Davies v K M Smith Builder Limited [2022] NZCA 380 (15 August 2022)

Last Updated: 23 August 2022

IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA

CA694/2021 [2022] NZCA 380

	BETWEEN	SIMON BERNARD DAVIES AND JUDITH GAY DAVIES Appellants
	AND	K M SMITH BUILDER LIMITED First Respondent KERRY MICHAEL SMITH Second Respondent

Hearing:	11 July 2022
Court:	Clifford, Peters and Downs JJ
Counsel:	L A Andersen QC and S Gaskell for Appellants A D G Hitchcock for Respondents
Judgment:	15 August 2022 at 10.30 am

JUDGMENT OF THE COURT

1. The appeal is dismissed.
2. The appellants must pay the respondent one set of costs for a standard appeal on a band A basis and usual disbursements.

____________________________________________________________________

REASONS OF THE COURT

(Given by Clifford J)

Introduction

• [1] The appellants, Dr Simon and Mrs Judith Davies (the Davies), entered into a labour and materials contract with the respondent K M Smith Builder Ltd (the Firm) for the building of a new home (the House). The second respondent, Kerry Smith, is the half‑owner, sole director and an employee of the Firm.
• [2] The contractual relationship broke down and the Firm abandoned the site before the House was completed.
• [3] The Davies then sued the Firm and Mr Smith for damages of $1,031,690.54, representing overcharging for building work and additional fees incurred by the Davies.
• [4] The Davies based that claim on nine causes of action. In the High Court Doogue J found in favour of the Firm and Mr Smith as regards each of those causes of action.^[1] At the same time, the Judge upheld the Firm’s counterclaim for unpaid invoices totalling $99,299.24. The Davies now challenge the Judge’s finding as regards one of those causes of action only, that is for misleading and deceptive conduct under the Fair Trading Act 1986.
• [5] In their amended statement of claim the Davies formulated the Fair Trading Act 1986 causes of action against the Firm by reference to an estimate of costs to completion, and by reference to an initial estimate of overall costs. In the judgment of the High Court, those two factually separate causes of action would appear to have been treated as one, and as involving both the Firm and Mr Smith on the same basis. That was the approach taken in this appeal, as regards the completion estimates. We proceed on that basis.
• [6] In their notice of appeal, the Davies say the Judge failed to specifically address their eighth cause of action which alleged that Mr Smith and the Firm had misrepresented that the costs of completing construction of the House would not exceed $700,000. That misrepresentation, which occurred at a certain point in the building process when difficulties had already arisen between the parties, constituted a breach of the Fair Trading Act.

Background

• [7] The facts are not now in dispute. The following summary is based on the narrative set out in the comprehensive judgment of Doogue J in the High Court.
• [8] In 2001 the Davies, through their family trust, purchased a property at Closeburn Station, a high-country station in the Queenstown Lakes district. Closeburn consists of 27 individual lots. With the purchase of a lot comes ownership of 1/27th of the balance of the station, and of that proportion of the shares in the management company that conducts the farming operations on Closeburn and maintains the common areas. The Davies then employed an architect, Mr Scaife, to design the House. At Mr Scaife’s suggestion the Davies, who lived overseas at the time, first built a cottage on the property.
• [9] In 2006 the Davies commissioned a pricing process based on Mr Scaife’s plans. That process generated an estimated cost for the House alone, excluding hard landscaping, driveways and the like, of $2.5 million exclusive of GST. The Davies did not continue with the building practitioner or the quantity surveyor who conducted that process.
• [10] It was not until mid-2014, after the Davies had met Mr Smith at the Christmas party of the local medical centre of which Dr Davies was an owner and at which Mrs Smith was employed, that the Davies and the Firm entered into a contract to construct the House.
• [11] The contract required the Firm to build the “dwelling house and works ... shown and described in the drawings and specifications ... signed for the purposes of identification”, together with any variations agreed by the owner, in a “thorough and workmanlike manner” and in conformity with the bylaws and regulations of local authorities having jurisdiction in respect thereto. Hourly rates were agreed for all work, together with a margin on materials and subcontractors’ charges. Payment arrangements and other matters were also agreed.
• [12] The Judge described the steps then taken to enable construction to begin in the following way:^[2]

[28] Between the pre-building preparations in June 2014 and early 2016 the Davies and Mr Smith oversaw a dynamic co-design construction process. Both the Davies (primarily Mrs Davies) and Mr Smith were adding layers of necessary detail to Mr Scaife’s sparse plans, and both parties were adding innovations to the construction in an organic way. The relationship between the parties appeared to be harmonious throughout this time.

