Shen v Ossyanin (No 2)
[2019] NZHC 2430
•25 September 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 2430
BETWEEN ZHAOWU SHEN
Plaintiff
AND
ANDREY YURIEVICH OSSYANIN AND TATYANA OSSYANINA
First Defendant
HARRINGTON PROPERTY INSPECTIONS LIMITED
Second Defendant
Hearing: 28 June 2019 Counsel:
A Sharp and C Huang for Plaintiff
R J Macdonald and M Cherrington for First Defendant
Judgment:
25 September 2019
JUDGMENT (NO 2) OF WHATA J
This judgment was delivered by me on 25 September 2019 at 4.00 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 2430 [25 September 2019]
[1] This is my second judgment in this matter. Mr Shen purchased an architecturally designed home from Mr Ossyanin. In a meeting prior to settlement, Mr Shen asked whether the house leaked. Mr Ossyanin said, in short, it did not. The house leaked. My first judgment determined whether Mr Ossyanin had made any actionable misrepresentation about the leaks. I found that he did not, because Mr Ossyanin honestly and reasonably believed the house did not leak. However, I tentatively found that he and Mr Shen may have been operating under a common mistake. Because the parties had not fully addressed common mistake, I reserved leave for them to bring that aspect back to Court.
[2] Mr Shen later advised the Court that he would pursue the issue of mistake.1 This judgment determines whether Mr Shen and Mr Ossyanin were operating under a mistake and, if so, what relief might be available.
Background
[3] The background is set out in some detail in my Judgment (No 1).2 I repeat the relevant parts of it here:
[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!
1 A hearing date suitable to both parties could not be fixed until 28 June 2019. An application to adjourn by the plaintiff was declined. (PER MY Minute dated 24 June 2019.)
2 Shen v Ossyanin [2019] NZHC 135.
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.
Key findings of first judgment
[4] The key findings made in my first judgment are relevant to the determination of whether the parties were operating under a common mistake. I summarise those key findings as follows.
The house leaked
[5]The following defects were likely to be present at the time of purchase:3
(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 sealed joinery failed in the main lounge;
(e)There was a significant leak from the garage deck;
(f)The shower was water damaged; and
(g)The garage retaining wall was inadequately waterproofed.
[6] 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
3 At [45].
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”.4
Mr Shen asked Mr Ossyanin about whether the house was leaking or had any problems
[7] At a meeting prior to the agreement going unconditional, Mr Shen asked Mr Ossyanin about whether the house was leaking or had any problems. He asked Ms Chen (an interpreter translating from Chinese to English) to raise the issue of “whether the property was leaking or had any problems”.5 Ms Chen confirmed that she did this. Her evidence was supported by the evidence of Mr Harrington, who was present at the meeting and had provided a report on the home. By contrast, Mr Ossyanin was a hundred per cent sure he was not specifically asked and his interpreter, Mr Naomov (translating from English to Russian), could not remember a single occasion where he was asked if the building leaked or the word “leaking” was used.6
[8]I concluded:
[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.
[9] Mr Naomov was also an unconvincing witness. Further, while Mr Ossyanin was more credible, there were problems with his evidence too. In answer to questions about the property, he said that the Harrington report should provide Mr Shen with the relevant information and that this was confirmed by Mr Shen under cross-examination.
4 At [46].
5 At [51].
6 At [53].
But aspects of his evidence also appeared implausible or lacked credibility.7 For example:
(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 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.
[10]There were further issues with Mr Ossyanin’s evidence, including relevantly:
[57] … 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.
[11]And further:
[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.
Mr Ossyanin answered “No”
[12] Mr Ossyanin answered “no” to Mr Shen’s questions about whether the house leaked. Notably, I found:
[62] [Mr Ossyanin] was also very firm in evidence about the fact that the house never leaked and he was very house proud. This included evidence that:
7 At [56].
(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.
There were erroneous representations, but they were not actionable
[13] As to the issue of misrepresentation, Mr Ossyanin’s negative replies to questions about leaking or any problems generally carried three meanings:8
(a)That the house had not leaked while he owned it;
(b)That he knew of no facts establishing it was through design or construction prone to leak; and
(c)In his opinion, the house was not, through design or construction, leaking or prone to leak.
