Shen v Ossyanin (no. 2) – Relief granted for a pre-sale mistake as to weathertightness
The High Court has heard an increasing number of cases in recent years relating to claims in misrepresentation for the sale and purchase of “leaky homes”. Having found in its first judgment in Shen v Ossyanin that the defendant did not misrepresent that the property was a leaky building, the Court invited the parties to make further submissions on a claim in contractual mistake. Shen (no. 2)1 provides an interesting example of the High Court’s approach to assessing a claim for common mistake, and the use of its discretion to award relief, where a claim in misrepresentation was unsuccessful.
Facts
Mr Shen purchased a house in Herne Bay, Auckland from Mr Ossyanin. Both parties were assisted in negotiations by translators. The sale and purchase agreement was conditional on Mr Shen obtaining a building inspection report and subject to a due diligence clause. The building inspection report identified several defects with the house which required repair. The Court found (after some dispute over what the parties had discussed via their respective translators) that at a meeting between the parties following receipt of the building inspection report, Mr Shen had asked Mr Oyssanin whether the property was leaking or had any problems. Mr Oyssanin’s answer was simply “no”.
Mr Shen followed through with the purchase. It subsequently became apparent that the house was leaking and required extensive repairs. Mr Shen sought to on-sell the property but was only able to do so with a reduction in price of approximately $1.5 million to account for the necessary repair work.
Mr Shen’s claim in misrepresentation failed, as the Court found that Mr Ossyanin’s statement that the house was not leaky was only a representation as to his knowledge and experience of the property, and therefore was not an untrue statement of fact. Alternatively, Mr Ossyanin’s statement was an opinion, honestly and reasonably held and so was not an actionable misrepresentation. Furthermore, even if there had been a misrepresentation, the Court found it was not reasonable for Mr Shen to rely on the representation and dismiss the expert building report which warned of weathertightness risks and defects.
With Mr Shen’s misrepresentation claim failing, Justice Whata raised the possibility that both parties were acting under a common mistake and provided a further opportunity for submissions on a claim in mistake to be heard. A subsequent hearing was held and the second judgment released in September 2019.
Mistake
Assessing the elements of mistake, the Court found:
There was a mistake which influenced the parties to enter into the contract. “Influence” required both parties to have mistakenly accepted in their minds a fact which affected to a material degree the consideration given by one of the parties (here, the purchase price paid). The period of “entry” into the contract continued until the sale agreement was confirmed unconditional. While the parties did not turn their minds to whether the house leaked when the contract was signed, after receiving and discussing the building report both parties had turned their mind specifically to the prospect of leaks and both parties were operating under the assumption that the house did not leak prior to the contract being confirmed unconditional.
The Court found that there was an unequal exchange, as it was clear that the house was worth significantly less than anticipated due to the defects as reflected in the loss in market value on resale (around $1.5 million).
Mr Shen was not obliged by a term of the contract to assume the risk that his belief the property was weathertight might be mistaken. Any allocation of the risk of mistake must be expressed clearly in a term of the contract. The building inspection condition did not oblige Mr Shen to assume the risk of mistake. It provided a process for Mr Shen to raise issues about the condition of the property with Mr Ossyanin and it was only after Mr Ossyanin’s statement the house did not leak that the contract was confirmed unconditional. The exercise of Mr Shen’s discretion to proceed with the purchase did not preclude a claim in mistake.
In granting relief, the Court noted the wide discretion conferred on the Court to make any order it thinks just, so long as the Court’s power would not be exercised in a way that prejudices the general security of contracts. While the reasonableness of reliance is not a qualifying element for mistake, the Court can look to the claimant’s contribution to the mistake / blameworthiness as a factor for reducing the loss claimed. The Court considered it was unreasonable for Mr Shen to rely on Mr Ossyanin’s assurances and dismiss the expert advice in the building report, but this was not a case of “unmitigated carelessness” as Mr Shen was an otherwise careful purchaser and thought he received better information from Mr Ossyanin. However, the Court split the burden of the mistake 70/30 between Mr Shen and Mr Ossyanin for Mr Shen’s contributory conduct. Mr Shen was a sophisticated property buyer; he was told that the house appeared to have weathertightness problems in the expert report; he did not seek a warranty as to the fitness of the property; and Mr Ossyanin was found to have honestly believed that the house did not suffer leaks – he was not intentionally misleading. Mr Shen recovered $450,000 plus interest from the date he resold the property, being 30% of the $1.5 Million loss in value on resale.
Comment
The threshold for successfully establishing the elements of contractual mistake appears to be lower than a claim in misrepresentation in a few respects. The parties need only be ‘influenced’ by the mistake in their entry into the contract rather than ‘induced’, and reasonable reliance is not a “qualifying element for mistake” unlike misrepresentation. However, the parties must be shown to have turned their minds to the alleged common mistake which will require evidence from a plaintiff to prove the defendant was mistaken, rather than simply not giving any thought to the issue. That could be difficult to prove in cases where there are no discussions or representations made about the alleged mistake (i.e. the weathertightness of the house), or such discussions are denied. Here, the critical fact was the discussion (and denial of) weathertightness issues following Mr Shen’s receipt of the building inspection report.
Furthermore, while a successful plaintiff is entitled to damages for an actionable misrepresentation, the Court has a broad discretion to consider contributory conduct when granting relief in mistake and a significant deduction was made in the present case. In any case, that the Court was willing to grant relief, albeit significantly deducted, does raise interesting questions about the role of caveat emptor (buyer beware) in such claims. While the vendor made no misrepresentations, reliance on the vendor’s statements was considered unreasonable and the (sophisticated) purchaser received an expert report identifying weathertightness problems, relief was awarded for the “arbitrary effects of the common mistake”. A vendor might reasonably expect to rely on the principle of caveat emptor in these circumstances, but it seems the Court was willing to exercise its wide discretion to award some relief to the purchaser, so that the burden of the unequal exchange of value (price paid) did not entirely rest on the purchaser where both parties mistakenly believed the property was weathertight.
