IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY

CIV-2009-404-6826

UNDER	the Family Protection Act

IN THE MATTER OF	The estate of RAYMOND CHARLES HARNESS, deceased

BETWEEN	JOANNE LOUISE HARNESS, AND JEREMY PHILLIP HARNESS, AND JUSTIN TIMOTHY HARNESS Plaintiffs

AND	KAREN FRANCES JENNINGS Defendant

Hearing:	21 April 2010

Appearances: Mr J D Atkinson for the plaintiffs
Mr D Connor and Mr R Dellow for the defendant

Judgment:	7 May 2010 at 10 a.m.

JUDGMENT OF ASSOCIATE JUDGE DOOGUE

This judgment was delivered by me on
7 May 2010 at 10 a.m., pursuant to
Rule 11.5  of the High Court Rules.

Registrar/Deputy Registrar

Date……………

Counsel:
Mr J D Atkinson, P O Box 105750, Auckland – Jeremy@highchambers.co.nz
Mr D Connor, Auckland - david.connor@davidconnor.co.nz

HARNESS & ORS V  JENNINGS HC AK CIV-2009-404-6826  7 May 2010

Background

[1]       On  13  December 2007,  consent  orders were made  in  the  High  Court  at Auckland in Family Protection Act proceedings (CIV 2006-404-0037420) in which the plaintiffs were the Harness’s (the first plaintiffs) and the defendant was Ms Jennings (the defendant).   The terms of the orders included inter alia:

(a)	An order that the defendant as executrix transfer the property at 2/36

Gordon Avenue, Milford (“the property”) to the plaintiffs as tenants in common in equal shares subject to the life interest of Mary Overton Gaffney;
(b)       An order that, if the property should require major work because of water  ingress  as  a  result  of  faulty  construction  or  design  of  the exterior of the house, the defendant indemnify the plaintiffs for the reasonable costs of repair;
(c)       An  order  that  the  costs  of  the plaintiffs  in  the Family Protection proceedings be paid from the estate with two-thirds being paid within two months of the date of the order (13 December 2007) and the balance two months later.

[2]       The life interest under the property terminated on the death of Mrs Gaffney on 23 July 2008. Water damage became evident and the plaintiffs commissioned reports and subsequently advised the defendant of their concerns that the house would require major expenditure to remedy the problem.

[3]       By a letter dated 11 December 2008, the defendant was advised that the plaintiffs claimed reimbursement of the estimated cost of the remedial work ($255,000.00) and that to mitigate their loss they were exploring the possibility of selling the property.  After obtaining appropriate advice they sold the property at the maximum available price of $315,000.00 by an agreement.  The plaintiffs stated that the house suffered from damage caused by water ingress before they sold it.  They never had the house repaired.   They stated that the house was worth less than it would have been worth had it not been for the water damage – that it should have fetched $510,000   rather than $315,000, so that there was a shortfall of $195,000.

The plaintiffs estimated that to have the house repaired would have cost $255,000. They now claim as their loss the difference between the sale price of the house and its  estimated value, a figure of $195,000 together with the cost of water penetration reports and other expenses totalling $4512.50, bringing the total damages claim to
$199,512.50.

Submissions

[4]       The plaintiffs allege that they made demand of the defendant.  Mr Atkinson submitted for the plaintiffs that they were entitled to be compensated for the breach by the defendant of her primary obligation to meet the cost of the necessary remedial work.   They acted reasonably to mitigate that loss by selling the property without having the work completed.  That decision was reasonable having regard to:

a)	The plaintiffs’ inability to meet the cost;

b)         The  fact  that  the  sale  of  the  property,  without  carrying  out  the remedial work, mitigated the loss because the cost of carrying out the remedial work would have exceeded the difference between the actual sale price of the property and its assessed market value if the remedial work had been carried out.

