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Strack v Grey [2018] NZHC 1254 (31 May 2018)

Last Updated: 7 June 2018

JUDGMENT OF NICHOLAS DAVIDSON J

1. INTRODUCTION

[1] The defendant, Mr Grey, was the enthusiastic would-be purchaser of a residential property in Maori Hill, Dunedin (“the property”). For many years it had

STRACK & ORS v GREY [2018] NZHC 1254 [31 May 2018]

been the fine family home of two of the plaintiffs, Dr and Mrs Strack, and Mr Grey thought it would be the ideal home for his young family.

[2] A conditional sale and purchase agreement dated 24 February 2014 (“the agreement”) was entered through the agency of Ms White, for a purchase price of $1,200,000, with settlement on 23 May 2014 or earlier by mutual agreement. The agreement is in the standard form published by the Auckland District Law Society, Ninth Edition 2012 (2).

[3] Unfortunately, Mr Grey’s enthusiasm for the purchase rapidly dissipated, within two days of the agreement being signed, and he promptly purported to cancel the contract and would not change his mind when he was asked to reconsider. That cancellation gave rise to this litigation.

[4] Before then, Mr Grey had quickly got to work to address a “subject to finance” clause, as well as clause 9.3, which made the sale conditional on the purchaser, within 10 working days, obtaining at his cost a report on the condition of the building and any other improvements, that he found satisfactory, on the basis of an objective assessment.

[5] Mr Grey took Mr Linwood, a licensed building practitioner, to look at the property and, apart from some minor items, all seemed well to both of them. As Mr Linwood later said the house presented as “... an excellent example of a property its age ...” However, Mr Grey was told by a valuer, Mr Reid, that the cavity between the outer and inner brick walls of this 1920’s house had been filled with an insulation product known as Insulfoam (“Airfoam”). Mr Reid told him there is a view held in some quarters that such insulation may act as a conduit of water between the brick wall and threaten the integrity of the building and the health of the occupants. As it turns out, there is no evidence of that effect on this house.

[6] Based on his conversation with Mr Reid, Mr Grey made an internet search which seemed to him to confirm there was an issue with this method of insulation and he spoke to Mr Linwood about what he had found out. Mr Linwood told him he was aware of the risk of water reaching the inner wall with this insulation methodology.
Mr Grey promptly instructed his solicitor, Ms Cumming of Downie Stewart, to cancel the contract, and she purported to do so by fax on 26 February 2014. Mr Grey did not make any further attempt to secure finance for the purchase, although he had already made enquiries in that regard.

[7] The plaintiff vendors responded to the purported cancellation by exercising their right to ask for a copy of the report on which Mr Grey relied, and although there was no written report at the time of the purported cancellation, Mr Linwood provided a very short report on 27 February 2014 at Mr Grey’s request and Ms Cumming forwarded it to Mr Crush, the vendors’ solicitor, on 28 February 2014.

[8] The vendors are the trustees of the Aurora Trust which owns the property. They say that there was no report to hand on which Mr Grey could rely to cancel the contract as he had not met his obligations under clause 9.3 of the agreement.

[9] However, the vendors for a few days stayed their hand and took no steps to enforce the contract after the purported cancellation. Mr Crush spoke to Ms Cumming on 3 March 2014 to ask if Mr Grey would reconsider cancellation if a satisfactory building report was obtained. Ms Cumming said that Mr Grey considered the contract to be at an end and shortly afterward Mr Crush faxed Ms Cumming a notice purporting to cancel the contract on behalf of the vendors for Mr Grey’s alleged repudiatory breach in purporting to cancel the contract.

[10] The vendors understood they were free to find another buyer once they had cancelled and on 5 May 2014 entered into a new agreement for sale and purchase for a lower price. They now sue Mr Grey for the $150,000.00 difference between the two contract prices. Mr Grey says he was entitled to cancel the contract, and in any event, he would not have been able to raise finance, and as a result the plaintiffs have lost nothing.

B. AGREEMENT FOR SALE AND PURCHASE – TERMS AND CONDITIONS

[11] The “General terms of sale” under clause 9.0 relevantly provide:

9.1 If particulars of any finance condition(s) are inserted on the front page of this agreement, this agreement is conditional upon the purchaser arranging finance in terms of those particulars on or before the finance date.

...

9.3 If the purchaser has indicated on the front page of this agreement that a building report is required, this agreement is conditional upon the purchaser obtaining at the purchaser’s cost on or before the tenth working day after the date of this agreement a report on the condition of the buildings and any other improvements on the property that is satisfactory to the purchaser, on the basis of an objective assessment. The report must be prepared in good faith by a suitably-qualified building inspector in accordance with accepted principles and methods. Subject to the rights of any tenants of the property, the vendor shall allow the building inspector to inspect the property at all reasonable times upon reasonable notice for the purposes of preparation of the report. The building inspector may not carry out any invasive testing in the course of inspection without the vendor’s prior written consent. If the purchaser avoids this agreement for non- fulfilment of this condition pursuant to subclause 9.8(6), the purchaser must provide the vendor immediately upon request with a copy of the building inspector’s report.

...

Operation of conditions

9.8 If this agreement is expressed to be subject either to the above or to any other condition(s), then in relation to each such condition the following shall apply unless otherwise expressly provided:

(1) The condition shall be a condition subsequent.

(2) The party or parties for whose benefit the condition has been included shall do all things which may reasonably be necessary to enable the condition to be fulfilled by the date for fulfilment.

(3) Time for fulfilment of any condition and any extended time for fulfilment to a fixed date shall be of the essence.

(4) The condition shall be deemed to be not fulfilled until notice of fulfilment has been served by the party on the other party.

(5) If the condition is not fulfilled by the date for fulfilment, either party may at any time before the condition is fulfilled or waived avoid this agreement by giving notice to the other. Upon avoidance of this agreement the purchaser shall be entitled to the immediate return of the deposit and any other moneys paid by the purchaser under this agreement and neither party shall have any right or claim against the other arising from this agreement or its termination.
[12] Clause 10.0 provides for “Notice to complete and remedies on default” and includes:

10.1(1) If the sale is not settled on the settlement date either party may at any time thereafter serve on the other party a settlement notice; but

10.1(2) The settlement notice shall be effective only if the party serving it is at the time of service either in all material respects ready able and willing to proceed to settle in accordance with this agreement or if not so ready able and willing to settle only by reason of the default or omission of the other party.

...

10.4(2) Where the vendor is entitled to cancel this agreement the entry by the vendor into a conditional or unconditional agreement for the resale of the property or any part thereof shall take effect as a cancellation of this agreement by the vendor if this agreement has not previously been cancelled and such resale shall be deemed to have occurred after cancellation.

[13] The “Further Terms of Sale” included:

19.0 Purchaser Acknowledgement –

The purchaser acknowledges that he/she relies solely upon his/her judgment and inspection of the property in making this offer and not upon any statement or representation made by the Vendor/s or his/her duly appointed agent.

...

20. This offer is subject to and conditional upon the purchaser obtaining finance on terms and conditions suitable to themselves in all respects by 4pm on the 10^th working day after the signing of this agreement by both parties and notifying the vendor or vendors solicitor of same.

21. The vendor agrees to provide the current registered valuation to the purchaser by 4pm on the 1^st working day after the signing of this agreement by the parties.

C. THE PLEADING Amended Statement of Claim

[14] By an amended statement of claim the vendors say that Mr Grey’s purported cancellation on the basis of a building report not satisfactory to him was in breach of his obligations under the agreement. They plead Mr Grey purported to cancel when he had no building report for the purpose of clause 9.3. Secondly, if there was a report,
oral or written, it was not prepared in accordance with “accepted principles and methods” under clause 9.3. Thirdly, they say the report did not provide an objective basis for Mr Grey to cancel the contract. Such report as existed refers generally to ‘foam type insulation’ but does not record whether there were defects or problems with this property arising from such. The use of Airfoam insulation has not on the evidence resulted in any defect or problem, including moisture ingress. It is therefore pleaded that there was no report for the purpose of clause 9.3, and Mr Grey wrongfully repudiated.

[15] The vendors say that Mr Grey’s wrongful repudiation began on 26 February 2014, and was repeated when Mr Crush spoke to Ms Cumming on 3 March 2014 and in a letter of 10 March 2014 from Ms Cumming when she said that Mr Grey considered he was entitled to cancel the agreement.

