Chen v Zhong HC Auckland CIV 2010-404-001995 [2011] NZHC 1543 (14 November 2011)

[1] The plaintiff, Mr Chen, seeks judgment against the first defendant, Mr Zhong, and the second defendant, WLC Properties Limited (“WLC”). Mr Chen alleges that one or other or both defendants were party to a building contract with him and have breached that contract. He claims damages.

[2] Mr Chen and his wife entered into an agreement to purchase a bare serviced lot at 10A Castleton Drive, Mellons Bay, Howick on 29 September 2007. Prior to settlement, Mr Chen obtained preliminary structural design plans for the construction of a residential dwelling and garage on the property.

[4] Mr Chen then engaged a company known as Tox Associates Limited to prepare building consent plans based on the original plans. Mr Zhong was a director of and shareholder in Tox Associates Limited. Tox Associates Limited completed the building consent plans on 10 July 2008. On or about 10 July 2008, Mr Chen spoke to Mr Zhong. Mr Chen told me that it was agreed that Mr Zhong would construct the dwelling and garage on the property in accordance with the plans for

$260,000 inclusive of GST. Mr Chen asserted that it was also agreed that the price would include the interior fit out, and the provision of appliances.

[5] An application for building consent was lodged with the relevant local authority, the Manukau City Council, on 18 July 2008.

[6] On 18 August 2008, the Manukau City Council issued a building permit for the construction of the dwelling and garage.

[7] Mr Chen gave evidence that Mr Zhong then said that he was not registered for GST purposes, and that the building contract should be between Mr Chen and WLC. Mr Zhong said that WLC was a company that he “owned”. According to a company search that was produced, Mr Zhong is the sole director of the company. It has two shareholders – Mr Zhong and a Nan Wang.

[8] Mr Zhong came to see Mr Chen on 3 September 2008 and he produced a contract, written in English. English is not Mr Chen’s native tongue. Nevertheless, after discussing matters with Mr Zhong, he signed the contract. It was dated

(c) WLC agreed to construct and carry out the building works in accordance with the drawings and specifications which were to be signed by both parties;

(d) the building works were to be carried out in a proper and workmanlike manner;

(g) various standard clauses were deleted. Relevantly, the clause confirming that the owner, Mr Chen, had applied for mortgage finance was deleted;

(i) the parties were to go to arbitration if any dispute or difference arose between them; and

[10] Mr Chen gave evidence that shortly thereafter, he looked at the agreement more carefully, with the assistance of his daughter, who speaks English. He became concerned that the agreement did not record the correct parties, or the agreed price. He therefore contacted Mr Zhong, and told him that he wanted a supplementary agreement signed that recorded:

(a) that the building agreement was between him and Mr Zhong; (b) the agreed fixtures, fittings and appliances;

[11] Mr Chen prepared a supplementary agreement in writing. It is in Mandarin, but I have been provided with a certified translation into English. The supplementary agreement was signed by Mr Chen and Mr Zhong on 13 September

2008. Its terms are limited. It listed a number of fixtures, fittings, and appliances to be provided. It recorded that the contract price was $260,000. It stated that the completion date was 25 December 2008 and that “damages for breach [were] NZD 500 for each day delayed”. It did not record that the contracting parties were Mr Chen and Mr Zhong. Nor did it release WLC from the 3 September 2011 agreement.

2008 was signed, he and Mr Zhong orally agreed that a one-metre high picket fence would run between 10A Castleton Street and 12A Castleton Street, and across the end of the driveway. Further, he asserted that Mr Zhong agreed that the contract price of $260,000 referred to in the supplementary agreement would include a large

lower deck, some 64 square metres in area, wrapping around the dwelling from the north-west corner to the south-east corner.

[13] The supplementary agreement does refer, albeit succinctly, to the fence. However, neither the building contract nor the supplementary agreement refer to a deck at lower floor level. The building plans do not show a lower deck. One plan, a site drainage plan, shows a rectangular area outside the lounge room on the eastern side of the dwelling. This feature is not however described on the drainage plan as being a deck. Indeed, it is not described as anything, and it is not shown on any of the other plans. The building consent application referred to a deck 20.54 metres in size. It seems that is a deck at first-floor level that is shown on the plans.

[14] Building works commenced in September 2008. They came to an end in or about November 2009 when the site was abandoned. Mr Chen gave evidence that he repeatedly tried to contact Mr Zhong at or about that time, but was unable to locate him. The dwelling was largely closed in by that stage, but there was still substantial works to be done and much that had been done was substandard.

[15] During the course of the building works, Mr Chen paid Mr Zhong, or third parties at Mr Zhong’s direction, the following amounts:

(a) $2,435.25 on 13 September 2008; (b) $15,000 on 13 September 2008; (c) $25,000 on 23 September 2008; (d) $30,000 on 11 November 2008; (e) $60,000 on 8 December 2008;

This final payment comprised two cheques, one made out to the contractor doing the flooring, and the other to the contractors doing the kitchen. Mr Chen said that he made these payments at Mr Zhong’s request, and that he required Mr Zhong to sign a personal loan agreement recording that the payments were an advance by way of a loan. A copy of the signed loan agreement was put into evidence. Unfortunately, it was in Mandarin. Mr Chen did refer to it in the course of his oral evidence, and the translator did provide a translation. It appears to be, in effect, an acknowledgement of debt. It was Mr Chen’s oral evidence that the $7,000 was given to Mr Zhong or lent to him personally.

