Western Park Village Ltd v Baho
[2014] NZCA 630
•19 December 2014 at 10:30am
| IN THE COURT OF APPEAL OF NEW ZEALAND |
| CA115/2014 [2014] NZCA 630 |
| BETWEEN | WESTERN PARK VILLAGE LIMITED DARRYLL LAWRENCE HEAVEN, ANNE EVELYN HEAVEN AND TRUSTEE MANAGEMENT LTD Second Appellants |
| AND | SINAN ABED BAHO |
| Hearing: | 19 November 2014 |
Court: | Randerson, White and Courtney JJ |
Counsel: | D G Chesterman for Appellants |
Judgment: | 19 December 2014 at 10:30am |
JUDGMENT OF THE COURT
ALeave to amend the statement of claim is granted.
BThe appeal is allowed and the judgment of the High Court is set aside.
CThe respondent is entitled to judgment against the appellants for the sum of $154,073.48 together with interest thereon at 19 per cent per annum from 25 May 2009 to the date of judgment.
DThe appellants are entitled to 80 per cent of the costs of the appeal fixed for a standard appeal on a Band A basis with usual disbursements.
E The costs order made in the High Court is set aside. In the absence of agreement between the parties, the High Court is to fix the costs payable in that Court in consequence of this judgment.
____________________________________________________________________
REASONS OF THE COURT
(Given by Randerson J)
Table of Contents
| Para No | |
| Introduction The facts in more detail Was there a breach of warranty? The Judge’s conclusion on loss Submissions on loss Analysis of the valuation evidence The evidence of Mr Cheyne The evidence of Mr Taylor Assessment of damages for breach of warranty – principles Conclusions on damages for breach of warranty Counter-claim issues Equitable set-off Result | [1] [15] [39] [42] [46] [49] [54] [57] [61] [67] [76] [82] [83] |
Introduction
By an agreement dated 16 May 2007 the first appellant Western Park Village Ltd (Western Park) purchased one of four residential units at 30 Augustus Terrace, Parnell from the respondent Mr Baho for $1.225 million. Payment was to be made partly in cash with the balance due to Mr Baho in two instalments over two years. The balance due was expressed in US dollars and was secured by a second mortgage from Western Park guaranteed by the second appellants.
Negotiations for the purchase took place between Mr Baho and Western Park’s principal, the second respondent Mr Darryll Heaven. There was discussion between the two about a leaky building problem. This was the subject of a side agreement and is not now at issue. But it is common ground that no disclosure was made to Mr Heaven of a complaint by the body corporate of a neighbouring commercial property. The neighbouring property was situated at 77 The Strand, Parnell at the foot of a cliff forming part of the Augustus Terrace land. The complaint was that rock debris was falling down the cliff and accumulating on the property below. It transpired there had been a letter from solicitors dated 6 October 2006 threatening the Augustus Terrace Body Corporate (the Augustus BC) with litigation for nuisance over the rockfall issue.
Mr Heaven’s evidence was that it was not until after the purchase was settled that he first learned of the rockfall issue. He did not seek to cancel the agreement for sale and purchase. Rather, he took active steps through the Augustus BC to negotiate a settlement of nuisance proceedings later issued in the District Court by The Strand Body Corporate (The Strand BC). A resolution was ultimately achieved with responsibility for remedial work shared between the two bodies corporate. The cost of the remedial work for which the Augustus BC was responsible was shared between the owners of the four Augustus Terrace units. Western Park’s share amounted to $33,665.05.
In the meantime, there had been communications between Mr Heaven and Mr Baho about the repayment of the balance due on the loan from Mr Baho. The total loan was US$219,000. The first instalment was paid but the second for US$127,750 was not paid when due and remains outstanding.
No agreement was reached and, in May 2012, Western Park issued proceedings against Mr Baho seeking rescission of the agreement for sale and purchase (ASP) and the mortgage. Alternatively, damages for $300,000 were claimed. This sum was alleged to be the difference between the price paid for the unit and its true value. In addition, special damages of $60,000 were claimed for costs incurred in resolving and settling the nuisance claim.
Two causes of action were alleged. Each relied on the failure to disclose the threat of proceedings for nuisance over the rockfall issue. The first cause of action was for breach of a warranty under cl 6.1(1)(d) of the ASP which relevantly provided:
The vendor warrants and undertakes that at the date of this agreement the vendor has not:
(1) received any notice or demand and has no knowledge of any requisition or outstanding requirement:
…
(d) from any other party;…
The second cause of action alleged misrepresentation based on the pre‑contractual discussions between Mr Heaven and Mr Baho. Relief was sought under the Contractual Remedies Act 1979.
Mr Baho counter-claimed against the appellants for the balance due under the mortgage.
After a trial of some eight days, Heath J dismissed Western Park’s claims and entered judgment on Mr Baho’s counter-claim against the appellants for NZ$301,698.87 together with interest.[1] The Judge’s key findings were:
(a)The solicitors’ letter did not amount to a notice, demand or requisition in terms of the warranty in cl 6.1(d) of the ASP.
(b)No misrepresentation had been made in terms of s 6 of the Contractual Remedies Act.
(c)If there had been a misrepresentation it did not induce Mr Heaven to enter the ASP.
(d)The valuation evidence did not establish any diminution in the value of the unit in consequence of the rockfall issue.
(e)The counter-claim for the balance due under the mortgage was established. The conversion rate from US dollars to NZ dollars was fixed at the date the second instalment was due for payment.
[1]Western Park Village Ltd v Baho [2014] NZHC 198.