Statement of Defence

[16] The defendant pleads that Ms Cumming’s fax of 26 February 2014 was a valid avoidance of the agreement under clause 9.3. The “report” obtained by Mr Grey was an oral report later reflected in the email from Mr Linwood of 27 February 2014.

[17] In a curious twist, Mr Grey pleads that he did not wrongly repudiate the agreement, and as a result the vendors were not entitled to cancel the agreement as they did by fax of 3 March 2014. He says the agreement had already been brought to an end by his own cancellation.

[18] Otherwise, in another twist, if the agreement had not been brought to an end by Mr Grey’s cancellation, he says the fax sent by Ms Cumming on 26 February 2014 did not constitute a valid cancellation for breach, as a mistake by Mr Grey as to his entitlement to avoid the agreement pursuant to clause 9.8(5) does not constitute a breach or repudiation of the agreement. This is pleaded to mean that Ms Cumming’s fax on 3 March 2014 was in breach and constituted wrongful repudiation.

[19] Mr Grey pleads that clause 9.3 of the agreement does not specify that the report must be in writing, and his cancellation followed oral advice from a builder, (Mr Linwood) confirmed in writing, of a potential problem with the insulation, not
disclosed or known earlier. He pleads that the (oral) report he relied on was made in good faith by a suitably qualified building inspector in accordance with accepted principles and methods.

[20] He pleads that even if he was not entitled to cancel the agreement under clause 9.8(5) he did not repudiate, as he did not express any intention not to be bound by the terms of the agreement. He cites his provision of a written report from Mr Linwood when requested as an example of this. He says this was in performance of his obligations so he was not refusing to perform the contract.

[21] Otherwise, Mr Grey pleads that even if the vendors were entitled to cancel the agreement on 3 March 2014, they have suffered no loss, he still had to obtain finance, which he would not have been able to do. He says he did not have to try to obtain finance given the wrongful cancellation by the vendors.

[22] He pleads that a report on the condition of the building does not need to deal with any particular issue. The only concern of Mr Grey was insulation, and that was addressed by Mr Linwood. He says the report was prepared in accordance with accepted methods and principles and his stance was later reinforced by two reports prepared by Flanders Marlow at the request of the plaintiffs, which confirmed the potential insulation problem. That report (discussed further below) said “There are always risks involved in changing the original design intended for a building element” and “There is always a risk that moisture will be able to penetrate the interior of any solid or cavity filled external wall, whatever the insulation material.”

[23] Mr Grey pleads that even if his cancellation of 26 February 2014 was not authorised by clause 9.8(5) of the agreement, it did not constitute wrongful repudiation but simply a “wrongful application of clause 9.3 of the agreement”. He says he did not express his intention not to be bound by the terms of the agreement, rather his conduct was at all times consistent with his belief that the cancellation was valid under those terms.

Reply to Statement of Defence

[24] The plaintiffs plead that the defendant failed to do all things reasonably necessary to enable the finance condition to be performed under the agreement and that Mr Grey did not nor could not have cancelled on the basis of the finance clause.

D. NARRATIVE

[25] The plaintiffs purchased the property in 2002 as the Strack family home. In 2009 Airfoam was installed in the cavity between the outer and inner brick walls and in 2010 the exterior was painted by a reputable Dunedin painting and decorating company, Sims & Blue Ltd.

[26] Mr Grey was living with his wife and children in Mosgiel when he found out that the property was for sale. He contacted the real estate agent, Ms White, and went through the property three times. He decided to purchase it, and he signed the agreement as an offer on 24 February 2014. The vendors accepted the offer, which was well below their expectation as they had a valuation from Mr Reid for
$1.7 million. Mr Grey thought he had a bargain because he knew of the valuation. Condition 21 of the agreement provided that the valuation would be made available so that Mr Grey could use it to obtain finance.

[27] Mr Grey had wanted to make an unconditional offer and had approached Westpac through his then manager, Mr Ross, to borrow the whole of the purchase price, as he still had to sell his Mosgiel family home. Mr Ross said that the bank would need to be satisfied that Mr Grey could service the loan and that was why the finance condition was included in the contract. Ms Cumming discussed with him the
$500,000 difference between the valuation and the asking price and queried why there was such a differential.

[28] On 26 February 2014, events unfolded swiftly. Before 9.30am Mr Grey inspected the property with Mr Linwood. Only minor issues were identified during their inspection and Mr Grey was keen to proceed.
[29] He then saw Mr Ross and spoke to the valuer, Mr Reid. Mr Ross asked Mr Reid if he would re-address his valuation to him (Mr Grey) and to his bank, as he wanted to use it to obtain finance. Clause 21 went no further than requiring the vendors to provide a copy of the valuation. Mr Reid would not agree to this and mentioned something about a potential problem to do with the insulation of the house, but said that he did not know of a problem when he valued the property. Mr Reid did not give evidence but there is no challenge that he said something cautionary about the insulation. Mr Reid did not think it was a “good thing” because cavities “are generally there for a purpose”.

[30] Mr Grey knew from Ms White there was insulation in the wall cavity, but he had not noticed anything to put him on alert. He followed up Mr Reid’s remark and searched the internet where he discovered some BRANZ documentation. BRANZ stands for “Building Research Association of New Zealand” and describes itself as:

An independent and impartial research, testing and consulting organisation inspiring the building and construction industry to provide better buildings for New Zealanders.

[31] It has four operational business units including “Research and Knowledge Dissemination”, which is described as “applying BRANZ’s industry leading expertise to produce accessible knowledge for the industry”.

[32] Mr Grey learned that BRANZ was funded through the Building Research Levy, through the Ministry of Science and Innovation, and commercial research. It has 100 “highly trained specialist staff located in Wellington and Hamilton”. Mr Grey understood from the BRANZ material that the cavity between the inner and outer walls should remain clear and he identified a possible problem if insulation filled up the cavity, which BRANZ warned against.

[33] The BRANZ material referred to “brick bungalows”, constructed using a double skin of brick, with the brick walls providing structure and exterior cladding. These buildings tend to be near a brickworks or a specialist brick construction company. The Wellington suburb of Brooklyn is an example. They are more common in the lower South Island, possibly because this method of construction was familiar to the Scots who settled in Otago and Southland in the late nineteenth century.
[34] Brick is not impervious to moisture, but the cavity between the two layers of brick, about 50mm wide, prevents moisture passing through the outer wall and reaching the inner wall. The cavity requires ventilation. The BRANZ material recorded it is “unlikely” that this method of construction was used after the 1931 Napier earthquake, as after that the New Zealand Building Regulations precluded the use of brick as a structural element.

[35] Mr Grey was concerned that this material indicated the house may present a danger to his family and he was frank in his evidence that he “went off” the property. However, he spoke to Mr Linwood, with whom he had other business connections, and told him he had found out there was insulation in the cavity. He asked him what he thought of that and Mr Linwood said he would think about it.

[36] Mr Linwood gave evidence as a ‘licensed builder’ (in fact a licensed building practitioner). His initial inspection on 26 February indicated the house was in satisfactory condition, apart from some minor items. Mr Grey later that day told him he had learned that insulation was placed in the cavity and his research indicated a potential problem. Mr Linwood did not know about the insulation at this property, but was aware of the issue in general terms. Later that day, he reported orally to Mr Grey, referring to seminars he had been to as well as the BRANZ publications. He understood the risk of the insulation filling the cavity and that moisture might pass through the exterior to the internal brickwork.

[37] Before he received a written report from Mr Linwood, and based on his own research and discussion with Mr Linwood, Mr Grey contacted Ms Cumming and told her that he was not satisfied with the “building report” and instructed her that the contract be cancelled. Her file note refers to the insulation issue and Mr Grey’s comments that he is “not confident [it] doesn’t cause water damage”. The only “report” at this time was Mr Linwood’s oral report. Ms Cumming notified Mr Crush, solicitor for the plaintiffs by fax at 3.40pm on 26 February that Mr Grey’s instructions were that he had received a report that was:

...not satisfactory. The building report highlights issues relating to the use of insulation in the walls of the house which my client finds unsatisfactory.

The contract is therefore cancelled.

