O'Connell v Dwerryhouse HC Auckland CIV-2010-404-1329 [2011] NZHC 801 (24 June 2011)

Last Updated: 4 August 2011

IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2010-404-1329

BETWEEN MARK O'CONNELL, KAREN O'CONNELL AND CHRIS MOORE Plaintiffs

AND TREVOR DWERRYHOUSE First Defendant

AND JILL PAYNE Second Defendant

AND ROBERT NOAKES Third Defendant

AND AUCKLAND PROPERTY RESTORATION LIMITED Fourth Defendant

Hearing: 14 February 2011

Counsel: M T Davies for Plaintiffs/Respondents

G White for Fourth Defendant (appearance excused)

S Robertson and C Holmes for First to Third Defendants

Judgment: 24 June 2011 at 12:00 PM

RESERVED JUDGMENT OF ASSOCIATE JUDGE SARGISSON (Defended Interlocutory)

This judgment was delivered by me on 24 June 2011 at 12 pm pursuant to

Rule 11.5 of the High Court Rules

Registrar/Deputy Registrar

Date .......................... Solicitors:

Meredith Connell, Auckland Minter Ellison, Auckland Kensington Swan, Auckland

MARK O'CONNELL, KAREN O'CONNELL AND CHRIS MOORE V TREVOR DWERRYHOUSE HC AK CIV-2010-404-1329 24 June 2011

[1] The plaintiffs own a leaky house, and land, at 2 Karori Crescent, Orakei which they purchased from the first to third defendants, the trustees of the Parnell Trust, in May 2007. The plaintiffs claim that the Parnell Trustees breached two warranties in the agreement for sale and purchase. One warranty relates to repairs the Parnell Trustees caused to be undertaken to deal with weather-tightness problems, and the other to the Parnell Trustees’ knowledge of weather-tightness issues affecting the house at the time of sale. The plaintiffs also claim in negligence against the fourth defendant, Auckland Property Restoration Limited, a property and building restoration specialist. The fourth defendant is said to owe the plaintiffs a duty of care in advising the Parnell Trustees on weather-tightness issues and carrying out remedial work in 2005.

[2] The Parnell Trustees deny breaching the warranties. The fourth defendant denies that it acted negligently.

The Present Application

[3] Presently, the Parnell Trustees seek an order under High Court Rule 10.15 that their liability for breach of the subject warranties be tried at a separate hearing, in advance of any other question that arises for determination in the proceeding.

[4] The warranties are set out in cls 7.2(5) and 18 of the agreement for sale and purchase.

[5] Clause 7.2(5), a standard form warranty, states:

The vendor warrants and undertakes that at the giving and taking of possession:

...

(5) where the vendor has done or caused or permitted to be done on the property any works for which a permit or building consent was required by law:

(a) the required permit or consent was obtained; and

(b) the works were completed in compliance with that permit or consent; and

(c) where appropriate, a code compliance certificate was issued for those works; and

(d) all obligations imposed under the Building Act 1991 and/or

the Building Act 2004..... were fully discharged.

[6] Clause 18, a warranty added to the agreement as a further term of sale, states:

The Vendor warrants to the best of its knowledge that there are no weather tightness or similar water-proofing issues affecting the building.

[7] For the purpose of determining the Parnell Trustees’ liability at the separate hearing, counsel for the Parnell Trustees has formulated two questions:

1. Whether the Trustees breached clause 7.2(5) of the sale and purchase agreement, namely:

(a) whether a building consent under the Building Act 2004 was required for the remedial work undertaken on the property in

2005.

2. In respect of the Further Term of Sale, its interpretation and whether the subjective knowledge of the Trustees at the time of settlement of the sale required them to disclose:

(a) past issues with the building which to the best of their knowledge have been remediated, and

(b) issues with the building that may arise in the future.

[8] The plaintiffs oppose the application. The fourth defendant agrees to abide by the outcome of the application.