Prior to the hearing before us, Mr Chesterman for the appellants applied for leave to amend the statement of claim to add a claim for breach of warranty under cl 7.1(6)(b) of the ASP which relevantly warranted that:
(6) The vendor has no knowledge or notice of any fact which might give rise to or indicate the possibility of:
…
(b) any proceedings being instituted by or against the body corporate;…
Although Ms Lethbridge for Mr Baho opposed the amendment, we granted leave. We were satisfied that no additional evidence was required to address the amended pleading and that there would be no material prejudice to Mr Baho if the amendment were allowed.
For reasons which we will detail later, we have concluded that the Judge was right to find there was no breach of warranty under cl 6.1(1)(d) but we have decided without difficulty that there was a breach of the separate warranty under cl 7.1(6)(b). These conclusions make it unnecessary for us to consider the correctness of the Judge’s finding on the misrepresentation cause of action. That cause of action, even if established, would not add anything to the appellants’ claim.
We note that Western Park did not pursue the remedy of rescission.
In consequence, the principal issue we have to determine on this appeal is whether the Judge was right to conclude that Western Park was not entitled to any damages since it had not been established there was any diminution in the value of the unit flowing from the failure to disclose the rockfall issue. There is a secondary issue raised by Mr Chesterman about the correct date for conversion to NZ dollars of the amount due to Mr Baho under the mortgage.
The facts in more detail
Our consideration of the facts can be substantially curtailed since we will not canvass the evidence relating to the discussions between Mr Heaven and Mr Baho which gave rise to the misrepresentation cause of action. Our focus will be on the facts relating to the breach of warranty claim. The discussion of the facts which follows is drawn largely from the Judge’s findings which are not generally in dispute as well as from contemporary documents.
Mr Baho acquired Unit D at Augustus Terrace in November 2005 for $925,000. There were ongoing issues relating to rockfall debris. In 1997, a geo‑textile net was installed on the cliff face below the Augustus Terrace property. It was designed to collect debris falling from the cliff face and damaging The Strand building, some ten metres below. In 1998 there was a substantial slip which caused debris including large rocks to be pushed up against The Strand building. The geo-textile net was damaged by that and later rockfalls. The Judge found that the 1998 event signalled the beginning of a long running dispute between the bodies corporate responsible for the Augustus Terrace and The Strand properties.
A meeting of the Augustus BC was held in November 2005. The minutes of the meeting record that there was discussion about a letter received from Crockers Strata Management Ltd on behalf of The Strand BC regarding liability for rockfall damage. A series of resolutions was passed. These included asking the body corporate secretary to obtain from Crockers the professional reports referred to in their letter as well as retaining a surveyor, engineer and a lawyer for advice. This meeting took place shortly before Mr Baho signed the agreement under which he purchased the unit.
Neither Mr Baho nor any other representative from Unit D was present at the meeting. However, the Judge found that Mr Baho received notice of the next annual general meeting for the Augustus BC held on 7 November 2006. Although he was overseas at the time, he appointed a proxy to attend the meeting on his behalf. The notice of the meeting annexed a copy of a letter dated 6 October 2006 from Glaister Ennor solicitors representing The Strand BC. The letter also recorded that a copy of it was sent personally to Mr Baho at Unit D. The Judge found that the letter was likely to have been received at a time when Mr Baho was residing in the unit.
The Glaister Ennor letter was lengthy and detailed. It covered the history of previous rockfalls, the damage to the geo-textile net and the costs incurred to that point for removal of debris. The lawyers advised that a firm of engineers, Tonkin and Taylor, had examined the site and concluded that the cliff was subject to erosion and slabbing-type failures of larger material. The engineers had recommended that work be done on the cliff and that regular maintenance be undertaken to prevent further damage from falling debris. As well, the advice of an arborist had been obtained warning of the risk that pohutukawa trees sitting at the top of the cliff could fall without warning and cause significant damage to the buildings below. Reference was made to previous correspondence with a warning that the Augustus BC “should be disabused of any notion that our client will tolerate further delays”. The letter expressed the view that the owners of the Augustus Terrace property were obliged to take reasonable steps to eliminate the nuisance emanating from their property. The letter then concluded:
Settlement
We write to extend one final opportunity to resolve by negotiation the issues presented by the scree falls and the pohutukawa trees. We propose that representatives from the respective bodies corporate attend a site meeting together with their consulting engineers and a member of the respective management committees. The parties can then explore solutions on a without prejudice basis.
If such a meeting cannot be arranged before 5pm, Friday 27 October 2006, and an agreement reached before 1 December 2006, we have instructions to commence proceedings in the District Court against the Body Corporate (and the individual owners) seeking:
1An injunction requiring Body Corporate 192929 to take immediate steps to:
(a)Repair the geotextile net on the cliff face and empty it of detritus;
(b)Keep the geotextile net in good repair and reasonably free of detritus;
(c)Address the danger posed by the precarious position of the pohutukawa trees;
2Such damages that may be required to compensate the owners of the Strand units for the cost of addressing the nuisance posed by the scree falls and the pohutukawa trees up to the date of judgment.
Should it prove necessary to submit this matter to the District Court our client will seek increased costs pursuant to District Court Rule 47C, and will bring this letter to the attention of the Court.
We look forward to hearing from you as a matter of urgency.
Yours faithfully
Glaister Ennor
The solicitors’ letter was discussed at the annual general meeting of the Augustus BC on 7 November 2006. The minutes record that it was resolved that the body corporate’s legal advisers in conjunction with an informal owners’ committee would “enter into such negotiations as may reasonably be expected to resolve the dispute without litigation”. It was further resolved that if it did not prove possible to negotiate a settlement an extraordinary general meeting of the body corporate should be arranged.
