over roof areas where there are not adequate capillary breaks installed. A photo of internal moisture ingress into the wall of the guest room to the guest accommodation was included.
(d)The cladding was identified as monolithic without a cavity, noting that any superficial cracking as found needed to be repaired and any gaps around windows must be sealed. Working drawings were also sought about the cladding systems.
(e)There were no capillary breaks allowed for in the lower lines above the roofing in an identified area.
(f)Plaster cladding lines were formed directly onto stone and roofing membranes in some locations which could cause moisture ingress and building paper to rot overtime.
[50] Other issues were also noted, including guttering that might be too narrow for rain surges, pest intrusion and waste master leakage.
[51] Mr Shen was adamant in evidence he asked Ms Chen to raise the issue of “whether the property was leaking or had any problems” at the 1 November meeting.
[52] Ms Chen confirmed she put this issue in English to Mr Naoumov on several occasions. Ms Chen, like Mr Shen, also noted that some of the main problems identified in the Harrington report were discussed with Mr Ossyanin, and that Mr Ossyanin had an answer for all of them. They both said he emphasised the need for maintenance. Mr Harrington recalled the word “leaking” or “leaky” being used. Mr Shen and Ms Chen recall a “no” answer. Mr Harrington also recalled a comment about the house being a big house requiring regular maintenance.
[53] By contrast, Mr Ossyanin was “hundred percent sure” he was not specifically asked about whether the house “leaked”. Rather he says he was asked about whether any building or restructuring work had been done to the house which would affect it. He says he recalls being asked whether there were any existing problems or issues with the house and the answer he gave was that Mr Shen had arranged a building inspection that should provide him with all the relevant information. He also accepted, however, in cross examination that he was asked more generally about whether he was aware of any problems with the house and he said that he was not aware of any problems and if he knew about any he would fix them without delay. Mr Ossyanin’s account is broadly supported by Mr Naoumov. Mr Naoumov could not remember a single occasion when he was asked if the building leaked or the word “leaking” was used. Like Mr Ossyanin, he recalled a question about whether Mr Ossyanin rebuilt anything in the structure of the house. He also however recalls the following question: “is there anything wrong with the house or are there any problems with the house”. He said there was some discussion among Mr Shen, Ms Chen and Mr Harrington about
Mr Harrington’s report, which he suggests culminated in a question to Mr Ossyanin about a crack in the skylight.
[54] I prefer the evidence of Mr Shen, Ms Chen and Mr Harrington on this issue. First, their mutually supportive accounts were largely untroubled by cross examination. They were clear and consistent about their recollection on this issue. Second, as Mr Sharp submits, a question or questions about whether the house leaked or had other similar problems plausibly fits the wider, largely agreed narrative of events. Mr Shen had just been shown around the house with his building inspector who had clearly raised issues about the cladding system and recommended further testing. It seems logical for Mr Shen to then ask about the problems identified in the report and whether the house leaked.
[55] Third, Mr Naoumov was not a convincing witness. His evidence in chief appeared to evolve to fit Mr Ossyanin’s account and he did not perform well under cross examination. Aspects of his testimony also appeared contrived. While demeanour is not always a strong indicator of credibility, he appeared to struggle badly with aspects of his recollection, including on simple matters. For example, he was initially unable to recall how he came to change his evidence shortly prior to hearing to include an alleged second inspection by Mr Harrington on 27 October 2013. At one point, he appeared to concede it came about through discussion with Counsel. At another point, he said he came to it himself. Mr Naoumov also conceded under cross examination that Mr Shen’s group had discussed Mr Harrington’s report among themselves at the meeting and that there was then an open-ended question about “problems with the house”. It is not credible to suggest that having just discussed the report, no mention was made by Mr Shen of the potential for leaks or that the reference to “problems” was not a reference to leaking problems.
[56] Fourth, while Mr Ossyanin was a more credible witness than Mr Naoumov, there were problems with his evidence too. I accept that in answer to questions about the property, he said the Harrington report should provide Mr Shen with the relevant information. This was confirmed by Ms Chen under cross examination. But aspects of his evidence also appeared implausible and or lacked credibility. The following examples illustrate this point:
(a)Under cross examination Mr Ossyanin said: “I have not considered” the Harrington report. But in an email of 23 October 2013, he responded to nine points made by the report, including, significantly, “possible leakage in the guest house entry door area and garage ceiling.”
(b)Mr Ossyanin’s said he was asked about “restructuring” of the house. But there is nothing in the surrounding context to suggest “restructuring” was a concern to Mr Harrington let alone Mr Shen.