Background/Statement of Claim

[9] In 1998, the original owners of the house engaged Bacchus Group to write a report on its weather-tightness. Following that report, Sansom Contracting Services, the construction arm of Bacchus Group, carried out limited remedial work in 1998.

[10] The report recommended that specific remedial work be carried out on the entrance, roof and deck details; the western wall of the study; tiles to the front gate steps; and plasterwork. A general upgrade of detailing was also recommended to ensure long-term durability.

[11] The Parnell Trustees bought the property in mid-2004 for Mr Dwerryhouse and Mrs Paine’s use. Shortly after moving in, they noticed weather-tightness problems with the house and the Parnell Trustees engaged the fourth defendant to

investigate and carry out remedial work. The fourth defendant enlisted Bacchus to conduct the investigation.

[12] On 24 November 2004, Bacchus sent a letter to the Parnell Trustees stating that the problems identified on the eastern wall were identical to those on the western wall outlined in the 1998 report. A copy of that report was attached to the letter. Accordingly, Bacchus recommended that a number of procedures be carried out to rectify these problems. The recommended procedures included addressing both patent and latent defects in the eastern walls, east elevation decks and the chimney. Bacchus also suggested further investigation into the exterior cladding of the house was necessary. Consequently, the Parnell Trustees instructed the fourth defendant to carry out some remedial work in 2005.

[13] As counsel for the plaintiffs highlights, the parties dispute how much of the recommended remedial work was actually carried out. The fourth defendant asserts in answers to interrogatories that it was instructed not to carry out all the remedial work recommended in the 2004 letter. Conversely, in their answers to interrogatories, the Parnell Trustees say that they instructed the fourth defendant to carry out all such work.

[14] The parties also dispute whether the fourth defendant gave any assurances as to the water-tightness of the property upon completion of the 2005 remedial work. While the fourth defendant states that no such advice or assurances were given, Mr Dwerryhouse for the Parnell Trustees deposes that the fourth defendant assured him that all the 2005 remedial work had been completed satisfactorily.

[15] The plaintiffs commenced this proceeding on 3 March 2010. By way of relief against the Parnell Trustees, they seek a declaration that they may cancel the agreement for sale and purchase and have the purchase price returned. In the alternative, the plaintiffs seek damages for the cost of remedying the defects and resulting damage estimated at $610,000, the cost of alternative accommodation and any consequential decrease in the value of the property, plus interest. As against the fourth defendant, the plaintiffs seek to recover the cost of remedying the defects and

resulting damage, the costs of alternative accommodation, and interest. The plaintiffs also seek costs.

Legal principles

[16] Rule 10.15 sets out when a court may order that a question or questions in a proceeding be determined separately from the other questions. It states:

10.15 Orders for decision

The court may, whether or not the decision will dispose of the proceeding, make orders for—

(a) the decision of any question separately from any other question, before, at, or after any trial or further trial in the proceeding; and

(b) the formulation of the question for decision and, if thought necessary, the statement of a case.

[17] For the purposes of r 10.15, r 10.14 defines “question” as including:

...any question or issue in any proceeding, whether of fact or of law or partly of fact and partly of law, and whether raised by pleadings, agreement of parties, or otherwise.

[18] For the purpose of the rule there is a presumption that all matters at issue are to be determined in one trial. The burden of displacing this presumption rests on the applicant and is “not insignificant”.1

[19] The rationale for the rule is well recognised. Fisher J in Clear

Communications v Telecom Corp of NZ Ltd notes:2

Split trials risk a number of difficulties. It is often difficult to define with sufficient precision the demarcation between those issues to be addressed at the first trial and those left for the second (see, for example, the Arklow litigation). It is not always easy to see what matters have become the subject of issues estoppels. It may be necessary to prepare issue estoppels schedules and hear argument as to their scope. A Judge may inadvertently disqualify