Although the minutes of the November 2006 meeting record that Mr Baho or his representative was to be appointed to the informal owners’ committee the Judge noted that Mr Baho said in evidence that the committee had never met. The Judge concluded there was insufficient evidence to form a reliable view about whether and, if so, what steps the committee may have taken to address the rockfall problem.
The solicitors for the respective bodies corporate met on 15 November 2006. On 7 December 2006, Glaister Ennor wrote again to the Augustus BC’s solicitors advising that Tonkin and Taylor had been unable to provide provisional cost estimates for the remedial measures they proposed. The letter advised that The Strand’s immediate priority was to have the debris on its property cleared prior to Christmas but also wished to find a permanent solution to “the nuisance posed by the cliff face and the pohutukawa trees as soon as possible”. The letter concluded by stating that the solicitors looked forward to receiving more detailed proposals from the Augustus BC.
On 15 December 2006 the Augustus BC solicitors advised the Augustus BC that prima facie liability lay on the body corporate in nuisance and recommended that a geo‑technical engineer be retained to come up with concrete proposals and cost estimates for the necessary work.
The engineering firm Babbage Consultants Ltd (Babbage) was retained and reported to the Augustus BC on 12 March 2007. This was a detailed report commenting on a report from Tonkin and Taylor obtained by The Strand BC dated 7 October 2005. The Babbage report described the problems caused by rockfall and the overhanging trees and continued:
Ball Park Costs
The technical problem can be clearly defined. Several solutions can be proposed to address the ongoing problem, none of which would be particularly economical on a cliff edge which is accessible. However, on this cliff edge access to undertake such a solution is close to impossible and thus any solution which might be achieved will be almost prohibitively expensive. Access is among one of the most difficult we have encountered.
For indicative purposes only, it is probable that the solution proposed by Tonkin and Taylor (and we doubt that their solution will address all of the issues) could be in the order of $100,000 to $200,000 to implement where access is available. In this location because of the access constraints, this cost could easily escalate to more than $1,000,000.
Just to remove the current debris at the base of the slope could easily be more than $10,000 and we have as yet to evaluate whether such would be safe to undertake. ...
The Babbage report went on to assert that the need to prevent the rock falls was a direct result of the location of The Strand building at the base of the cliff and that the designers of The Strand building had failed to take into account the location of the building at the foot of the cliff. The report then said:
Minimum Work Required to Improve the Safety of 77 The Strand
In our opinion the minimum work required to return the building at 77 The Strand to a reasonable level of safety is as follows:
1. Remove the debris at the base of the cliff edge.
2. Check the durability of the remaining nets.
3.Reinstate those nets which have been destroyed or lost.
4.Improve the anchorage of the nets at the top of the slope.
5.Trim the large branches of the Pohutukawa trees ideally to ultimately leave the root ball but to maintain the trees in a living state.
6.Implement a program to continually remove new debris.
7.Restrict people use of space behind building to maintenance staff.
We do not see any added benefit to install a rock wall at the base of the slope other than to contain the rocks at the base of the nets after they have fallen. While in an ideal world such would be desirable, because of access limitations to build such a wall would be very difficult.
We would need to get specialised contractors with abseiling expertise to assess the cost of such work but for ball park costs believe the following might be an approximation:
·Remove debris allow $15,000
·Check and replace netting allow $30,000
·Improve anchorage allow $20,000
·Trim trees allow $30,000
Say $95,000
The report concluded by suggesting that all avenues to share the cost of the work should be explored. It was recommended that “we meet with Tonkin and Taylor Ltd and agree a minimum remedial solution”. Once this was agreed in principle, Babbage suggested they should then approach specialists in the field to obtain quotations for the work.
In May 2007 there were discussions between Mr Baho and Mr Heaven leading to Mr Heaven signing the ASP on 16 May 2007. It is unnecessary for the reasons already stated to discuss what was said between the two. It is common ground that no reference was made by Mr Baho or anyone on his behalf to the rockfall issue or the threatened litigation for nuisance.
Although Mr Baho was overseas between 30 October 2006 and 3 March 2007 there can be no doubt that he was aware of the rockfall issue at the time of his pre-contractual discussions with Mr Heaven. Ms Lethbridge accepted that Mr Baho had received the minutes of the Augustus BC meeting held on 7 November 2006 in which the nuisance claim was discussed; he was aware that Babbage had been instructed to provide advice on the issue; and he knew about the legal opinion obtained by the BC with regard to its prima facie liability in nuisance. We also consider it is a reasonable inference that he had received a copy of the Glaister Ennor letter of 6 October 2006 for the reasons given by the Judge.
There was some debate before us as to when Mr Heaven first became aware of the rockfall issue and, in particular, whether this was before the ASP was settled. The possession date under the ASP was 25 May 2007. The Judge found that Mr Baho went overseas on that date and did not return to New Zealand until 26 June 2007. There is documentary evidence to show that Mr Heaven had been given the key to the unit on 30 May 2007 although the purchase was not finally settled until after that date. The Judge found that the purchase was settled on or about 15 June 2007. However, there is documentary evidence to show that the cash portion of the purchase price amounting to $753,407.60 was not paid until 5 July 2007.
Although Mr Heaven had asserted in his initial claim that he did not learn of the rockfall issue until December 2007, the Judge found he was present at the Extraordinary General Meeting of the Augustus BC on 31 July 2007 at which that topic was discussed in detail.