[57] Fifth, while Mr Ossyanin claims to be a “hundred per cent sure” Mr Shen did not ask questions about whether the house leaked, he was plainly aware of the leakage issues raised in the Harrington report. In this regard, Ms Chen’s evidence was also that specific aspects of the report were discussed and that Mr Ossyanin was largely dismissive of them. An example is the leak in the garage. Mr Ossyanin explained they forgot to close the door to the guest room and rain got in. Ms Chen was not seriously challenged about this. It was simply put to her that the Harrington report was in fact discussed at an earlier meeting. In any event, Mr Ossyanin must have appreciated that when he was asked about whether there were any “problems” with the property, and said there were none, Mr Shen would have understood him to be referring to, among other things, problems identified in the Harrington report.
[58] Sixth, I reject Mr Macdonald’s submission that by the time of the 1 November meeting, the leaking issues had been already resolved. I accept there is at least some cogent evidence of a second inspection by Mr Harrington on 27 October 2013. As noted, in an email from Ms Chen dated 30 October 2013 she referenced the “last time” inspection and then referred to two issues. This suggests there was more than one inspection and only two issues remained to be addressed. But, Mr Harrington denied the 27 October inspection took place and he has no record of it. More importantly, there is no contemporaneous evidence to suggest Mr Harrington had changed his view about the weathertightness defects identified in his report prior to the 1 November meeting. Ms Chen was also adamant that the object of the November meeting was to specifically address the leaking problems identified in the report. Again, she was not seriously challenged about this. It is therefore against the evidence and speculative to
suggest Mr Shen had by the 1 November meeting put the weathertightness issues raised in the Harrington report to one side.
[59] Seventh, I also reject Mr Macdonald’s defence theory that an absence of any contemporaneous record by Mr Shen of the “leaking” issue supports the conclusion that it was not mentioned at the November meeting. Rather it is available, and in my view more plausible, to suggest that a clear statement in the November meeting that there was no leaking or leaking problems, removed the need for further correspondence about it. The failure then to mention the exchange about the “leaks” until pleading is hardly a strong basis for an adverse finding of fact in the face of direct, credible and plausible testimony.
[60] Finally, it may be that the words “leaks” or “leaking” were lost in translation at the point where Mr Shen’s questions were put to Mr Ossyanin, but in a choice between two largely incompatible narratives, I am satisfied on the balance of probabilities that Mr Shen asked Mr Ossyanin about whether the house was leaking or had any problems.
Did Mr Ossyanin answer “No”?
[61] I again prefer the evidence of Mr Shen and Ms Chen on this issue for the reasons already given. The answer to their questions about whether there were leaks or any problems was no. Mr Ossyanin says he deflected questions about defects to Mr Harrington’s report, but he also accepted under cross examination that he told Mr Shen there were no problems with the house. In context, that answer plainly encompassed the issues raised in the Harrington report.
[62] He was also very firm in evidence about the fact that the house never leaked and he was very house proud. This included evidence that:
(a)He was aware that the house was designed by a leading New Zealand architect and held out as an exemplar;
(b)He was fastidious about his home;
(c)He insisted on regular maintenance;
(d)He undertook a comprehensive renovation of the exterior elements in 2007;
(e)He showed off his house to friends, including Mr Clapham.
[63] Thus, while Mr Ossyanin deflected some questions about the house to Mr Harrington’s report, the evidence strongly suggests he would have expressed considerable confidence about there being no leaking or other problems with the house at the meeting on 1 November. I am therefore satisfied that when specifically questioned about whether the property was leaking or had problems, his answers were no or to similar effect.
What is the meaning and significance of Mr Ossyanin’s answer(s)?
[64] Mr Sharp submits that Mr Ossyanin knew or must have known the property leaked and would leak if it rained. He said Mr Ossyanin’s answers were therefore both dishonest and or unreasonable about key facts.
[65] Mr Macdonald submits Mr Ossyanin’s answers ought to be interpreted as “were it to rain heavily at the present time would the property leak.” He says they could also mean the property never leaked during his ownership, but that question was not asked. In any event he submits his answers must be those of opinion based on his occupation of the property over the preceding years. The central question therefore is whether Mr Ossyanin was aware of circumstances that might lead him to believe that the property would leak if it started raining.
Assessment
[66] In Magee, the majority identified three potential meanings for the phrase: “it isn’t leaking”: first that the house had not leaked while the Magees owned it (meaning 1); second that Mrs Magee knew of knew of no facts establishing it was through design or construction prone to leak (meaning 2); and thirdly, that it was not through design or construction leaking or prone to leak (meaning 3). The Court found
that the first two meanings were not misrepresentations because the statements were true. The Court also rejected the third meaning. The majority observed it was a statement of opinion, but may carry with it representations of past or present fact. The majority found, however, that the purchaser incorrectly assumed the vendor would know whether it was a leaky building. They found that the vendor did nothing to engender that assumption.
