WESTERN PARK VILLAGE LIMITED v BAHO CA115/2014 [2014] NZCA 630 [19 December 2014]

IN THE COURT OF APPEAL OF NEW ZEALAND

CA115/2014

[2014] NZCA 630

BETWEEN

WESTERN PARK VILLAGE LIMITED

First Appellant

DARRYLL LAWRENCE HEAVEN,

ANNE EVELYN HEAVEN AND

TRUSTEE MANAGEMENT LTD

Second Appellants

AND

SINAN ABED BAHO

Respondent

Hearing:

19 November 2014

Court:

Randerson, White and Courtney JJ

Counsel:

D G Chesterman for Appellants

J E M Lethbridge and T J P Gavigan for Respondent

Judgment:

19 December 2014 at 10:30am

JUDGMENT OF THE COURT

A Leave to amend the statement of claim is granted.

B The appeal is allowed and the judgment of the High Court is set aside.

C The 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.

D The 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

[1] 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.

[2] 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.

[3] 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.

[4] 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.

[5] 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.

[6] 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;…

[7] 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.

[8] Mr Baho counter-claimed against the appellants for the balance due under the

mortgage.

[9] 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.

[10] 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;…

[11] 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.

[12] 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.

[13] We note that Western Park did not pursue the remedy of rescission.

[14] 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

[15] 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.

[16] 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.

[17] 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.

[18] 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.

[19] 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:

1 An 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;

2 Such 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

[20] 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.

[21] 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.

[22] 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.

[23] 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.

[24] 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. ...

[25] 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

[26] 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.

[27] 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.

[28] 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.

[29] 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.

[30] 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.

[31] 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].

[32] 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.

[33] 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.

[34] 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.

[35] 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.

[36] On 7 December 2010 a written settlement agreement was entered into

between the respective body corporates. The recitals to the agreement recorded,

4 Western Park Village Ltd v Baho, above n 1, at [69](d).

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.

[37] 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.

[38] 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?

[39] 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.

[40] 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.

[41] 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).

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 Judge’s conclusions on loss

[42] 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

[43] 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.

[44] 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.

[45] 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

[46] 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.

[47] 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.

[48] 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

[49] 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.

[50] 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.

[51] 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.

[52] 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.

[53] 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

[54] 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.

[55] 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.

[56] 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

[57] 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.

[58] 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.

[59] 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.

[60] 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

[61] 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

[62] 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.

[63] 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

[64] 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

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]. 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. 8 Marlborough District Council v Altimarloch Joint Venture Ltd, above n 6, at [27].

[65] 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.

[66] 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

[67] 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.

[68] 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,

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]. 11

Marlborough District Council v Altimarloch Joint Venture Ltd, above n 6, at [156].

Mr Cheyne’s evidence supported the view given by Mr Morley in his evidence at

trial.

[69] 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.

[70] 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.

[71] 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.

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.

[72] 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.

[73] 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.

[74] 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.

[75] 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

[76] 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

[77] 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

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). 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.

was due as claimed by Mr Baho in the notice issued on his behalf under the Property

Law Act 2007.

[78] 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.

[79] 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; …

[80] 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.

[81] 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

[82] 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

[83] 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.

[84] 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.

[85] 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

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].