[16] In December 2009, various items that had been delivered to the property were removed.

[17] In February 2010, Mr Chen engaged a specialist building consultant, Mr Hare, to inspect the property. Following the inspection, he prepared a lengthy report dated 10 February 2010. That report detailed various elements of the building works that had not been completed. It also outlined defects which were apparent in the work that had been undertaken, and departures from the plans in the building agreement. The defects are discussed below. Relevantly, Mr Hare concluded as follows:

In summary, the finish of the house is poor. The builder seems to have substituted cheaper materials to compensate for the low square metre rate that applies to the contract sum quoted. The quality of workmanship is substandard and again is a reflection of the agreed contract price. The house is salvageable but there is significant cost to bring the house up to an acceptable level of finish...

Mr Hare also prepared a trade summary identifying the costs involved in completing the dwelling and in undertaking the necessary remedial works. Mr Hare estimated that the costs involved were $180,997.20 excluding GST. This estimate made no allowance for the lower deck discussed above.

[18] In March 2010, Mr Chen engaged a firm of quantity surveyors and asked them to estimate the cost of the construction works necessary to complete the

dwelling. They prepared a report dated 31 March 2010, and estimated the total cost at $288,000 excluding GST.

[19] Also in March 2010, Mr Chen engaged Mr Simon Sheen, a builder, to complete part of the building works. He paid Mr Sheen $20,000 on 15 March 2010. In fact, the work undertaken by Mr Sheen only came to $15,992.50, and he refunded

[20] Mr Chen also engaged a company known as Siu Lum Gar Limited, trading as Roofix, to complete more of the outstanding work, and to get a code compliance certificate for the dwelling. Siu Lum Gar Limited did various works and invoiced Mr Chen $41,904.54 for the work it undertook. The work included the construction of the lower deck. It is not possible to work out from the invoices produced in evidence how much the work on the deck cost. Mr Chen has paid $27,110.45. He denies liability for the balance and has sued Siu Lum Gar Limited in the District Court at Manukau for $25,183.85 together with compensation for defective work he alleges was undertaken by that company. Those proceedings have yet to be resolved.

[21] Mr Chen and his wife also did some work themselves. Mr Chen gave evidence before me as to that work, and he produced a very large number of invoices for payments he made to complete the dwelling. He asserted that he spent a total of

$104,843.73 including GST. This figure includes the total invoice rendered by Siu Lum Gar Limited for inter alia, the lower deck referred to above. It also makes allowance for a correction which Mr Chen made in the course of his evidence relating to the cost of light bulbs.

[22] Mr Chen and his family moved into the property in August 2010, notwithstanding that it still does not have a code compliance certificate. The Council would not accept a certificate in relation to pre-lining plumbing work because the registration number given by the person who signed the certificate is incorrect. Mr Chen has unsuccessfully tried to locate the plumber. He has endeavoured to have the work certified by other plumbers, but they have refused to do so because the pipe

work is enclosed in a wall cavity. Mr Chen gave evidence that, in all other respects, the dwelling can now obtain a code compliance certificate.

[24] An initial statement of claim was filed. In brief, it alleged that the building works were commenced by Mr Zhong and/or WLC and that one or the other or both breached the building contract. Mr Chen sought damages based on Mr Hare’s trade summary. In addition, he claimed liquidated damages.

[26] In June 2010, Mr Chen filed a first amended statement of claim. Again, Mr Zhong and WLC filed a statement of defence. They also joined a third party to the proceedings, a Mr Tao Wang.

[28] Associate Judge Abbott reviewed the file on 18 August 2011. Mr Chen wished to file a further amended statement of claim. Accordingly, Abbott AJ put in place a timetable requiring, inter alia, the filing of a second amended statement of claim by 2 September 2011, and any amendments to the statement of defence by 9

September 2011. He also required that the defendants were to serve their briefs of evidence by 7 October 2011.

[29] A second amended statement of claim was filed as directed, but the defendants did not file an amended statement of defence. Nor did they serve their briefs of evidence by 7 October 2011.