[67] In the present case, the assessment of the meaning and significance of Mr Ossyanin’s response is made difficult by the diverging accounts as to what was asked and answered. Nevertheless, Mr Ossyanin’s negative replies to questions about leaking or any problems generally, having regard to context, clearly carry the first two potential meanings identified in Magee.
[68] First, they naturally follow from negative answers to questions about whether the house was “leaking or had any problems”. Second, as noted, Mr Harrington’s report set the framework of reference for Mr Shen’s inquiries. Mr Harrington’s presence at the meeting supports this conclusion, namely that the question about “leaking” or “problems” was directed to weather-tightness issues raised by him, including the design and construction defects identified by Mr Harrington. In this regard, Mr Ossyanin was also asked about specific aspects of the report. Ultimately his response was that the property just needed maintenance. Therefore, his negative replies, in context, meant that the house did not leak while he owned it and he knew of no facts indicating the house would leak because of the defects in design or construction. The emphasis on property maintenance, however, made clear that leaks might occur through wear and tear if the house is not properly maintained.
[69] Both meanings contain within them assertions of fact. They self-evidently assume Mr Ossyanin had no knowledge of any leaks (other than the leaks already known to both parties). I am therefore satisfied Mr Ossyanin’s negative responses were representations of fact of this kind.
[70] The third meaning is not so clearly available in the present context. Like the vendor in Magee, there is no evidence to suggest Mr Ossyanin held himself out in the 1 November meeting as qualified to express a categorical statement (whether through
experience or otherwise) that the house was not, through design or construction, leaking or prone to leak. In addition, whatever Mr Ossyanin said could not be elevated to a statement of categorical fact in the face of Mr Harrington’s clear expert assessment to the contrary. However, as I have said, I am satisfied Mr Ossyanin would have expressed with considerable confidence, in response to multiple questions, that the house did not leak or have any problems of that kind. I am also satisfied Mr Shen took him at his word. Whether he did so reasonably is another matter addressed below at [86]-[89]. But for present purposes, the meaning conveyed by the totality of Mr Ossyanin’s answers was that, in his opinion, the house was not through design or construction leaking or prone to leak.
[71] I therefore proceed on the basis that there were representations of fact within meanings 1 and 2. The third meaning 3 was also available, but as a statement of opinion only.
Did Mr Ossyanin know or reasonably ought he to have known his answers were untrue?
[72] Mr Sharp submits that the evidence of Mr Ball establishes quite clearly that the house did leak because of systemic construction defects. It is also clear that the property did leak and this became apparent to Mr Shen after the heavy rain that was experienced in the period 17 April to 19 April 2014. He says the evidence shows the property would have leaked irrespective of the level of maintenance and that alternative explanations for the April leaks including sealant failure caused by water blasting and blocked guttering are not supported by the evidence. There is no direct observational evidence of water blasting having occurred prior to the April event and the gutters were cleaned in late 2013.
[73] Mr Sharp further contends that Mr Ossyanin would have reasonably known the property was leaking as he held himself out as fastidious and meticulous about his home. He says it is highly improbable Mr Ossyanin would not have been aware of the leaking issues. His evidence about the importance of maintenance and gutter clearance supports the inference that he had experienced and was aware of leaking problems.
[74] Mr Macdonald agrees that Mr Ossyanin was fastidious and ensured that his home was always properly maintained and kept in good condition. He says that he would have no reason to suspect any weathertightness issues, and this is supported by several witnesses who had worked on, valued and/or resided at the property. Their consistent view of the property is that there was nothing to suggest it leaked or was a leaky home. Mr Macdonald says the only evident leakage in the garage was known to the parties and explicable as a discrete issue. He also says that Messrs Bayley and Ball agree that several of the defects would not have been visible to Mr Ossyanin.
Assessment
[75] The overwhelming weight of the evidence suggests Mr Ossyanin maintained his home to a very high standard; that he was meticulous about its maintenance and upkeep and that there were very few visible signs, if any, of leaks. This was confirmed by:
(a)Real estate agents who visited the property, including Hugh Cronwright, who undertook detailed tours of the property, and said there was never any indication of leaks at any time he visited the property;
(b)Valuers, who had undertaken valuations of the property in 1992, 2002, 2007, 2009, 2012 and 2012, including Ian Colcord, who during an inspection on 27 June 2012 did not see any evidence that the property had any weathertightness issues;
(c)Lennard Frederick Clapham10 who in late 2013 undertook an extensive house tour. Because of his background in the building sector he made a point of assessing the property for any tell-tale signs of moisture invasion. He found none. He was also convinced Mr Ossyanin had done everything to maintain the house;
10 As noted at [45], Mr Clapham was Chief Executive for the Building Officials Institute of New Zealand which is responsible for accreditation of builders.