[14] The first two representations were, however, honest and reasonably held representations as to fact, while the third representation or meaning was a statement of opinion only.9 They were therefore not actionable misrepresentations. In summary, Mr Ossyanin honestly and reasonably believed his house did not suffer from leaks while he owned it, knew of no facts establishing it was prone to leak and, in his opinion, it was not prone to leaks, whether through design and construction defects known to him or otherwise, if properly maintained.10
8 At [66].
9 At [71].
10 At [76]–[85].
Other findings
[15]Other relevant findings include:
(a)Mr Shen was induced to buy the property because of Mr Ossyanin’s answers.11
(b)Mr Shen’s reliance on Mr Ossyanin’s answers was unreasonable in the context because Mr Shen was alerted about potential weathertightness issues by an expert qualified to do so.12
(c)Had there been an actionable misrepresentation, Mr Shen’s loss would have been about $1.5m.13
Common mistake
[16] As noted in my previous judgment, submissions on the issue of mistake were only received in writing after the first hearing. There had been no full opportunity to test them. I made some preliminary observations, however, including:
(a)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. This was a common mistake. 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. He placed great weight on Mr Ossyanin’s representations that the house was not leaking and that there were no problems with it. He was so influenced by it, he altogether dismissed the significance of the Harrington report.14
(b)In terms of unequal exchange, it was clear that the house was objectively and subjectively well below the expectations of the parties as reflected in the loss in market value on resale which then provided
11 At [86].
12 At [89].
13 At [90].
14 At [106].
an appropriate starting point for assessment.15 Adjustment to account for Mr Shen’s failure to heed expert advice was needed.
(c)In terms of assumption of risk, Mr Macdonald had not raised the issue in his submissions. But given the significance of a finding of common mistake to the defendant, I considered that a further opportunity to submit on it should be afforded to him. I then observed:
[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.
Jurisdiction
[17] I turn then to examine the issue of mistake with the benefit of full submissions and argument. Section 24(1)(a) provides for relief in cases of mistake. It relevantly states:
24Relief may be granted if mistake by one party is known to another party or is common or mutual
(1)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; and
15 At [107].
[18]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; and
(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.
[19]It appears common ground that three elements are required to be proved:16
(a)A mistake.
(b)An unequal exchange of value.
(c)No consequential assumption of risk.
[20] Mr Macdonald, for Mr Ossyanin, however, identifies the following key issues to be resolved:
(a)Was Mr Ossyanin influenced in his decision to “enter into the contract” by the same mistake as Mr Shen?
(b)Did the contract provide for the risk of mistakes and was Mr Shen obliged to assume that risk?
(c)If not, should Mr Shen’s conduct in causing the mistake disentitle him to relief?
16 See also David McLauchlan “Misrepresentation? Or was it a case for relief on the grounds of mistake?” [2018] NZLJ 13.
(d)In that event, has there been a substantially unequal exchange of value proved by the plaintiff?
[21] Mr Sharp does not address the same issues directly, but I am content to frame my judgment by reference to Mr Macdonald’s key issues. I therefore turn to address them.
Was Mr Ossyanin influenced in his decision to “enter the contract” by the same mistake as Mr Shen?
[22] The case made by Mr Macdonald for Mr Ossyanin on this issue may be stated briefly. The operative time for considering the issue of mistake for Mr Shen was when the contract was made unconditional, and this was the time that Mr Shen made the mistaken assumption the house did not leak. After consulting his lawyers, Mr Shen made the decision to confirm the contract but because the conditions were conditions subsequent and for the sole benefit of Mr Shen, Mr Ossyanin had no role to play in that decision. What Mr Ossyanin thought or didn’t think was irrelevant and Mr Ossyanin was after all entitled to hold any view or no view on the issue of the condition of the property, given the clear assumption of risk by Mr Shen to have the issue of building quality resolved to his satisfaction.
[23] Mr Sharp, in contrast, submits citing McMorland, that “entry” includes the process leading up to making the contract unconditional.17
Assessment
[24] I do not accept Mr Macdonald’s submission on this. To “influence” is simply to “have an effect on”.18 That is the ordinary meaning of “influenced”, and that meaning accords with the remedial purpose of s 24 of the Act – that is, to provide a remedy for the arbitrary effects of mistake.19 Further, as stated in Ware v Johnson,
17 D W McMorland, Sale of Land (3rd ed, Cathcart Trust, Auckland 2011) at 50-51.
18 The New Zealand Oxford Dictionary (Oxford University Press, South Melbourne, 2005). See also the discussion of the “influence” requirement in Law Commission Contract Statutes Review (NZLC R25, 1993) at 135.