[5]       If the plaintiffs had managed to raise sufficient funds to have the remedial work carried out, and if that remedial work had cost the amount estimated in a cost estimate that  they obtained  from  Cove  Kinloch,  the plaintiffs  would  have been entitled to judgment against the defendant for all $240,000 rather than the claimed
$199,512.50.

[6]	It was Mr Atkinson’s submission that because the defendant failed to respond to the demand for reimbursement of the estimated cost of remedial work, her primary obligation under the contract to do so was replaced by an obligation to pay damages for diminution of value of the house.

[7]       Mr Connor for the defendant pointed out that it was alleged in the plaintiff’s submissions that, by not replying to two letters from the plaintiff, Ms Jennings had

placed herself in breach of her obligations and her “conduct was consistent only with a refusal to meet those obligations” under the indemnity.

[8]       Mr Connor submitted that in the absence of a specific obligation to “speak out” or respond, there is no such obligation.   Nor, he said, is a failure to respond consistent only with a refusal to meet obligations under an indemnity.  Ms Jennings’ obligations went no further than to meet her obligations under the indemnity should they arise.   At no time has she said those obligations do not exist.   She was not required to enable the plaintiffs to recover in circumstances to which the indemnity did not respond.  The defendant, in his submission, had an obligation to reimburse the plaintiffs if and when they repaired the house, but that never occurred.

Interpreting the contract

[9]       Even though the parties consented to the entry of judgment in the Family Protection proceedings, counsel argued the issues in the present case as though the rights of the plaintiffs were determined by agreement between the parties.  It was not assumed for the purposes of the argument that the rights the parties had under the compromise agreement had merged in the judgment.  I have had some difficulty in resolving the dispute between the parties because of that feature of the case.  It is not for technical reasons but because when attempting to analyse what remedies are available to a party, the nature of the source of their rights is a critical issue.

[10]     Approaching the question is a matter of constructing their agreement.   The general background against which the provision requires to be interpreted was that the plaintiffs considered that they were entitled to further and better provision from the estate of their late father.  His trustee and executor, who is the other party to the agreement, contended otherwise.   The fact that the parties came to a compromise implicity recognises that the defendant apprehended that there was some risk that the Court would make an order directing further provision if no agreement was reached. A  further  and  notable  background  feature  is  that, rather than  fixing the  further provision by reference to a money sum and agreeing to the entry of judgment for that amount, the parties agreed that such entitlement as the plaintiffs had or were to

receive under the agreement was to be satisfied in specie, that is, by transfer of the house property.  The fact that reference was made to the contingency that the house might require remedial work indicates that it was accepted that, unless the contract contained a provision protecting the plaintiffs against possible damage to the house because of water ingress, the assumed amount of further provision that they would receive by receiving the house property could turn out to be less than the parties intended.  Those elements of background suggest that the objective of the indemnity clause  was  to  preserve  the  position  of  the  plaintiffs  and  maintain  the  level  of provision that they would receive out of their father’s estate.  The means by which that was to be achieved was that the defendant gave the plaintiffs “an indemnity for the reasonable costs of repair”.     The contract therefore protected the plaintiffs against any loss that might arise from a latent and non-apparent defect in the house. It did not protect against possible erosion of the value of the benefits they were to receive due to other causes, such as a fall in housing prices.

[11]     That  brings  me  to  the  nub  of  the  dispute  between  the  parties.    That  is, although the contractual formula was based upon the reasonable costs of repair, did the plaintiffs actually have to incur the costs of repair before they could be entitled to claim under the indemnity?  Or could they claim on the basis of the reasonable but notional costs of repair?   Or were they to be compensated on a different basis, namely for the decrease in the value of the house because it was not weathertight?

[12]     The three possibilities then are these:

a)        the plaintiffs had no entitlement under the contract because repairs were never carried out;

b)        the  plaintiffs  should  receive  the  amount  of  the  estimated  cost  of repairs; or

c)        the  plaintiffs  should  receive  compensation  being  the  difference between what the house was actually worth and what it would have been worth without the defects due to water ingress.