(d)Olga Robertson, who worked from the premises from September 2007 until September 2009 and had the opportunity over 10 years to observe the care Mr Ossyanin took with the property. She never saw anything to indicate the dwelling was a leaky home.
(e)Beverley Lytollis, who was employed to maintain the ground and carry out some work inside the house from time to time. She had never seen any indications of any water damage or leakage.
(f)Andrius Mitalauskas, a builder who undertook renovations of the property, including the removal and replacement of balustrades and weatherboards. He said he never saw any signs of water damage or leaks. He also rejected suggestions that he had installed Aluband material to address leaking issues. He said he was doing no more than ensuring the house was code complaint as required when replacing the balustrades and weatherboards. His evidence was cogent and not materially affected by cross examination.
(g)Mr Saltis (a painting contractor and house renovator) painted the house over a period of 18 months (late 2006 to 2008). He had full access to the property and was familiar with works to the property at that time. He said in all the time he was there, he was never aware of any water damage, he never smelt dampness and the property was always immaculate. Mr Saltis also noted that he had bought about twelve leaky homes, repaired them and sold them successfully. He had also painted between forty and fifty houses per year affected by leaking issues.
(h)Mr Shen, who had recent experience with a “leaky home,” did not see any signs the property was leaking until they were shown to him by Mr Harrington.
(i)As noted, Mr Ball accepted that this was not a “leaky home” as that term is usually understood.
(j)There were only 18 adverse moisture readings out of 111 (16 per cent) which as Mr Bayley said is a relatively small number for a house of the present size, and a considerable number are acceptable.
[76] I therefore accept that Mr Osyannin honestly believed his house did not suffer from leaks and was not prone to leaks, whether through design and construction defects known to him or otherwise, if properly maintained.
[77] The evidence of the experts as to what defects might reasonably have been observed was mixed but broadly supports this conclusion. I note the following:
(a)Both experts observe that it is unlikely Mr Osyannin would have been aware of the existence of Defect A, cladding clearance. I agree.
(b)Mr Ball says that Mr Ossyanin would have been aware of the moisture flowing into the games room because of the balustrade defects (Defect B), although he may not have known where it originated. He says this is caveated by the fact that there is evidence that Mr Ossyanin instructed localised remedial works to be carried out to certain balustrades. By contrast, Mr Bayley says that, in his opinion, a reasonable homeowner would not have been aware of the defect or its existence. I agree with Mr Bayley. Firstly, it is difficult, if not impossible, to identify the likely point in time at which the balustrades began to fail. Secondly, the degree of water ingress appears to be relatively minor, at least based on the available information. Thirdly, I reject Mr Ball’s caveat. Mr Mitalauskas was, as I have said, a credible witness. He said that when he replaced the balustrades in 2007 and applied Aluband, he did so to make it code complaint rather than to address an identified water defect or leakage. Accordingly, I do not accept that water leakage from this effect would have been known to Mr Ossyanin or reasonably observable by him.
(c)Both Mr Bayley and Mr Ball agree that a reasonable homeowner would not have been aware of Defect C or its existence. I agree.
(d)Mr Ball was of the view that had water leaked through the ceiling over the master bedroom en suite entrance and the first-floor corridor windows (Defect D), then be believes it would have been apparent to Mr Ossyanin. He also considers that the damage to the chute and ceiling would have been visible. Mr Bayley disagrees. He says a reasonable homeowner would not have been aware of the defect or its existence given its location or had it been visible would have attributed the leak to a roof membrane defect. I agree with Mr Bayley. It is highly unlikely that, had Mr Ossyanin noticed the water damage in the laundry chute he would have attributed this to a defect with the butyl roof. The damage present in the ceiling of the master bedroom en-suite would however have been reasonably observable. But I doubt Mr Ossyanin would have attributed this to a defect in the roof.
(e)Mr Ball accepts that the staining to the ceiling is at high-level (Defect
E) and not typically in a person’s direct line of vision. Therefore, he says it is possible that Mr Ossyanin may not have observed the localised discolouration to the timber ceiling. Mr Bayley agrees, noting that a reasonable homeowner would not have been aware of the defect or its existence. I also agree; this damage would not have been visible to a reasonable homeowner unless there was visible dripping in this location
– which is unlikely as a piano was located directly below it (at least at the time of purchase).