1 KPMG New Zealand v Gemmell HC Auckland CIV-2008-404-4288, 27 March 2009 at [20].

2 Clear Communications v Telecom Corp of NZ Ltd, HC Auckland CL51/96; CL4/97, 26 June 1998 at

himself or herself by expressing views on matters yet to be fully addressed at the second hearing (Winton). Findings might be inadvertently made without the benefit of evidence and argument envisaged by a party as appropriate only for the second hearing. The second hearing can require the recalling of the same witnesses with needless extra time and cost to the parties and the public. There is duplication of time spent by counsel and the Court in re- acquainting themselves with issues imperfectly remembered from an earlier trial and the time spent retraversing those matters in Court. There can be multiple appeals (in extreme cases taking the matter to the Privy Council as in Tyde v Sorenson) before returning to the Court of first instance to embark upon the second phase of the case. Even without appeals, there can be delay in embarking upon a second round of discovery and other interlocutory matters and amended pleadings following the first trial and then the delay of obtaining a fixture for the second hearing. There can be difficulties in ensuring that the same Judge is available for the second hearing, bearing in mind the usual commitments, sabbaticals, retirements and deaths which are the unhappy lot of the judiciary. If a different Judge has to preside at the second hearing there can be difficulties over earlier views as to credibility and the status of the notes of evidence from the first hearing. In my view these and other difficulties together place a heavy onus on any party seeking a split trial.

[20] Fisher J cautioned that:3

In the end, however, every case must be considered individually and the possibility of a split trial should never be dismissed out of hand.

[21] The most important single question usually is the interaction between the issues intended to be addressed at the first hearing and those for the second hearing.4

That will be so whether the proposed split is a split between a liability hearing and a second hearing confined to damages, or a second hearing that deals with more extensive issues.

[22] Where issues intended for the first hearing are intertwined with those intended for the second, that factor will tell against division. Such was the case in Clear Communications where issues material to the liability of defendants were found to “intimately concern...and shade through” the financial consequences and

_remedy.5 _{Similarly in Young v St Lukes Square (1993) Ltd, Asher J noted that}

3 _{At 335.}

4 At 335.

potential overlap of evidence material to liability and quantum should be avoided if significant.6 He also stated:7

... there needs to be good reason disclosed by the applicant on clear and tangible grounds, before a division between the liability hearing and the damages hearing will be ordered.

The Issue for Determination

[23] Broadly, the issue that I am required to determine is whether the Parnell Trustees have shown that there are good reasons on clear and tangible grounds to warrant an initial separate hearing for the proposed questions. A key enquiry is whether the trustees have established convincingly that there is no significant interaction of issues intended for the first hearing and those that will remain for the second.

[24] There is no serious contention that the application should nevertheless succeed if there is such interaction.

Discussion

[25] Counsel for the Parnell Trustees submits that dividing the hearing in the proposed way would not cause any interaction of issues or overlap in the evidence. He submits that the questions proposed for the first hearing relating to the Parnell Trustees’ liability are distinct from questions as to remedy and the fourth defendant’s liability. He further submits that the split would lead to distinct advantages:

(a) The first hearing would require two days only. It could be held soon.

(b) The split is likely to have a significant and practical impact on the scope and length of the main trial.

6 Young v St Lukes Square (1993) Ltd HC Auckland CIV-2003-404-3215, 17 November 2005 at [6].

7 At [7].

(c) Allowing the separate hearing will reduce the main trial by one week.

If the Parnell Trustees are successful, evidence as to quantum will become unnecessary.

(d) Allowing the separate questions will promote settlement with other parties if answered in the Parnell Trustees’ favour.

(e) Delay is unlikely given that the proceedings are yet to be allocated a trial date and the proposed separate hearing will only take two days.