[38] Mr Crush faxed Downie Stewart at 12:19pm on 27 February to ask for a copy of the building report under clause 9.3 of the contract, as the vendor was entitled to do. There was no report to copy at this stage.

[39] At 8:30pm on 27 February, Mr Linwood emailed a two paragraph report to Mr Grey (sic):

On Inspection of the above property of which I found to be an excellent example of a property its age, it was discovered that a foam type insulation has been used between the brick cavity.

This type of insulation has been bought up in seminars I have been to and also in BRANZ publications I have read. I have made David aware of the issues that have are of concern with the system blocking the cavity and giving external moisture a bridge to the internal brickwork. This is not a personal opinion but based on information I have received. I will add a link to the BRANZ website that stresses the importance of keeping the cavity clear of debris and obstructions, a search on the internet will also bring up other industry issues with the insulation system.

[40] The first line is misleading as Mr Linwood’s inspection did not reveal the foam type insulation. That information came from Mr Grey.

[41] Mr Grey forwarded this email to Ms Cumming on 28 February 2014, and that same day she sent it to Mr Crush, referring to Mr Linwood as a “licensed builder”.

[42] Mr Grey confirmed that he would not proceed on 2 March 2014 when he texted Ms White. This came as a shock to her. She told Mr Grey that Flanders Marlow would do a full report on the home, including the insulation in the walls. She said that there was a report from Sims & Blue about the paint system used. Mr Grey asked Ms White if Dr and Mrs Strack understood he would not be proceeding with the purchase and presciently Ms White said “Yes, but we still need to know that there isn’t an issue”, to which Mr Grey responded in a text saying “I understand completely. I feel gutted for them”.

[43] On 3 March 2014, Mr Crush telephoned Ms Cumming to say that the vendors did not accept the purported cancellation and wanted to explore options which might resolve the issue. Ms Cumming’s file note records this, and that Mr Crush said that Mr Grey had not complied with the contract. Mr Crush said that he telephoned
Ms Cumming to see if she could persuade Mr Grey to reconsider, on the basis that a satisfactory building report could be obtained, but he was told that the contract was at an end (so far as Mr Grey was concerned) very shortly afterwards. He faxed Downie Stewart saying that the purported cancellation of the agreement was a (wrongful) repudiation and giving notice that the vendors would resell the house to mitigate their losses. He gave notice that the vendors cancelled the contract for that wrongful repudiation.

[44] That did not produce a change of heart by Mr Grey and on 10 March 2014 Ms Cumming wrote to say that Mr Grey was at a loss to understand why it was said that he did not have a valid ground for cancellation, because his actions conformed with clause 9.3 of the agreement.

[45] The plaintiffs sold to other parties on 5 May 2017 for a price of $1,050,000.00, and settled on 13 June 2017. This left a shortfall of $150,000.00, the claim they make in this proceeding.

E. ISSUES

[46] Counsel agreed on the following eight issues:

(1) Does the building report obtained by the defendant satisfy the requirements of clause 9.3 of the agreement for sale and purchase?
(2) Was the defendant entitled to avoid the agreement following receipt of the building report?
(3) Is the defendant’s solicitor’s facsimile dated 26 February 2014 an avoidance of the agreement pursuant to clause 9.8(5) of the agreement?
(4) If the defendant’s facsimile did not avoid the agreement, did it constitute a repudiation of the agreement?
(5) Was there any conduct of the defendant subsequent to the facsimile dated 26 February 2014 that constituted a repudiation of the agreement?
(6) Did the plaintiffs have the right to cancel the agreement?

(7) Did the facsimile sent by the plaintiffs’ solicitors on 3 March 2014 constitute a valid cancellation of the agreement by the plaintiffs?

(8) If the plaintiffs validly cancelled the agreement, what losses were suffered by the plaintiffs?

[47] While this list does encompass the issues, and all are captured in the discussion that follows, I have found it helpful to reach judgment by a different route.

Good faith

[48] I find that Mr Grey acted in good faith, in the sense that he believed he was entitled to cancel the contract as and when he did. He was keen to buy the property, and he thought he had a bargain. Had it not been for the discussion with Mr Reid, his own research, and Mr Linwood’s comment, he would have regarded the property as in a condition suitable for him to confirm clause 9.3 of the agreement. He did not simply “go off” the property, for some other reason. There was a good reason to avoid the contract in his mind, and that reason was based on information he had received.

[49] So too, I find Dr and Mrs Strack acted in good faith. This was, and I assume still is, a fine older house in good condition in a good part of Dunedin and they were rightly proud of it. It had been their family home for some 12 years. They thought there was no problem with the house and had gone to some lengths to ensure it was watertight.

[50] Dr Strack and Mr Grey are patently honest and each seem bemused by the position reached as each believes they have the law on their side. The real problem here is that Mr Grey jumped the gun and had he obtained a written report, of the sort contemplated by the agreement, there could in my view have been no challenge to his right to cancel, as this judgment explains.

Condition of the property

Evidence

[51] Dr Strack and Mrs Strack had heard of Airfoam insulation and had looked at two houses where it had been installed, in York Place and Highgate. They understood it could be installed in a brick masonry house, here of double brick construction with a plaster exterior. They contracted Mr Jackson to install Airfoam, and after that the house was much warmer. The following year, Sims & Blue painted the house with a three coat Granoskin membrane and one coat of Sunproof Acrylic, as an exterior paint and sealing system.

[52] When Mr Grey purported to cancel the contract, Dr Strack contacted Mr Jackson and asked if a building consent had been obtained for the Airfoam insulation and was told that it was not needed in 2009. Dr Strack tried to speak with Mr Grey but he did not want to speak with him. Dr Strack said that if Airfoam was a concern then Mr Grey could speak with Mr Jackson who would put his mind at rest.

[53] Dr Strack was advised by Mr Crush that the purported cancellation by Mr Grey could be challenged, but it would take time, so it was decided to sell the house, get the best price they could, and then decide what to do. Flanders Marlow was instructed so that a report could be given to prospective purchasers. Two reports were made following an inspection on 10 March 2014, which Mr Jackson attended, one entitled “Cladding Report – Airfoam” and the other “Condition Report”.

[54] Flanders Marlow made comment about the Airfoam, without invasive testing. The property was described as in reasonable condition for its age. Works that had been carried out and the exterior cladding were in reasonable condition and it was well maintained. The cladding was durable and required little maintenance. It was in reasonable condition and decorative order. The property is reasonably sheltered, to some extent protected by trees and neighbouring buildings which reduce the risk of rain penetration. There are overhanging eaves and a steep roof pitch in sound condition, which provides significant protection to exterior walls. It has moderate exposure to driving rain. There is no evidence of rain penetration or change in the rate of weathering of external walls which might be attributable to the Airfoam.
[55] The exterior was solid plaster “rendered” over the double brick cavity external wall, assumed to be tied with metal wall ties for lateral restraint, and appeared in reasonable condition. The masonry appeared true to line, level and plumb. There was no obvious cracking. Rendering had been used to increase the weather resistance of the basic wall material and to resist wind driven rain. Exposed facing brickwork is porous and the render system provides protection.

[56] The modern paint system applied by Sims & Blue along with the plaster over the brickwork significantly improved the weathertightness of the exterior cladding if properly maintained.

[57] The retrofitted insulation has benefits in the thermal comfort and energy efficiency of the property but the report cautions that “... there are always risks involved in changing the original design intent of a building element.” The risk was mitigated by the building elements, but “that said, there is always potential for unforeseen problems.” Even though the cavity-filled insulation should not compromise resistance to rain penetration, there is always a risk that moisture will penetrate to the interior of any solid or cavity filled external wall, whatever the insulation material and cladding, and junctions should be monitored and maintained in a watertight condition. Flanders Marlow did not assess the condition of the cavity.

[58] The Airfoam had been installed by a licensed installer (Mr Jackson) in 2009. The process involved drilling holes into the rendered brickwork and injecting insulation into the cavity. The injection holes appeared to be consistently spaced. The insulation may not extend to the upper reaches of the walls and may have left unfilled areas which could be subject to cold spots, with increased risk of condensation. Invasive inspection techniques would provide better information. There was no obvious or significant condensation to the interior of the external walls. There were no current issues of moisture ingress and the conclusion was expressed in this way: “Based upon the type of construction and traditional design features the risks are considered to be negligible in this instance”.