(f)Both experts agree that a reasonable landowner would have been aware of the staining in the garage (Defect F) It was also recorded in correspondence dated 23 October 2013 and in in the pre-purchase report provided by Harrington at ‘External 1/paragraph 6 – Decks, Handrails and Verandas’.
(g)Mr Ball believes that anyone using the shower/changing room would have been able to clearly see the moisture-related damage to the walls and ceiling (Defect G), and the bottom of the wall adjacent to the entrance door which is visibly bulging outwards significantly.
Mr Bayley suggested that a reasonable homeowner would not have been aware of the defect or its existence. He also suggested the condensation could have occurred through worker use after Mr Shen purchased the property. I agree with Mr Ball. The identified damage would have been reasonably obvious. I also reject Mr Bayley’s suggestion that intensive use in the post settlement period explains the damage.
(h)Both experts agree that a reasonable landowner would not have identified the moisture damage relating to the garage retaining wall. I agree.
[78]Given the foregoing, three potential leaks were reasonably observable:
(a)The moisture damage to the ceiling of the master bedroom en-suite (Defect D).
(b)The staining in the garage (Defect F).
(c)The moisture damage in the pool changing room (Defect G).
[79] However, in respect of Defects D and G a reasonable person would not have necessarily linked this moisture damage to “leaks”, including those identified by Mr Harrington. Both affected rooms were shower rooms where some dampness might be expected. There is an element of speculation to this, but I am not satisfied on the evidence that Mr Ossyanin observed this “damage” or reasonably ought to have identified this damage as caused by a defect. Only the water moisture damage in respect of Defect F stands out as reasonably observable evidence of a “leak” caused by a defect. But as this moisture damage was known to both Mr Ossyanin and Mr Shen prior to settlement I am not satisfied Mr Ossyanin lied or was unreasonable about his explanation for it, namely that a door was left open in guest accommodation and the rain got in.
[80] Finally, I have weighed into the mix (a) that the evidence of leakage into the house after the April storm event is not disputed and (b) I have found against Mr Ossyanin on the issue of what was said at the November meeting – which naturally bears on the credibility of his broader testimony. Dealing with (a), I accept the evidence of leakage following the April event suggests the house may have been prone to leaks in very heavy rain events. But it is relatively weak evidence about whether Mr Ossyanin knew or ought to have known about leaks caused by systemic, design and or construction defects. By any reckoning the April event was a major storm event. Leakage in such storm events is not uncommon with or without such defects. In my view, it is speculative to suggest Mr Ossyanin would have drawn a linkage between leakage in such events and design defects.
[81] As to the significance of my findings about what happened on November 1, the level of independent corroboration of Mr Ossyanin’s experience of the property is sufficient to outweigh the impact of my adverse credibility findings on that issue. Problems with literal translation may also plausibly explain Mr Ossyanin’s strident position about what was said, though for reasons I have stated, I am satisfied that Mr Shen was told on multiple occasions that there were no leaks or similar problems.
[82] Accordingly, I find Mr Ossyanin did not know or reasonably ought to have known about the existence of leaks due to defects, or about facts pointing to design or construction defects, except for the garage staining, which was made known to Mr Shen by Mr Harrington. Furthermore, to the extent that Mr Ossyanin’s representations suggested to Mr Shen that the house was not, through design or construction, leaking or prone to leak, he had an honest basis for this opinion. His representations about leaking or other problems were not, therefore, intentionally false. Any claim of claim of fraudulent misrepresentation fails at this juncture.
Was Mr Ossyanin’s answer an actionable innocent misrepresentation?
[83] Mr Sharp did not present the claim based on innocent misrepresentation.11 Nevertheless, the potential for this claim is evident on the facts as pleaded and on the evidence. I therefore address it.
[84] Palmer J in Grant (another case with similar facts to the present) observed that it does not matter that the person making the statement did not know about the leaks. He said an incorrect statement by a vendor claiming the house “does not leak”, even if honestly held, is an actionable innocent misrepresentation.12 I do not disagree with this proposition as a statement of law, the application of which is fact-dependent. But, in my view, there is a significant difference between statements about the knowledge of the vendor – which if honestly and reasonably held, are not misrepresentations per Magee – and statements of alleged fact about an object which though honestly held are, objectively assessed, wrong at the time of the statement. The latter is likely to be an innocent misrepresentation.13 But, within this latter category, it is also important to distinguish statements of fact from mere statements of opinion. As Professor McLauchlan helpfully reminded us:14
Thus, as pointed out in Dawson and McLauchlan, The Contractual Remedies Act 1979 (Sweet & Maxwell, Auckland, 1981) at 16 – 17, there have been cases where very positive statements that on the surface asserted facts without qualification were held to be mere opinions because, particularly in view of the subject of the statements and the mutually known respective positions of the parties, the plaintiffs could not fairly regard the defendants as having done anything more than express their opinions. Of course, every case will turn on its own facts.