[26] It is plain from submissions that the application is intended to result in a first hearing to determine whether or not the Parnell Trustees are liable for breach of the two warranties. All other questions would be left to a subsequent hearing. They would include:

(a) The question whether the appropriate remedy, or remedies, in the claim against the trustees (assuming the trustees are unsuccessful on the issue of liability), should include cancellation or simply damages;

(b) All the questions in the claim against the fourth defendant, including questions of liability and quantum (assuming liability); and

(c) All of the issues on which these questions will turn, including whether the Parnell Trustees’ breaches, if any, meet one or other of the tests in s 7(4) of the Contractual Remedies Act 1979 of essentiality and substantial reduction of contractual benefit.

[27] To my mind, this is not an appropriate use of the r 15.10 procedure. My reasons follow.

Interaction between the claimed breach of the warranty in cl 7.2(5) and the fourth defendant

[28] Counsel for the Parnell Trustees concedes that the first proposed question gives rise to the following issues when considering breach of the warranty in cl

7.2(5):

(a) What was the scope of the remedial work that the fourth defendant undertook on the property in 2005?

(b) Did that work require a building consent under the Building Act

2004?

[29] Counsel for the Parnell Trustees submits that these are straightforward issues that be disposed of separately without substantial evidence on the numerous alleged defects and remedial work required to remedy the defects. He advises that the Parnell Trustees will call only two experts to give evidence on the nature and extent of the remedial work, and whether building consent was therefore required.

[30] It is evident, however, that the role of the fourth defendant and the nature of the scope and work that it undertook in 2005 are inextricably linked with the claim against the trustees for breach of warranty in cl 7.2(5).

[31] As counsel for the plaintiffs submits, evidence as to the scope and extent of the 2005 remedial work will be directly relevant to the question of the fourth defendant’s negligence. Consent requirements under the Building Act 2004 cannot be assessed until the scope of the work undertaken is ascertained. Nor can the fourth defendant’s liability in negligence. Such evidence pertaining to each defendant is not readily severable. Overlap is inevitable.

[32] Barker J’s impression of the proposed division in Dobson v Dobson, though concerned with a third party claim, is apposite:8

The impression I have from submissions is that the role of the third party is inextricably mixed up with the claim of the plaintiffs against both defendants and with the cross-claim of the first defendant against the second defendant.

[33] Here, the role of fourth defendant is inextricably mixed up with the plaintiffs’

claim against the Parnell Trustees.

[34] This overlap or mix-up tells against separation.

Interaction between the claimed breach of cl 18 and the fourth defendant

[35] The second proposed question gives rise to similar problems and reinforces my impression that the likely overlap of issues and evidence tells against separation.

[36] I begin with a preliminary concern about the lack of precision in the second proposed question. Counsel for the Parnell Trustees submits that there are two limbs to the question. The first, he says, is one of interpretation of the warranty. Though the proposed question signals that liability turns on the issue of interpretation, no question of interpretation is stated. It is apparent that counsel assumes, despite the absence of formation, that the warranty will be given a restrictive interpretation. He submits material evidence will then be confined to the Parnell Trustees’ subjective knowledge about the weather-tightness of the house at the time of the sale, and the factual background leading to the warranty being inserted into the agreement. Under this submission, it is said that evidence as to the nature and scope of the defects and the proposed repair work will not be relevant.

[37] The assumption is unsafe. A restrictive interpretation cannot be assumed. There is more than a little substance to the submission of counsel for the plaintiffs that the concept of knowledge is arguably broader. As the Court of Appeal noted in Tri-Star Customs and Forwarding Ltd v Denning:9

It may of course be proper for a Court to infer actual knowledge from proved circumstances, even if the person in question denies having that knowledge.

[38] Hence, I agree with counsel for the plaintiff that there is considerable potential for overlap. In order to assess the Parnell Trustees’ knowledge, the court will need to consider evidence as to:

(a) What remedial work the fourth defendant carried out, and what instructions the Parnell Trustees gave to the fourth defendant;

(b) What, if any, assurances the fourth defendant and any third parties gave to the Parnell Trustees;

(c) Whether, as the Parnell Trustees’ claim, they followed the

recommendations of the 2004 Bacchus letter and the fourth defendant.

