Yu v T & P Developments Ltd
[2002] NZCA 280
•4 September 2002
| IN THE COURT OF APPEAL OF NEW ZEALAND | CA112/01 |
| BETWEEN | SAN KEUNG YU AND KIT FUN KAREN YU |
| Appellants |
| AND | T & P DEVELOPMENTS LIMITED |
| First Respondent |
| AND | PATRICK CHI KING HUNG AND THERESA HUNG |
| Second Respondent |
| Hearing: | 26 March 2002 |
| Coram: | Elias CJ |
| Appearances: | D G Smith and M C Josephson for Appellants D K Wilson for Respondents |
| Judgment: | 4 September 2002 |
| JUDGMENT OF THE COURT DELIVERED BY ELIAS CJ |
Table of Contents Paragraph Number Background 1 The decision in the High Court 11 The appeal 35 Flashings to windows 45 Cancellation 51 Misrepresentation 67 Damages 71 Conclusion 72
Background
The appellants, San Keung Yu and Kit Fun Karen Yu, are father and daughter. In 1997 they struck up a friendship with the second respondents, Patrick Chi King Hung and Theresa Hung who are husband and wife. The two families met when Mr Yu and his daughter bought a house built by Mr Hung. Mr Yu knew that Mr Hung had been a merchant banker in Hong Kong before coming to New Zealand but that since his arrival in New Zealand he had developed residential properties, including the house first purchased by Mr Yu. In September 1997 Mr Yu asked Mr Hung to design and build him a house on a new property. When Mr Hung agreed, a contract was entered into between the appellants and the first respondent, T & P Developments Limited, a company through which Mr Hung’s development projects were undertaken. Mr Yu and his daughter expected the house to be substantial and imposing.
The main contract is contained in a number of documents. The most important is a letter from T & P Developments Limited (T & P) confirming “the construction of a new luxury manor”. The terms and conditions contained in the letter recorded an understanding that “a high quality house of approximately 10,000 sq. ft including an indoor heated swimming pool is to be erected on the site”. The construction price was to be “based on NZ$150.00 per sq. ft, including architectural, engineering and Manukau City Council’s fees”. The letter provided for progress payments. Attached to it were general specifications as to the materials to be used and the features required for the house. Separate contracts were entered into between the parties in respect of the swimming pool and airconditioning. Additions and variations were also the subject of further agreement.
The personal friendship between the parties came under strain and they fell out for reasons unconnected with the contractual arrangements between them. That falling out seems to have embittered the dispute which is the subject of these proceedings.
When the house was substantially completed, the defendants’ solicitors wrote on 12 March 1999 cancelling the contract. The background can be shortly described.
The letter of cancellation had been preceded by correspondence in January from the solicitors for the Yu family trust about cracking to concrete floors on the property and a complaint that “no periphery sealants” had been applied to the aluminium joinery. The lawyers proposed that the Yu family would engage a contractor to rectify the defects to the concrete floors and that the costs of the work, including the costs of reports commissioned on behalf of Mr Yu, would be “to your account and, if appropriate will be deducted from any moneys otherwise payable to you under the contract”. Notice was also given that $20,000 would be retained from the contract price for a period of 2 years “as a maintenance retention in respect of any future remedial work required as a result of ongoing problems with the concrete”. T& P, by its lawyers responded agreeing to the cost of the remedial works ($4,220) being deducted as well as “reasonable engineer’s fees”, while not accepting any poor workmanship or fault on its part. The solicitors’ letter rejected the suggestion of retentions of $20,000. And it denied any liability in respect of periphery sealants:
Regarding this point we are instructed that provision for such sealants is included in the contract work to be carried out by our client. This work is still to be completed and cannot be the subject of any claim by your client.
Settlement of this dispute appears to have foundered on the demands by the Yu trustees that T & P acknowledge fault and agree to the $20,000 retention. The correspondence indicates that T & P took the view that the cracks were not of structural concern and were inevitable in concrete slabs of the type used. The concrete repairs were carried out by the consultants engaged by the Yu family trust. The consultants reported with further recommendations for remedial work to particle board flooring. That was followed by complaints about wood panelling in the study, and issues as to whether T & P intended to tile the kitchenette (in respect of which the specifications did not prescribe tiles).
On 12 March, new solicitors for the Yu family trust wrote cancelling the contract:
We now act for the Yu Family Trust. Our client has referred to us the correspondence that has been exchanged between your solicitor and our client’s former solicitor. . . To date you have failed to adequately remedy the breaches of contract that have been brought to your attention by our client. Additionally there is other work on the property that has not been completed in a proper, thorough, and workmanlike manner or in compliance with the agreed specifications. Our client therefore cancels its contract with you as at today’s date. You are not longer entitled to enter on the property and our client has taken steps to secure the property accordingly. If you, your employees, contractors or agents attempt from today onwards to enter on to the property, a trespass notice will be issued.
As a consequence of this cancellation you are required to deliver up to our offices on Monday, the four crystal wall lamps that were to be installed on the wall of the gallery on the first floor of the property. You are no longer entitled to possession of these lamps. Our client will now be taking its own steps to remedy the breaches and complete construction and will then be considering the legal remedies available to it for recovery of its loss.