[59] Mr Parker, a principal of Flanders Marlow, is a registered building surveyor and has been a licenced building inspector since 2012. He referred to Airfoam and
other types of injectable insulation commonly used in Europe and Britain in brick/block cavities and walls. These systems allow for old homes to be insulated. The insulation may allow water ingress as the cavity is filled up and the most effective response is to ensure the exterior is regularly painted with good quality paint or another coating system to make a watertight exterior seal. The property had overhanging eaves and a steep roof, drip mouldings installed to the render or plaster above window heads, and projecting sills below the windows. Mr Parker said that to the best of his knowledge there is limited or no research in New Zealand about the use of retrofitted insulation into double brick cavity wall construction. New Zealand studies focus on timber frame buildings.

[60] Mr Parker said that despite experience in the United Kingdom he had never heard adverse feedback regarding properties insulated in this way. In the United Kingdom there may be building regulations which require solid plaster to be installed onto the exterior of the brickwork to mitigate issues arising from a face-sealed system. There were UK Government initiatives to insulate. He acknowledged to Mr Anderson for Mr Grey that there will always be a risk with a cavity wall that it could become a “solid wall”, allowing water to permeate. He says that a double brick cavity wall cannot easily be insulated, but no significant issues have arisen from double cavity brick walls being insulated to his knowledge.

[61] Mr Andersen put it to him that if there is potential for water to become a problem even with other mitigating design features including rendering and cladding it is for the purchaser to decide whether to take the risk. There are methods available to reduce the risk, including the use of a cavity closer. Mr Parker said that an earthquake will affect most building types, as there is the prospect of cracking or movement, but as to settlement, a building of this age is likely to have done most of its settling. However, as a result of the Airfoam installation, he agreed there was a slightly higher risk of moisture penetration than before. Ongoing monitoring and diligent maintenance is important, and there is a cost associated with that.

[62] Mr Parker does not accept that Mr Linwood’s email of 27 February 2014 is a full report because it did not cover every aspect of the house. Indeed, he did not accept it was a report on this house. He says the reference in Mr Linwood’s email was to
generic research, and was not property specific. He understood that someone paying
$1.2 million for a property would want it “perfect”. He says if there was a problem with the insulation, there would be manifestations of dampness on the internal walls. He says a full building report would have given the “full picture,” to allow an informed decision, but he accepts it is a decision for a purchaser whether they are willing to take the risk of retrofitted insulation. He accepted that some people may not accept that the insulation would not create a problem for them.

[63] Mr Jackson installed the Airfoam and said the insulation complied with the Building Code. Even if the house was situated in the wind driven exposed islands above Scotland, it would meet UK standards. When this dispute arose, Mr Jackson sent a report from Energy Saving Trust (UK) on cavity insulation and an Airfoam Licensed Installer’s Certificate. He told Dr Strack to get a retrospective certificate of acceptance from the local authority to show the insulation was compliant with the Building Code. He referred to a determination from the Ministry of Business Innovation and Employment (“MBIE”) of 12 December 2013 as to the code-compliance of retrofitting foam wall insulation in a split-stone veneer house in Karori, Wellington. That determined that the retrofit complied with the Building Code and did not cause moisture ingress.

[64] Mr Jackson was aware of the BRANZ material and says it was to a large extent displaced by the MBIE determination. He says that the BRANZ position is controversial and the methodology and findings of the authors are in places “highly questionable”. He referred to high-pressure water being applied to the exterior surfaces in an unnatural manner for testing purposes. Yet despite this, and the use of Airfoam overseas, the two BRANZ reports undermined the reputation of retrofitted foam insulation and effectively put Airfoam franchisees out of business. Mr Jackson says that despite 15,000 New Zealand homes being insulated in this way over the past 25 years, he is not aware of any system failure.

[65] Mr Jackson was very critical of the BRANZ material, as the testing undertaken was financed by the Energy Efficiency: Conservation Authority (“EECA”) and the Airfoam group had no part in the testing or the design of the experiments. As a result, he says the wall structures insulated with Airform in the BRANZ tests were very
different to those in the “real world”. He felt that the outcome of the BRANZ testing was decided before testing began. There was clearly some ill feeling about the challenge to the effectiveness and sustainability of Airfoam, felt by Mr Jackson and other franchisees.

[66] Mr Jackson said that as far as he was concerned, the whole of the double cavity was insulated, but he acknowledged that if the fill was incomplete then a “shortfall” may allow moisture to permeate. In fact, he acknowledged the risk of water penetrating the cavity, but said the risk is not at a level that would cause any detriment to the building elements or the occupants. He said that placing a product in the cavity which does not allow the water to pass is “perfectly acceptable”, and in short, he fundamentally disagreed with the BRANZ view of this methodology.

[67] Mr Jackson also said while there was ample reference to the brick with mortar being permeable, he has never seen the BRANZ concerns manifested, despite a lot of effort to see what happens with prolonged driving rain and indeed, he said, “nobody has”. Mr Jackson said had he seen Mr Linwood’s email of 27 February 2014 and his reference to concerns about the insulation methodology, he would have completely disagreed with it because in his view the sort of report contemplated by the contract should relate such concerns to the property in question. However, he accepted that there were those within the industry who would hold the opinion that there should not be retrofitted insulation in double cavity walls. He said the reason he finally stopped selling Airfoam was the difficulty in getting a building consent.

[68] When Mr Jackson inspected the property on 10 March 2014, no moisture penetration was evident. There were no damp patches in the inner leaf of the brickwork. His evidence was thus on the face of it reassuring that the retrofitted insulation at the property, with other elements of the property described, means that the house was weatherproof. There were, however, other voices to the contrary in the wings, as has been mentioned.

[69] Dr Strack told the Court that as soon as he realised there was a problem with the agreement which related to the insulation he called Mr Grey, who did not want to have a discussion. He acknowledged to Mr Anderson under cross-examination that
when Mr Crush said that Mr Grey was avoiding the contract he knew that “a building report” had highlighted issues relating to the use of insulation in the walls, although he had not previously been aware of any such problem. He acknowledged that material which he was shown referred to potential problems with such insulation, but that was not something he was aware of when the insulation was put in. He knew from Mr Jackson that insulation like this was used in England, and had proved satisfactory. He acknowledged to Mr Anderson that he could understand why Mr Grey would be “very disturbed” with this, saying very fairly in the context of litigation, “Yes, I can understand some of his concerns”. He also said one of his “main concerns” was the purported cancellation in reliance on an oral building report, rather than reliance on a written report.

[70] Mr Reece is a registered building surveyor and the principal of Reece Building Consultants Ltd. He was the Building Control Officer for the Dunedin City Council before 2004 and worked for various architectural firms throughout the Otago region. Mr Reece was called as an expert witness by Mr Grey. He read the report by Mr Linwood of 27 February 2014, and the two reports by Flanders Marlow. If he had advised Mr Grey at the time of the purchase, he would have said that retrofitting with foam insulation can cause issues with dampness as windblown rain is expected to soak through the exterior brick skin and that is the reason for the cavity which is a design element to dry out the external brick wall. A lack of airflow in the roof space can cause humidity and result in health problems. Such potential problems led to a building consent now being required before installing such insulation, but only after the insulation was retrofitted in this case. Mr Reece recognised that the property has features which mitigate moisture permeation but says that filling the cavity in this way “is not recommended as good trade practice as it has reduced the 100% expectation of dryness from the original design”. Although there are no evident moisture issues with this property, Mr Reece says there is no guarantee this will continue indefinitely, and cracking caused by an earthquake or settlement could provide a moisture pathway in the future, defeating the purpose of the cavity. Mr Reece says that Mr Linwood’s advice was correct and he gave Mr Grey enough information to make an informed decision with regard to the purchase.
[71] Mr Reece said a house that is properly maintained, including proper painting every five to eight years should be weathertight. He acknowledged that Mr Linwood’s report was not a full building report, because it did not comply with the requirements of NZS 4306. That requires a full inspection and a written report. Mr Reece considers a building report is the sort of thing obtained from Flanders Marlow, which will include photos and lists the elements of the building and its faults. He makes pre-sale building inspections because of liability issues. Had he made such a report, it would have included comment about the insulation in the cavity. He knew of the BRANZ research and that the Council was “not keen on it either”. He was aware from what he was told that there was no obvious problem, but the insulation reduced the weathertightness of the structure.