Ms Lethbridge submitted it could be inferred that Mr Heaven had actual knowledge of the rockfall problems before settlement of the purchase took place. The Judge’s finding was that Mr Heaven had discovered the nature and extent of the rockfall claim, at the latest, when he attended the Extraordinary General Meeting on 31 July 2007.[2] It is possible that Mr Heaven became aware of the issue prior to settlement on 5 July 2007 although the Judge made no finding to that effect. He referred to an undated notice of the Extraordinary General Meeting that alerted unit owners of a proposed discussion about the rockfall issue.[3] The notice included a summary of legal issues and anticipated costs prepared by the Augustus BC’s solicitors along with a barrister’s opinion. The Judge went on to say that it was unclear on what day the notice of meeting was despatched to the unit owners. He noted that it must have been after 2 July 2007 as the barrister’s opinion of that date was included in the papers. The Judge also inferred that Mr Heaven must have received the notice of the meeting and the enclosures with the notice since he attended the meeting at which the rockfall issue was discussed.
[2]Western Park Village Ltd v Baho, above n 1,. at [69].
[3]At [34] and [35].
Our conclusion on this issue is that Mr Heaven had possession of the property from 30 May 2007 when he received the key but final settlement of the purchase did not take place until 5 July 2007. We agree with the Judge that Mr Heaven learned of the rockfall issue at the latest by the time of the Extraordinary General Meeting on 31 July 2007 and that he must have received the notice of the meeting prior to that time. However, there is insufficient evidence to show that he had received the notice of the meeting or had otherwise learned of the rockfall issue before settlement on 5 July 2007.
It is of some significance that, despite learning of the rockfall issue at the latest at the meeting on 31 July 2007, it was not until June 2008 that Mr Heaven advised the solicitors then representing Mr Baho that he had not been made aware of the nuisance claim. The Judge found that this issue was raised in correspondence in the context of the first instalment of monies due under the second mortgage. The Judge was satisfied that the late raising of the issue was “a cynical attempt by Mr Heaven to avoid payment of [monies] owing to Mr Baho”.[4] The Judge made adverse findings about Mr Heaven’s credibility. This finding was well-supported by, for example, Mr Heaven’s admission that he had lied in an email he sent to Mr Baho in an attempt to resolve the dispute between them.
[4]Western Park Village Ltd v Baho, above n 1, at [69](d).
On 26 October 2007, The Strand BC issued proceedings in the District Court against the Augustus BC, claiming injunctive relief to abate the nuisance or alternatively an unspecified sum for remedial costs.
Mr Heaven’s evidence was that he decided the most important thing to do after becoming aware of the rockfall issue was to mitigate any losses by attempting to negotiate a solution with The Strand BC. He said that throughout 2008 and 2009 he devoted his energies primarily to resolving issues regarding the nuisance claim. This included using labour provided by him to remove debris and arranging contractors to prune and later remove the pohutukawa tree canopy.
On 7 December 2010 a written settlement agreement was entered into between the respective body corporates. The recitals to the agreement recorded, amongst other things, that following various meetings between representatives of the parties it was agreed in November 2009 that the tree canopy on the Augustus Terrace property would be substantially reduced; that the geo-textile net was basically sound but needed to have slight repairs effected and then be maintained to an appropriate standard; there remained some debris to be removed albeit at lower levels than previously; and there needed to be agreement between the parties concerning ongoing removal of future debris, future repairs to the geo-textile net and ongoing maintenance of the tree canopy.
The substantive part of the settlement agreement recorded cost-sharing arrangements for initial remedial work and future care and maintenance. The percentage share of the work assumed by The Strand BC varied between 55 and 60 per cent depending on the items identified. The agreement excluded liability for major landslips although, as we note below, the engineers were in agreement that there was no significant risk of structural instability of the cliff face. The agreement noted that a discontinuance of the District Court proceedings had been filed.
At trial, Western Park produced a schedule of special damages although Mr Chesterman conceded before us that Western Park could not be entitled to damages on the basis of diminution of loss as well as the cost of the steps taken to abate the nuisance. The total of the costs claimed including legal and engineering fees came to $124,027. Western Park’s share of those expenses was $33,665.05. In later submissions provided at our request, Ms Lethbridge submitted that some of these expenses were not properly recoverable. Mr Chesterman disputed this and pointed to the trial evidence. On the view we take of the matter, the precise figures are not material.”
Was there a breach of warranty?
The Judge found there was no breach of warranty under cl 6.1(1)(d) of the ASP. He referred to a judgment of Associate Judge Bell in Kaitaia Timber Co Ltd
v Alternative Enterprises Ltd and other authorities mentioned in a case note by Professor DW McMorland.[5] We agree with the conclusion reached by the Judge that the Glaister Ennor letter of 6 October 2006 did not amount to a notice or demand or to a requisition or outstanding requirement in terms of cl 6.1(1)(d) of the ASP. As the Judge observed, the warranty clauses in the ASP need to be considered together. There is an obvious contrast between the more formal terminology used in cl 6.1(1)(d) and the much more widely drawn cl 7.1(6)(b). The former contemplates a formal requirement or demand that specified action be taken. The language used may be more apt to refer to some form of official requirement from a local body or other government agency although we would not rule out the possibility of, for example, a formal demand made by a non-government party.
[5]Kaitaia Timber Co Ltd v Alternative Enterprises Ltd (2012) 14 NZCPR 177 (HC) and Professor DW McMorland Kaitaia Timber Co Ltd v Alternative Enterprises Ltd (2013) 15 BCB 137.
The Glaister Ennor letter called for negotiations and threatened the issue of court proceedings but we do not view the letter as conveying the flavour of a formal requirement or demand that specific action to be taken in the sense used in cl 6.1(1)(d). In contrast, cl 7.1(6)(b) merely requires knowledge or notice of any fact which “might give rise to or indicate the possibility of” court proceedings being instituted by or against the body corporate. We regard the letter as falling more naturally within the cl 7.1(6)(b) warranty.