[30] The second amended statement of claim largely reflected the factual background set out above. It alleged that the building contract was between Mr Chen and Mr Zhong personally, or in the alternative, that it was between

Mr Chen and WLC or both WLC and Mr Zhong. It outlined two alternative loss calculations. They were as follows:

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Total amount paid in reduction of contract price	$219,435.25
Total cost of completing the building work to a point where a code compliance certificate can be issued	$100,531.37
Total estimated cost of completing all remaining work	$ 74,331.22
Fees of building assessor and quantity surveyor	$ 4,432.50
Subtotal,	$398,730.34
less contract price	$260,000.00
Balance/Damages	$138,730.34

Total amount paid in reduction of contract price	$219,435.25
Total cost of completing the building work to a point where a code compliance certificate can be issued	$100,531.37
Loss of amenity value	$ 30,000.00
Fees of building assessor and quantity surveyor	$ 4,432.50
Subtotal	$354,399.12
Less contract price	$260,000.00
Balance/Damages	$ 94,399.12

Mr Chen also sought further mortgage interest of not less than $60,000 for the period between 1 April 2009 and 1 October 2010. In addition, or in the alternative, Mr Chen sought liquidated damages of $500 per day as from 25 December 2008. There was also a claim for general damages of $25,000.

[31] On 17 October 2011, the matter came before Venning J. He noted that counsel for the defendants had withdrawn, and that the solicitors for the defendants had advised the Registrar by email that the defendant, Mr Zhong, proposed acting for himself. Venning J ordered that, unless the defendants filed and served their witness

statements by 4.00 pm on Friday, 21 October 2011, their statement of defence and third party claim would be struck out, and the matter would proceed by way of a formal proof hearing.

[32] The defendants did not file and serve their witness statements as directed.

[33] The matter came before me on 26 October 2011. There was no appearance for the defendants and the hearing proceeded by way of formal proof. I heard evidence from Mr Hare, Mr Chen, and his daughter, Yiyun Chen. I also heard extensive submissions from Mr Keall, appearing on behalf of Mr Chen. He submitted that the following matters were in issue:

(d) To what extent did Mr Zhong and/or WLC leave the contract work incomplete and/or defective?

(e) What costs has Mr Chen incurred to date in completing the contract work, and what is the cost of completing the remaining work?

(g) Can Mr Chen claim additional mortgage costs and/or liquidated damages in addition to the cost of completing the contact work?

[34] With the exception of item (h), I agree with Mr Keall that each of these issues requires resolution. There are also some ancillary issues which I deal with below. I do not deal with item (h) because it only arises if reference is made to the statements of defence filed to the initial and the first amended statement of defence. Those defences have been struck out. Mr Chen is not required to deal with positive defences raised in pleadings which are no longer before the Court.

[35] Mr Keall presented an amended quantum summary in relation to the claim for damages. This was substantially the same as is outlined in [31] above, except that it allowed for the dispute between Mr Chen and Siu Lum Gar Limited and the light bulbs. As a result, damages calculated under the first alternative were said to be

[36] I now turn to each of the issues identified by Mr Keall. Before doing so, I

[37] The High Court Rules do not provide discreetly for hearings by way of formal proof. Indeed, they do not expressly address such hearings at all. Rather, the position has to be gleaned from other rules.

[38] Here, the matter proceeded to hearing by way of formal proof because the defendants’ statement of defence was struck out when they failed to comply with Venning J’s unless order. The Court can make such an order striking out all or part of a pleading, inter alia, in the exercise of its inherent jurisdiction.1

[39] When a statement of defence is struck out, there is no defence to a plaintiff’s claim. Mr Keall argued that it must follow that allegations of fact made in the statement of claim are deemed to be admitted. I do not agree. There is no rule that

_{provides for this. Mr Keall relied on High Court Rule 5.48(3). Rule
5.48 deals with}

the requirements of a statement of defence. It provides that a defendant must either admit or deny the allegations of fact in a statement of claim and r 5.48(3) provides that an allegation not denied is treated as being admitted. It does not follow that all allegations of fact made in a statement of claim are to be treated as admitted where a statement of defence is struck out. Rather, they must be proved, formally.

[40] Similarly, it does not follow that causes of action pleaded in a statement of claim are deemed to be admitted where the statement of defence is struck out. Under r 10.7, if the plaintiff appears and the defendant does not, the plaintiff must nevertheless prove the cause of action so far as the burden of proof lies on the plaintiff. A plaintiff proceeding under this rule should ensure that everything relevant to the proof of his or her case is put before the Court, to minimise the

[41] Where no statement of defence has been filed, a plaintiff can proceed under whichever of rr 15.7 to 15.10, or 15.12 is applicable.3 Where a statement of defence has been struck out by the Court, the position seems to be the same.4

[42] Where there is a claim for unliquidated damages, r 15.10 requires that the proceeding be tried to assess damages. No defendant can adduce evidence without the leave of the Court, except in mitigation of damages. The effect of r 15.10 is not however to treat the defendants’ omission as giving rise to the entry of judgment by default in respect of liability. Damages will only flow if an applicable cause of

3 Andrew Beck and Others McGechan on Procedure (looseleaf ed, Brookers, updated to

[43] In the present case, Mr Chen has to prove, on the balance of probabilities, that there was a contract, who the parties to the contract were, the terms of the contract, breach, and loss warranting damages.