[85] The first two meanings of Mr Ossyanin’s negative replies are representations of fact about his knowledge. They were honestly and reasonably held. They are not fraudulent or innocent misrepresentations. As I have said, if the third potential meaning is available, then it was a statement of opinion for the reasons already
11 The plaintiffs’ claim is framed on the basis that “the First Defendant would have been aware of the weathertightness defects”.
12 Grant v Ridgway Empire Ltd [2018] NZHC 2642. See also La Grouw v Cairns (2004) 5 NZCPR 434 (HC) cited by Palmer J. Grant was not cited by the parties, presumably because it was released after the first hearing in September 2018. Reference to it assists the plaintiffs. Given, however, where I get to on this issue, I did not see the need to invite further submissions on it.
13 La Grouw v Cairns, above n 12.
14 David McLauchlan “Misrepresentation? Or was it a case for relief on the grounds of mistake?” [2018] NZLJ 13 at 14.
expressed – see [64] – [71]. His opinion was honestly and reasonably held. I am satisfied therefore that Mr Ossyanin’s statements about the house were not innocent misrepresentations of fact. Mr Shen’s claim in misrepresentation must therefore fail. I turn, nevertheless, to examine whether the remaining elements for misrepresentation are met.
Was Mr Shen reasonably induced to buy the property because of Mr Ossyanin’s answer or answers?
[86] I find Mr Ossyanin intended to induce purchase with his statements about the property. He was house proud and he let Mr Shen know it. I also accept that his answers had a material effect on the decision to purchase; so much so, Mr Shen appears to have put to one-side Mr Harrington’s expert advice. I accept therefore that Mr Shen was induced to buy the property because of Mr Ossyanin’s answers.
Was Mr Shen’s reliance on Mr Ossyanin’s answers reasonable?
[87] As stated in Magee, a representee must show that he relied on the representation and that such reliance was reasonable. The test of reliance is usually easily satisfied once it is shown that the representor intended that it induce entry.15 But there are major problems with Mr Shen’s case regarding the issue of the “reasonableness” of his reliance on what Mr Ossyanin said about the property. Mr Shen must have known Mr Ossyanin is not an expert about leaks and there is no evidence to suggest Mr Ossyanin held himself out as an expert on weathertightness. In addition, he could not reasonably assume Mr Ossyanin had any greater knowledge of the property than that usually afforded to unqualified occupants.
[88] Moreover, Mr Harrington was a building expert. He identified potential defects, leakage and weathertightness issues. There is no evidence to suggest that Mr Harrington changed his opinion about these matters following the November meeting. Rather his evidence is that he told Mr Shen, through Ms Chen, it would cost him about $300,000 to repair the defects. While Mr Shen says that is a lie and Ms Chen does not recall this aspect, Mr Harrington’s comment about cost of repair plausibly fits the context. Furthermore, the nature and scale of the defects identified
15 Magee at [51].
by him put Mr Shen on clear notice that there was potential for leaking at the property. Thus, to the extent that he preferred Mr Ossyanin’s statement that there were no leaks, he had to first dismiss the clear expert advice from Mr Harrington about potentially very costly weathertightness defects. Given also Mr Shen is an astute business person with recent direct experience with a “leaky home”,16 it was unreasonable for him to do so. The most Mr Shen could place on Mr Ossyanin’s comments was that he had not experienced any leaks, and that in his inexpert opinion, the property was not prone to leaks if maintained properly. It transpires he was wrong to place full reliance on those representations for the reasons, among others, set out in the Harrington report.17
[89] This outcome also mirrors the conclusion reached by the majority in Magee. They concluded that the inference the house was not prone to leak resulted from an assumption, for which the vendor was not responsible, that the vendor would have experienced weathertightness problems if the house was a leaky building.18 The reliance here is perhaps even less reasonable because Mr Shen was alerted about potential weathertightness issues by an expert qualified to do so.
What is Mr Shen’s loss (if any)?
[90] Given the conclusions I have reached, I only touch on damages for misrepresentation briefly. Mr Sharp seeks damages on a diminished value basis of
$1.5m plus $200,000 for monies expended on the property by Mr Shen. He also submits that the representation made is akin to a warranty, and loss should flow on that basis. It is accepted, however, that if Mr Shen’s conduct contributed to the loss sustained, this may be considered.