19 Refer also Jeremy Finn, Stephen Todd and Matthew Barber Burrows, Finn and Todd on the Law of Contract in New Zealand (6th ed, LexisNexis, Wellington 2018) at 10.3.3, citing Yeoh v Al Saffaf HC Auckland CIV-2005-404-964, 8 December 2005; Adams v Touchtwo Ltd (2011) 11 NZCPR 577 at [89].
“the Act cannot mean that both parties must be induced by the mistake to enter into the contract”.20 Rather, to be influenced “means no more than that both parties must necessarily have “mistakenly accepted in their minds the existence of some fact which affects to a material degree the worth of the consideration given by one of the parties.”21
[25] I have no doubt that at the time Mr Ossyanin signed the agreement for sale and purchase, both parties were operating under the assumption that the house did not leak. This is borne out by the advertisement for the house, which stated:
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.
[26] Further, Mr Ossyanin’s entire case on the misrepresentation claim was premised on his honest and reasonable assumption that the house did not leak. As he said in his brief of evidence:
25. I have never seen any evidence of water penetration, whether direct signs such as water leaks or puddles, or leaking around the windows or any other thing such as the deterioration of wood or paint bubbles or mould or softening of the wall surfaces. Had anything of that nature occurred or developed, I would have immediately taken action to fix the problem., and i remain firmly of the view that there were no issues of weathertightness or water entry issues to the property during my ownership.
[27] However, it appears that while the parties signed the agreement assuming the house did not leak, they only turned their minds specifically to the prospect of leaks after the Harrington report and Mr Shen’s enquiries of Mr Ossyanin. I therefore proceed on the basis that that is the point at which the mistake influenced both Mr Shen and Mr Ossyanin.
[28] Nevertheless, I do not consider that this should deprive Mr Shen of relief. Like McMorland (and Mr Sharp), I consider “entry” into the contract for the sale and purchase of land extends until the contract becomes unconditional: 22
20 Ware v Johnson [1984] 2 NZLR 518 (HC) at 539-540; see also Shotover Mining Limited HC Invercargill CP96-86, 30 September 1987 at 157-158.
21 At 540.
22 D W McMorland, above n 17, at 50-51..
Where the contract is conditional, for the purpose of misrepresentation the process of entry into the contract continues until the contract becomes unconditional, so that a party has the usual remedies for a misrepresentation which induces that party to make the contract unconditional. For this purpose at least, entry into a contract is a process, not a single event, and any misrepresentation materially influencing a party during that process is capable of being a misrepresentation inducing the party to enter into the contract.
[29] McMorland was dealing there with misrepresentation, but the reasoning has logical application in the context of a mistake which induces a party to make the contract unconditional. This approach is also concordant with the purpose of relief for mistake, that is, to mitigate the arbitrary effects of mistake.
[30] The mistake in this case was plainly operative prior to the contract of sale going unconditional. Residual issues as to the effect of the inspection and due diligence conditions of the sale and purchase agreement are relevant to the issue of assumption of risk, not whether Mr Shen and Mr Ossyanin were influenced by a common mistake about the house not leaking when they entered into the sale and purchase agreement and/or when the agreement went unconditional.
Did the contract provide for the risk of mistake and was Mr Shen obliged to assume that risk?
[31] As to assumption of risk, Mr Macdonald contends for a multi-layered position as follows:
(a)Mr Shen was obliged to have the issue of building quality resolved to his satisfaction, per cl 9.3 which provided:
If the purchaser has indicated on the front page of this agreement that a building report is required, this agreement is conditional upon the purchaser obtaining at the purchaser’s costs on or before the tenth working day after the date of this agreement a report on the condition of the buildings and any other improvements on the property that is satisfactory to the purchaser, on the basis of an objective assessment. The report must be prepared in good faith by a suitably-qualified building inspector in accordance with accepted principles and methods. Subject to the rights of any tenants of the property, the vendor shall allow the building inspector to inspect the property at all reasonable times on reasonable notice for the purposes of preparation of the report. The building inspector may not carry out any invasive testing in the course of inspection without the vendor’s prior written consent. If the purchaser avoids this agreement for the non-fulfilment of this condition pursuant to subclause 9.8(5), the purchaser must
provide the vendor immediately upon request with a copy of the building inspector’s report.