[44] Mr Chen was adamant that the building contract was with Mr Zhong. He asserted that Mr Zhong was the designer of the property, and that he reached a verbal agreement with Mr Zhong that Mr Zhong would build the dwelling on 10 July 2008. He acknowledged that he had signed the building contract that referred to WLC, but said that he required the supplementary agreement to support the verbal agreement that he had earlier entered into with Mr Zhong.

[45] A building contract is not required to be in writing. Nevertheless, any alleged contract must be certain. Inter alia, the parties to the contract must be defined and ascertained at the time the contract is made. 6

[46] Here, Mr Chen told me that he entered into an oral agreement whereby Mr Zhong agreed to build the dwelling. There is nothing to suggest that Mr Zhong told Mr Chen that a nominee would build the dwelling. Had the matter gone no further, Mr Zhong would have been bound by the terms of his oral agreement. However, in the event, a written building contract was concluded and it was not between Mr Zhong and Mr Chen. Rather, it was between Mr Chen and WLC. Mr Chen told me that Mr Zhong explained why he wanted the building contract to be in WLC’s name. Mr Chen agreed to that request when he signed the contract. There has, in effect, been a novation. Mr Chen agreed to substitute WLC as the contracting party, and, implicitly, to release Mr Zhong from the obligations that he orally assumed.

[47] Mr Keall did suggest that the written contract was a sham. That allegation was not pleaded. Further, in my view, it cannot withstand close analysis.

6 Kelner v Baxter (1866) LR 2 CP 174; The Laws of New Zealand, Contract, [6].

[48] There are two situations where a document can be set aside as a sham. The first is where the document does not reflect the true agreement between the parties. In those circumstances, the cloak can be removed and recognition can be given to the common intention. The second is where the document was bona fide at its inception, but the parties have departed from their initial agreement while leaving the original

[49] The first circumstance cannot apply. Mr Zhong explained why he wanted the building contract to be in the name of WLC. Mr Chen signed it, thereby concluding the contract with WLC. The document is clear on its face. There is nothing to suggest that it did not represent the true agreement between the parties at the time it was signed. There has been no application for rectification. The 3 September 2008

[50] Nor can the second circumstance apply. It is not clear from the evidence that the parties have departed from the written building agreement. Mr Chen stated in evidence that he subsequently decided that he wished to clarify matters with Mr Zhong. He said that he spoke to Mr Zhong and told him that he wanted a supplementary agreement that, inter alia, correctly stated that the agreement was between him and Mr Zhong personally. Mr Chen prepared the supplementary agreement and Mr Zhong signed it. The difficulty from Mr Chen’s perspective is that the supplementary agreement does not state that the building contract was intended to be between Mr Chen and Mr Zhong. The supplementary agreement does not refer to Mr Zhong at all. Mr Zhong did sign the document, but I do not think that that is decisive. It seems more likely that Mr Zhong signed it on WLC’s behalf. If the parties intended for WLC to assign its obligations to Mr Zhong then there should have been a further novation, whereby each of the parties entered into a new contract. The new contract should have recorded that, in consideration of Mr Chen releasing WLC from its obligations, Mr Zhong agreed to assume responsibility for their performance. That did not occur.

[52] The terms of the building contract are relatively clear. They are as set out in the contract and the supplementary agreement outlined at [8] and [11] above respectively. In brief, WLC was required to construct and carry out the building works shown in signed drawings and specifications. Although no drawings and specifications were ever signed, there does not appear to be any dispute about this. The drawings and specifications referred to in the contract were those which were submitted to the Manukau City Council and which received a building permit. The works were required to be carried out in a proper and workmanlike manner, and WLC was to comply with the provisions of all relevant regulations and bylaws applicable to the works. In addition, WLC was bound by the supplementary agreement to provide the fittings, appliances and fixtures detailed in that document.

[54] An issue arises in relation to the lower deck, the fences, and floor coverings in some areas. Mr Chen asserts that he entered into a verbal agreement in relation to these matters with Mr Zhong.

[55] It seems relatively clear that there was an agreement in relation to fencing and the substitution of wooden flooring with carpet in some areas. Fencing is referred to in the supplementary agreement. Carpet has been substituted for wood in some areas. Carpet is the cheaper option, and Mr Chen does not complain about that.

[56] The position in relation to the deck is more difficult. As noted above, the deck is not referred to in the building contract or the application for a building permit. Nor was it shown on the plans. However, according to Mr Chen, he and Mr Zhong verbally agreed that Mr Zhong would build the deck before the building contract was concluded.

[57] Mr Chen’s assertion is contrary to the express terms of the building contract. Moreover, it seems inherently unlikely that the contract extended to the deck. The

64 metres square in size. It was built by Siu Lum Gar Limited. As noted above, it is not possible from its invoices to ascertain the precise cost of the structure. According to Mr Hare, the cost of building the deck would have been $350 per square metre. It follows that the cost of construction of the deck was approximately

$22,400. The evidence established that the deck became necessary, because WLC did not install sliding doors at the eastern end of the lounge as shown on the plans. Rather, it installed them in the northern wall of the lounge, and it put windows in the eastern wall. The sliding door on the northern side would have opened out into mid air had the deck not been installed. The drop was less than a metre. Apparently, no Council consent was required for the deck and no consent was sought. Mr Hare however considered that an amendment to the building consent should have been filed. This did not happen.