[13]     Mr  Connor  submitted  that  the  court  should  not  attempt  to  assess  the “fairness”, “justice” or  “injustice” that would arise under the agreement by giving anything other than a literal interpretation to the indemnity.  This does not provide much assistance.  The actual words used in the contract do not explicitly state that unless the plaintiffs actually carried out repairs they should not receive anything under the contract.  The contract does not provide, as it might have, that the plaintiffs indemnified only for actual costs incurred.  Equally, though, the contract does not say, as it might have, that the plaintiff was indemnified to the extent of the estimated cost of repairs.

[14]     Turning to matters of context and background, it is difficult to understand why the plaintiffs would not receive one cent under the contract even though the very  occurrence  which  the  contract  was  designed  to  protect  them  against  (loss because of water ingress), has actually occurred.

[15]     I next consider why the parties might have regarded it as important that the repair costs have actually been incurred rather than merely estimated.  It is necessary at this point to turn attention to the phrase “reasonable costs of repair”.  The use of this expression was obviously intended to limit the amount of the defendant’s exposure to repair costs.  An amount which was reasonable could well be less than the amount actually incurred. While there is no evidence on the point, commonsense would suggest that reaching a judgment on the reasonable cost for repairing a house would be a rather more straightforward exercise where the repairs had actually been undertaken as compared with assessing the cost of a notional repair which was never carried out.  But the parties would have foreseen that it would not be impossible to fix the reasonable cost of repairs even if the plaintiffs did not actually repair the house.     It could have been that the repairs would be carried out by some other person, such as a subsequent owner, from whom information might be obtained about the actual cost of repairs.  Alternatively, professional opinion might have been available as to what the cost of repairs was expected to be.  These possibilities would offset any concern that the defendant might be called on to pay a sum of money which might have had no relationship to the proper cost of repairs. While this last risk may have been a legitimate concern for the defendant, it is difficult to accept

that it was substantial enough to justify the plaintiffs being entirely deprived of the contractual benefit for which they exchanged their rights to claim under the Act.

[16]     The next issue is whether there was some alternative basis upon which the plaintiffs might be compensated.  That leads me to the question of whether, in place of an indemnity for repair costs, they may receive compensation for reduction in the value of the house because of water ingress.  Mr Atkinson stated that this was the preferred option from the plaintiffs’ point of view.  He referred to authorities which had concluded that the diminution in value approach was the correct measure of loss. Specifically, Mr Atkinson referred me to the decision of Tipping J in Chase v de Groot [1994] 1NZLR 613.  That case was quite different from this.   It involved a builder constructing a house contrary to a condition of the building permit, which resulted in the house having to be demolished.   The plaintiff purchaser sued in negligence.  Reinstatement was not a practical option because the plaintiffs had since sold the property, the house on which had been demolished.  The judge concluded that in the circumstances the fairest approach was to adopt the diminution in value approach when fixing damages.

[17]     I have not been assisted by references to the way in which damages are fixed in other cases such as Chase.  In the present case the plaintiffs sue in contract.  In the event of breach, they are entitled to be placed in the same position as they would be had the contract been performed.  Had the contract been performed, they would have received a sum of money representing the cost of repairs.  In terms of the contract, they never had an entitlement to claim an amount equal to the diminution in value of the house.  There may have been good reasons why the defendant would not agree to provide compensation on such a basis.  It may have been foreseen, for example, that disentangling reduction in value due to water ingress damage from diminution due to other causes such as a general fall in the market, meant that there would be greater certainty if a formula embracing reasonable costs of repairs was adopted.