The solicitors for T & P Development responded that the purported termination of the contract was invalid. It gave notice that it would be treated by T & P as repudiation in breach of contract. The letter referred to work in hand, and suggested arbitration to determine matters in dispute. That course was not accepted by the Yu family trust.
At the time of cancellation $1,473,910 had been paid by the appellants to T & P. When it was denied access to the site by Mr Yu, T & P issued proceedings claiming the difference between the contract price of $1,488,900 (GST inclusive) and variations and extras amounting to $252,614.88, less progress payments made, together with the sum owing on additional contracts for completion of the swimming pool, air conditioning and carpet underheating. The total amount claimed as unpaid was $449,847.56.
In response to that claim, the appellants denied liability and counter-claimed for $220,694.59 for breach of contract and under s9 of the Fair Trading Act 1986. While allegations of deceit against Mr Hung were abandoned before trial, claims for misrepresentation as to expertise were advanced. In addition, the appellants maintained that the quality of the building undertaken by T & P and its contractors was in breach of implied terms as to the quality of the workmanship. Such terms as to quality were said to be derived from the requirement to build a “luxury manor” and a “high quality home”, as well as from an implied term of the contract that the building be undertaken in a workmanlike and competent manner.
The decision in the High Court
The claim and counter-claim were heard by Glazebrook J in a hearing which extended from 6 to 20 November 2000. Substantial evidence relating to the quality of the workmanship, including evidence from experts called for both parties, was heard. The Judge noted a total conflict in the evidence of the parties in some respects. The background was complicated by the soured friendship between Mr and Mrs Hung and Mr Yu and his daughter.
The main issues at trial were:
whether the purported cancellation was valid;
whether Mr and Mrs Hung had misrepresented their ability to complete the project to the standard required by the contract;
whether the workmanship was to the standard required by the contract ;
quantification of the amount owing for additions and variations; and
quantification of damages (requiring credit for work not completed by the plaintiff because of the purported cancellation, and assessment of deductions for rectification of the defects in the workmanship and quality of finish).
The Yu family argued that it was entitled to cancel the contract under s7 of the Contractual Remedies Act 1979 because:
T & P was at the time of cancellation in breach of an essential stipulation that the house would be finished in a proper, thorough and workmanlike manner.
At the time of cancellation it was clear that T & P would not or was incapable of remedying defects which amounted to a breach of the implied essential term that the house would be finished in a proper, thorough, and workmanlike manner.
T & P’s breaches substantially reduced the benefit of the contract to the defendants.
The Yu family had been induced to enter into the contract by a misrepresentation by the directors of T & P (the second respondents) “that they had all the skill and knowledge necessary to enable a luxury manor to be erected”.
These respective bases for defending their cancellation were pleaded by the appellants by amendment made on 15 November 2000, during the course of the hearing, as particulars to a general denial of the claim and assertion that the actions of the Yu family in cancelling were “entirely legal and justifiable”. As the late amendment suggests, there seems to have been less clarity than the Judge was entitled to expect in the analysis of the claim. The Judge was criticised on the appeal for making detailed findings of fact relevant to breach of the claimed stipulation and to the claimed misrepresentation in the later part of her judgment, when assessing damages, rather than when considering those grounds of cancellation. But the approach seems to have been prompted by the manner in which the case was presented.
It was sensible for the Judge to deal with the large number of deficiencies said in aggregate to amount to breach of the stipulation or as evidence in support of the misrepresentation in the part of the judgment quantifying damages. Her overall conclusions that the deficiencies found were insufficient to justify cancellation, in application of s7(4)(b) and did not support the allegations of misrepresentation, were necessarily informed by the detailed analysis of the matters required to be rectified. Given the extent of the criticisms made of the finish and construction, the Judge was obliged to go through item by item.
The Judge first rejected any suggestion that T & P had repudiated the contract by refusing to remedy the defects identified in the correspondence from the Yu family solicitors. On the basis of the exchange of letters she was of the view that there was nothing to suggest that T & P was making it clear that it did not intend to complete or perform its obligations under the contract, such as would justify cancellation under s7(2) of the Contractual Remedies Act. No timeframes for answer had been set in the correspondence. It was reasonable for T & P to obtain an expert to advise it on the remedial work required to the flooring. The short period of delay in replying to the correspondence (9 days in respect of the flooring and 4 days in respect of other claimed deficiencies) did not support a conclusion that T & P was refusing to remedy any defects established. The Judge’s conclusion that T & P had not repudiated is not the subject of challenge on appeal. Indeed, the appellants maintain that the Judge misunderstood their argument and that they had not relied upon repudiation.
It was accepted by T & P that it was an implied term of the contract that the house be finished in a “proper thorough and workmanlike manner and in accordance with the specifications”. The Yu family contended that the breach of this term entitled them to cancel the contract on the alternative bases that:
There had been a total failure of consideration because the breaches of the term as to workmanship meant that they did not receive a “luxury manor”.
