Ipsofactoj.com: International Cases [2001] Part 10 Case 9 [NZCA]


COURT  OF APPEAL, NEW ZEALAND

Coram

Oxborough

- vs -

North Harbour Builders Ltd

TIPPING J

HERON J

GENDALL J

7 AUGUST 2001


Judgment

Tipping J

(delivered judgment of the court)

INTRODUCTION

  1. This appeal from Nicholson J concerns the validity of the appellants’ cancellation of the building contract into which they had entered with the respondents. We shall refer to the appellants as the Oxboroughs and to the respondents as the builder. The Judge held that the Oxboroughs’ cancellation was invalid and they now challenge that conclusion.

  2. The contract was signed in January 1999. The builder agreed to construct a dwelling on land already owned by the Oxboroughs. Work commenced in late March 1999 and by May the Oxboroughs were expressing concerns to the builder about a number of aspects of the job. Various meetings and correspondence ensued but by mid August the Oxboroughs were still dissatisfied with the quality of the work and the progress being made. They commenced proceedings in the High Court seeking specific performance of the building contract and an interlocutory order preserving the money they had already paid to the builder by way of progress payments. Their ambitious contention was that the builder held these sums upon a constructive trust because, as they put it in their pleading:

    there appears to be a complete failure of the consideration, to construct and carry out the works in a thorough and workmanlike manner and in conformity with the Building Act and the Building Code, to the plaintiffs despite their payments to the defendants.

    [text as in original]

  3. The Oxboroughs’ substantive specific performance claim was for orders that the builder:

    a.

    Carry out the whole of the work in a thorough and workmanlike manner and in conformity with the Building Act and Building Code.

    b.

    Cause to be effected remedial work, at it’s cost, to fix the faults and defects as set out in the building appraisers report (annexed hereto and marked with the letter ‘B’).

    [text as in original]

    There was in addition a request for an inquiry as to the damages suffered by the Oxboroughs as a result of the builder’s "breaches".

  4. The proceedings were served on the builder on 20 August 1999. The preservation application had a hearing date of 26 August 1999. The builder promptly instructed its solicitors and they wrote to the Oxboroughs’ solicitors on 25 August 1999. They said they were instructed to oppose the preservation application. They also made the following general observations:

    1.

    The proceedings as a whole appear to us to be premature. Our instructions are that neither company has any intention of abandoning the project. Nor do they dispute their obligations to provide your clients with a home built to an acceptable standard. It is their intention to provide such a home.

    2.

    The contents of the report prepared by Prendos are not accepted. If necessary our clients will commission their own report. However, it will not be possible to obtain such a report immediately and in any event it would appear to be a waste of both time and finance.

    3.

    The Building Agreement contained an arbitration clause. Section 8 of the Arbitration Act 1996 requires a Court to stay proceedings and refer the parties to arbitration. It is our intention to file a request at the Court in compliance with Section 8 either prior to filing a Statement of Defence or at the time the Statement of Defence is filed.

    4.

    In our view the concerns which your clients have are likely to be more constructively addressed either by way of mediation or arbitration, rather than through the High Court.

  5. The presently material parts of the builder’s notice of opposition to the preservation application were grounds 2-7 which read:

    2.

    The First and Second Defendants have carried out building work in accordance with the contract with the Plaintiff in a thorough and workmanlike manner, in accordance with the Building Act and pursuant to the Building Code.

    3.

    The First and Second Defendants have not acted in breach of contract.

    4.

    The First and Second Defendants deny that remedial work estimated at $35,000.00 to $45,000.00 is required.

    5.

    Pursuant to the contract entered into between the parties, the Plaintiff is required to submit any disputes arising out of the contract to arbitration. The Plaintiff has not sought to exercise that option.

    6.

    The amounts advanced by the Plaintiff to the Defendants does [sic] not exceed the value of the construction work carried out to date.

    7.

    The order which is sought would have an unduly detrimental effect upon the cash flow of both Defendants.

  6. The High Court dismissed the preservation application on 26 August 1999. The very next day the Oxboroughs’ solicitors wrote to the builder’s solicitors cancelling the contract. To reinforce the position they added:

    Can you kindly advise your clients that they are to desist from entering onto the Oxborough land other than to secure the premises pending hearing of the substantive claim. It is your client’s responsibility to insure the structure and Mr and Mrs Oxborough accept no liability whatsoever in respect of the structure that is on their land.