[18]     Any damages to which the plaintiffs are entitled in this case would be the damages stemming from a failure to perform the agreement to indemnify for repairs. Prima facie the damages that the plaintiffs are entitled to would be designed to place them in the same position as they would have been had the obligation to indemnify

been honoured.  That is they should be compensated by receiving the cost of repairs together with any consequential loss such as interest on money borrowed. The fact that there has been a breach of contract does not convert the contractual obligation into something quite different, namely an obligation to compensate on the basis of a fall in value of the house.  There is no avoiding the fact that the terms of the contract imposed on the defendant an obligation to indemnify against the cost of repairs. It would be odd if a provision of this very specific type were fashioned to compensate the plaintiffs for types of loss of a quite different kind.  The indemnity against the cost of repairs cannot easily be viewed as a formula designed to compensate other types of loss quite unrelated to repairs, such as diminution in value which might involve quite different amounts of money.

[19]     Therefore, the only basis upon which the plaintiffs can be compensated is for the cost of repairs. If they are only entitled to recover where they actually carried out repairs, then in a case like this, they will get nothing.  That raises the further issue of whether such an outcome is reasonable.

[20]     Additionally, the parties might be expected to have foreseen that it would prove impossible for the plaintiffs to fund the repairs initially from their own resources, leaving them later to claim reimbursement from the defendant. If that was what they were required to do, and if that were to prove beyond their means, then this too would have resulted in them forfeiting all of their benefits under the contract. Such a conclusion is one that I would lean against reaching unless it was plain that that was what the parties intended.

[21]     Balanced against those considerations is the fact that the process of fixing the cost of repairs will be more straightforward where the repairs actually been done, rather than approaching it as a notional exercise.

[22]     A further relevant consideration is that an indemnity is usually only called in to play when a loss has been suffered.  No relevant loss could be said to have been suffered here until the cost of the repairs had actually been incurred.

[23]     Taking all of these features of the case into account I now set out my views. This is a case where the defendant agreed to compensate the plaintiffs for the cost of repairs. If the plaintiffs actually repaired the house they would qualify for compensation.   I consider also that, if the court were to conclude that there were reasonable grounds to suppose that they intended to repair the house, and they were seeking funding in advance equal to the expected cost of repairs, the plaintiffs would possibly qualify for compensation.  But outside of those circumstances there is no entitlement to compensation.  There is no justification for extending their entitlement to another form of loss which the contract does not mention, namely, diminution in value.  That is so even although the cause of both types of loss might ultimately be traced back to a common cause, namely ingress of water into the house which caused damage.

[24]      I am  afraid  this  is  one  of  those  cases  where  the  court  has  to  face  the unpalatable fact that, because of the limitations of the actual words used in the agreement, one party has been left without a remedy.   This problem cannot be overcome by adopting an unjustified construction of the contract.

[25]     I  reluctantly conclude that the plaintiffs are not entitled to recover against the defendant under the agreement to indemnify.   I note that for the purposes of the summary judgment application I was not asked to consider other possibilities, such as whether the parties’ agreement had been frustrated or whether the plaintiffs might be able to obtain relief under the Contractual Mistakes Act or indeed other possibilities.

Result

[26]     The   plaintiffs’   application   for   summary   judgment   is   dismissed.   The defendant’s application for summary judgment mirrors that of the plaintiffs.  If, as a matter of interpretation of contract, the plaintiffs cannot succeed in the proceeding, then the way is open to the defendant to obtain judgment.  Were it possible for the plaintiffs to shore up their position by adducing further evidence, or if the Court could conclude that through the process of discovery or trial matters could emerge

which would conceivably change the outcome, then it would be wrong to enter summary judgment for the defendant.  But that is not the case here.  The words of the contract are immutable.   It would not appear that there are any gaps in the Court’s knowledge of the background to the transaction which might have a substantial affect on the context in which the agreement was reached and, as a result, affect the interpretation which the Court gives to it.  For these reasons I conclude that judgment can be entered for the defendant without causing injustice to the plaintiffs. The merits of the case are clear and capable of summary disposal:  Westpac Banking Corp v MM Kembla New Zealand Ltd [2001] 2 NZLR 298 at 315.

[27]     The parties should confer on the matter of costs.  If they are not able to agree on that issue I shall hear counsel at 9 a.m. on a convenient date.

J.P. Doogue
Associate Judge