The term was an essential one to the parties and its breach entitled them to cancel the contract under ss7(3)(a) and 7(4)(a) of the Contractual Remedies Act.
The breaches of the stipulation as to workmanship meant that the benefit of the contract to them was substantially reduced, justifying cancellation under ss7(3)(a) and 7(4)(b) of the Contractual Remedies Act.
The Judge rejected the contention of the defendants that there had been a total failure of consideration because Mr Hung and his company had failed to deliver the “luxury manor” contracted for. She considered that the contract was to provide the house defined in the plans and specifications. The term “luxury” in that context was meaningless. The house was built in accordance with the agreed plans and specifications.
It was held by Glazebrook J that the implied term as to workmanship was not one the parties had agreed was essential. There was no such express agreement. Essentiality would not have been agreed to by T & P. It would have made no commercial sense:
Defects would of course be required to be remedied. They would not, however, justify cancellation unless they were serious.
Even if there had been breaches of the implied term as to workmanship, therefore, they would not have provided a justification for cancellation under s7(4)(a) for breach of an essential stipulation.
The Judge then considered whether the deficiencies identified in the correspondence considered separately or in the aggregate amounted to breaches of the stipulation of workmanship justifying cancellation. Under s7(4)(b) substantial reduction in the benefit to the cancelling party is required before breach of such a stipulation permits cancellation, rather than the remedy of damages alone.
Glazebrook J considered that no substantial reduction in benefit justifying cancellation had been established in respect of the matters of complaint identified in the correspondence which preceded cancellation. There was no structural problem with the concrete and the Yu family, having expressed dissatisfaction with the finish, had proceeded with the contract on an agreed basis as to rectification. It was acknowledged that sealants were still to be applied at the time of purported cancellation but T & P had indicated it would be applying them before completion. The Judge found that the complaints about the floor and panelling were not substantial and were capable of rectification. She went on to consider whether the reference in the letter of cancellation to unspecified “other work”, not done in a workmanlike manner, justified cancellation.
There was an immediate problem in identifying the defects complained about. The defendants sought to rely on the Joyce report, obtained after cancellation. The judgment records a concession on behalf of the defendants that cancellation cannot be subsequently justified on the basis of breaches discovered later. This was in apparent acceptance of the view taken in Mercurius Ventures Ltd v Waitakere City Council [1996] 2 NZLR 495. Glazebrook J therefore proceeded on the basis that it was not possible to rely on the Joyce report for the grounds of cancellation “to the extent that it raises matters not known at the time of the cancellation”. And she rejected the defence reliance upon the report as evidence to back up the statement in the letter of cancellation that other work had not been completed in a proper fashion on the basis that “this would clearly be bringing in the Joyce Report by the back door”:
Apart from Mr Yu’s evidence and his diary there is no way of knowing what matters that the defendants had in mind and thus which parts of the Joyce Report merely confirm the defendants’ view at the time and which introduce new grounds.
On this basis, the Judge considered Mr Yu’s evidence as to his concerns at the time. They were substantiated in part by his diary entries. The Judge found that:
All of these items were already dealt with, were minor, or were capable of rectification, and thus cannot provide extra justification for the cancellation.
While this conclusion was reached independently of the additional items of completion or deficiency later identified in the Joyce report, Glazebrook J expressed the view that, even if the Joyce report could be relied upon,
[61] . . . it would be doubtful if it would provide grounds for cancellation. It is true that there were clearly a large number of items that needed to be rectified.
[62] There were also some major concerns with safety with regard to the electrical work. However, these problems were with safety during the installation rather than safety of the ultimate electrical installation. Most of the faults identified were on the whole easily rectifiable.
Glazebrook J did not accept the cost of rectification put forward on behalf of the Yu family. Much of the work was completion work, which T & P was prevented from doing or requiring its contractors to do at their expense because of the purported cancellation. Some items initially claimed were later agreed to be unnecessary, others were disputed (and resolved in the judgment in determining the amount owing to the plaintiff by way of damages). The largest item in the list of defects was for the provision of window flashings. The Judge commented in respect of that claim:
There is, however, evidence that sealants are normal practice in the industry and disagreement from the plaintiff’s expert as to the extent of change to flashings that is needed.
Much of the other work was described by the Judge as “relatively minor”, while cumulatively costly.
The Judge concluded that the deficiencies identified were insufficient to justify cancellation:
[67] The most important point overall is that, apart from a very few of the defects, all can be remedied. The Joyce Report has not been able to point to any aspect that raises a structural concern with any of the defects (although of course it can never be certain that such defects are not latent). As such the breaches (either in themselves or in aggregate) are unlikely to be seen as substantially reducing the benefit of the contract or making it substantially different as required by s7(4)(b).