We have no doubt that the letter from Glaister Ennor was more than sufficient to amount to a fact which might give rise to or indicate the possibility of court proceedings being issued against the Augustus BC in terms of cl 7.1(6)(b). Although, as the Judge said, there were conciliatory elements to the Glaister Ennor letter in relation to the willingness of The Strand BC to enter into discussions, the letter was explicit in stating that if a resolution could not be promptly achieved, court proceedings for nuisance would be instituted. As we have previously found, Mr Baho knew of the existence of the letter but did not disclose the fact of its receipt to Mr Heaven before settlement. We are satisfied there was a breach of the warranty under cl 7.1(6)(b).
The Judge’s conclusions on loss
In view of his conclusions on liability, the Judge said it was not strictly necessary to consider the extent of any loss suffered by Western Park. But he did consider the issue nevertheless, even if briefly. He referred to three reports from a registered valuer, Mr Morley, who gave evidence on behalf of Western Park. In each case, Mr Morley valued the property at figures in excess of the price paid under the ASP of $1.225 million. In summary the dates and the amounts of the valuations of the subject unit were:
22 May 2007 $1.298 million
11 March 2008 $1.298 million
11 September 2009 $1.3 million
Mr Chesterman accepted that, at least by the date of the second valuation of 11 March 2008, Mr Heaven was aware of the extent of the rockfall issue and knew that the court proceedings had been issued by The Strand BC. We discuss below whether and, to what extent, Mr Morley was aware of those issues at the time of the 2008 and 2009 valuations.
The Judge recorded that on 13 April 2010, Mr Morley provided a letter to Mr Heaven’s solicitors in response to a request for a report on the reduction in value of the unit. Mr Morley stated in his letter that if he had access to the reports from Tonkin and Taylor and Babbage and the opinion of the lawyer representing the Augustus BC at the time the May 2007 valuation was prepared, he would have recommended that Mr Heaven should not purchase the property or, if he had wished to proceed, his firm would have suggested that the purchase price and the valuation be discounted by at least $300,000 “to take into account the work that is potentially needed to repair the bank and the ongoing ‘stigma’ attached to the property due to the instability of the bank”. The letter concluded:
We are therefore of the opinion that compensation from the previous owner of your client’s property in the order of $300,000 would be required to fairly reflect the events that have occurred, the previous owner’s knowledge of the problems with the site when he sold the property in 2007 and the ongoing costs to properly remedy and contain the problem.
The Judge went on to conclude:
[75] Other valuation evidence, given on a reconstructed basis by Messrs Cheyne and Taylor, tended to support the valuations provided on a contemporary basis by Mr Morley, other than the report to Western Park’s solicitors of 13 April 2010. I am satisfied that their valuation evidence should be accepted. That being so, no diminution in value of Unit D can be established as having flowed from the rock-fall issue, even if a false representation had been made.
Submissions on loss
Mr Chesterman challenged the Judge’s findings on the loss issue, submitting that the proper measure of damages was the difference between the price paid and the true valuation of the property if the existence of the Glaister Ennor letter and the engineering reports from Tonkin and Taylor and Babbage had been disclosed to Mr Heaven at the time of purchase. As Mr Chesterman put it, what would a reasonable hypothetical purchaser have paid at that date on the basis of the information then known but not disclosed? Mr Chesterman accepted this should be assessed on a willing seller/willing buyer basis.
While acknowledging that Western Park had an obligation to take reasonable steps to mitigate its loss, Mr Chesterman strongly submitted that the assessment of loss should be confined to what was known at the date of the ASP and that it was not permissible to take into account subsequent events.
To the contrary, Ms Lethbridge pointed to Mr Heaven’s acceptance in evidence that the actual cost incurred by Western Park as a share of the settlement with The Strand BC was only a tiny fraction of the maximum cost estimated by Babbage in the report of 12 March 2007. It was, she submitted, unrealistic not to take evidence of the actual costs incurred into account when assessing the loss.
Analysis of the valuation evidence
Since Mr Morley did not mention the rockfall issue in any of the three valuations referred to at [42] above, it is necessary to discuss in more detail the valuation evidence, the extent of Mr Morley’s knowledge of the rockfall issue at relevant times and the steps taken by Mr Heaven after he purchased the unit and became aware of the issue.
It was unnecessary for the Judge to make any findings on these topics but we have reviewed the evidence ourselves. There is no evidence that Mr Morley knew of the rockfall issue at the time of his valuation of $1.298 million in his report of 22 May 2007 nor when he confirmed on 11 March 2008 that the property had held its value at that level. But by the time of the Augustus BC Extraordinary General Meeting held on 26 May 2009 (which Mr Morley chaired) he accepted he knew about the nuisance claim. He said he did not attach much significance to this because (as the minutes of that meeting confirm), the Augustus BC solicitor said at the meeting that a practical solution had been agreed. The solicitor reported that the court case was due for review on 15 September when it was expected costings would be available for the removal of trees on the cliff top. The minutes also record Mr Heaven’s expectation that Council consent to remove the trees would be given. The netting on the bank would be repaired once the trees were removed. Mr Heaven believed the total cost would be in the region of $30,000 to $40,000. The division of those costs between the two bodies corporate would be agreed between their respective lawyers.
In consequence, Mr Morley did not consider it was necessary to include reference to the rockfall issue or the associated nuisance claim in his valuation of 11 September 2009. He added that he did not see the engineers’ reports from Tonkin and Taylor and Babbage until early 2010. When he became aware of these reports, he expressed the view that an appropriate discount on the purchase price for the unit should have been $300,000. He derived this figure from a 25 per cent share of the Babbage upper estimate of $1 million for repair costs. This gave a figure of $250,000 to which he added a further $50,000 for unspecified expenses he considered would have been incurred.