(b)This obligation is complemented by cl 18 which provided:
18.0 Builder’s Report Condition
(a)This Agreement is conditional on the Purchaser confirming by 30 days of the date of this agreement its 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. Should the Purchaser in good faith be dissatisfied with any aspect of the report, then before the contract can be cancelled the Purchaser must give notice (“Purchaser’s notice”) to the Vendor by the deadline specified above stating the particular matters in respect of which the Purchaser is dissatisfied with the report and if those matters are capable of remedy what the Purchaser required to be done to remedy those matters.
(b)The Purchaser may only raise or request remedy of those matters which would not have been readily apparent to the Purchaser on the Purchaser’s reasonable inspection of the property.
(c)The Vendor shall notify the Purchaser (“Vendor’s notice”) within three working days after receiving the Purchaser’s notice of such defect whether or not the Vendor is prepared to remedy the said defect identified by the Purchaser’s notice.
(d)If the Vendor’s notice advises that the Vendor is unable or unwilling to comply with the Purchaser’s notice or if the Vendor has not given notice at all, and the Purchaser does not on or before the 5th working day after the date of giving the Purchaser’s notice, give notice to the Vendor that the Purchaser waives the Purchaser’s dissatisfaction with the building inspection report, this condition shall not have been fulfilled and this Agreement may be avoided pursuant to the provisions of General Term 9.8(5).
(e)If the Vendor gives a Vendor’s notice advising that the Vendor is able and willing to comply with the Purchaser’s notice then this condition is deemed to have been fulfilled and it shall be a requirement of settlement that the Purchaser’s notice be complied with. Before settlement the Vendor must carry out the relevant work on the property and if necessary obtain the consent of the local authority to undertake the work to be done and obtain a Code Compliance Certificate for those works if applicable.
(c)Applying orthodox interpretative principles, conditions 9.3 and 18 are conditions subsequent, requiring Mr Shen to obtain a building report on
or thirty days from the date of the agreement by a suitably qualified building inspector in accordance with accepted principles and methods.
(d)If Mr Shen was dissatisfied with any aspect of the report, then notice was required to be given, and Mr Shen could only request a remedy of matters which would not have been readily apparent to him on his reasonable inspection of the property. If the matters identified could not be remedied, Mr Shen could have avoided the contract.
(e)These conditions are comparable to conditions which have been previously held to transfer the assumption of risk, referring to the following observation of Smellie J in Dennis Friedman (Earthmovers) Ltd v Rodney County Council:23
In my view the contractor was obliged by the terms of the contract (particularly specific condition 8 of Part 2 of the specific condition and general condition 8.1 of the general conditions) to assume the risk that his beliefs as to the time in which the contract could be carried out, the water content of the material to be encountered and the shear strength to which it could be compacted “might be mistaken”.
(f)Mr Shen accepted that he paid extra attention to the leaky home issues when exercising his rights pursuant to the further terms of sale and purchase, and he could have negotiated a warranty as to quality but did not.
(g)Given the combined effect of cls 9.3 and 18, Mr Shen assumed the risk of mistake.
[32] Mr Sharp submits, in short, that any clause purporting to exclude of relief should be read restrictively,24 and that, in any event, cls 9 and 18 do no more than preserve caveat emptor and do not expressly or by implication allocate risk of defects to the purchaser. Moreover, he says there was no failure of enquiry as Mr Shen obtained the report and discussed the relevant parts of the report with Mr Ossyanin.
23 Dennis Friedman (Earthmovers) Ltd v Rodney County Council [1988] 1 NZLR 184 (HC) at 184.
24 Citing Prattley Enterprises Ltd v Vero Insurance New Zealand [2016] NZSC 158; [2017] 1 NZLR 352 and Brian Coote Coote on the New Zealand Contract Statutes (Thomson Reuters, Wellington, 2017) at 53-54.
Any mistaken assertions that induced Mr Shen to declare the agreement unconditional, therefore qualify for relief for the mistake.
Assessment
[33] Section 24(1)(c) states that the Court may only grant relief in a case where the contract expressly or by implication provides for the risk of mistake, the party seeking relief 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.
[34]Two issues therefore require resolving: 25
(a)Does the contract expressly or by implication provide for the risk of mistakes about whether the house leaked; and if so,
(b)Is Mr Shen obliged by a term of the contract to assume the risk that his belief about whether the house leaked might be mistaken?
[35] In relation to the first issue, I agree with Mr Macdonald that cls 9 and 18 provide for the risk of mistakes insofar as they provide an opportunity for the purchaser:
(a)to avoid the agreement if the building is unsatisfactory based on a non- invasive assessment of the condition of the building undertaken by a suitably-qualified building inspector (the “assessment”) (cl 9); and
(b)to cancel the agreement if the purchaser is dissatisfied with any aspect of a building inspection report (the “report”), and the particular matters in respect of which the purchaser is dissatisfied are not remedied by the vendor (cl 18).