Glazebrook J rejected the claimed misrepresentation as to Mr Hung’s skill and experience. Because of her view, she did not resolve the objection that no misrepresentation had been relied upon as a ground of cancellation at the time (and indeed had been pleaded only by amendment during the course of trial). The Judge was not prepared to infer from the number of defects identified as at the date of cancellation that T & P and Mr Hung had insufficient experience and skill to carry out the project. The contractors employed were competent. The defects "were on the whole capable of rectification". Many were minor, and at the time of cancellation the project was incomplete. Although, on the basis of the history of the air conditioning installation and some of the problems with under-floor heating, Mr Hung “did not have the experience necessary to deal with the co-ordination of the type of services that were required in the house", those items were not in the original specifications and therefore not the subject of any representation at the time the contract was entered into.
More fundamentally, on the facts, the Judge held that Mr Hung’s actual experience was well known to Mr Yu and that there was no misrepresentation of his or T & P’s experience. In addition, M Yu was himself an engineer and had been involved in property:
In my view any representation must be read as being qualified by a reference to the actual experience of the plaintiff which was well known to the defendants. It must also be assessed in the light of Mr. Yu's background and experience. This gave him the ability to assess that representation as to skill. The representation can thus be assumed to be a representation that the plaintiff was able to manage a building project similar to the projects already managed and in terms of his experience with those projects. If this is done it is clear the defendants cannot succeed on this point.
For these reasons, all bases upon which the defendants sought to rely in cancelling the contract were rejected in the High Court. That left the defendants in breach of contract and required the Judge to assess the damages payable to the plaintiff on its claim.
Glazebrook J considered that the plaintiff’s losses consequential upon the wrongful cancellation should be assessed at the builder’s net profit, arrived at after deducting the cost to it of completing the project from the contract price. She assessed the amount owing to the plaintiff under the contracts and in respect of additions and variations, but net of completion costs not incurred by the plaintiff because of the purported cancellation, at $207,983.06. That conclusion followed determinations of fact on the conflicting contentions on behalf of the parties as to whether items were or were not within in the contract price.
The Judge found deficiencies in respect of finishing and workmanship which would have been to the cost of T & P to remedy before completion. Her conclusions followed an exhaustive review of the facts and the expert evidence given for both parties. Some sixty-nine defects were identified in a report by Mr Morrison, the expert for the Yu family and the author of the “Joyce report”. Some were trifling, requiring expenditure of as little as $20 to rectify. The full costs of remedying the defects was put by the Joyce report at $268,449.70. T & P Developments accepted deductions were appropriate in the case of a number of the defects, although in respect of some the cost of remedy was disputed. Some “defects” were accepted by the Judge to be properly classified as completion items, which should be deducted from the T & P claim. The Judge also identified the defects which T & P’s subcontractors could have been compelled to remedy had it not been wrongly excluded from completing the contract. The cost of remedying those defects was not therefore deducted by the Judge from the contract price claimed by T & P because it would not have been to the cost of T & P.
Those defects for which T & P was held responsible by the Judge (necessitating an adjustment to its claim for the contract price) were:
1. Impractical opening to windows in family room $1,138.50
2. Concealment of curtain opening mechanism $ 909.56
3. Unsuitable design of desk unit in guest room $ 120.00
4. Raise level of spa bath in en suite $2,567.81
5. Movement of control joints, garage door $1,955.25
6. Recessing jets around pool $ 891.00
7. Sealing tiles (completion work) $ 173.25
8. Installation discharging fans (completion work) $ 501.19
9. Provision of hooks to doors of bedroom (completion work) $ 198.00
10. Removal of dressing table $ 120.00
11. Installation discharge for kitchen fan (completion work) $ 488.81
12. Re-tightening tap connection (completion work) $ 20.00
13. Sealing tiles (completion work) $ 61.88
14. Repainting of unsuitable colour on bathroom units $ 872.44
15. Discharge fan, bedroom (completion work) $ 433.13
16. Remove sign and clean bath (completion work) $ 37.13
17. Replacement timber panelling study $6,713.44
18. Replacement unsuitable desk unit bedroom2 $1,113.75
19. Replacement 2 small showers $5,321.25
20. Repositioning air conditioning grille $ 371.25
21. Discharge fan installation (completion work) $ 253.69
22. Alteration of floor bedroom 5 and studio $ 850.00
23. Installation discharge fan (completion work) $ 253.69
24. Door stop bedroom5 (completion work) $ 49.50
25. Removal rubbish roof space (completion work) $ 618.75
26. Securing building paper (completion work) $1,076.63
27. Structural upgrading to roof truss (completion work) $ 482.63
28. Trim and sealing entrance doors (completion work) $1,051.88
29. Connecting extract and grille (completion work) $ 470.25
30. Making good hole in stonework (completion work) $ 297.00
31. Concealing exposed pipework $ 847.69
32. Concealing ducting games room $ 198.00
33. Providing access around pool equipment $3,953.81
34. Concealing pipework outside kitchen $ 544.50
35. Replacement cracked roofing tiles (completion work) $ 767.25
36. Provision downpipe spreaders (completion work) $ 816.75
37. Removal enclosure around air conditioning plant $ 300.00
38. Fixing appropriate flashings to windows $12,055.00
39. Partial rebuilding stone fence $1,000.00
40. Strengthen entry gates (completion work) $ 915.75
41. Fix particle board $2,760.00
42. Replace marble tiles kitchen $2,760.00
43. Electrical rectification $6,225.54
44. Plumbing rectification $8,087.07
45. Mechanical services rectification $25,400.00
46. Half professional fee for rectification work $17,000.00
47. Contingency $10,000.00
It is not necessary to set out the Judge’s reasons for her conclusions on these items. With the exception of the item allowed for fixing flashings to the windows, her assessments are not challenged on the appeal. The defendants’ pleadings had adopted the Joyce report in claiming that the absence of flashings on windows and the use of sealants was contrary to the Building Regulations. The claimed reduction for installation of flashings was $84,000. The Judge dealt with the dispute shortly in her judgment:
[143] The final aspect where costings differ related to the provision of window flashings, item 59. The allegation of the defendants was that the flashings and sealant to the windows and doors did not fully comply with building regulations. This is because the site is a high wind zone. It appears from the stage that the council inspections had reached that the Council was happy with the sealant as against the flashings and evidence is given on behalf of the plaintiff that sealants were considered satisfactory by many in the building trade. In addition there had been questions raised as to sealants on windows and the correspondence from Kensington Swan, the defendants’ former solicitors, there was no mention of the flashings question. The plaintiff’s experts agree, however, that there should be flashings but there is disagreement as to the extent. The Court’s finding is that a deduction should be allowed in respect of flashings to the extent the plaintiff’s experts consider them necessary. The higher of the plaintiff’s estimates of $12,055 is therefore deducted.