[29] As the house plans had minimal detail it took a high level of project management and building expertise to bring the plans to life. There were numerous areas where Mr Smith was required to interpret Mr Scaife’s vision.

• [13] The Judge described the subsequent construction process as follows:

[36] Mr Smith said during the construction the Davies made multiple changes to what had been set out in the original plans. Mrs Davies would spend long periods perusing building and design online and then would come to him with ideas and ask him to achieve various outcomes. She often selected products that would be considered much more expensive than even an average high-end build.

• [14] The Judge then provided various examples of ways in which that process worked, concluding:

[42] These are just some examples of the number of decisions that added to the overall build cost. More importantly, they demonstrate the fluidity with which the Davies approached the interpretation of Mr Scaife’s design. Mrs Davies had many ideas and Mr Smith worked through the practicalities and logistics to make them a reality.

• [15] By early 2016 the Davies were becoming increasingly concerned at the time being taken to complete the project and the costs they were incurring to do so. Dr Davies asked Mr Smith to advise him of some, but not all, of the estimated costs of completion of the House and for an itemised list of estimates for certain subcontractors.
• [16] On 16 March 2016 Mr Smith provided the Davies with the requested estimate — $448,295.27 — for specified subcontractors’ costs. At the same time, he raised a series of questions about additional matters which, in terms of Dr Davies’ request, he had not provided for.
• [17] On 16 March 2016 Dr Davies sent the following email to Mr Smith:

Hi Kerry,

Could you please provide me with a letter (preferably on headed paper) that the estimated costs of completion of our project will be $700,000 please.

This will be used for the release of funds.

Regards,

Simon

PS give me a call if you need to discuss.

• [18] Mr Smith provided a letter to the BNZ on 16 March 2016, as requested by Dr Davies, confirming the “estimated” completion costs were $700,000. It is that letter which the Davies said in the eighth cause of action, exposes Mr Smith and the Firm to liability under the Fair Trading Act.
• [19] On 1 July 2016, and although the House was not by then completed, the Davies moved in. The Davies stopped paying the Firm’s invoices on 15 July 2016. By that stage they had been charged a total of $3,607,429.54. The Firm issued a further invoice on 20 July 2016 for $180,355.18.
• [20] The Firm withdrew its services from the Davies in August 2016 without any discussion with the Davies.
• [21] In 2017 after the dispute had arisen, Mr Smith gave a further estimate for completion of $280,520.12. This was not accepted. The Davies used other contractors to complete the House at a cost of $183,620.15, almost $100,000 less than Mr Smith’s quote.

The Davies’ claims

• [22] The Davies commenced these proceedings in August 2019.
• [23] The Judge summarised their claims in the following way:^[3]

(a) That Mr Smith made inducing representations that:

(i) he had the time and ability to project manage the building work;

(ii) construction of the House (including landscaping) would cost between $2.5 and $2.8 million (inclusive of GST); and

(iii) construction would be completed by March 2016, namely within 15 to 18 months of commencement of construction (November 2014).

(b) That the contract contained the following implied terms:

(i) Mr Smith would project manage the building work to ensure the cost of the building work would be reasonable and in accordance with the estimate of costs;

(ii) the cost estimate was between $2.5 and $2.8 million (inclusive of GST);

(iii) the Firm would ensure the subcontractors costs were reasonable; and

(iv) the actual cost of the building work would be no more than $3 million.

(c) If the Court found Mr Smith did not make the alleged representations and the contract did not include the implied terms, the Davies claimed against the Firm in contract and against Mr Smith in negligence for failing to adequately project manage the construction of the House.

(d) The Firm and Mr Smith were liable under s 9 of the Fair Trading Act for misleading or deceptive conduct constituted by the provision of the March 2016 estimate. The Davies’ allegation of misleading and deceptive conduct against the Firm was the estimate of costs given by Mr Smith and the reassurance he gave that the cost would not exceed $3 million. Against Mr Smith, they relied on his letter of 16 March 2016 to the BNZ wherein he represented he expected the cost of completion of construction at that time to be no more than $700,000.