  7. At this point the substantive claim was one for specific performance. But consistent with the cancellation, the Oxboroughs filed in due course an amended statement of claim asserting that they had had a right to cancel because the builder was in qualifying breach and had repudiated the contract. They claimed recovery of all money paid, damages and an order that the builder remove the now largely completed house from their land. In the meantime the builder’s solicitors had written to the Oxboroughs’ solicitors disputing their right to cancel and in particular claiming that by seeking specific performance the Oxboroughs had affirmed the contract with full knowledge of the claimed breaches and repudiation. The builder did not expressly plead affirmation in its statement of defence but the Judge accepted its contention and held the Oxboroughs had indeed affirmed. Mr Bradford complained at the lack of pleading but it was well within the Judge’s discretion to allow the point to be taken. It had been foreshadowed a year before the hearing and was never abandoned. In any event no evidentiary prejudice arose for the Oxboroughs because the claimed affirmation was based largely on their conduct in suing for specific performance which was a matter of Court record. Against that broad background, it is convenient to examine the appeal on the affirmation point first.

    AFFIRMATION

  8. Section 7(5) of the Contractual Remedies Act 1979 states that a party shall not be entitled to cancel the contract if, with full knowledge of the repudiation or breach, he has affirmed the contract. At the time they commenced their proceedings for specific performance, the Oxboroughs clearly had full knowledge of the facts which they asserted amounted to repudiation or breach by the builder. Indeed they had pleaded that the builder’s conduct was such as to amount to a complete failure of consideration. Hence the Oxboroughs must be regarded as having affirmed by taking, through their specific performance proceedings and associated conduct, unequivocal action to keep the contract on foot. Mr Bradford properly did not dispute this, but argued that between the commencement of the specific performance proceedings and the Oxboroughs’ cancellation (a period of 7 days), the builder was guilty of further repudiatory conduct which, he contended, gave the Oxboroughs the right to cancel despite their earlier affirmation. If there was indeed any such repudiatory conduct during this period, the Oxboroughs would have had the right to cancel because that conduct would have overtaken their earlier affirmation and represented a further breach: see Johnson v Agnew [1980] AC 367; [1979] 1 All ER 883, and Chatfield v Jones [1990] 3 NZLR 285, 290 per Cooke P. The question is whether what the Oxboroughs claim to be continuing or renewed repudiation by the builder should properly be characterised as such.

  9. We should add that at common law the act of commencing proceedings for specific performance in response to a repudiatory breach was not normally viewed as amounting to affirmation of the contract: see Burrows Finn and Todd, Cheshire and Fifoot’s Law of Contract, 8th New Zealand edition, at 576. Of the various reasons for that approach noted by the learned authors, the most convincing is that a continuing refusal to perform and thus remedy the breach amounts to a continuation of the repudiation from day to day. That justifies a new election in favour of cancellation. In other words, the continuation of the repudiation gives the innocent party a continuing right to cancel which is not lost forever by the earlier decision to seek specific performance. We do not think that the Act was intended to alter existing common law rules on the subject.

  10. But it is fair to say that at common law much depended on the circumstances in which specific performance was sought, and on what other or alternative remedies were claimed, and what indications may have been given by the plaintiff outside the proceedings themselves. In the present case the Oxboroughs’ proceedings for specific performance were accompanied by the application for the preservation order in relation to the progress payments. That in itself may be thought to be relatively neutral but overall their correspondence and conduct all supported an objectively reasonable conclusion that at the time when they sued for specific performance they were unequivocally electing to keep the contract alive. Hence Mr Bradford was correct in accepting that as at 20 August 1999, by suing for specific performance and their associated conduct, the Oxboroughs had affirmed the contract.

  11. The matters relied on as amounting to repudiation in the period between 20 August and 27 August 1999 were the builder’s conduct in declining to accept the Prendos report (being a report of 12 August 1999 commissioned by the Oxboroughs: see para [3(b)] above), and the other statements the builder made in its solicitors’ letter of 25 August 1999 and its notice of opposition to the preservation order. It is important to appreciate that a party is not generally regarded as being in repudiation by denying breach in good faith, whether the breach is said to be factual or a matter of interpretation. In essence, that is all the builder was doing in the present case. What is more, the builder was clearly signalling that it wished to complete the work and intended to do so if given the opportunity.

  12. Repudiation arises when, in the words of s7(2) of the Contractual Remedies Act, a party makes it clear that he does not intend to perform his obligations under the contract or, as the case may be, to complete such performance. The builder’s mention of arbitration and its willingness to submit to that process was the antithesis of repudiation. Under the contract all questions and differences whatsoever, at any time arising between the parties, were submitted to arbitration in terms of a conventional clause to that effect. In its correspondence and notice of opposition, the builder was simply asserting the existence of a dispute and demonstrating its willingness to undergo the contractually agreed process for resolving that dispute.