In the result, the cost of completion and making good the defects for which T & P was responsible was held to be $120,933.02. That sum was deducted from the amount due to T & P (the contract price plus additions and variations). The counterclaim under the Fair Trading Act failed on the same findings of fact upon which the Judge rejected the misrepresentation ground for cancellation. Judgment was accordingly entered for T & P for $187,050.04, together with interest and costs.
The appeal
The appellants appeal on the grounds that the Judge was wrong;
to find that their cancellation of the contract was not justified;
in holding that liability under the Fair Trading Act had not been established against the respondents; and
in holding that T & P Developments Limited was not in breach of contract.
The only respect in which the Judge’s primary findings of fact as to the need for remedial work is challenged is in relation to the instalment of flashings. The appellants contend that flashings should have been required for all windows, not simply those on the exposed side of the house (as the Judge had accepted was necessary). It is not in dispute that the cost of the additional flashings would be $72,000. At the very least, if the Judge’s finding on cancellation is affirmed on the appeal, the appellants argue that the damages recoverable by T & P must be reduced by this sum.
The principal contention of the appellants is that the Judge was wrong in her assessment of the standard of workmanship required by the contract. They maintain that it is set (by the contractual reference to a “luxury manor”) at a higher standard than was applied by the Judge. That standard is said to have been essential. The failure to achieve it substantially affected the benefit of the contract to the appellants. The Judge is said to have been wrong in relying only on the cumulative cost of rectification: some qualitative assessment of value was required. Valuation evidence suggested that on a “currently presented” basis the house was worth $875,000, although payments totalling $1,488,900 had already been made for it. Even on the basis adopted by the Judge nearly $100,000 of rectification work was required. Although the construction had not been completed, the respondents “could not or were incapable of complying” with the term that all the work be completed in a proper, thorough and workmanlike manner. On that approach, cancellation had properly been open to the appellants.
It was submitted on behalf of the appellants that the Judge had misunderstood their arguments in relation to repudiation and cancellation for failure to deliver a luxury manor. Neither had been argued as separate grounds for cancellation, as the Judge had treated them. The inability of T & P to complete the contract in accordance with the term as to workmanship justified cancellation under s7(3)(b) and (c) for breach of an essential stipulation. The appellants had not relied upon repudiation as justifying cancellation under s7(2). Similarly, the contractual reference to a “luxury manor” had not been put forward as an independent ground of cancellation, but as a standard informing the term as to workmanship and the representation as to skill and knowledge and their essentiality.
The appellants argue that the Judge wrongly excluded the Joyce report. It was evidence supporting its position, communicated in the letter of cancellation, that the workmanship of the T & P was in breach of an essential term. Although it necessarily particularised the defects, the Judge should have stepped back from the detail to consider the overall result as required by MacIndoe v Mainzeal Group Ltd [1991] 3 NZLR 273 at 284-285. It is submitted that the use of the term “luxury manor” was not, as the Judge considered it to be, exhausted by the provision of a house complying with the plans and specifications (which were “minimal”). Instead it prescribed the standard of workmanship contracted for and underscored its essentiality. Looking at the “totality” of the standard of workmanship and the materials used (where not prescribed), there is demonstrated both breach of the contractual term and the ability of the respondents to meet it.
It is argued for the appellants that on the question of flashings the Judge was wrong to adopt the evidence of the plaintiff’s experts because a luxury manor required more than the minimum standards they applied. It is submitted that the Joyce report proposal that flashings should be applied to all windows should have been accepted for a “luxury manor”. A further allowance of $72,000 was therefore necessary.