[72] Mr Linwood is a licensed building practitioner as mentioned. He made an inspection of the property with Mr Grey on 26 February 2014. His “category” is in carpentry, and he completed an adult apprenticeship. He does joinery work and installation for Mr Grey, and other building work. He does not do block or brick work. To him the house seemed satisfactory. He did not know that it was insulated with Airfoam. Later Mr Grey called him to say that he had been told about the insulation and his internet research indicated a potential problem. Mr Linwood reported back the next day that such insulation did create a potential problem. He saw a potential risk notwithstanding the overall good condition of the building.

[73] Mr Linwood had not actually come across such insulation in a brick cavity before, but had considered putting it into one of his own houses. He has worked on a lot of houses of similar construction. He decided not to insulate in that way as he was aware of the potential problem with the insulation providing a conduit for moisture. He acknowledged there are pros and cons of such insulation. He knew the house and that it was sealed, but information derived from his further consideration of this system led to the conclusion he reported to Mr Strack on 27 February 2014.

[74] Ms White’s evidence is that when the house was inspected by the Grey family, and Mr Linwood on 26 February 2014, they were excited and happy. She said it was a superb house, the best she ever had on her books. Mr Grey was positive and indicated an intention to confirm the contract, so it was a shock when he cancelled.
Ms White thought that Dr and Mrs Strack should try and sell the house to a new buyer to see if they could get a better price than $1.2 million and avoid any loss. She recommended they get a building report. She was aware there was a rumour that the house was damp due to the Airfoam installation.

Discussion

[75] There is little doubt about the condition of the property. It was well maintained, and it was attractive to Mr Grey and his family. In Mr Linwood’s words it is “...an excellent example of a property of its age...”. Any work required was, on the face of it, minimal. Mr Grey was not aware of an insulation issue at the time of his inspection, and nor was Mr Linwood. The house disclosed no evidence of that. It was only the remark by Mr Reid which led to Mr Grey’s further enquiry. It is my firm conclusion that the house was overall in good condition, and the only issue relevant to the contractual analysis is the Airfoam insulation. There were no problems evident, although there were no penetration tests undertaken. Dr Strack said it made the house much warmer and it had been in place for a number of years.

[76] I find this method of insulation does create a potential problem. The evidence is to a degree conflicting, but filling the cavity is not in principle sound, in that it alters a fundamental design element. The insulation provides a potential bridge or conduit for moisture and thus theoretically a problem is identified. On the other hand, the need for the “skin” of the house to be weatherproofed was well recognised and that work was undertaken, with the Granoskin and Sims & Blue’s work. The theoretical problem was clearly mitigated and on the evidence successfully, because there were no visible signs of moisture penetration. I find there was no actual problem evident with the insulation, other than my recognition that in design terms it is not recommended.

[77] While the BRANZ material is critical of the methodology, there is evidence that it has been successfully used in the United Kingdom and in New Zealand.

[78] I conclude that filling the cavity with Airfoam creates a potential problem which in substantial part can be mitigated by the sort of protective measures undertaken on this property. However, in the event of cracking of the outer skin, for whatever reason, the risk may come to reality. It is in short, a risk that a purchaser
would need to objectively consider, to make a decision whether to proceed with the purchase or not. Some purchasers would recognise the risk but discount for the particular features of the house, or the water proofing achieved. There will be others whose caution, whether drawn of a natural disposition, or experience, would mean they might not be so satisfied. There are many permutations of an objective and contractually compliant response by would-be purchasers to a report which identified the risk and the mitigating measures.

[79] I conclude that with all relevant information available about the building, including the apparent success of its moisture proofing and the building’s characteristics, a prospective buyer would be cautious given what still may be an adverse outcome and would be entitled to employ clause 9.3 of the contract to cancel. The question is whether Mr Grey was in that position. Mr Grey did not have all of this information available to him when he instructed cancellation and the next question is whether, given the information he did have and the steps he took to comply with clause 9.3, he was entitled to cancel.

Contractual performance

Evidence and submissions

[80] When the contract was purportedly cancelled on the basis of Mr Linwood’s report, Mr Crush asked for a copy of the report. He did not regard the report from Mr Linwood as satisfactory and took issue with the fact it was not to hand when Mr Grey instructed Ms Cumming to cancel the contract on 26 February. Mr Crush said that he found the timing of the written report “unsatisfactory”, but accepted an issue of concern had been raised about the fact that insulation had been placed between two skins of brick. He does not consider an oral report to constitute a building report for the purpose of the contract but in any event, while the report referred to a problem with the type of insulation, it did not relate specifically to this property. He referred to the house and said “I mean, machine gun bullets would have bounced off it...”.

[81] Mr Crush was asked by the Court about the sort of report he thought was contemplated by the agreement and he said it needed to be a report that related to the particular property. He said such a report should address the features of the particular
property and despite the BRANZ publications, a building inspector might well have said that in the case of this house, with its particular features, the risk of water penetration was negligible. In his words, “To me the report has to be a report on the house, ... you have got to relate that back to the property which you are actually dealing with”.

[82] Mr Crush responded in the affirmative to the following question from the Court:

Q. ... Your view, ... and it is a view, is that what this contract requires in the building report clause is that a report is obtained which will address that particular building, and it may well include reference to the insulation here but it will do so in the context of evaluation of the whole building for all its features.

[83] Mr Crush accepted that the principal purpose of providing a written building report when asked is to enable the vendor to understand the purchaser’s reasons for dissatisfaction, and to be satisfied they are genuine and objective. The purchaser would want to know the dissatisfaction was justified in the context of the particular building. He did not regard a BRANZ general caution about potential problems as sufficient. At the same time, Mr Crush accepted that if a “proper report” was obtained from an appropriately qualified person, the purchaser would be entitled to rely on it.

[84] Mr Crush wrote on 3 March 2014 to say that the purchaser had no valid ground for cancellation and the purported cancellation of 26 February 2014 was a wrongful repudiation, so in turn the vendor gave notice that the contract was cancelled. Once the contract was cancelled, Mr Crush said the purchaser could not provide a further report to justify his position, as a matter of law.

[85] Mr Andersen put to Mr Crush that if the building report of 27 February from Mr Linwood was a “proper report” for the purpose of the contract, it would have justified cancellation. Mr Crush reverted to saying that as a solicitor he was unhappy about the timing of the purported avoidance or cancellation by the purchaser, and he was also unhappy with the report in itself, as a matter of contractual compliance. He strongly disputed Mr Andersen’s suggestion that cancellation may be advised orally and be backed up by a written report. He thought that a most surprising proposition.
He regarded it as “totally negligent” to cancel prior to getting a written report. He said that a purchaser cannot cancel on the basis of an oral report because the contract expressly contemplates that a “copy” of the report must be available immediately on request. The implication is there must be a physical, written report. Avoidance of itself can be effected simply by communication, if there is a report which complies with the contract.

[86] Mr Crush says that the contract is structured to address the risk of a purchaser generating a report after a challenge to meet their wishes to get out of the contract. He accepted that the contractual reference to there being a “copy of the building inspector’s report” just means there is a building inspector’s report, and does not dictate when it is generated, but he says it cannot follow an oral report which has been contractually acted on. He said that if he did not get an extension of time to obtain a building report after the contractually permitted time, he would cancel on the grounds that he could not comply with the timeline, not because he did not have the building report. Mr Crush thus disagreed with Mr Whitcombe, a solicitor called by Mr Grey, as to the ability to cancel the contract on the basis of an oral report.

[87] Mr Grey said he was deeply concerned about what he learned about Airfoam, once his understanding was validated by Mr Linwood. He did not know a written report was required. He instructed Ms Cumming to cancel the contract and he was referred to her note of a conversation with him, that he knew he was supposed to get a written report but did not see why that was necessary. Mr Grey said that given the information he obtained about the insulation, everything else was irrelevant, so while he did not have a full building report, he thought what he did have was sufficient, enough to instruct cancellation. After the contract was cancelled, he thought that meant “it was over”, and he did not pursue the question of finance.

