Home inspector personally liable for misleading report and verbal advice

In Macfarlane v Informed House Inspections Ltd & Sewell [2023] NZHC 934, Wellington home inspector Mark Sewell and his company Informed House Inspections Ltd (IHI) were found liable for $524,500, the loss suffered by a homeowner after she bought a property in reliance on a report prepared by IHI (through Mr Sewell) and verbal advice from Mr Sewell that the property was “definitely not a leaky home”, only to discover that significant weathertight defects were not identified. Limitations and disclaimers in the report did not protect IHI or Mr Sewell from liability for misrepresenting the condition of the property, which the plaintiffs’ experts confirmed presented with “indicators of significant defects and weathertightness risk at the time the Property was first inspected”.

Stuart Dalzell (Partner) and Sam Smith (Solicitor) acted for the successful plaintiff.

The Facts

In 2019, the plaintiff purchased a property in Lower Hutt. Following a property viewing, the real estate agent provided the plaintiff with a house inspection report (the inspection report) prepared by IHI (a building inspection company) through Mr Sewell (a building inspector and sole director of IHI). The inspection report generally described the property as being in a reasonable condition for a building of its age and type, despite it being constructed at a time and of a design associated with “leaky” buildings.

Before the purchase was complete, the plaintiff called Mr Sewell to discuss the inspection report and the condition of the property. Mr Sewell said the property was “definitely not a leaky home” and a “reasonable property with minor maintenance issues” (the verbal advice). In reliance on the inspection report and verbal advice, the plaintiff purchased the property.

Shortly after moving in, the plaintiff discovered water ingress and weathertightness damage. Subsequent investigations revealed the property suffered from serious construction defects and building failures that were causing widespread damage and decay that required extensive remediation. Many of the defects would have been visible at the time of the pre-purchase inspection.

The plaintiff claimed that the inspection report and verbal advice were misleading or deceptive in breach of section 9 of the Fair Trading Act 1986 (FTA) and amounted to negligent misstatements. Damages were sought for the cost of remediation and other losses.

Procedural Background

The matter proceeded by way of formal proof because IHI did not file a defence to the claim and Mr Sewell failed to comply with discovery orders made on an “unless” basis so that Mr Sewell’s defence would be struck if he did not comply with the orders within a stipulated time.

Mr Sewell appeared personally in the Court before the Judge at the formal proof hearing and sought further time. However, the Court noted that an earlier formal proof hearing had been dismissed to allow IHI and Mr Sewell to advance their defence, but they had failed to do so in accordance with the Rules and Court directions (causing irreparable prejudice to the plaintiff).

Findings – Fair Trading Act (misleading or deceptive conduct)

Section 9 of the FTA provides that no person in trade shall engage in conduct that is misleading or deceptive or is likely to mislead or deceive. The Court found that IHI was clearly in trade and actively carrying out the business of pre-purchase house inspections. Mr Sewell, as the company’s sole director and shareholder, was found to be the “alter-ego” of IHI and himself in trade. It was Mr Sewell who personally inspected the property, produced the inspection report, and made representations to the plaintiff based on his inspection.

The inspection report made positive representations as to the quality of the property, and presented it as being well-maintained, in good order, and without structural damage or abnormal moisture levels. The Court found this representation of the property was fundamentally inconsistent with the expert evidence presented at the hearing and that the inspection report failed to alert the reader to weathertightness risks, or recommend a specialist report be carried out. The Court concluded this amounted to misleading or deceptive conduct.

The plaintiff argued that conduct caused her loss (including the cost of fixing her property), in that she held a genuine belief that the property was in good condition and relied on the defendants’ representations when deciding whether to purchase the property, particularly Mr Sewell’s verbal advice that the property was “definitely not a leaky home”.

The Court considered whether it was reasonable for the plaintiff to rely on the inspection report given it contained a disclaimer that the use of the report by any third parties was prohibited and that it was only to be used by the vendor. A further “substantive disclaimer” was also included in an “Inspection Agreement” with the vendor which was not provided to the plaintiff. Due to the inspection report being provided by the vendor’s agent, the phone conversation the plaintiff had with Mr Sewell regarding the property (in which no disclaimer was given) and the defendants’ holding themselves out as specialists in pre-purchase inspections and reports, the Court found that the plaintiff’s reliance on the inspection report and verbal advice was reasonable.

It followed that the defendants ought to have known the inspection report would be provided to potential purchasers and that they did know the plaintiff had received the report as was discussed during the phone call. Given the general prohibition on contracting out of the FTA, the Act’s consumer protection purposes and the circumstances of the case, the Court found the disclaimer in the inspection report was unable to absolve the defendants from liability under the FTA.

The claims against both defendants for misleading or deceptive conduct in breach of the FTA were successful.

Findings – Negligent Misstatement

The tort of negligent misstatement provides for loss caused when a statement made or advice given by a person with a special skill is relied upon. Where a duty of care exists, the person making the statement can be liable for the loss that flows.

The Court considered that the defendants knew the inspection report would be provided to prospective purchasers and that knowledge was confirmed during Mr Sewell’s conversation with the plaintiff. These circumstances created a special relationship with and duty of care owed to the plaintiff.

The Court also found the inspection report would likely be acted upon without independent inquiry, particularly because further inquiries were not recommended in the inspection report or verbal advice. It was therefore reasonable for the plaintiff to rely on the defendants’ representations, as they were made by persons holding themselves out as experts in pre-purchase house inspections and reports.

The plaintiff acted on the defendants’ advice to her detriment. She would not have purchased the property had she known its true condition and was now faced with significant remediation costs. The Court agreed that the defendants had breached their duties of care owed to the plaintiff.

The Court considered whether the disclaimers relating to the defendants’ inspection and report made reliance unreasonable for the negligent misstatement claim. In the circumstances, the disclaimers did not make reliance unreasonable, particularly because the defendants’ had the opportunity to discuss the disclaimers with the plaintiff during their phone call and to comment generally to discourage reliance.

The claims against both defendants for negligent misstatement were also successful.

Relief

Generally, where someone has suffered loss by the conduct of a person who has contravened the FTA, the Court may order that person to pay damages to put the wronged party in the same position they would have been but for the FTA breach. The same measure of damages was found to apply to the negligent misstatement claims. The plaintiff sought relief for damages (remediation costs), alternative accommodation, general damages, costs and interest.

When assessing the award for damages, the Court considered (among other things) that the benefit obtained by the defendants’ misleading conduct was minor (the defendants charged a $1,200 fee for the report). This was balanced against the cost of remediation which was likely to be higher than identified by the quantity surveyor’s report prepared a year earlier. A 5% reduction in the damages sought was found to be appropriate. The Court also concluded that the plaintiff did not contribute to her loss, due to the reasonable care she took and the reasonableness of her reliance on the inspection report and verbal advice.

The total sum awarded to the plaintiff was $524,495.52 (plus interest). 

Comment

If we did not have formal proof hearings and/or default judgments, defendants could avoid losing a case by ignoring it or failing to comply with the Court’s orders. The Court is astute to prevent a potential abuse of process by a defendant.

Defendants might be allowed a limited right to participate in some circumstances, but often formal proof hearings proceed without them, on the basis that it is not a “rubber stamp exercise” and the plaintiff must put the Judge in a position in which they are satisfied that the claim and damages are made out. That occurred here, with the Judge concluding that judgment should be entered against IHI and Mr Sewell personally.

If you have any questions about this decision or wish to discuss claims against building inspections, please get in touch.