It is submitted for the appellants that the Judge was in error in her consideration of the claim of misrepresentation. The inadequacies she accepted in Mr Hung’s skill and experience were not overcome by her view that the defects were able to be rectified. That was irrelevant to the cancellation for misrepresentation as to skill and ability. Nor was the Judge correct to take the view that it was an answer that Mr Yu knew what experience Mr Hung had. That was tantamount to saying that Mr Yu should not have believed the representation. It ignores the background of trust arising by way of culture and friendship.
For similar reasons, it is said that the Judge was wrong to dismiss the Fair Trading Act claim.
It is submitted that the Judge was wrong not to have entered judgment for the Yu family on their counterclaim for breach of contract. They seek damages for breach of contract as on a total failure of consideration (refund of the moneys paid) or, alternatively, judgment for $220,694.59 (on the basis of the Joyce report). They also seek damages under the Fair Trading Act.
On the appeal the principal issues are:
Whether the Judge should have held that flashings should have been fixed to all windows (not simply to those on the exposed side of the building), with the effect that the T & P claim should have been further reduced by $72,000.
Whether the Judge was correct in holding that the deficiencies in workmanship did not entitle the appellants to cancel the contract.
Flashings to windows
The largest defect identified in the Joyce report was the fitting of flashings to the aluminium windows at a cost of $72,000. The report, which was annexed to the statement of defence as a particular, claimed that the absence of flashings and the reliance upon sealants was contrary to the Building Code requirements.
As the Judge’s conclusion at paragraph 143 (noted at para 33 above) indicates, the reliance upon the Building Code proved to be misplaced. The evidence at the hearings was that both sealants and flashings are acceptable and sealants had been passed by the Council’s building inspector. Mr Veltman, the architect commissioned to design the house, gave evidence that the building code permitted sealants. He did not detail flashings on the plans because in his opinion silicone was accepted “throughout the building industry” for such application, even in an exposed site. The acceptability of the use of sealants is also consistent with the pre-cancellation correspondence about their fixing.
Notwithstanding the fact that the reliance upon the Building Regulations did not substantiate any deficiency in the use of sealants, the experts for T & P, Mr Dean and Mr Green, took the view that a cautious approach was warranted in respect of the prominent bay window on the exposed side of the house. Although both expressed the opinion that the use of sealants was in accordance with trade practice, they indicated a preference for flashings to be fixed to the bay window. No such caution was necessary in respect of the other windows in the house which were generally set back in a manner wholly consistent with standard trade practice. Indeed, Mr Green expressed the opinion that such windows and sills were “seldom, if ever, flashed or sealed in any manner, in typical masonry veneer construction”.
The Judge accepted these “cautious” views in requiring allowance to be made for the installation of flashings in relation to the bay window. She adopted the higher of the two estimates provided by the witnesses for T & P in setting the allowance at $12,055 inclusive of GST.
On appeal it is submitted that the Judge failed to apply the correct standard. The contract required workmanship of high quality, not standard trade practice. Mr Smith pointed to building industry guidelines suggesting use of flashings either instead of or in addition to sealants.
We are not persuaded that the approach adopted by the Judge was wrong. The defect had been identified in the appellants’ pleadings (through adoption of the Joyce report) as one of failure to comply with the Building Regulations. The evidence of Mr Morrison, Mr Dean, Mr Green and Mr Veltman did not establish any such failure. Their evidence was directed at what was required in the Building Regulations because the deficiency was claimed to be in failure to comply with them. The witnesses were not asked to address a higher standard. It is rather late in the day to raise the question whether, though complying with the Building Regulations, the use of sealants was in breach of the of some higher standard of workmanship provided by the contract. In any event, there is no evidential basis for such conclusion. The experts speak of varying approaches, all compliant with the regulations. The “caution” preferred by Mr Dean and Mr Green was accepted by the Judge as appropriate in the circumstances. There is no evidence to suggest it is inadequate to meet the contractual obligation or that the consequential allowance of $12,000 was inadequate to supply flashings to the bay window.
CANCELLATION
A substantial difficulty faced by the appellants is the circumstance that their purported cancellation prevented T & P completing the house. In determining whether cancellation was warranted, therefore, allowance must be made for the finishing of the project and any remedial work T & P would have been obliged to make good. The implied term relied upon by the Yu family as justifying cancellation was a term that “all work be completed in a proper, thorough and workmanlike manner”. Although there may be clear cases when it sufficiently emerges before completion that such a term will not be complied with, it was a bold move to cancel on that basis. A breach itself might not be established if the defects at the time of cancellation can be rectified before completion, at least where there is no suggestion that the party in default will refuse to do so. Even if breach is established, under s7 of the Contractual Remedies Act it has to be of a term which has been agreed to be essential or else the consequences of breach must be substantial. In the High Court, the appellants largely fell at each of these hurdles.
The evidence of Mr Morrison, the author of the Joyce report and the expert witness for the appellants, was that all defects identified by him, other than an issue of concrete cracking, could be remedied. The concrete cracking was not a structural defect, as the Judge specifically found. It had been the subject of the pre-cancellation correspondence, and the appellants had imposed their own solution, using another contractor at a cost initially estimated at $4,220.