[36] It may be reasonably inferred that in providing for a non-invasive assessment and a building inspection, and an opportunity to avoid or cancel the agreements based
25 Jeremy Finn, Stephen Todd and Matthew Barber, above n 19 at 344.
on matters that might reasonably be identified by that assessment or that inspection, the parties expect the purchaser to avoid or cancel the agreement if he or she is dissatisfied about the risk of mistake about those matters.
[37] But it does not follow that Mr Shen is obliged by these clauses to assume the risk of the mistake that the house did not leak. As Mr Sharp submitted, any allocation of the risk of mistake, and thus exclusion of relief under the Act, must be expressed clearly. The reference to a “term” of the contract supports this restrictive reading.26 In this case, the clauses confer a discretion to avoid or cancel following the completion of a due diligence process, but do not expressly or by implication allocate the risk of mistake about those matters to Mr Shen.
[38] To illustrate, the wording of these clauses can, as Mr Sharp submits, be contrasted with the conditions in Dennis Friedman (Earthmovers) Ltd, cited by Mr Macdonald. These conditions state:27
GENERAL CONDITIONS
2.1.2 The tenderer shall inspect and examine the Site and its surroundings and shall satisfy himself before submitting his tender as to the nature of the ground and sub-soil (so far as is practicable and from data supplied by the Principal) the form and nature of the Site, the quantities and nature of the work and materials necessary for the completion of the Works, and the means of access to the Site, the accommodation he may require and in general shall himself obtain all necessary information as to risks, contingencies and other circumstances which may influence or affect his tender.
8.Sufficiency of tender:
In addition to the requirements of Clause 8.1 of the General Condition of Contract (NZSS 623: 1964), the Contractor shall be deemed to have satisfied himself before tendering, by personal inspection of the site, as to the accuracy of the specification, plans, schedules etc or any other information of any kind supplied to tenderers. He shall also be deemed to have satisfied himself as to the feasibility of constructing works of the kind and in the manner specified, and as to all other matters which can in any way influence his tender. No claim will be recognised arising from the Contractor’s failure to comply with this clause.
26 See Brian Coote, above n 25 at 54 and, in terms of exclusions clauses generally, see Prattley Enterprises Ltd v Vero Insurance New Zealand Ltd, above n 24, at [8]. Compare Shotover Mining Limited, above n 20 at 160.
27 Dennis Friedman (Earthmovers) Ltd v Rodney County Council, above n 23, at 189-190 (emphasis added).
8.1The Contractor shall be deemed to have satisfied himself before tendering as to the correctness and sufficiency of his tender for the Works and of the rates and prices states in the priced schedule of quantities if any, and the schedule of rates and prices (if any) which rates and prices shall (except in so far as it is hereinafter otherwise provided) cover all his obligations under the contract and all matters and things necessary for the proper completion and maintenance of the Works.
[39] As the highlighted portions show, the contract by necessary implication deems the risk of mistake about the matters listed to be assumed by the contractor. There is no deeming of this kind here.
[40] Furthermore, cls 9 and 18 both envisage an ongoing assessment of the condition of the building which includes the potential for further engagement with the vendor. Any allocation of risk was always conditional on this process being completed. Relevantly, in the present case, Mr Ossyanin responded to Mr Shen’s concerns about whether the home leaked, and only after Mr Shen had his statements that it did not leak, was Mr Shen satisfied he could confirm the agreement was unconditional. To the extent therefore that he assumed the risk of mistake, it was predicated, at least in part, on Mr Ossyanin’s advice.
[41] As the Court of Appeal stated in Magee, a purchaser’s independent inquiries may bring reliance to an end, so negating the effect of a misrepresentation, but that need not be so.28 Similarly in the context of mistake, the exercise of discretion to avoid or cancel does not preclude a claim in mistake.
[42] I am fortified in reaching the view that the facts of the present case engage s 24 by analogy to the approach taken by the High Court and the Court of Appeal in Snodgrass v Hemmington.29 This was also a case about a sale and purchase of a house. During a precontractual visit to the property, one of the vendors said there was nothing wrong with stability. A sale and purchase agreement was signed. It included a due diligence clause together with an exclusion clause which stated:30
28 Magee v Mason [2017] NZCA 502 at [48].
29 Snodgrass v Hemmington CA254/93, December 1995.
30 Recorded at [4] in the judgment.
I acknowledge that I have inspected the said property and that I purchase it solely upon my own judgment and not upon any representations or warranties made by you or your agents.