High Court judgment

• [24] The Judge first considered challenges the Davies had made to Mr Smith’s credibility, and specifically — as the Judge put it — that he was “a dishonest man who both generally and in relation to the specific allegations in this case acts in bad faith”.^[4] It was in that portion of her judgment, to which we return, that the Judge considered the claim of misleading and deceptive conduct as regards the estimate letter, and two other instances of actions of Mr Smith in connection with the contract said to demonstrate his dishonesty.
• [25] The Judge concluded the matters the Davies had raised did not establish Mr Smith generally acted in bad faith and lied.^[5]
• [26] She then went on to consider the claims of misrepresentation and breach of implied terms. In general terms she found Mr Smith had not made the alleged inducing pre-contractual representations.^[6] Nor were there implied terms in the contract the cost of construction did not exceed $3 million or that the building would be completed by March 2016. There was an implied term in the contract the cost of construction would be reasonable, but the Davies had failed to prove it was not.^[7] Likewise, there was an express term in the contract the Firm would project manage the construction, and Mr Smith owed the Davies a duty of care to do so adequately. He had failed to discharge that duty, but only to a limited extent entitling the Davies to damages of $4,364.50.^[8]
• [27] The Judge noted it had been agreed by the parties that if the Davies failed in their causes of action the amount they owed the Firm was $75,334.74 plus interest of $23,964, totalling $99,299.24. Deducting the amount of $4,364.50 meant that the Davies were ordered to pay the Firm $94,934.74.^[9]

The appeal

• [28] On appeal, and reflecting the Davies’ notice of appeal, Mr Andersen QC argued the Judge had failed to address the Davies’ Fair Trading Act claim, so that we should do so. In the alternative, he argued that, to the extent the Judge had addressed that claim, she had erred in her finding that Mr Smith had not incurred liability when he gave the estimate as Mr Smith must have known it was incomplete and that the Davies would rely on it. For Mr Smith, Mr Hitchcock argued that, on the evidence, the Davies knew full well the Firm and Mr Smith had not made a full estimate of anticipated or actual completion costs. Whilst Mr Smith had regretted sending the letter, he had done so because the Firm was owed a significant amount of money by the Davies at that time.
• [29] This matter is best considered in the context of the analysis the Judge undertook of Mr Smith’s conduct in providing the estimate when she considered the Davies’ general challenge to his credibility.
• [30] There was no doubt, the Judge found, that Mr Smith, as he had acknowledged, had sent the estimate to the bank as a result of the Davies’ request to do so. It was also apparent that the estimate of $700,000 fell short of the actual amount required to finish the building of the House and was itself incomplete.
• [31] Reviewing the circumstances in which the estimate was provided by Mr Smith, the Judge made the following factual findings:

(a) It was apparent that Dr Davies had requested itemised costs for certain sub‑trades only.^[10]

(b) The figure Mr Smith sent provided estimated costs to completion for a number of sub-trades but not all. Nor did it include labour costs generally, or labour and material costs for sub-trades for major components of the overall building.^[11]

(c) Nor did it contain an estimate of costs for the Firm’s labour, as Dr Davies preferred to undertake that exercise himself. It was evident on the face of the written estimate that Mr Smith was raising as many questions as he was providing answers.^[12]

• [32] The Judge then went on:

[78] Initially Dr Davies insisted in cross-examination that the document Mr Smith had provided was a list of all outstanding work and an estimate of all completion costs. He did subsequently concede that a large number of quite fundamental building elements were not included in the document. Dr Davies was questioned by Mr Hitchcock on the document as follows:

17. This is just his attempt to respond to your request, isn’t it?

A. And my request was unfortunately inaccurate.

[79] Thus the estimate was already compromised by three significant omissions. It did not contain the full complement of subcontractor costs, nor did it contain the labour costs. The parties were also yet to settle on the full extent and design of the hard landscaping so that was not costed either.

[80] In cross-examination, Dr Davies accepted that he sent the email asking Mr Smith to write the letter to the BNZ and he explained how the $700,000 figure was arrived at. The evidence established that the figure of $700,000 was a figure devised by Dr Davies and his banker, not by Mr Smith.