[88] Mr Whitcombe gave expert evidence as a Dunedin solicitor. He referred to Potter J in Lerner v Schiehallion Nominees Ltd, which case concerned the meaning of “building report” under the predecessor to clause 9.3.¹ A building report must have sufficient relevant detail for the party relying on it to reach an objective assessment

¹ Lerner v Schiehallion Nominees Ltd [2003] 2 NZLR 671 (HC).

whether the property was in a condition “satisfactory” to the purchaser. The report must be made by a person qualified to give such in good faith, in accordance with basic inspection and reporting principles and methods for building reports. This, in my view, confirms the obvious intent that a building report must have credibility about it, both in terms of the experience and qualification of the report writer, and in the level of detail, to allow an objective assessment whether the property is “satisfactory” to the purchaser. It must be carried out in accordance with good practice.

[89] There are entities which represent building inspectors and/or surveyors in New Zealand and there is a New Zealand Standards organisation (Standards New Zealand) which issued NZS4306:2005, Residential Property Inspection. However, that is not widely used according to Mr Whitcombe, nor did it have statutory form when Mr Linwood inspected this property. Mr Whitcombe knows of three recognised building inspectors in Dunedin, and they are quite hard to retain given the demand on them. It is not uncommon for purchasers in Dunedin to use relationships with builders, rather than building inspectors, whether the builder is certified, registered, or otherwise. It is common practice for a purchaser to have an inspection made, then an oral report, then a written report to follow. A building report should bring to account issues such as cladding and internal cavity insulation which are significant in terms of weathertightness, especially where a building feature is covered up and cannot be properly examined without invasive inspection. Mr Whitcombe considers a building inspector/builder undertaking such a report would have to address these other issues.

[90] Mr Whitcombe says that Mr Grey’s conduct was “an entirely expected and reasonable course of action” given the information known to him and if he had been instructed, he would have advised him to cancel the contract on the basis of a “non-satisfactory” building report. Mr Whitcombe says he has cancelled contracts on behalf of clients for those reasons and here, on the evidence as he understood it, there was no wrongful repudiation by Mr Grey who was entitled objectively and properly not to be satisfied with the report he received about the house.

[91] He refers to the Supreme Court’s emphatic statement that for a party to repudiate a contract, which is a “drastic conclusion”, there must be an unequivocal
intention not to perform the contract.² Mr Whitcombe says that Ms Cumming’s correspondence of 26 and 28 February 2014 cannot easily be read as Mr Grey saying he would not be bound by the contract, because he was complying with the contractual terms by effecting cancellation under clause 9.3. He says the vendors should have disputed the cancellation, held Mr Grey to the contract, and proceeded on the basis that he was still required to confirm the conditions, including finance. I do not agree with this proposition, as the principles of repudiation include the response of an innocent party faced with repudiatory breach to elect whether to accept the breach and cancel for that, or not to do so, and seek to enforce the contract. All this turns on a finding as to whether the actions of Mr Grey in cancelling the contract constituted a repudiatory breach. Mr Grey was saying the contract was at an end. He had to comply with the contract and provide a copy of the report as part of that step of cancellation. There was no reservation of his position under the contract that he might reverse course and seek finance.

[92] Mr Whitcombe agreed when it was put to him by the Court that if an inspection identified a very serious problem such as subsidence, then a judgement about the condition of the building could be made by the purchaser based on that. If a written report was required, it would inevitably address that issue. A major defect such as subsidence or a leaky building would obviate the need to go any further in getting a lengthy report, at cost, when there is such an obvious ground for the purchaser to regard the condition of the building as unsatisfactory.

Discussion: Repudiation

[93] In the pleading and the submissions, there was repeated reference to “repudiation”. Principles of Real Property Law provides a lucid and helpful description.³ The learned authors describe repudiation as arising where a party makes it clear that he or she does not intend to perform his or her obligations or, as the case may be, to complete performance. This is the common law position and it means in short “I will not perform this contract any further”. There is authority that:⁴

² Kumar v Station Properties Ltd (in liq and in rec) [2015] NZSC 34, [2016] 1 NZLR 99 at [58].

3. GW Hinde Neil R Campbell and Peter L Twist Principles of Real Property Law (2^nd ed, Lexis Nexis, Wellington, 2013) at [11.250].

⁴ Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] UKHL 11; [1980] 1 All ER 571 (HL)

Repudiation is a drastic conclusion which should only be held to arise in clear cases of a refusal, in a matter going to the root of the contract, to confirm contractual obligations.

[94] Repudiation is the result of someone “turning their back” on the contract. A breach does not necessarily mean the contract has been repudiated although breaches may become so persistent that they evince an intention not to perform the contract in the future, and thus constitute repudiation. Something short of repudiation may still give the right to cancel, such as a breach of an essential term or a breach with sufficiently substantial consequences. Wrongful repudiation is the purported cancellation by a party who does not have the right to do so.

Discussion: Clause 9.3

[95] This form of agreement is widely used and engaged in many different settings. The vendor and the purchaser were in the same city in this case and physical inspection by Mr Grey and his family extended to the licensed building practitioner, Mr Linwood. There will be many cases where the purchaser is at a distance relying on technology to inform him or her about the building and inspection under clause 9.3. It has been worded carefully so as not to provide a purchaser with an escape clause, to accommodate a change of heart. A bargain has been struck, and the parties intend that a building report will be obtained and considered objectively and fairly.

[96] It is not intended that the vendor second guess the purchaser’s decision whether the building report is satisfactory or not, as it is not intended for debate, but the need to provide a copy of the report when asked is intended to allow the vendor to check to see that an objective decision has been made based on an adequate report.

[97] The purchaser does not have to explain in fine detail what it is that he or she regards as unsatisfactory, but it must be identifiable and may be something of moment to one purchaser but not to another. In this case, Mr Grey said why he regarded the “report” unsatisfactory. Ms Cumming passed that on. It could be dissatisfaction about a building material, a design element, a consent given or not given. It may be

at 576 per Lord Wilberforce.

something of such obvious import that it would put off any purchaser, such as a serious foundation problem or serious contamination.

[98] I do not think there can be any doubt a written report is required. First, by the wording of clause 9.3, the purchaser must provide a “copy” when asked, so there must be a report to copy, not just a summary of an oral report. It cannot otherwise be intended that an oral report followed by a written report would do, as it opens up the prospect of variation between the oral and written report, supplementation, and reinforcing of an oral report when the vendor asks for a copy which is otherwise non-existent. It means that evidence would quite likely be required to explain the two reports, oral and written.

[99] Hence, to cancel without a written report is, in my view, in breach of the agreement. However, in this case the purported cancellation was repeated with a written report by the email of 27 February 2014 from Mr Linwood.

[100] In my view, a report does not need to take a particular form to comply with the contract, and it may be a Flanders Marlow type report or in a shorter form. This is especially so where a purchaser is concerned only with some elements of the building. It may be that something is so damning that it needs no further elaboration, or it may be somewhere in between. It may be a short report dealing with one aspect only, because that is all the purchaser wants, all else being satisfactory. It may report many small defects, none significantly large in themselves.

[101] In this case, there is really only one problem identified and that was generated by Mr Grey’s own concerns expressed to Mr Linwood. It was potentially a problem of sufficient consequence, but the question is whether the report on which Mr Grey acted was that required by the contract.

[102] The problem identified by Mr Grey and confirmed by Mr Linwood, essentially involved modification of a very important design feature. That problem is readily identifiable and understood to a lay person once it is explained, as a potential bridge for moisture across a cavity. Yet despite the criticism of the Airfoam methodology, there is much to counter that concern. The evidence makes it plain that those familiar
with the practice hold different perspectives and in my judgment, they do so reasonably. It is worth mention that there appears to be no evidence “in the field” of failure based on this methodology.

[103] Here, the property was in good shape and the perceived risk had not manifested itself, I infer, because the building had been well sealed. Had all that had been reported, then a balanced report would have been available to Mr Grey, one that would do the property and the vendors justice, by a proper appraisal of what otherwise is only a theoretical design problem.

[104] I have considered whether Mr Linwood’s report does bring such balance to bear in its positive report on the condition of the building, the reference to the Airfoam insulation, and its potential problems. It is not in my view a report of that kind. It identifies the risk, but its actual mitigation at this property needed to be addressed.

[105] Mr Grey was determined that he should proceed to cancellation despite Ms Cumming’s caution reflected in her file note of 26 February where she noted “He understands he is supposed to get an actual report but does not see why it is necessary”. Mr Grey was in a hurry and I conclude he simply wanted out cleanly and swiftly.