[58] I am not satisfied on the balance of probabilities that there was an oral agreement between Mr Chen and Mr Zhong on behalf of WLC to build the lower deck. I have reached this conclusion for the following reasons:

(d) the deck was not required until it became obvious that a door had been substituted for a window in the northern lounge wall, and there is nothing to suggest that this became an issue until after WLC defaulted under the building contract.

[59] There is nothing in the evidence that I have heard to suggest that Mr Chen authorised any variations, or that he agreed to alter the contract price. It is clear that a number of materials were substituted and that there were a number of deviations from the plans and specifications. However, there is nothing to suggest that Mr Chen authorised any of these changes.

To What Extent Did Mr Zhong and/or WLC Leave the Contract Work Incomplete and/or Defective?

[60] In light of my above finding that the contractual parties were Mr Chen and WLC, I need only consider whether WLC left the contract work incomplete and/or defective.

[61] I accept Mr Hare’s extensive evidence on this issue. In brief, the following work was left incomplete, and/or was defective:

(a) Aluminium joinery – Much of the exterior aluminium joinery and windows provided did not comply with the plans and specifications.

(b) Garage door – The garage door was manufactured to the wrong size and WLC attempted to “pack down” the head of the door in an unsatisfactory manner.

(c) Laundry – Skirting was missing from the floor, no silicon had been applied to floor tiles, the interior floor had been damaged, and the laundry tub had been substituted for a cheaper brand.

(d) Interior doors – All interior doors were badly hung and many had been installed out of square, and with twists in the frame. All hardware had been substituted for a cheaper brand. Striker plates had not been installed.

(e) Interior paintwork – Interior paintwork was rough. Some remedial plastering was required.

(f) Electrical systems – A central vacuum system had been pre-piped, but the unit was not installed. An HRV system had not been installed. An alarm system and been pre-wired, but not completed and installed. An Infinity gas hot water system had not been supplied or installed. An intercom had been pre-wired, but the intercom system had not been supplied and installed.

(h) Ground floor toilet – Silicon work in the ground-floor toilet was not complete, and the wrong toilet suite, vanity and tapware had been installed.

(i) Master bedroom en-suite – The wrong sanitary and tapware had been installed in the master bedroom en-suite. Floor and wall tiles needed to be removed and reinstated, and the bath had been substituted and poorly installed. A number of items in the master bedroom en-suite were missing.

(j) Master bedroom – The master bedroom wardrobe had not been fitted out. The master bedroom carpet, low energy light bulbs, and light and power switches had not been provided.

(k) Staircase – An internal staircase and handrail were missing. The stairs had not been carpeted. There was no light fitting in the stairwell.

(m) Stone cladding – Stone hearth and wall cladding had not been put in place.

(n) Kitchen – The kitchen joinery was wrong. WLC had allowed for a freestanding stove rather than an under-bench oven and hob. The sink

and tapware had been substituted for cheaper brands. A number of items had not been supplied.

(o) Flooring – A very cheap laminated timber overlay system had been used. There was water damage to both the first and ground floors, and the floors had been damaged by stones and building debris.

(p) Electrical/Gas – Electrical fit out and sign off was required, as was gas fit out and commissioning.

(q) First floor bathroom – In the first-floor main bathroom, incorrect sanitary and tapware had been installed, and a number of items had not been provided.

(s) Shelving – There was no shelving in the hallway cupboard. The first floor had not been carpeted.

(t) First floor deck – The first floor deck departed from what was shown in the plans and specifications, and the decking had been nailed on with inappropriate nails. A timber handrail was missing.

(u) External work – Some external work on the building had not been completed. Some of the mitred corners had not been primed. Paint preparation on the weatherboards was unacceptable. Head flashings over windows and doors had no stoppings. The flashing had also been poorly installed. The soffit linings were unacceptable. The exterior stone cladding had not been provided. The entry deck had been nailed down with inappropriate nails. Down pipes had not been installed. Water main and plumbing needs to be completed and attended to.

(v) Sundry – A number of exterior items such as a clothesline, channel and grating, driveway, gates, features, and the like had not been provided.

[62] A number of photographs showing the property as at February 2010 were made available. I have considered the same. I have also considered the plans and specifications, and Mr Hare’s evidence. It is abundantly clear that there were significant departures from both the plans and specifications, and good building practice. The dwelling was left in an unfinished state. WLC walked off the site. The building contract has clearly been breached.

What Costs has Mr Chen Incurred to Date in Completing the Contracted Work, and

[63] Mr Chen gave detailed evidence of the work that he had undertaken, and the costs that he has incurred in completing that work. He produced invoices for costs he incurred , and in general, I accept his evidence.