[43] The house had, however, been built on land subject to subsidence. The effect of this subsidence was not noted until after the agreement had become unconditional but prior to settlement taking place. The purchasers refused to settle. The vendors sued on the sale and purchase agreement. The purchasers defended the claim on the basis, they say, there had been misrepresentation and/or mistake. The High Court found that there had been both misrepresentation and mistake. This finding was upheld by the Court of Appeal. That Court observed:31
… Implicit in the Judge’s finding was that both parties made the same mistake as to the value of the house and that the agreed purchase price for the house was not the actual value of the house at the time of the contract because it did not reflect the history of the land upon which the house was built, what had happened since its construction and the possibility of further, albeit minor subsidence in the future.
[44]The Court then observed:32
In our view there was evidence upon which the Judge could find that both parties mistakenly accepted the position as to subsidence. They both proceeded on the erroneous assumption that there had been no past subsidence and no risk of future subsidence and that this assumption in turn led them to come to an erroneous conclusion as to the worth of the house. The engineering evidence established beyond doubt that the assumptions of the parties on subsidence were wrong.
[45] Relevantly, the Court found that the express exclusion clause did not preclude relief for the mistake. I am therefore satisfied that, like the purchasers in Snodgrass, Mr Shen did not assume the risk of mistake in exercising his rights under cls 9 and 18.
Should Mr Shen’s conduct disentitle him to relief?
[46] Mr Macdonald submits that I should exercise any discretion unfavourably to Mr Shen because he unreasonably relied on Mr Ossyanin’s representations. He noted Mr Shen was a sophisticated purchaser of property, having traded multiple properties in Auckland, whereas Mr Ossyanin, while an experienced businessman, had not sold
31 At [27].
32 At [28].
a property before in New Zealand. He said Mr Shen could have obtained a warranty if he wanted to have surety about whether the house leaked, and that Mr Shen had a report indicating the house leaked, the particulars of which included some of the defects about which he is now said to be mistaken. The report recommended deep probing. By contrast, Mr Macdonald submits, Mr Ossyanin was a fastidious owner who honestly believed the house did not leak, which is to be contrasted to the vendor in Snodgrass who had some knowledge of the subsidence issue in that case.
Assessment
[47] Section 28 provides the Court with a broad power to make any order that it thinks just, including the grant of relief by way of restitution or compensation. The purpose of this section, as per s 21, is to “mitigate the arbitrary effects of mistakes” on contracts by giving the courts appropriate powers to grant relief in the circumstances mentioned in s 24. The only relevant express statutory fetter on the relief powers is that they must not be exercised in a way that prejudices the general security of contracts.
[48] It is important to note that the “reasonableness” of the reliance on the mistake is not one of the qualifying elements for mistake identified at s 24. It appears that may have been intentional. The Contracts and Commercial Reform Committee in 1976 expressed concerns about the influence of the concepts of negligence and carelessness in contract cases. They noted:33
It seems to us carelessness, while it may be relevant in apportioning loss that has been occasions to the parties as a result of their transaction, it is not helpful in determining whether the other party to the contract should be entitled to enforce his expectation interest, and thus make unwarranted profit from another’s carelessness
…
It may well be that a court, after cancelling a contract for fundamental mistake, may look at the aftermath and determine that one of the parties has suffered loss as a result of the carelessness of the other, who ought therefore to make recompense as a condition of being granted relief.
33 Contracts and Commercial Law Reform Committee Report on the Effect of Mistakes on Contracts
(1976) at 6.
[49] The Act does, however, address a claimant’s contribution to its own loss at ss 26 and 27 in specified ways, namely:
(a)per s 26, the decision of the party to enter into a contract is not made under the influence of the mistake if, before the party elects to enter into it and at a time when the party can elect not to enter into it, the party becomes aware of the mistake but elects to enter into the contract despite the mistake; and
(b)per s 27, the extent to which the party seeking relief caused the mistake must be taken into account by the Court.
