Leaky building -section 9 of the Fair Trading 1986 – Bhargav & Anor v First Trust Limited & Anor

Introduction

In a recent High Court decision the Court has found a director personally liable under section 9 of the Fair Trading Act 1986 (FTA) for misleading and deceptive conduct. In addition the Court has found the proper measure of loss for breach of warranty to be the actual cost of leaky building repairs rather than diminution in value. 

The Plaintiffs had purchased a residential property in May 2020 from FTL. Mr R was a director and shareholder in FTL. Prior to this sale, FTL being fully aware it was a leaky building had carried out some building works to the property including

  • the installation of pillars to support the first floor balcony,

  • the installation of bitumen tape at the base of the cladding where it met the upper deck,

  • replacement of the downstairs bathroom including up the wall and replacing timber,

  • the installation of a new bottom plate and laying tiles. 

  • the replacement of the ceiling and wall gib in the downstairs room, and repainting the interior and exterior. 

All of this work was organised by Mr S but was dependent upon Mr R’s approval of invoices. In terms of the sale process to the Plaintiff, there was never any mention of the leaky home issues. A conditional agreement was entered into by the Plaintiffs which was conditional upon finance, LIM, and a building report. Subsequently the agent made several positive representations to the effect that the house was not a leaky building. 

On 18 March 2020 the agreement went unconditional and then it settled on 1 May 2020. On 2 May 2020 the Plaintiffs visited the property and noticed water entering the house through the joinery of the downstairs bathrooms, FTL denied any responsibility for the leaks or weathertightness. Proceedings ultimately were issued by the Plaintiffs. 

This proceeding was partially resolved via a formal proof hearing but the issues remaining to be resolved were:

(a)  whether Mr R was liable under section 9 of the FTA for misleading and deceptive conduct or was he liable as an accessory for knowingly participating in FTL’s misleading and deceptive conduct?

(b)  What is appropriate measure of damages for the breach of contractual warranty (that any work on the property requiring a consent had received the required consent) by FTL?

(c)  What is the appropriate measure of damages for breach of the FTA?

(d)  What other heads of damage are appropriate?

 

FTA liability

For Mr R to be found personally liable under section 9, the Plaintiff must be able to point to conduct directly attributable to the defendant which was in itself misleading or deceptive. It needs to have been made by the defendant personally. Liability of a director as principal of a company is commonly imposed where that director is the alter ego of the company and the only person authorised to act on its behalf. The Court ruled that in fact it was overall Mr R who was approving the works completed to the house prior to sale and approving payments. It concluded further that prior to sale Mr R was aware that the house was a leaky building and his failure to disclose this information constituted misleading conduct for the purposes of section 9. The Cout ruled that Mr R was well aware of the leaky building issues and ordered the cover up works post purchase, and maintained the control over the works. He was aware that the Plaintiffs were presented with a false impression of the house. The Court also ruled that Mr R was liable as an accessory under section 43(1)(d). 

 

Measure of loss

In terms of the appropriate measure of damages for breach of the warranty, the Court ruled that in this particular instance the cost of repair to remedy the breach of warranty, was the appropriate measure rather than diminution in value. Noting that the overriding objective was to achieve fairness between the parties, the Court ruled that the cost of repairs will most accurately reflect the actual loss suffered by the Plaintiffs and achieve fairness. Critical in making this assessment was the evidence of the Plaintiffs that they did not intend to sell, the property was not readily substitutable for an equivalent alternative due to current market factors and its unique features, and an order for repair costs would not be oppressive to the Defendants. 

The Court also found that the appropriate measure of loss for relief under section 43 of the FTA was not cost of repair but diminution in value but adjusted upwards to reflect loss of opportunity suffered by the Plaintiffs. It also ruled that a General Damages award of $80,000 was appropriate in the context of section 43 relief. 

Note: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by TM Bates & Co. or Building Today to anyone who relies on the information in this article.