[64] The actual costs incurred by or invoiced to Mr Chen to date are $90,351.33 inclusive of GST. That figure included an allowance for light bulbs of $170. The invoice established that the actual amount spent on light bulbs is $31.25, and Mr Chen corrected his evidence in that regard. It also included monies claimed by Siu Lum Gar Limited in respect of the work done by it, including the construction of the lower deck. The best evidence I have before me as to the cost of that work is Mr Hare’s evidence – that the deck would have cost approximately $22,400. Deducting both of these sums, it follows that the costs invoiced to Mr Chen to date in completing the contract work were $67,812.58 (I say “invoiced to” because Mr Chen is disputing part of the Siu Lum Gar Limited invoice, and he has not to date paid it in full.).

[65] In addition, Mr Chen incurred costs in tidying up the site, and providing items, for example, a mailbox and a clothesline, all of which were supposed to have been provided by WLC. He produced various invoices in relation to those items, that total $2,451.53 including GST. He also incurred significant costs in obtaining

the necessary producer statements, and certificates in order to try and obtain a code compliance certificate, and in dealing with the Manukau City Council. Again, he produced invoices. Total costs in that regard amount to $12,178.62.

[66] It follows that the total costs invoiced to and/or incurred by Mr Chen to date are $82,442.73 includingGST.

[67] It is clear from the evidence, and in particular Mr Hare’s evidence, that all of the works the subject of the contract between Mr Chen and WLC have not as yet been completed. The estimated cost of completing the remaining works, according to Mr Hare, is $74,331.22. Mr Chen has given evidence that he fully intends to complete the work when and if judgment is entered in his favour.

[68] It is trite law that where a contract is breached, an aggrieved party seeking damages is entitled to be restored, insofar as money can do so, to the position he or she would have been in had the breach of contract not occurred, and as long as the damage is not too remote. Damage will not be too remote if it is reasonably foreseeable. What is reasonably foreseeable depends on the knowledge of the parties at the time, or at least the knowledge of the party who later committed the breach. There are two kinds of knowledge, imputed knowledge and actual knowledge. In the case of the former, the contract breaker, as a reasonable person, is taken to know what loss could ordinarily result from a breach of the contract. In the case of the latter, the contract breaker may have knowledge of special circumstances outside the ordinary course of events that may give rise to additional loss. In this event, the

[69] Here, Mr Chen claims damages of not less than $60,000 for additional mortgage interest. There is however nothing to suggest that WLC was aware that Mr Chen had a mortgage, or that he would incur additional costs if the house was not

_{built as provided for in the contract. As noted above, the clause
confirming that}

9 See Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528 at 539 per

Mr Chen had applied for mortgage finance in the building agreement was deleted. In his evidence, Mr Chen has not asserted that he discussed his mortgage, nor any increased liabilities to which he might be exposed if the building contract was breached, with Mr Zhong.

[70] Accordingly, I conclude that it is not open to Mr Chen to claim additional mortgage costs by way of damages for WLC’s breach of the contract. The additional mortgage costs are too remote.

[71] The supplementary agreement did contain a liquidated damages clause. It provided that damages for breach were to be assessed at $500 per day.

[72] The parties to a contract may agree beforehand what sum will be payable by way of damages in the event of breach. As is noted in the Law of Contract in New Zealand, such provisions may reflect good business sense, and be advantageous to both parties. It allows them to envisage the financial consequences of a breach and, if litigation proves inevitable, avoid the difficulty and legal costs of proving what loss has in fact been suffered by the innocent party.10

[73] However, the Court will not enforce provisions which do not seek to compensate the innocent party, but which seek to penalise the breach. In such cases, the promisee is sufficiently compensated by being indemnified for his or her actual loss. The promisee acts unconscionably if he or she demands a sum which, although fixed by the agreement, is disproportionate to the injury and the loss suffered, and the plaintiff must instead prove the actual amount of his or her loss in the ordinary

building agreement is a genuine pre-estimate of loss, or a penalty, the Court must consider the terms and inherent circumstances of the building contract at the time of making the contract, and not at the time of breach. The onus in this regard is on the

10 Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington,2007)

[74] Here, I have concluded that the clause contained in the supplementary agreement is a penalty, and not a genuine pre-estimate of loss.

[75] Mr Chen gave evidence on this issue. He told me that he and Mr Zhongdid not discuss the $500 per day figure. Rather, he told me that this was the figure he estimated would be his loss if there were any delays. He said that he told Mr Zhong the figure, and said he could either accept it and go ahead, or not accept it, in which case he would find somebody else to undertake the building works. He endeavoured to explain why he chose the $500 per day figure. He said that it included the mortgage on another house that he owned, the mortgage “of the current loan”, the construction cost of the dwelling, and also that his funding came from the stock exchange market in China, Hong Kong and the USA. He stated as follows:

If there is any problem that will happen to my cash flow link, then I will have to be forced to sell my shares, sell my stocks and also if anything happened like that what have happened for this particular case where the builder has not been responsible, then I will have to invest more money and more people to do something that I am not familiar with.

Frankly, I did not understand Mr Chen’s reasons for estimating his losses at $500 per day, and it seemed to me that there was no coherent explanation justifying that figure.