[81] It is unfortunate Mr Smith sent the letter, but it was commissioned for the purpose of assisting the Davies and the bank with financial planning. It was not commissioned for the purpose of Mr Smith undertaking and crystallising the actual costs of construction. That would have been obvious to both parties because of the exclusion of the major components identified ...

[82] I note further that it would not have been possible to ascertain an accurate estimate of the trades excluded from the estimate, as the parties were still working through what was required in respect of these elements as part of their organic collaborative interpretation and co-design.

[83] I consider it is disingenuous of the Davies in these circumstances (which they created) to assert Mr Smith represented to them the actual costs completion in March 2016 were $700,000 and to rely on it to allege he acted in bad faith and misled them.

[84] For the reasons I have set out above, I also do not consider this letter is proof that Mr Smith represented to the Davies the actual costs of completion to be $700,000. I find that he was obviously misguided in sending the letter to the bank, but I do not consider the letter proves in and of itself that Mr Smith has been dishonest in his dealings with the Davies

Analysis

• [33] In face of those findings, which in our view constitute the Judge’s assessment and determination in Mr Smith and the Firm’s favour of the Davies’ Fair Trading Act claims, Mr Andersen argued the Judge had missed the point. The Davies’ claim was not that Mr Smith was misleadingly representing the actual costs of completion (see [83] and [84] of the judgment). It was clear what was provided was an estimate.
• [34] Rather the Davies’ argument was that Mr Smith knew the estimate was incomplete and that he knew the Davies were relying on it — in effect as if it were an estimate of all construction costs to completion. Hence his action of providing the letter requested by the bank and by Dr Davies without further comment or qualification was misleading and deceptive. Moreover, it did not matter under the Fair Trading Act that Mr Smith may not have intended to deceive the Davies. Dishonesty is not a requirement of a claim under that Act.
• [35] The 16 March 2016 letter was clearly not, as the Judge described it on several occasions, a statement of the actual costs of completion. That is clear from the terms of Mr Smith’s letter to the bank itself. Nor was it, understood in context, a statement of an estimate of all costs to completion. The following, unchallenged, findings of fact in our view mean that the estimate could not have misled or deceived the Davies so as to constitute, as between them and Mr Smith, misleading and deceptive conduct by Mr Smith:

(a) The original list of estimated costs of outstanding work responded to Dr Davies’ request which, as he acknowledged, “was unfortunately inaccurate”.^[13]

(b) Dr Davies accepted he sent the email asking Mr Smith to write the letter to the BNZ and that the figure of $700,000 was one reached by Dr Davies and his banker, not by Mr Smith.^[14]

(c) At the time of Dr Davies’ original request, and of Mr Smith writing the letter, it would not have been possible to ascertain an accurate estimate of the elements of outstanding work that were not included in the list Dr Davies sent to Mr Smith as the parties were still to finalise the scope of required work.^[15]

• [36] Both the Davies and Mr Smith were under pressure: the Davies it would appear from their bank and Mr Smith from the financial difficulties of the Davies. Dr Davies’ agreement with the bank as to the quantum of additional funding to be provided, and Mr Smith’s unfortunate decision to provide the requested letter, were both products of those pressures. But, as the Judge found, in all the factual circumstances it would be unrealistic and unfair to categorise the sending of the requested letter as constituting misleading and deceptive conduct in trade as between Mr Smith and the Davies.

Result

• [37] The appeal is dismissed.
• [38] The appellants must pay the respondents one set of costs for a standard appeal on a band A basis and usual disbursements.

Solicitors:
Teresa Chan Law Ltd, Dunedin for Appellants
AWS Legal, Invercargill for Respondents

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^[1] Davies v K M Smith Builder Ltd [2021] NZHC 2865 [Judgment under appeal].

^[2] Judgment under appeal, above n 1.

^[3] Judgment under appeal, above n 1, at [3]–[7].

^[4] At [58].

^[5] At [66] and [84]–[85].

^[6] At [93], [118], and [125]–[128].

^[7] At [152].

^[8] At [153], [157], [192] and [215].

^[9] At [242]–[244].

^[10] At [73].

^[11] At [75].

^[12] At [76]–[77].

^[13] At [78].

^[14] At [80].

^[15] At [82].