[91] Mr Macdonald submits the starting point is to consider the remedial costs in respect of identified issues. He notes also that the new sale price was discounted for several factors, not only the for the weathertightness defects. Mitigation is a further
16 A matter of some importance to members of Asian communities according to Ms Chen and Mr Harrington.
17 A similar conclusion was reached in Cooper v Tamms [1988] 1 EGLR 257 where expert advice about dampness was not heeded by the purchaser. The parties did not bring this case to my attention and I refer to it only because of similar reasoning.
18 Magee at [53].
issue raised. He submits that Mr Shen, a commercial businessman with experience in the Auckland market, failed to properly mitigate his loss by among other things:
(a)Failing to undertake a mini repair;
(b)Failing to obtain the best price for the property (i.e. selling it at about
$4.25m under value);
(c)Failing to give the defendant an opportunity to rectify the house.
Assessment
[92]Cost of cure is the usual response in building cases. But as Tipping J said in
Altimarloch:19
It is as 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.
[93]In the present case, experts have provided defect estimates in the range of
$1,360,719 to 2,204,000. But no definitive assessment of repair costs has been undertaken. They are based on the Maynard Marks report which provided a summary of the “minimum remedial” works. That summary was however subject to the following note:
The above list of remedial works is a summary of the required works only and does not constitute a specification. Full detailed drawings and specifications need to be provided for the works … this scope is not sufficient to instruct a builder to repair the dwelling.
[94]That is not a proper basis for quantifying damages.
[95] Similarly, there are evidential problems with a diminution in value approach as that concept is usually understood – that is, the difference between the value of the building had it been built without the defects and the value of the building with the
19 Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11, [2012] 2 NZLR 726 at [156].
defects.20 In the present case, there is no expert valuation evidence specifically identifying the difference in value of the house with and without the defects. The evidence of Mr Gemmell (for Mr Shen) instead provides a broad-brush retrospective estimate of value of the property while Mr Colcord critiques the price obtained on sale.
[96] However, in the absence of better information,21 the difference in the purchase price and the resale price provides a good starting point for quantifying damages. The property was purchased by Mr Shen following an orthodox marketing programme (assuming no leaks) and resold following an orthodox marketing programme (assuming leaks). The difference is $1.5m. This sum broadly reflects the movement in market value over the intervening period after the defects are considered.22 It also incorporates the value to the market of any other existing defects and the improvements made by Mr Shen in the interim, so no further subtractions or addition are needed for these factors.23
[97]As to mitigation, I am largely in agreement with Mr Sharp:
(a)it is unclear that a mini repair (whatever that might be) in advance of sale may have borne any benefit to the plaintiff;
(b)the obligation of the plaintiff to act reasonably is “not to be weighed in nice scales”.24
(c)the plaintiff acted reasonably –
(i)in selling the house, he acted on independent advice that the house had multiple weathertightness defects;
(ii)he engaged reputable real estate agents to sell the property;
20 Warren and Mahoney v Dynes CA49/88, 26 October 1988 at 10-11.
21 As stated in Walsh v Kerr [1987] 2 NZLR 166 at 494, the Court must do the best it can when assessing damages based on incomplete information.
22 I am fortified in this view given the initial offer for the house without accounting for the defects in 2015 was for $10,900,000.
23 There is also no clear evidence of the value of those improvements to the sale price.
24 Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452 at 506.
(iii)he engaged in an orthodox in a market sale process;
(iv)he accepted a reduced the sale price to reflect what appear on their face to be reasonable bases for reduction – namely the defects, foreshore and other repair works;
(d)it was not unreasonable to go to market rather than invite rectification by Mr Ossyanin – it is as Mr Sharp says too convenient now to suggest Mr Ossyanin would have repaired the identified defects (particularly as he maintains still there are no real defects to repair).
[98] Furthermore, it is not clear the counterfactual (repair / rectification or alternative sale) would have reduced the amount payable by Mr Ossyanin, having regard to among other things the estimates based on the Maynard Marks report and Mr Shen’s holding costs and other expenses that must be incurred pending repair, rectification or alternative sale.
[99] In those circumstances, had I found actionable misrepresentation, and based on the limited available information, I would have been inclined to quantify loss at about $1.5m. However, as Mr Sharp properly concedes, Mr Shen contributed to his own loss, namely the fact that he acted against expert advice. My preliminary view is that would be in the order of 50 per cent, given the significance of the Harrington report.
Mistake
[100] Submissions on the issue of mistake were only received in writing after the first hearing.25 There has been no full opportunity to test them. The following comments are my preliminary assessment of the issue of mistake.
[101] Mr Sharp contends that relief for mistake is available without pleading referring to s24(2) of the C&CL Act, which provides that relief may be granted “in the
25Leave was granted to call evidence after the close of the first hearing as a key witness, Mr Mitalauskas, became available only after that hearing. This hearing took place on 19 December 2018. Submissions on the issue of mistake were received in the interim.
course of the proceedings or on application”. This point is not disputed. I therefore proceed on that basis.