Conclusion on contractual performance

[106] I consider that in not obtaining a written report and advising cancellation, Mr Grey was in breach of contract as a written report is required. In practice, it may not matter so much because an issue which drives cancellation may be of such consequence that there can be no dispute about what a written report would say. However, it is clear that a written report is required under clause 9.3.

[107] A written report does not have to be a Flanders Marlow type report, because the purchaser may restrict the report with all elements of the building being satisfactory other than a particular issue for which a report is sought. That is the case here, as Mr Grey was concerned only with the insulation. That required the report to address the issue, not just conceptually as a matter of good or bad design, but against the particular features of the house, and what was known about the manifestation of a potential problem. If someone confines their “objective” consideration to the BRANZ
material then it paints a gloomy picture, but even without the criticism by Mr Jackson of the way BRANZ produced its findings, there must be something more in a building report to address the theoretical risks and the mitigating measures taken at the particular property, the evidence of a problem or otherwise, with reference to enquiries of this insulation practice and any problems attendant, particularly in New Zealand.

[108] It was not until the written report was obtained from Mr Linwood and sent to the vendors that they decided to cancel for repudiatory breach, and in that regard I find that they were quite entitled to do so. Treating the “report” as that of 27 February, I find that this was not the sort of report contemplated by the agreement, indeed far from it, and Mr Grey was in breach by proceeding to cancel on that basis.

[109] This form of agreement is intended to allow a purchaser an “out” only when a written report is obtained which objectively warrants a purchaser avoiding any further obligation. Interpretation must allow for the wide range of responses from purchasers, some risk average, some with their own skills to remediate, some with more financial ability to remediate.

[110] I therefore conclude that Mr Grey was in breach even when he provided the written report, as it was not the sort of report contemplated by the agreement. Mr Linwood was by his qualifications able to make a report. Clause 9.3 does not stipulate a particular qualification. Having heard his evidence, I am satisfied he was qualified. However, the overall result is that Mr Grey was in repudiatory breach and the vendors were entitled to cancel.

Cancellation on another ground?

[111] Where a cancelling party purports to rely on a ground which proves invalid, but there is another ground, perhaps not recognised at the time which supported a valid cancellation, then the purported cancellation is good.⁵ The principle behind this is that wrongful cancellation of a contract which was able to be properly cancelled should not provide a windfall to a party who does not deserve the benefit of the contract. When Mr Grey purported to cancel the contract on 26 February 2014, and repeated

⁵ Pearce v Stevens [1904] NZGazLawRp 147; (1904) 24 NZLR 357 (CA); Thompson v Vincent [2001] 3 NZLR 355 (CA).

that later. The vendors say that was an act of wrongful repudiation as Mr Grey was not entitled to cancel the contract on the basis that he had received a building report unsatisfactory to him for the purposes of clause 9.3.

[112] The fact that the defendants may well have been entitled to cancel the contract under clause 9.3 had they received a proper report is immaterial to deciding the issue. The contract required the purchaser to cancel on the basis of the report received. Here, the decision was based on a report that was inadequate because it did not furnish the purchaser with all of the information necessary to make a reasonable decision on the insulation issue. Given the lack of information regarding the steps that had been taken in mitigation of the potential issue, the rejection of the contract on the basis of the report was something of a foregone conclusion. Had the report contained all relevant information, however, that would not have been the case. There is no way of telling whether, provided with the necessary information, Mr Grey would have been satisfied with the state of the house. To offer a view on that question would be purely speculative; not even the purchaser can reliably say how they would have responded had they been provided with an adequate report which assessed the potential issue in light of the mitigating measures taken. Suffice to say some “reasonable” purchasers would have had concerns about the insulation problem allayed by further information. The vendors were entitled to be satisfied that any cancellation under clause 9.3 was made pursuant to a report that put the building in a fair light, bringing all relevant information to bear.

F. DAMAGES

[113] The plaintiffs have been successful in proving that Mr Grey was in breach of contract. However, whether they have suffered any identifiable loss is a separate question. The plaintiffs say they are entitled to the full $150,000 shortfall. Mr Grey asserts he would have failed to secure finance and thus the contract would have fallen through and no loss has resulted.

Evidence

[114] When Mr Grey visited Mr Ross on 26 February 2014 the latter made a diary note and he said he wanted to borrow 100 percent finance with security over both
properties, and sign over his present home and the subject property. He told Mr Ross of the $1.7 million valuation and that it would be re-addressed to the bank (Westpac). Mr Ross rang rang Mr Reid to ask that it be re-addressed to Westpac but he would not do so.

[115] Mr Ross said he was never “keen” on 100 per cent finance from the bank. Mr Grey had a property to sell. He had borrowings so to “chuck another $1.2 million at him” meant he [Mr Ross] would have struggled to meet the bank’s servicing criteria, and probably he “wouldn’t have sent it up” for approval. In other words, he would have likely declined the 100 per cent finance sought.

[116] In his prepared written brief, he said that he thought it would be “touch and go” as to whether he could borrow $1.2 million with approval from the Westpac Credit Division if he recommended that the application proceed. It did not go further of course because he was told that the building report indicated the insulation was an unsatisfactory feature and Mr Grey had withdrawn from the contract. He says that if Mr Grey continued with his application for finance he does not know if the bank would agree to advancing him $1.2 million but he thinks there were two main hurdles. The first was that Mr Grey would have to have satisfied him he would have sufficient income to service both the $1.2 million borrowings plus existing business borrowings. The second hurdle was that the bank needed a valuation and the $1.7 million valuation would not have been addressed to Westpac, as Mr Reid refused to do so.

[117] However, under further examination Mr Ross said the valuer referred to the insulation as an unsatisfactory feature and that had a negative effect on the value of the property, so there was a “question mark around how acceptable that property would have been as security”. His evidence was that “If we’d had to actually do a formal application for the finance, I probably would have cut it off ... and I wouldn’t have sent it out.”

[118] In a case such as this where breach of contract by Mr Grey has been found by the Court, it cannot be for the vendor to prove that finance would be or would not be available. I consider this is an evidential issue, as to whether the contract would have
been confirmed for finance, and the onus shifts to Mr Grey to prove that he would not have got finance, and thus not confirmed the contract.

Legal principles

[119] In the law of contract, the general rule is that damages are assessed at the time the contract is breached. However, that rule has in recent times been subject to an important qualification. Golden Strait Corporation v Nippon Yusen Kubishika Kaisa (The Golden Victory) is relevant to the issues in this case.⁶ It is discussed in Burrows Finn and Todd:⁷

the House of Lords held that this was subject to the overriding compensatory principle that the damages awarded should represent no more than the value of the contractual benefits of which the plaintiff had been deprived. So if at the date of breach there had been a real possibility that an event would happen terminating the contract or reducing the contractual benefits, the quantum of damages might need to be reduced proportionately to reflect the estimated likelihood of the possibility materialising. But where such an event had already happened by the time the damages were assessed, the court should have regard to what had actually occurred.

[120] In The Golden Victory, the charterers wrongly repudiated the charter party which had four years remaining. However, soon after breach, the Second Gulf War broke out – an event which under the contract would have entitled the charterer to bring it to an end. The majority held that the charterer was not liable for any loss suffered after that date, and emphasised Lord Blackburn’s principle that the object of damages is to restore the injured party to the position he would have been in but for the breach.

[121] The minority disagreed, favouring the need for certainty and finality in charter transactions. If there was an available market, there was no good reason not to apply the general rule that damages fell to be assessed at the date of breach when the ship- owners could enter the market and make a substitute contract. They acknowledged Lord Blackburn’s principle, but said that where there is an available market at the time

6. Golden Strait Corporation v Nippon Yusen Kubishika Kaisa (The Golden Victory) [2007] UKHL 12, [2007] 2 AC 353.
7. John Burrows, Jeremy Finn, and Stephen Todd The Law of Contract in New Zealand (5^th ed, LexisNexis, Wellington, 2016) at 802.

of breach this crystallises the loss, so that there can be no question of the loss being diminished or increased by subsequent events.