  13. With respect to Mr Bradford’s submissions, the facts of this case are a very long way from repudiation. There are three high level authorities which support the view we take of the matter. The first is the decision of the House of Lords in Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 All ER 571, [1980] 1 WLR 277. The second is the decision of the High Court of Australia in DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423, 432. The third is the decision of this Court in Starlight Enterprises Ltd v Lapco Enterprises Ltd [1979] 2 NZLR 744. In Starlight it was said that in order to find repudiation it is necessary to conclude that the party said to have repudiated was unequivocally asserting its intention not to perform the contract according to its true interpretation. In the present case it is not so much a matter of interpretation but rather what the rights and obligations of the parties to the contract truly were. Thus to find repudiation against the builder, it is necessary to be satisfied that it was unequivocally asserting its intention not to perform the contract according to whatever remaining obligations truly lay upon it thereunder. It can therefore be seen that the builder was effectively taking a stance which was the exact opposite of repudiation.

  14. We should mention specifically Mr Bradford’s strenuous reliance on the statement in the letter of 25 August 1999 whereby the builder said it did not accept the contents of the report prepared by Prendos. Mr Bradford claimed that at trial the builder had acknowledged most if not all of the matters raised in that report as defects. That submission takes too literal a view of what the builder was saying in its solicitors’ letter read as a whole. By saying it did not accept the contents of the report, the builder was effectively saying in the context that it did not accept the essential conclusion reached in the report that remedial work was required and it was going to cost some $35,000 - $45,000. Whatever stance the builder may have taken at trial about the individual defects, it is significant that it continued to deny the cost of remedy asserted in the Prendos report. In that respect the builder was largely vindicated by the Judge’s conclusion, he being of the view that the cost of the remedial work was nowhere near the amount asserted by the Oxboroughs.

  15. A further answer to the point is that the builder expressed a willingness to adopt the contractually prescribed method of resolving what was obviously a bona fide dispute. It thereby evinced a clear intention to perform the contract to the extent arbitration found performance was hitherto deficient. The logical corollary of Mr Bradford’s argument is that in order to avoid being in repudiation, the builder was obliged there and then to accept the Prendos report. That proposition only has to be stated to demonstrate its lack of merit in what appears to have been no more than a conventional building dispute.

  16. Nicholson J focused primarily on the issues of breach and repudiation. In the light of his views on those issues which were against the Oxboroughs, he understandably found it unnecessary to say much about the question of affirmation. He expressed the view that even if there had been breach, and the same applies in the case of repudiation, by commencing the specific performance proceedings after they had received the Prendos report, the Oxboroughs affirmed the contract with full knowledge of the breaches. Therefore, because of s7(5), they were not entitled to cancel.

  17. In coming to this conclusion we consider the Judge was entirely correct. The case before him does not appear to have been focused, as it was before us, on the question whether there was repudiatory conduct by the builder after the commencement of the specific performance proceedings which conduct might have given a right to cancel despite the earlier affirmation.

  18. We have chosen to address the affirmation issue first, and have dealt with it on the basis advanced by Mr Bradford in this Court. That basis fails. In short, the Oxboroughs affirmed the contract by commencing their specific performance proceedings. Because of that affirmation they were not entitled to cancel. There was no repudiatory conduct by the builder after the specific performance proceedings were commenced. Hence the Oxboroughs’ cancellation was invalid. The appeal must fail on this ground but for completeness we will state our conclusions on the question of the validity of the cancellation, leaving aside all questions of affirmation. That inquiry will focus on whether the builder had committed a breach justifying cancellation and whether the builder was in repudiation generally, rather than in the period 20 August to 27 August 1999.

    BREACH

  19. In order to be able to cancel for breach, the Oxboroughs had to fulfil the requirements of s7(4) of the Contractual Remedies Act. If they could show the builder to be in breach they also had to show either:

    1. that the parties had expressly or implicitly agreed that performance of the broken stipulation was essential to them; or

    2. that the effect of the breach was substantially to reduce the benefit or increase the burden of the contract to or upon them, or its effect was to make that benefit or burden substantially different from that contracted for.