[76] Application of the formula contained in the supplementary agreement would result in damages of a very substantial sum. According to the supplementary agreement, the dwelling was supposed to be completed by 25 December 2008. If liquidated damages for $500 per day are allowed to 24 April 2010, when a new builder was first engaged to partially complete the contract works, the total sum payable in accordance with the provision contained in the supplementary agreement would be $242,500 (485 days at $500 per day). If damages are calculated in accordance with the supplementary agreement until 31 July 2010, when the new builder ought to have completed the contract works, the figure would be $291,500 (583 days at $500 per day). If damages are calculated at $500 per day from 25

December 2008 down to the date of the hearing, then damages would be $503,500 (1007 days at $500 per day). Clearly, such figures are significantly in excess of the actual loss that Mr Chen suffered.

[77] There is no evidence to suggest that Mr Chen ever cancelled the building contract. Indeed, the suggestion was made during the course of the hearing that Mr Chen kept the building contract on foot, so that liquidated damages could continue to accrue.

[78] Under the Contractual Remedies Act 1979, an innocent party is presented with an election. He or she may either affirm the contract by treating it as still in force, or cancel it.12 If a party elects to cancel a contract, then notice should be given.13 The general rule is that cancellation is not effective until the other party knows of it.

[79] Here, it seems to me that cancellation was clearly communicated when Mr Chen issued the proceedings claiming damages. That made WLC aware of Mr Chen’s position, and in my view, served as communication of cancellation in terms of s 8.14 Here, the proceedings were issued in March 2010. Even by that date, had the liquidated damages clause been in effect, substantial damages would have accrued.

[80] There is no evidence that the $500 per day figure was a genuine pre-estimate of damage at the time the contract was entered into. Further, the $500 per day figure would result in an award which is extravagant and unconscionable. Accordingly, I decline to allow Mr Chen damages in accordance with the provision contained in the supplementary agreement.

[81] As noted above, the total costs incurred by Mr Chen to date in rectifying and partially completing the building works are $82,442.73, inclusive of GST. The estimated costs of completing the remaining work are $74,331.22. In addition, Mr Chen has incurred costs in retaining both Mr Hare, the building assessor, and the

_{quantity surveyors. It is his evidence that the fees incurred amounted
to $4,432.50.}

12 Burrows, Finn and Todd Law of Contract in New Zealand (3rd ed, LexisNexis, Wellington,2007)

14 See Chatfield v Jones [1993] NZLR 285; See Law of Contract in New Zealand at 594–596 at

The evidence also established that Mr Chen paid $219,455.25 to WLC in reduction of the contract price. This includes the final payment of $7,000 made on 2 May

2009. Notwithstanding that Mr Zhong gave Mr Hare an acknowledgement of debt in respect of that sum, I am satisfied from Mr Chen’s evidence that the monies were in fact used to pay tradesmen doing work on the house. Indeed, Mr Chen made payments direct to those tradesmen.

a	Total amount paid in reduction of the contract price	$219,435.25
b	Costs incurred by Mr Chen in rectifying and completing building works	$ 82,442.73
c	Estimated cost of completing remaining work	$ 74,331.22
d	Fees of the building surveyor and quantity surveyor	$ 4,432.50
e	Subtotal	$380,641.70
f	Less contract price	$260,000.00
g	Total	$120,641.70

[83] As noted above, Mr Chen disputes part of the invoice Sui Lum Gar Limited has rendered to him. The invoice was for $41,904.54. Mr Chen has paid

$27,110.45, and is denying liability for the balance. He has sued Sui Lum Gar Limited for $25,183.85, being compensation for defective work he alleges was done by that company. If Mr Chen succeeds in these proceedings, the actual costs incurred by him will be less than the figure noted in (b) above. It is impossible to predict the outcome of those proceedings, but in my view, some allowance has to be made for them. I deduct a figure of $7,500 from the damages otherwise payable, to allow for the uncertainty inherent in that litigation. Necessarily, that deduction is a stab in the dark. It may be that Mr Chen succeeds in the District Court. It may be that his action fails. The difficulty in assessing damages has never been a bar to relief, and the Court must do the best it can to estimate the loss. In my judgment, allowing a deduction of $7,500 is a reasonable estimate that is more or less fair to both parties.

[84] Mr Chen also seeks general damages of $25,000. He gave some evidence in relation to this issue. He stated that he had suffered considerable distress, anxiety

and inconvenience as a consequence of WLC’s actions. He asserted that he had to waste a huge amount of time tracking down alternative contractors to complete and rectify the problems, and has had many sleepless nights worrying about getting the work done, and the ongoing financial stresses caused by WLC’s breach of contract. He said that worry had caused him to lose six kilograms in weight, and that he often feels irritable and exhausted.