[39] Indeed such evidence involves an inevitable overlap between the claims

against the Parnell Trustees’ breach of cl 18 and the fourth defendant in negligence.

[40] The Parnell Trustees’ claimed lack of knowledge also deepens the degree of

overlap. It is based largely on their contentions that the fourth defendant:

(a) Carried out all of the remedial work that Bacchus recommended; and

(b) Advised them that such work had been completed satisfactorily.

[41] In effect, they say that because of the fourth defendant’s role, they had no reason to believe other than that there were no remaining weather-tightness issues. The fourth defendant disputes these contentions.

[42] Such evidential disputes will require resolution when assessing both the Parnell Trustees’ knowledge and the care taken by the fourth defendant in carrying out the 2005 remedial work.

[43] The above findings are clearly dispositive of the application for the separate hearing of the proposed questions. There is considerable force in counsel for the plaintiffs’ submission that separating the proposed questions will likely lead to a substantial duplicity of issues and evidence.

Interaction between the claimed breaches and remedies sought against the Parnell

Trustees

[44] Given the above findings, I do not need to deal further with counsel for the Parnell Trustees’ submission that the proposed split will cause no overlap between questions of the Parnell Trustees’ liability, and questions of remedy and quantum. However, for completeness I deal with it briefly.

[45] I agree with counsel for the plaintiffs that the court must have regard to the tests in s 7(4) and factors in s 9(4) before determining that the plaintiffs may exercise the right to cancel the agreement for sale and purchase. Whether or not cancellation is an appropriate remedy must take into account the factors leading to any liability for breach of the warranty. Material factors, as the plaintiffs contend, will include:

(a) Whether the fourth defendant was engaged to investigate and undertake further remedial work to deal with problems first identified in 1998.

(b) Evidence of the extensiveness or otherwise of problems identified by the 1998 report, and drawn to the trustees attention in the 2004

Bacchus letter and later by the fourth defendant.

(c) The Parnell Trustees’ later instruction that the fourth defendant to carry out more limited remedial work.

(d) Whether the effect of any breach was to avoid the disclosure that would inevitably have occurred if building consent had been obtained for the 2005 work. The effect of the failure to disclose actual knowledge was arguably to conceal the on-going existence of weather-tightness issues and the recommendation that there be further investigation. Arguably, the recommendation clearly signalled the need to be mindful of the possible existence of latent defects.

(e) The extent to which the breach of warranties caused the plaintiffs to be deprived of the benefit they contracted for.

[46] Hence, evidence from the first proposed hearing will be relevant at the second. As in Clear Communications, issues of liability “intimately concern...and shade through” the financial consequences and remedy.10

Conclusion

[47] For the reasons discussed, I am far from satisfied that the Parnell Trustees have discharged the onus of showing that a separate hearing to determine the proposed separate questions is warranted. I agree with counsel for the plaintiffs that the safe course is to decline the application

[48] My primary reason is that separating the questions proposed will lead to a substantial duplication of evidence between the first and second hearing. Given the inextricable links between the issues intended for the first hearing and those to be left for the second, the proposed division is not appropriate. The proceeding carries the hallmarks of one that must be dealt with as a single trial if the potential risks of division are to be avoided. The Parnell Trustees have not shown there are good reasons on clear and tangible grounds to warrant a separate hearing for the proposed questions.

[49] The claimed advantages, if indeed there are any, cannot outweigh the risks inherent in the application.

Result

[50] The interlocutory application is dismissed.

[51] Costs must follow the event. The plaintiffs are accordingly entitled to costs on a 2B basis plus disbursements as fixed by the Registrar. I so order.

10 At 335.

[52] The Registrar is to allocate a case management conference at a date

_{convenient to the parties.}

Associate Judge Sargisson