  20. The Judge held in relation to para A dealing with the essentiality issue, that the builder had not broken any stipulation in the contract. He did so primarily because the work had not yet been completed, and the builder, if given the opportunity, would have taken all necessary steps to complete to the contractual standard. Mr Bradford challenged this reasoning on the basis that the contract contained two discrete obligations; first to carry out the work and second to complete it to the required level of performance. We agree with the Judge’s approach to this issue. It is contractually artificial to view the obligations to carry out and complete the work as discrete and self contained. The dominant purpose of the contract was to obtain completion according to its terms. No issue of breach or repudiation on account of delay was raised. A stipulation was relevantly broken only if at completion the work was not in accordance with the contract, or if the builder wrongly refused to remedy some appropriately established defective work, and thus could not be said to have completed it in terms of the contract. Neither of these situations existed.

  21. The absence of breach also defeated the Oxboroughs right to cancel on the basis of para B, which involves the question of substantiality. In this respect the Judge also held the substantiality requirement had not been established. He said:

    Furthermore, even if any of the manner or compliance deficiencies which existed on 27 August 1999 amounted to a breach of cl 1.2 of the contract, the effect of such breach or breaches either individually or in combination did not substantially reduce the benefit of the contract to Mr and Mrs Oxborough or make the benefit or burden of the contract substantially different from that contracted for within the meaning of s7(4)(b) of the Act.

  22. Mr Bradford contended that the Judge had misdirected himself in law on this issue. He claimed the Judge had put the test for substantiality too high. The first point to note, and it is one upon which Mr Bradford’s submissions were not directly focused, is that it is the effect of the breach which is in issue not simply the nature and quality of the breach viewed in isolation of its effect.

  23. The Judge aptly cited authority in the following terms:

    In MacIndoe v Mainzeal Group Ltd [1991] 3 NZLR 273 at 284-285 Richardson J said:

    Substantiality in that statutory context is a matter of fact, degree and impression. It has the same flavour as "significantly" and "considerably". It is equally capable of any kind of arithmetical analysis. One must stand back and, assessing the matter objectively, determine whether the effect of the breach will be, to take the most obvious provisions subparas (i) and (ii), substantially to reduce the benefit of the contract .... or substantially to increase the burden .... under the contract.

    In Jolly v Palmer [1985] 1 NZLR 658 at 662 Hardie Boys J said:

    The statute does not define the word "substantially" and the Court should not attempt to do so either. It is enough to say that what is required is something more than trivial or minimal, but I think [counsel] went too far when he argued that what is required is a difference so great as to alter the subject-matter of the contract. Each case must be considered on its own facts, and an individual determination made having regard to the nature of the contract and of its subject-matter and to all the circumstances of the case.

  24. Having considered all Mr Bradford urged upon us on this topic, we are left a long way short of being persuaded that the Judge erred in fact or in law. On the legal point, Mr Bradford referred to the Judge’s conjunction of substantial with serious in his phrases "substantial and serious, and serious or substantial" appearing respectively in paras [22] and [26]. To put the matter that way does not amount to a misdirection in law. The Judge was simply using as explanatory of the word substantial the concept of seriousness which Burrows Finn & Todd themselves use in the present context at 567:

    Whereas section 7(4)(a) is concerned with the status of the term which has been broken, or the misrepresentation which has been made, section 7(4)(b) is concerned with the severity of the consequences of the breach or misrepresentation. For the purposes of this subsection the essential nature of the term broken is irrelevant. Even if the term or misrepresentation seems a relatively minor one, a breach will still be ground of cancellation if the breach has had the serious effects set out in section 7(4)(b).

  25. As the authorities demonstrate, there is no advantage to be gained in attempting to explain or paraphrase the word "substantial". Hardie Boys J’s statement in Jolly v Palmer of what substantial does not mean is no justification for the proposition inherent in Mr Bradford’s argument that anything more than trivial or minimal must be substantial. The statutory tests take the place of the doctrine of discharge for breach at common law. It may be that the new statutory criteria are a little less onerous than the classic exposition by Diplock LJ in Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, [1962] 1 All ER 474. There at 72 and 489 His Lordship referred to a discharging breach as one which substantially deprives the innocent party of the whole of the benefit contracted for. The common law authorities in this area also contain references to whether damages will be an adequate remedy for the breach as opposed to the remedy of treating the contract as wholly discharged. That is not the immediate focus of the statutory provisions but there may be room for similar notions to be taken into account in the overall assessment which must be made.

  26. We are not persuaded that the Judge erred in law nor are we persuaded that his factual assessment of the effect of the breach which he found established was erroneous. Indeed we consider his conclusion was amply open to him on the evidence. He heard a number of witnesses during a trial which lasted 9 days. Broadly speaking he preferred the builder’s evidence to that called by the Oxboroughs. Nothing that Mr Bradford advanced in his detailed submissions persuades us that we should interfere with the Judge’s conclusion. Indeed on the basis of the Judge’s assessment of weight and reliability his conclusion seems entirely correct. We therefore hold that, leaving aside the question of affirmation, the Judge was correct in deciding that the Oxboroughs had no right to cancel for breach. While there may have been elements of breach, in total they simply did not qualify for cancellation.