[85] I accept Mr Chen’s evidence, but in my view, the amount claimed by him by way of general damages is too high in the circumstances. I note that Mr Chen and his family were not occupying the dwelling until they chose to move into it before it was complete. There was no evidence before me as to why they chose to take that step. Further, Mr Chen has taken a relatively leisurely approach to getting the building works completed, and I infer that at least to an extent, he has been prepared to put up with matters. In the circumstances, it seems to me that an award of general damages of $15,000 is appropriate.

[87] Mr Keall, on Mr Chen’s behalf, submitted that Mr Zhong was personally liable in tort, for the following reasons:

(b) Mr Chen personally dealt with Mr Zhong at the early design stages; (c) Mr Zhong checked all of the consent plans;

(e) the building consent application reveals that Mr Zhong had a detailed knowledge of the project;

(h) the building agreement provided that it was a cost plus management fee contract, and the assumption of responsibility for the management role fell to Mr Zhong; and

(i) Mr Zhong personally collected all payments and issued receipts for the same.

[89] Where a company is incorporated, the acts of its directors are usually identified with the company, and they do not give rise to personal liability.15

However, the concept of limited liability, while relevant, is not decisive. Limited liability limits the financial risk of shareholders to the capital they introduced to the relevant company. It is not intended to provide company directors with a general immunity from tortious liability.16

[90] In Morton v Douglas Homes Limited, Hardie Boys J expressed the view that if a company director has personal control over a building operation, he or she can be held personally liable. He noted that the relevance of the degree of control which a director has over the operations of a company is that it provides a test of whether or not his or her personal carelessness may be likely to cause damage to a third party, so that the director becomes subject to a duty of care. He observed that it is not the fact that the person who is the director that creates the control, but rather the fact of

[91] In Trevor Ivory Limited v Anderson, Hardie Boys J referred to Morton as being an example of a situation where the director had assumed responsibility by

exercising particular control or control over a particular operation or activity. He observed that personal liability can arise where there is clear evidence that the director is acting not as the company, but as a company’s agent or servant. He stated that, in such cases, the Court looks upon an assumption of responsibility – actual or imputed – in order to find personal liability.

[92] Recently, the Court of Appeal has comprehensively analysed the reasoning in Trevor Ivory. It held by a majority that the case has no application at all to cases in which assumption of responsibility is not an element of the tort.18 Chambers J expressly, and William Young P and Arnold J implicitly, preferred an “elements of the tort” approach. Ellen France and Glazebrook JJ agreed with the judgments of William Young P and Arnold J. An “elements of the tort” approach requires as a

precondition for liability a conclusion that the director assumed personal responsibility for the relevant conduct associated with the presumption against such an assumption where the director was simply acting on behalf of the company. It only requires the Court to find that the director assumed personal responsibility

where that is an element of the tort, for example as in negligent misstatement.19

[93] Here, the pleadings alleged that Mr Zhong owed a concurrent tortious duty of care to Mr Chen to undertake and supervise the building work to the standard of a reasonably competent builder. The essential allegation was that Mr Zhong was negligent. Assumption of responsibility is not an element of the tort of negligence simpliciter. Rather, Mr Chen has to establish that Mr Zhong owed a duty to take care. He has to show that Mr Zhong acted in such a way as to breach that duty of care, and that the damage suffered by him was caused by the breach of that duty, and was a sufficiently proximate consequence of the breach so as not to be too remote. He has not done so.

[94] Further, and in any event, I do not consider that the various factors relied upon by Mr Chen demonstrate any assumption of responsibility by Mr Zhong. First, a number of the matters asserted to support the alleged liability are steps taken by

irrelevant in considering his liability as director of WLC. Secondly, the evidence compels the conclusion that Mr Zhong was not personally involved in the construction of the dwelling. It was Mr Chen’s evidence that the builder, and the person managing the project, was somebody called Wang Tao. He stated that Wang Tao was on the site “the longest” and that all other trades people came and went. He did say that if he required anything, he called Mr Zhong, and that if there was anything inappropriate happening on the site, he told Mr Zhong. He stated that he saw Mr Zhong on the site on occasion, but that he was telling other people what to do, rather than doing any work himself. He stated that he did not see him on the site “very much”.

[95] In the circumstances, I do not consider that there is any principled basis on which Mr Zhong can be held personally liable in negligence for the actions of WLC, and I decline to award damages against him personally.

[96] In summary, I award damages against WLC, and in favour of Mr Chen, in the sum of $128,141.70. Mr Chen is entitled to interest on that sum, as from the date or dates on which the various payments were made by him. Interest should be calculated by reference to the relevant figure specified in the Judicature Act 1908 at the time of each particular payment. If there is any difficulty in finalising the interest calculation, the same is to be referred to me.

[97] Further, Mr Chen is entitled to his costs and reasonable disbursements. Costs should be calculated on a 2B basis. Again, if there is any difficulty in finalising the same, that issue is to be referred to me.

[98] Any memorandum in relation to interest and/or costs is to be filed within 10 working days of the date of this judgment. I will then finalise the issue on the

High Court of New Zealand Decisions

Chen v Zhong HC Auckland CIV 2010-404-001995 [2011] NZHC 1543 (14 November 2011)