On behalf of the appellants it was suggested that the fact that the respondents had disputed responsibility in the litigation for some of the defects (while acknowledging responsibility for others) indicated a rejection of the contractual obligation and itself justified cancellation. That submission, in effect amounting to a claim of repudiation, is not warranted by the pleadings or the facts. The respondents throughout have acknowledged obligations in relation to the completion and finish of the project. If they have disputed some items, in context the disputes fall far short of repudiation.
Although the argument for the appellants adopted something of a scattergun approach, we think the essential merits of the case turn on the facts as to essentiality of the term and substantiality of any breach. Both in our view turn on assessments of degree which the trial Judge was well placed to address.
There is no explicit agreement that the implied term as to the manner of completion accepted by the respondents was essential to the parties. The Judge took the view that such an agreement, entitling the appellants to cancel no matter how trivial the breach, would make no commercial sense. If the deficiencies are serious enough, cancellation would be justified under s7(4)(b) without need to have recourse to s7(4)(a). For reasons indicated in para[58] below, any reference to “luxury manor” could not impose a lower thresh-hold for cancellation.
Whether T & P was in breach of the implied term to complete the house in a proper thorough and workmanlike manner required the Judge to consider whether the term would have been complied with, had the contract proceeded. Cancellation in advance of completion has been considered by this Court recently in Oxborough v North Harbour Builders Ltd and Regency Designer Homes Ltd [2002] 1 NZLR 145 and Adkin v Brown (CA2/02, 11 March 2002). Those decisions emphasise that a stipulation as to completion in accordance with a contractual standard is only broken if the work is not in accordance with the contract “at completion”, or if the work during construction is such that it cannot be made to conform with what the contract requires. If any defects can be remedied before completion, the builder will be in breach only where he has made it clear he does not intend to rectify.
There was ample evidence upon which the Judge was able to conclude that T & P appreciated that it was still to complete the building and that a number of matters would require rectification to meet the implied term of completion in a proper, thorough and workmanlike manner. The correspondence between the parties before the contract was cancelled provides ample substantiation for that attitude. Although the Judge was criticised on the appeal for treating the question of whether there was breach at the time of cancellation as though turning on whether T & P had repudiated the contract, the appellants’ cancellation ahead of completion effectively invited that analysis. Breach at a time before completion could only be shown if the builder had been shown to be unwilling or unable to complete to the contractual standard.
The appellants argue that the standard was a “luxury manor” and that the range of deficiencies later identified demonstrate that T & P was not able to complete to that standard. This argument was more fully developed in relation to the substantiality of breach. We agree with the Judge’s conclusion that the term added very little to the contractual obligations. The contract was to deliver a house in accordance with the plans and specifications. At best, the expectation of a “luxury manor” may have provided some content to the obligation to complete in a proper and workmanlike manner. But that could not overcome the specification of cheap materials and a price per square foot which Mr Johnson, the architect who gave evidence for the Yu family trust, acknowledged was not based on the highest quality. Quality of workmanship is not aptly described in terms of luxury, and the quality of the appointments was largely determined by the specifications. The house could be no more a “manor” than its agreed design could allow, nor more “luxurious” than the specifications contemplated. There is considerable force in the submission for the respondents that the term “luxury manor” was used to indicate that the house was to be imposing and contain a number of impressive features. It did not add to the agreed plans and specifications by which the house was defined.
Although the conclusion that T & P was not in breach of the term as to completion in a proper and workmanlike manner was strictly speaking sufficient to deal with the validity of the appellants’ cancellation, the Judge dealt with the substantiality of any such breach. It was not seriously in dispute on the appeal that in confining herself to the matters identified in the correspondence which preceded the cancellation, in reliance on Mercurius Ventures Ltd v Waitakere City Council, the Judge was in error. In Thompson v Vincent [2001] 3 NZLR 355 this Court overruled Mercurius Ventures Ltd. It is clear that the grounds for cancellation in s7 are objectively assessed and may be justified by information obtained after cancellation.
It was appropriate therefore for the determination of whether cancellation was properly available to the Yu family to take into account the deficiencies subsequently identified through the Joyce report, to the extent that they were found to be substantiated. Notwithstanding her acceptance of Mercurius Ventures Ltd, the Judge went on to do just that. Her conclusion that the deficiencies she found to the cost of T & P, and deducted from the contractual price due to it, did not substantially reduce the benefit of the contract to the appellants are fatal to the cancellation, if upheld on appeal. The appellants contend that the Judge failed to look at the overall result in the context of the construction of a “luxury manor”.
The proper approach, in application of s7(4)(b) of the Contractual Remedies Act was described by Richardson J in MacIndoe v Mainzeal [1991] 3 NZLR 273 at 284-285.“Substantiality” in the statutory context “is a matter of fact, degree and impression”.
It has the same flavour as “significantly” and “considerably”. It is equally incapable of any kind of arithmetical analysis. One must stand back and, assessing the matter objectively, determine whether the effect of the breach will be, to take the most obvious provisions subsparas (i) and (ii), substantially to reduce the benefit of the contract to Mainzeal or substantially to increase the burden on Mainzeal under the contract.