[50] For reasons already expressed, neither of these factors are in play insofar as concerns Mr Shen (see discussion at [15](a), [16](a), and see also [53] below). I proceed on the basis therefore that the reasonableness of reliance on the mistake is simply a factor going to the justness of relief. In this regard, I agree with Mr Macdonald that the approach taken to misleading conduct under the Fair Trading Act 1986 in Red Eagle Corporation Limited v Ellis is apposite by analogy.34 The Court there examined the extent to which a claimant’s conduct might preclude relief. The Court said that the key issue is whether the defendant’s conduct in misleading or deceiving the claimant was “an operating cause of the claimant’s loss or damage”; and addressed a claimant’s contribution to its own loss in this way:35
[29] … The court must first ask itself whether the particular claimant was actually misled or deceived by the defendant’s conduct. It does not follow from the fact a reasonable person would have been misled or deceived (the capacity of the conduct) that the claimant was actually misled or deceived. If the Court takes the view that the claimant was indeed misled or deceived, it needs then to ask whether the defendant’s conduct in breach of s 9 was an operating cause of the claimant’s loss or damage. Put another way, was the defendant’s breach the effective cause or an effective cause? The impugned conduct, in breach of s9, does not have to be the sole cause, but it must be an effective cause, not merely something which was, in the end, immaterial to the suffering of the loss or damage.
…
[30] Another operating cause of loss or damage may perhaps have been the claimant’s own conduct in failing to take reasonable care to look after his or
34 Red Eagle Corporation Ltd v Ellis [2010] 2 NZLR 492 (SC) (citations omitted).
35 At [29].
her own interests. The court should therefore ask itself whether the claimant’s carelessness, if there were any, should be regarded as the sole or a contributory operative cause of the loss. The fact that the claimant may have contributed by carelessness to his or her own downfall does not disqualify the claim.
[51]The Court also addressed the discretion to grant relief, stating:
[30] … the proper exercise of discretion may lead it to decide that part only of the amount of the loss or damage should be paid by the defendant to the claimant (or, in some cases of reckless behaviour by the claimant, even that no order for payment should be made).
[31] The exercise of the power to make an order for payment under s 43 is, in the end, as Richardson J also said [in] Goldsbro, a matter of doing justice to the parties in the circumstances of the particular case and in terms of the policy of the Act.
[52] Consumer protection considerations are engaged by the Fair Trading Act 1986, so rote application of these dicta is not appropriate. But a similar approach to the availability of relief under s 28 gives proper effect to the legislative purpose.
[53] Turning to the evaluation, I accept that Mr Shen’s reliance on Mr Ossyanin’s representations about leaks was unreasonable for the reasons stated in my first judgment,36 which are largely mirrored in Mr Macdonald’s submissions. I further accept that had Mr Shen wanted absolute surety, he could have negotiated warranties.37 But I am not satisfied that his unreasonableness is such as to disqualify him from relief for mistake altogether. Rather, I am satisfied Mr Shen was induced to go unconditional by Mr Ossyanin’s answers to the questions about whether the house leaked. While his reliance was unreasonable insofar as he then effectively dismissed Mr Harrington’s report, but for Mr Ossyanin’s repeated affirmation that there were no leaks or other problems, Mr Shen would not have gone unconditional. Significantly, this is not a case of unmitigated carelessness. It is a case where an otherwise careful purchaser sought and was given what he thought was better information by the owner. Furthermore, Mr Harrington’s report only identified some of the defects. The true scope of the defects was not known by either Mr Shen or Mr Ossyanin prior to entry into the sale and purchase agreement and/or an unconditional contract. The mistake was still therefore an effective cause of the decision to go unconditional.
36 At [87]-[89].
37 Willis v Castelein [1991] 3 NZLR 103 (HC).
Has there been a substantially unequal exchange of value proved by the plaintiff?
[54] Mr Macdonald submits that the critical date for assessing the unequal exchange of value is the date of the contract and that the mistake must have resulted in an unequal exchange of values and at the time of sale, the property was valued at $11.3m and Mr Shen only paid $10.75m. Mr Shen, he says, was aware that defects identified by Mr Harrington were likely to cost in the order of $300,000 and this must be deducted from any relief claimable by Mr Shen. Furthermore, Mr Macdonald contends there is wide divergence between the experts as to what the total repair bill would have been and there is no valid way to measure Mr Shen’s pleaded contractual loss in the absence of any proper estimation of the cost of repairs. The burden rested with Mr Shen to show his loss and he has not done so.