[122] Later cases have put a question mark over whether the majority’s decision in The Golden Victory is limited to cases where subsequent events put at issue the duration of the contract had the breach not occurred. In Bunge SA v Nidera BC the UK Supreme Court suggested it was “a very open question” whether the same approach would apply to a one-off sale of goods contract.⁸ The seller had repudiated a contract for the sale of Russian wheat which it turned out was to be delivered on a ship on which the Russian Government had put a temporary ban on the export of wheat. The ban meant that the contract in the ordinary course of events would have been validly cancelled and there would have been no loss. The parties had agreed a damages scheme in the contract so it was unnecessary for the Court to decide The Golden Victory point – but the indication from the Court was that it might not apply.

[123] These cases were discussed recently in New Zealand by Heath J in Forest Holdings Ltd v Mangatu Blocks Incorporation.⁹ His Honour took a flexible approach to the authorities and said that this was directed by the s 9 Contractual Remedies, which reads, relevantly:

9 Power of court to grant relief

(1) When a contract is cancelled by any party, the court, in any proceedings or on application made for the purpose, may from time to time if it is just and practicable to do so, make an order or orders granting relief under this section.

(2) An order under this section may—

...

(b) subject to section 6, direct any party to the proceedings to pay to any other such party such sum as the court thinks just:

(3) Any such order, or any provision of it, may be made upon and subject to such terms and conditions as the court thinks fit, not being in any case a term or condition that would have the effect of preventing a claim for damages by any party.

⁸ Bunge SA v Nidera BC [2015] UKSC 43, [2015] All ER 1082.

⁹ Forest Holdings Ltd v Mangatu Blocks Incorporation [2017] NZHC 448, [2017] NZAR 671.

(4) In considering whether to make an order under this section, and in considering the terms of any order it proposes to make, the court shall have regard to—

(a) the terms of the contract; and

(b) the extent to which any party to the contract was or would have been able to perform it in whole or in part; and

...

(f) such other matters as it thinks proper.

[124] Heath J, contrary to Lord Blackburn, characterised the basic principle of contract damages as aiming at putting the injured party in the same position it would have been in if the contract had been performed. Referring to Woodhouse P in Maori Trustee v Clark, he said the compensatory principle is set by the answer to the question “what has the party actually lost by reason of the breach?”¹⁰ In many situations, such as that in The Golden Victory, and in the present case, the answer to that question will be quite different to the position they would have been in had the contract actually been performed in full. Nevertheless, Heath J stressed the need for flexibility and for rules and methods to be treated only as aides.

[125] The authorities above, and the flexibility available to the Court in quantifying damages, suggests the following outcomes are available in this case.

(a) Applying the approach of the minority in The Golden Victory and hinted at in Bunge SA, Mr Grey should pay the full $150,000. That would be to put Dr and Mrs Strack in the position they would have been in had the contract been performed in full, even if that may not have happened.

(b) Applying the approach of the majority in The Golden Victory, Mr Grey pay an amount proportionate to the likelihood that the finance condition would have been fulfilled. If the evidence establishes there was no real chance that Mr Grey would have secured finance, then Dr and Mrs Strack will be only be entitled to nominal damages. If the evidence

¹⁰ Maori Trustee v Clark [1984] 1 NZLR 578 (HC).

establishes there was a real chance that finance would have been secured, then Dr and Mrs Strack should be entitled to that proportion of the alleged loss. This would be to apply the compensatory principle as stated by Woodhouse P and endorsed by Heath J.

[126] I have said that the onus cannot be on the plaintiffs to prove whether finance would likely have been obtained. Mr Grey has that onus, as he was in breach.

[127] I consider outcome (b) is more consistent with the authorities and does justice to the merits of this case. It would be an undue windfall if the vendors were to be compensated for loss which, if the contract had continued, would not have settled. While the principle in The Golden Victory has not been it seems applied in a case like this, it is in a line towards flexibility and discretion in the award of damages. It gives effect to s 9(4)(b) of the Contractual Remedies Act 1979, now s 45 of the Contract and Commercial Law Act 2017.

The likelihood of finance being obtained

[128] I am satisfied that the likelihood of Mr Grey obtaining finance pursuant to the contract was so remote as to be negligible. In the terms of The Golden Victory there was no “real possibility” of finance being obtained. In reaching this conclusion I take into account the evidence of Mr Ross and the fact that the valuation was to be unavailable to the bank as a result of Mr Reid’s refusal to readdress it. While Mr Grey would have been bound under the contract to take all reasonable steps to obtain finance, and may have on refusal turned elsewhere, I am conscious that the contract anticipated finance being arranged within ten working days. After that period Mr Grey would have been entitled to withdraw. Given the substantial hurdles in the way of obtaining finance on the terms Mr Grey required, the likelihood of the contract proceeding in that time was so low that I am unable to sensibly assign a percentage amount to the lost chance. As a result, Dr and Mrs Strack have not suffered any loss and can only be entitled to nominal damages.

Nominal damages

[129] In Civil Remedies in New Zealand, the following is said about damages in cases where there is a breach, but no loss proved:¹¹

If the plaintiff fails to prove an actual loss, damages will be limited to a nominal sum. Nominal damages are token sums of money awarded to acknowledge the existence of the breach. Such awards may arise if the plaintiff fails to prove the causal link between the breach and any loss, or if the plaintiff fails to prove the actual amount of the loss.¹² In Walsh v Kerr, the plaintiffs were awarded $10 nominal damages.¹³ They proved breach of contract but failed to prove loss according to the proper principles of assessment and by proper evidence.

...

A plaintiff who recovers nominal damages is not necessarily regarded as a “successful” plaintiff¹⁴ and it will depend on the facts whether costs are recoverable.

[130] The practice of awarding nominal damages as in Kerr,¹⁵is well established. For example, in Mallard Productions Ltd v Attorney-General, the now Chief Justice considered whether the plaintiffs proved they had suffered loss as the result of the defendant’s breach of contract, which had been established in a previous judgment.¹⁶ The plaintiffs entered into an agreement with the Crown, whereby the Crown agreed to assist the plaintiffs in locating and excavating hidden tunnels believed to be at North Head in Auckland. The tunnels were thought to hold historic aircraft and other military objects of value. The Crown contracted to assist the plaintiffs, and in return the plaintiffs agreed to sell the property recovered to the Crown for 50 per cent of its current value. The Crown breached its obligation to assist, the excavation did not go ahead, and the plaintiffs sought to recover the loss of income they would have received had the items believed to be in the tunnels been recovered, as well as the loss of a chance to make a marketable film of the excavation.

¹¹ Civil Remedies in New Zealand, Blanchard (ed) (online ed, Thomson Reuters) at [1.6.10].

¹² Clark v Kirby-Smith [1964] Ch 506.

¹³ Walsh v Kerr [1987] 2 NZLR 166 (HC).

¹⁴ Anglo-Cyprian Trade Agencies Ltd v Paphos Wine Industries Ltd [1951] 1 All ER 873 at 874;

Brown v Dunsmuir [1994] 3 NZLR 485 (HC) at 488.

¹⁵ Above n 13.

¹⁶ Mallard Productions Ltd v Attorney- General HC Auckland CP290/64, 15 May 2001.

[131] After considering a great deal of evidence, the Court was not satisfied the plaintiff had proved that the venture would have been successful. It was not proved that the tunnels existed, nor that any of the artefacts anticipated to be inside them existed. Nor did the plaintiff demonstrate the lost opportunity to make a film was an opportunity of value. Elias J awarded nominal damages of $100 for the breach of contract, reserving the issue of costs. Similarly, in Otaki Tyre and Service Centre Ltd (in liquidation) v BVR Ltd, McGechan J awarded nominal damages of $100 each in relation to two proved breaches of contract which had not in fact contributed to the loss suffered by the plaintiff.¹⁷

G. CONCLUSION AND DISPOSITION

[132] The defendant is liable to the plaintiffs in breach of contract. No loss is proven. Judgment is entered for the plaintiffs for nominal damages of $100.00.






[133] Costs are reserved for memoranda to be filed within two weeks of delivery of this judgment.





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Nicholas Davidson J

Solicitors:

¹⁷ Otaki Tyre and Service Centre Ltd (in liquidation) v BVR Ltd HC Wellington

Wilkinson Rodgers Lawyers, Dunedin Alistair D Paterson, Dunedin

Copy to counsel:

Leonard Anderson, Barrister, Dunedin Dean Tobin, Barrister, Dunedin