[102] Section 24(1)(a) of provides for relief in cases of mistake. It states that a court may grant relief under section 28 to a party to a contract if:
(a)in entering into the contract –
(i)the party was influenced in the party’s decision to enter into the contract by a mistake that was material to that party, and the existence of the mistake was known to the other party or to 1 or more of the other parties to the contract; or
(ii)all the parties to the contract were influenced in their respective decisions to enter into the contract by the same mistake; or
(iii)the party and at least 1 other party were each influenced in their respective decisions to enter into the contract by a different mistake about the same matter of fact or of law.
[103]Section 24(1)(b) and (c) then provide that an applicant for relief must show:
(b)the mistake or mistakes resulted, at the time of the contract —
(i)in a substantially unequal exchange of values; or
(ii)in a benefit being conferred, or an obligation being imposed or included, that was, in all the circumstances, a benefit or an obligation substantially disproportionate to the consideration for the benefit or obligation.
(c)in a case where the contract expressly or by implication provides for the risk of mistakes, the party seeking relief (or the party through or under whom relief is sought) is not obliged by a term of the contract to assume the risk that that party’s belief about the matter in question might be mistaken.
[104] In the present case, as Professor McLauchlan recently surmised about Magee, three elements are required to be proven:26
(a)A mistake;
(b)An unequal exchange of values;
26 At 13.
(c)No contractual assumption of risk.
Common mistake
[105] Both Mr Ossyanin and Mr Shen specifically turned their minds to and mistakenly assumed the house did not leak in any material way due to defects for the reasons explained above at [72]-[81]. This is what the law calls a ‘common mistake’. Most relevantly, Mr Ossyanin’s negative responses to Mr Shen’s questions were a material factor in Mr Shen’s mistaken assumption the house did not leak. In this regard, he placed great weight on Mr Ossyanin’s representations that the house was not leaking and there were no problems with it. As I have said, Mr Shen was so influenced by it, he altogether dismissed the significance of the Harrington report. I also think it is relevant, in the context of a common mistake claim, that Mr Ossyanin also maintained his confidence about the absence of leaks in the face of Mr Harrington’s report.
[106] Mr Macdonald’s argument that Mr Shen was thinking not a “leaky home” while Mr Ossyanin was thinking “no leaks” is not supported by the evidence – see [49]-[60]. His further argument that the house does not in fact leak is also not supported by the evidence – see [20]-[46].
Unequal exchange
[107] With respect to counsel, the submissions on unequal exchange were sparse. But what is clear is that the house was objectively and subjectively well below the expectations of the parties as reflected by the diminution in market value (see [90]- [99]) which then also provides an appropriate starting point for assessment. Further, adjustment to account for Mr Shen’s failure to heed expert advice would then be needed.
Assumption of risk
[108] Mr McDonald does not claim Mr Shen contractually assumed the risk of leakage, though the issue of the reasonableness of Mr Shen’s assumption is a matter raised by him. Given the building report clause, it is a live issue not properly addressed
in submissions, and given the late stage at which the issue of mistake was raised, it would be unfair to the defendant not to resolve this issue properly. For present purposes, I simple observe that the “common mistake” operated after the building report had been obtained and appeared to supplant it.
[109] Given the foregoing, I reserve my position pending hearing full argument on the issues of unequal exchange and assumption of risk. For the benefit of the parties I wish to make clear however that this case appears to have the hallmarks of common mistake about a central fact that undermined a key premise of the sale and purchase – namely that the house did not leak. While Mr Shen was alerted to the potential for leaks by Mr Harrington, the scale of the leakage issues was never made clear to him and Mr Ossyanin’s honest appraisal of his home then led Mr Shen to honestly believe the house was fit for his needs, when plainly it was not.
Outcome
[110] The claim based on misrepresentation is dismissed. Mr Shen asked about whether the house leaked on multiple occasions and was told “no” in response. In context, his inquiries were directed to Mr Ossyanin’s knowledge and opinion, based on his experience as the owner of the house, about whether leaks existed. Mr Ossyanin honestly and reasonably believed that they did not. Mr Shen also unreasonably relied on Mr Ossyanin’s representations in the face of an expert report that identified multiple weathertightness defects.
[111] However, as I have not heard full argument on the issue of mistake, I reserve my position and direct the registrar to allocate the first available date for hearing, if one proves necessary. My tentative view is that, on the facts as proven, both parties made a common mistake about leaks and this should be reflected in the result.
[112] Submissions on costs may be filed, though it would be sensible to have the issue of mistake addressed first.
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