The Judge did not accept the full list of defects put forward on behalf of the appellants. After an exhaustive review of the evidence, including a site inspection proposed by the appellants, she accepted the deficiencies summarised at paragraph [32] above. Although the Judge acknowledged that the list of deficiencies was not short, she made the point that all could be remedied, in the most part for relatively small sums. It is to be noted that even in respect of the defects for which she held T & P responsible, the list contains some fourteen items the Judge regarded as properly to be characterised as completion work.
The appellants maintain that the Judge did not step back and assess the overall scale of the deficiencies. But it is clear from her reasons that she did precisely that. In para 67 of the judgment the Judge specifically concludes that neither in themselves “or in the aggregate” did the deficiencies substantially reduce the benefit of the contract.
We would be reluctant to interfere with the assessment of the Judge in a judgment so dependent upon the facts and matters of impression. But in our view the conclusion was clearly right. Leaving aside the completion items, the overall cost of rectification was put at less than $100,000. That needs to be seen in relation to the contract price which, with variations and extras, amounted to more than $1.7million. There is no basis upon which it could be concluded that deficiencies of the order identified, almost all able to be corrected, substantially reduced the benefit of the contract to the Yu family. The alternative suggested measurement put forward of valuation evidence is misconceived: the benefit of the contract must be measured in its own terms. The Judge identified and quantified the defects. Except in the matter of the fixture of flashings her primary findings of fact in these assessments are not challenged. We agree with the Judge’s conclusion that, overall, the deficiencies did not substantially reduce the benefit of the contract and do justify the cancellation.
We have considered whether that assessment is affected by the contractual reference to the house as a “luxury manor”. It is clear that the identification of defects requiring rectification by T & P required work of a quality commensurate with that label in the circumstances of the materials and design specified. Thus, the Judge accepted that some matters of finish were unsuitable for aesthetic reasons in such a home. Similarly, she adopted the “cautious” recommendation of the T & P expert witnesses in relation to flashings, rather than the standard indicated by the Building Regulations. But the use of the term was inevitably limited by the specifications of the contract. The price per square foot contracted for and the materials identified precluded imposition of an overall standard derived from the word “luxury” alone. In context, we are of the view that the language was referable to the impression the appellants wished their home to make and the features it was to contain, rather than to any standard of quality contracted for.
We are satisfied that the Judge was correct to conclude that the established deficiencies did not substantially reduce the benefit of the contract to the appellants. It follows that cancellation was not available to them.
Misrepresentation
The Judge’s findings of fact that:
the actual experience Mr Hung had was well known to the Yu family; and
it was not possible to infer from the defects identified that Mr Hung and his company lacked the experience and skill necessary to carry out the project
were fatal to the claim of misrepresentation.
On behalf of the appellants, it is argued that the Judge’s approach was tantamount to saying that the Yu family should not have believed the representation that Mr Hung had the skills to manage the project to successful completion. It is clear, however, that the Judge found affirmatively that Mr Hung did have the represented skills. Although the Judge criticised aspects of the conduct of the project (particularly in relation to documentation and other matters held to have required rectification), they did not cause her to conclude, overall, that Mr Hung lacked the relevant skills to undertake the project. The only excepted area of deficiency in skill was in the co-ordination of the airconditioning services. Since they had not been part of the original contract, however, they were not part of any misrepresentation inducing the contract, as the Judge specifically held. The tradesmen employed by T & P were held by the Judge to have been competent. The identified deficiencies could be rectified and, overall, had not resulted in a substantial diminution of value. Although it is suggested that the Judge should have preferred the evidence of Mr Yu, she was uniquely well placed to decide whether, in the context of this very heated falling-out, his subjective assessment of reliance was reliable.
In any event, the bald submission made on the appeal that “the effect of the misrepresentation is seen by the mess created”, runs into the difficulties already discussed with reference to the substantiality of breach. The findings of the Judge, which were well-supported by her review of the evidence, were that the deficiencies, drawn on by the appellants to support their contention of misrepresentation of skill, were able to be remedied and did not substantially alter the benefit of the contract. As such, any misrepresentation would not have justified cancellation.
The conclusions that the representations were fulfilled and that the appellants were not in fact misled, with which we agree, are sufficient to dispose of the appeal based on the Judge’s dismissal of the Fair Trading Act claims.
Damages
The reduction in the contract price claimed by the respondents met the overall merits of the case. The Judge’s painstaking review of the work requiring rectification was not the subject of any effective challenge. We have already indicated our view that the conclusion reached on the question of the additional flashings was appropriate. That adjustment, and others decided adversely to the respondents, were sufficient to reflect the expectation of standard contracted for.
Conclusion
For the reasons given, the appeal is dismissed. The appellants must pay the respondents’ costs which are fixed at $5,000 together with disbursements, including the reasonable travel and accommodation expenses of counsel, to be fixed if necessary by the Registrar.
Solicitors
Cairns Slane, Auckland for Appellants
B Ellis, Auckland for Respondents
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