Although the Judge formed a very negative view of Mr Heaven’s credibility he made no finding in relation to Mr Morley’s credibility. In the absence of any such finding, we consider Mr Morley’s evidence that he did not become aware of the engineers’ reports until early 2010 must be accepted. Nevertheless, the fact that he did not consider any adjustment was needed to his September 2009 valuation of $1.3 million tended to support the Judge’s conclusion that, at least at that time, the existence of a nuisance claim had not resulted in any diminution of the value of the property.
As earlier noted, the Judge concluded that the evidence of two other registered valuers (Mr Cheyne and Mr Taylor), tended to support the three valuations prepared by Mr Morley. The Judge was satisfied that the valuation evidence of the additional valuers should be accepted. His conclusion in that respect supported his finding that there was no diminution in value of the subject unit in consequence of the rockfall issue. We now summarise the evidence of Mr Cheyne and Mr Taylor.
The evidence of Mr Cheyne
Mr Cheyne was called by Western Park to assess the extent of any loss occasioned by the rockfall issue. He did not undertake a valuation of the property. Mr Cheyne’s view was that a purchaser of the unit in May 2007 would wish to identify the proportion of any costs that he or she would be responsible for arising from the need for remedial work on the rockface and any consequential legal issues which might arise. He noted that the minimum cost of $95,000 referred to in the Babbage report was merely to return the cliff to a degree of safety but it was not a complete solution.
In estimating the reduction in value arising from the rockfall issue, Mr Cheyne adopted the estimated cost of $1 million referred to in the Babbage report and increased that by 10 per cent to $1.1 million to allow for legal fees and any cost escalation. Since Unit D’s share of responsibility was 27.24 per cent, Mr Cheyne arrived at a rounded figure of $300,000. In reaching his conclusions, he took no account of the actual costs incurred to address the rockfall issue.
In cross-examination he accepted that, according to the reports from the engineers, there was no issue about stability of the cliff face itself. Rather, the focus of the threatened court proceedings was on the removal of debris from The Strand property, repairing and maintaining the geo-textile net and addressing the risk posed by the pohutukawa trees. Mr Cheyne accepted that any damages claim in the District Court could not exceed $200,000. Nevertheless, he considered that a prospective purchaser of the property in May 2007 would have wanted a longer term solution. The figure of $95,000 referred to in the Babbage report “[might] make the litigation go away but it wouldn’t fix the problem”.
The evidence of Mr Taylor
Mr Taylor was called to give evidence on behalf of Mr Baho. He had not valued the unit on a contemporary basis but undertook a retrospective valuation as at May 2007. Based on comparable sales at the time, Mr Taylor’s view was that the unit had a market value at May 2007 of $1.1 million, leaving aside any concerns about the rockfall issue.
Mr Taylor challenged the evidence of Mr Morley and Mr Cheyne to the effect that the rockfall issue warranted a reduction in value of the property of some $300,000. Mr Taylor took into account that the rockfall issue had been ongoing since at least 2003; it was not suggested that the land suffered from instability issues; and there was a low cost solution to the rockfall issue which could be viewed as a maintenance issue of minor importance.
Mr Taylor was critical of the approach adopted by Mr Morley and Mr Cheyne and, in particular, the adoption as a starting point of the $1 million cost figure mentioned in the Babbage report. He regarded that figure as the top end of a range and noted that the Babbage report was preliminary in nature. Mr Taylor also considered that the likelihood of a resolution on a cost-sharing basis with The Strand BC would also be taken into account by a hypothetical purchaser. On that footing, even if Mr Cheyne’s approach were to be adopted (which he did not accept), Mr Taylor considered the adjustment would be $135,000.
In cross-examination, Mr Taylor accepted that the correspondence from Glaister Ennor and the threat of legal proceedings would be taken seriously by a prospective purchaser. He accepted that this might reduce the saleability of the unit but said this would be offset by the attractive views available from the unit and its city location. A purchaser in this situation would make further inquiry to establish the extent of any potential liability for damages.
Assessment of damages for breach of warranty – principles
It is uncontroversial that damages for breach of contract are to be assessed on the basis that the plaintiff is entitled, as far as money can do it, to be placed in the same position as if the contract had been performed.[6]
[6]Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 (Exch) at 365; Stirling v Poulgrain [1980] 2 NZLR 402 (CA) at 419; McElroy Milne v Commercial Electronics Ltd [1993] 1 NZLR 39 (CA); and Marlborough District Council v Altimarloch Joint Venture Ltd [2012] NZSC 11, [2012] 2 NZLR 726 at [23].
The assessment of damages is a matter of fact. In cases involving breach of warranty, issues may arise as to the measure of loss. In particular, is the loss to be assessed by the extent of any resulting diminution of value of the property contracted for or by the cost of restoring the property to conform with the contract as represented or warranted? In the present case where there has been a failure to disclose threatened litigation and a potential liability for nuisance, the first approach requires an assessment of the difference between the price paid for the unit and its true value if the existence of the threatened litigation had been disclosed. The second approach would involve an award based on the cost of abating the nuisance and settling the litigation.
The diminution in value has been said to be the usual approach but this is treated as a guide rather than an absolute rule. A “cost of cure” approach may be adopted where diminution of value would not deliver an appropriate measure of damages.[7]
[7]These issues were discussed in some detail in Marlborough District Council v Altimarloch Joint Venture Ltd, above n 6, per Elias CJ at [24]–[27]; per Blanchard J at [66]; Tipping J at [156]–[166]; and McGrath J at [186]–[191]. Although this aspect of the case discussed damages for misrepresentation under s 6 of the Contractual Remedies Act 1979, the principles discussed are relevant here.