    REPUDIATION

  27. The Judge’s assessment of the effect of the builder’s breach is relevant to this question also. There can be no doubt that the Judge correctly applied the law and on the facts, as he found them, he was right to hold that the builder had not repudiated. The builder had not made it clear that it did not intend to complete performance of its obligations under the contract as and when they were appropriately established. We have already found that to be so in relation to the events occurring between 20 August and 27 August 1999. The position is the same when consideration is given to those events in combination with all relevant earlier events. The following findings of the Judge seem to us to be indicative of the builder’s attitude, both shortly before the abortive cancellation and by inference throughout. That attitude was the antithesis of repudiation. Speaking of the letter of 25 August 1999 written by the builder’s solicitors and subsequent events the Judge said:

    However, the suggestion that the proceedings be adjourned and that the concerns be dealt with constructively was not agreed to and the Oxboroughs went to hearing on 26 August 1999. I accept Mr Michael Pasco’s evidence [for the builder] that he spoke to Mr Bradford [the Oxboroughs’ counsel] at Court on 26 August 1999 before the hearing and said that he was happy to go through the Prendos report line by line to address all the concerns. When the application was heard that day it was dismissed. I accept Mr Michael Pasco’s evidence that after that decision, as they were walking back to their cars, he had a further discussion with Mr Bradford and said that he was happy to go through the report and that they could resolve all the issues in the report. Mr Bradford told him that they were going back to his office to cancel the contract and the only way that Regency [the builder] could have the Court proceedings go away was to give Mr and Mrs Oxborough their money back and take the house away.

  28. The Judge’s overall conclusion, reached after a careful survey of the evidence, was that the evidence did not establish words or conduct by the builder which could have led a reasonable person to the conclusion that the builder did not intend to complete performance of its obligations under the contract according to its terms. In stating that conclusion the Judge applied the test for repudiation approved by this Court in Starlight Enterprises (supra) at 748. He applied it against a factual conclusion which in our view is unassailable. In substance we agree with Mr Wilson’s submissions for the builder on this and indeed on each aspect of the case.

    CONCLUSION / FORMAL ORDERS

  29. For the Oxboroughs the course of events has been an unfortunate one. They started out having some legitimate concerns about the builder’s performance. But by taking a fatally wrong turn in purporting to cancel, they overplayed their hand and adopted a course which, on the facts as ultimately found by the Judge, was untenable in law. To attempt peremptory cancellation in the circumstances the Oxboroughs faced was always going to be a bold move, the more so after they had sued for specific performance only 7 days earlier with an associated plea that the builder’s performance or lack of it amounted to a total failure of consideration. The builder consistently showed itself willing to complete performance, if necessary in terms of an arbitrated solution. The builder acted on the Oxboroughs’ affirmation by continuing to work on the house in the 7 days leading up to the purported cancellation. It can be seen that the Oxboroughs were most unwise to attempt to resolve matters by proceedings in the High Court. The builder’s solicitors were entirely correct when they said in their sensible letter of 25 August 1999 that mediation or arbitration was the appropriate way to proceed rather than litigation in the High Court.

  30. For the reasons given the appeal is dismissed. The Oxboroughs must pay the builder’s costs in the sum of $5000 plus disbursements, including the reasonable travel and accommodation expenses of counsel to be fixed if necessary by the Registrar.


Cases

Johnson v Agnew [1980] AC 367; [1979] 1 All ER 883; Chatfield v Jones [1990] 3 NZLR 285; Woodar Investment Development Ltd v Wimpey Construction (UK) Ltd [1980] 1 All ER 571; DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; Starlight Enterprises Ltd v Lapco Enterprises Ltd [1979] 2 NZLR 744; Hong Kong Fir Shipping Co Ltd v Kawasaki Kisen Kaisha Ltd [1962] 2 QB 26, [1962] 1 All ER 474; Jolly v Palmer [1985] 1 NZLR 658

Legislations

Contractual Remedies Act 1979, s.7(5)

Authors and other references

Burrows Finn and Todd, Cheshire and Fifoot’s Law of Contract, 8th New Zealand edition

Representations

G N Bradford for Appellants (instructed by Corboy Wilson Rolfe & Co, Wellsford)

D K Wilson for First and Second Respondents (instructed by Raymond S Walker, Auckland)


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