Assessment
[55] I have no cause to depart from the assessment I made about loss, as set out in my first judgment at [92]-[99]. In summary, the experts provided defects estimated in the range of $1,360,719 to $2,204,000. But there was no definitive assessment of repair cost, so the defect estimates do not provide a proper basis for quantifying damages. There was also no expert valuation evidence identifying the difference in the value of the house with and without the defects. However, in the absence of better information,38 the difference in purchase price and resale price provided a good starting point for quantifying loss attributable to the mistake about whether the house leaked. The difference is about $1.5m, which broadly reflected the movement in the market value over the intervening period after the defects are considered. Mr Shen also acted reasonably in mitigating his loss. There was therefore a substantially unequal exchange of value.
Relief
[56] Given the foregoing, I am satisfied there must be some relief to mitigate the arbitrary effects of the common mistake. There is limited guidance as to the application of s 28. Burrows, Finn and Todd notes that generally any relief given has
38 As I noted in a footnote in my first judgment, citing Walsh v Kerr [1987] 2 NZLR 166 (HC) at 494, the Court must do the best it can when assessing damages based on incomplete information.
been of a nature akin to remedies available in other parts of the law of contract, referring to a comment made in Slater Wilmshurst Ltd v Crown Group Custodian Ltd.39 But, it also says: 40
… it is to be hoped that the comment will not be elevated into a statement of general principle.
[57]And further:
… [the law reformers] contemplated that relief should ensure that benefits conferred in pursuance of the contract should be returned or paid for, subject to a right of set-off expenditure or other detriment which has been incurred under the contract, or to vary the consideration to reflect what the consideration might have been had the true state of affairs been known.41
[58] Indeed, the Contracts and Commercial Reform Committee in 1976 said that “it is desirable to allow the courts a wide discretion to make such order as best meets the needs of that particular case” and that “arbitrary limitations ought not to be placed on the courts’ remedial powers” 42 The reference to both compensation and restitution as a potential remedy emphasise the breadth of the available relief. I therefore consider that, given the breadth of the language used, a broad-brush approach should be applied here.
[59] Mr Sharp effectively conceded that ordinary contractual remedies were inappropriate and submitted that each party should bear $750,000 of the shortfall. This is an acknowledgment of Mr Shen’s contribution to the unequal exchange. While this quantum accords with the view I expressed about Mr Shen’s contribution to his own loss in my first judgment (at [99]), I have come to the view that this outcome would be unfairly generous to Mr Shen, for the reasons mentioned by Mr Macdonald. Mr Shen was a sophisticated buyer of properties. He was told that the house appeared to have weathertightness problems. He did not seek a warranty as to the fitness of the property, and none was given. Mr Ossyanin honestly believed the house did not suffer from any leaks. This is not a case of intentionally misleading conduct. On that basis,
39 Jeremy Finn, Stephen Todd and Matthew Barber, above n 19 citing Slater Wilmshurst Ltd v Crown Group Custodian Ltd [1991] 1 NZLR 344 (HC) at 358.
40 At 347.
41 Referring to Contracts and Commercial Law Reform Committee, above n 33 at [26] and [27].
42 Contracts and commercial Law Reform Committee, above n 33 at [25].
I am satisfied Mr Shen should bear the burden of the unequal exchange to a greater extent than Mr Ossyanin.
[60] In my view, therefore, a 70/30 per cent split between Mr Shen and Mr Ossyanin of the burden of the mistake will appropriately mitigate the arbitrary effects of their common mistake and will do justice to them.43 The parties did not seek adjustment for real estate agent fees, other costs associated with the sale and purchase or subsequent costs for, among other things, weathertightness assessments. I am not minded, in any event, to provide for these matters. Inevitably, there will be costs incurred by both parties because of the mistake, but I do not consider that accounting for them now is necessary in terms of doing what is just between them.
[61] In the result, there shall be an order in Mr Shen’s favour in the sum of $450,000, plus interest at the applicable statutory rate from the date of sale of the property by Mr Shen, being the date at which the full impact of the mistake was realised.
Costs
[62] My view is that Mr Ossyanin won the first round and lost the second. The evidence given in the main hearing was relevant to both rounds. The second round was, however, an indulgence to Mr Shen, who had not pleaded common mistake. I am minded to award Mr Ossyanin 50 per cent of his 2B costs and disbursements. If agreement cannot be reached about this, submissions on costs may be filed within ten working days.
43 Woodhouse J reached a similar decision in Johnson v Auckland City Council [2013] NZHC 165 at [145], where the purchaser failed to obtain a builder’s report and take other prudent steps to assess wheathertightness risk.
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