As the Chief Justice discussed in the Marlborough District Council case, much will depend on the nature of the breach and the subject matter of the contract. And, as she also pointed out, there may be cases where “achieving substitute performance is necessary mitigation of loss or itself establishes the value lost”.[8]
[8]Marlborough District Council v Altimarloch Joint Venture Ltd, above n 6, at [27].
The assessment of loss is generally undertaken as at the date of the breach but this is not an invariable rule and the interests of justice may require the assessment of loss at a later date.[9] There is authority for the proposition that subsequent (hindsight) evidence may be considered when assessing the weight to be attached to a valuation at the date of breach.[10] And it is necessary in any event to take into account the cost of cure when choosing between alternative remedies.
[9]Stirling v Poulgrain, above n 6, at 424; Johnson v Agnew [1980] AC 367 at 400–401 (HL); and John Burrows, Jeremy Finn and Stephen Todd Law of Contract in New Zealand (4th ed, LexisNexis, Wellington, 2012) at [21.2.2](c).
[10]Wood v Wood (1985) 1 FRNZ 576 (HC) at 584; Alan Hyam The Law Affecting Valuation of Land in Australia (4th ed, Federation Press, Sydney, 2009) at 131–134 cited in Marriott v Attorney‑General [2011] 1 NZLR 354 at [23].
In the end, as Tipping J put it in Marlborough District Council:[11]
The key purpose when assessing damages is to reflect the loss actually and reasonably incurred by the plaintiff.
Conclusions on damages for breach of warranty
[11]Marlborough District Council v Altimarloch Joint Venture Ltd, above n 6, at [156].
We have difficulty in accepting the Judge’s conclusion that there was no evidence of diminution in the value of the property purchased by Western Park. First, we do not consider that substantial weight can be given to Mr Morley’s valuations showing the purchase price of the property was less than its assessed value. At the time Mr Morley made his first two valuations in 2007 and 2008, he was not aware of the rockfall issue and threatened proceedings. By the time of his 2009 valuation he was aware of the rockfall issue but explained that he understood it was well on the way to being resolved and that he did not consider it to be a major issue. It was not until he received the engineers’ reports in early 2010 that he appreciated it was a much more serious issue.
Second, the Judge was in error in saying that the evidence of Mr Taylor and Mr Cheyne supported the conclusion there was no diminution in value. That was true of Mr Taylor although even he made some concessions on the effects that disclosure of the issue might have had on the saleability of the property. But Mr Cheyne’s evidence was that a prospective purchaser would have sought a discount of $300,000 if the required disclosure had been made. In that respect, Mr Cheyne’s evidence supported the view given by Mr Morley in his evidence at trial.
Third, we accept Mr Chesterman’s submission that the correct approach in the circumstance of this case is to assess the loss on a diminution of value basis. The warranty under cl 7.1(6)(b) related to matters the disclosure of which would be expected to have material effects on the price a prospective purchaser would be willing to pay. The loss is to be identified by assessing what a hypothetical purchaser would have been prepared to pay for the property if the existence of the rockfall issue and the threatened litigation had been disclosed. This is to be approached on the orthodox valuation basis of a willing but not anxious purchaser and a willing but not anxious vendor.[12] The assessment requires consideration of the information reasonably available at the time of purchase. If the true value of the property assessed on that basis is less than the price paid, the difference is, at least prima facie, a proper measure of loss.
[12]Boat Park Ltd v Hutchinson [1999] 2 NZLR 74 (CA) at 83–84; Sayes v Tamatekapua [2012] NZCA 524, (2012) 25 NZTC 20,156 citing Holt v Holt [1990] 3 NZLR 401 (PC) at 402 and Alan Hyam The Law Affecting Valuation of Land in Australia, above n 10, at 53–55.
Approaching the evidence afresh, we consider a hypothetical prospective purchaser would have been properly concerned if the correspondence from Glaister Ennor in 2006 had been disclosed. Some purchasers may have decided to abandon any thought of proceeding with the purchase but a more experienced buyer would have been likely to investigate further if alerted to the rockfall issue in order to ascertain the extent and nature of potential liability and, if appropriate, to negotiate a reduced price.
An obvious source of inquiry would have been the Augustus BC. An inquiry to the secretary would have revealed at least the Glaister Ennor letters of 6 October 2006 and 7 December 2006, the engineers’ reports from Tonkin and Taylor and Babbage, the minutes of the Augustus BC meeting on 7 November 2006 and possibly earlier ones, and the advice from the Augustus BC’s solicitors on 15 December 2006 that the body corporate was prima facie liable for nuisance over the rockfall issue.
The key facts the prospective purchaser would have learned were:
·There was an ongoing dispute with The Strand BC over the issue.
·Legal proceedings in the District Court were threatened but had not then been issued.
·There was a prima facie liability on the Augustus BC to abate the nuisance.
·The Strand BC had indicated a willingness to negotiate a solution with the assistance of professional advice from engineers.
·Engineers’ reports had been obtained that indicated there was no evidence of any major structural instability of the cliff face but there was an issue with repairing and maintaining the geo-textile netting to contain rockfall, clearing debris, and addressing the risks proposed by the pohutukawa trees at the top of the cliff.
·Preliminary “ballpark” cost estimates from Babbage ranged from $95,000 to $1 million depending on the solution agreed upon and the extent to which the agreed work could be regarded as a permanent solution.
·There was a prospect of sharing the costs of the work with The Strand BC given the Babbage view that the location of its building was a material cause.
·The proportion of any costs payable by Unit D towards any share borne by the Augustus BC was 27.24 per cent.
·The maximum amount that could be claimed for damages in the District Court was $200,000.
We are satisfied that it is reasonable to expect that the hypothetical purchaser would have obtained a significant discount on the price if the facts we have outlined had been disclosed. But, in assessing the extent of the loss, we do not consider it would have been reasonable to adopt costs at the top end of the range of preliminary cost estimates identified in the Babbage report. A settlement may have been negotiated for the lower estimate of $95,000 but, at worst, the cost to the Augustus BC if it had done nothing could not have exceeded $200,000, assuming that, as indicated by Glaister Ennor, proceedings would be issued in the District Court (as ultimately occurred). The 27.24 per cent share of $200,000 attributable to Unit D of that sum would have amounted to $54,480.
Where the court is satisfied there has been some real damage due to breach of warranty, the court will do the best it can to arrive at an appropriate figure on the evidence, even if the assessment may be speculative to a degree or the evidence is exiguous.[13] Given the range of factors we have identified in [72] above, we find that Western Park is entitled to damages for breach of warranty against Mr Baho of a (rounded) sum of $50,000 being the difference between the price he contracted to pay for the unit and its value if Mr Baho had not breached the warranty in cl 7.1(6)(b) of the ASP.
[13]See Walsh v Kerr [1989] 1 NZLR 490 (CA) at 494 per Cooke P citing Tai Hing Cotton Mill Ltd v Kamsing Knitting Factory [1979] AC 91 (PC).
As it happens, this sum does not differ significantly from Western Park’s actual share of the total costs which amounted to $33,665.05. We acknowledge Ms Lethbridge’s submission that Western Park and Mr Heaven had a duty to mitigate the loss, a point accepted by Mr Chesterman. However, approaching the matter in the round, we consider justice will be served by an award of $50,000 assessed on a diminution of value basis.
Counter-claim issues
The Judge found that Mr Baho was entitled to judgment against the appellants for the balance due under the loan Mr Baho provided. Judgment was entered against the appellants for NZ$301,698.87 together with interest thereon at 19 per cent per annum from 21 December 2011 until the date of judgment.[14]
[14]The date of 21 December 2011 was the date of a notice issued under the Property Law Act 2007 by Mr Baho to Western Park.
The Judge was satisfied that the terms of the loan agreement required repayment to Mr Baho in US dollars. He agreed with a submission made on Mr Baho’s behalf that the amount due expressed in US dollars should be converted to NZ dollars on the basis of the rate of exchange prevailing at the date the payment was due as claimed by Mr Baho in the notice issued on his behalf under the Property Law Act 2007.
In his written submissions, Mr Chesterman challenged the Judge’s findings on several grounds but, in oral submissions, focussed mainly on the exchange rate. He submitted that judgment should have been given in US dollars and that the appellants had been disadvantaged by the application of the lower exchange rates applicable at the date payment was due. This in turn had affected the validity of the Property Law Act notice and the calculation of the amount due including interest.
The starting point is the terms of the loan as expressed in the ASP. Clause 15B of the ASP relevantly provided:
B As to the balance by the Purchaser executing a mortgage in favour of the Vendor on the following terms:
i
Principal Sum: per NZ$1.00
$US219,000.00, being the sum of $NZ$300,000.00 at an exchange rate of $US0.73 for
i
Term:
2 Years from the Possession Date
ii
Interest Rate:
Nil
iii
Penalty Interest Rate:
19% per annum
iv
Principal Repayments:
$US91,250.00 on the 1st anniversary of the Possession Date; and
$US127,750.00 on the 2nd anniversary of the Possession Date; …
The possession date stipulated in the ASP was 25 May 2007 so that the principal repayments were due on 25 May 2008 and 25 May 2009. The fact that final settlement was not actually completed until after that date is immaterial.
We agree with the Judge that Mr Baho was entitled to US$127,750 on 25 May 2009. Mr Baho could have sought judgment in US or NZ currency. He elected to seek judgment in NZ dollars with the exchange rate fixed at the rate prevailing at the date the payment was due on 25 May 2009. On the footing that Mr Baho was entitled to be put back in the position he would have been in if the payment had been made on due date, we are satisfied that the approach adopted by the Judge was correct. This was the approach adopted by Mr Baho in the Property Law Act notice relying on an exchange rate of 0.626 as at 25 May 2009. We are satisfied that the exchange rate of 0.73 identified in the loan agreement was not intended to control the exchange rate as at the date the repayments were due.
Equitable set-off
We did not understand Ms Lethbridge to dispute that, in the event of the claim for breach of warranty succeeding, any damages awarded should be set off against the amount due by the appellants to Mr Baho under the loan agreement.[15] We are satisfied the relevant date for set-off purposes is the date the repayment was due under the loan. Accordingly, the respondent is entitled to judgment against the appellants determined on the following basis.
Amount due to Mr Baho in repayment of the loan $204,073.48
Less damages due for breach of warranty to Western Park $50,000.00
$154,073.48
Result
[15]Grant v NZMC Ltd [1989] 1 NZLR 8 (CA) at 12–13 and Property Ventures Investments Ltd v Regalwood Holdings Ltd [2010] NZSC 47; [2010] 3 NZLR 231 at [68].
The appeal is allowed and the judgment of the High Court is set aside. The respondent is entitled to judgment against the appellants for $154,073.48 together with interest thereon at 19 per cent per annum from 25 May 2009 to the date of judgment.
The appellants have been successful in part. They are entitled to 80 per cent of the costs of the appeal fixed for a standard appeal on a Band A basis with usual disbursements.
The costs order made in the High Court is set aside. In the absence of agreement between the parties, the High Court is to fix the costs payable in that Court in consequence of this judgment.
Solicitors:
Dyer Whitechurch, Auckland for Appellants
Grove Darlow & Partners, Auckland for Respondent
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