Contractual mistake in sale and purchase of a leaky house

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Tim Bates

Timothy Bates and Sabina Boyd of Auckland law firm Legal Vision review a recent case which concerned a contractual mistake in an agreement for sale and purchase of a leaky house.

The recent High Court decision of Shen v Ossyanin & Another concerned a contractual mistake in an agreement for sale and purchase (“Agreement”) of a leaky house.

The judge was asked to consider whether Mr Shen (“S”) and Mr Ossyanin (“O”) were operating under a mistake, and the possible relief available.

Background

S purchased an architecturally-designed house from O. Prior to purchasing the house, S enquired with O as to whether the house leaked.

While O told S that the house did not leak, in fact, it did. In a previous hearing, the judge determined that O had not made any misrepresentations as O maintained that he was unaware of the leaks.

This article concerns the “contractual mistake” aspect of the case, which was heard as a separate issue.

Contractual mistake 

The following issues were to be resolved: 

1  Was O influenced in his decision to enter into the contract by the same mistake as S?

2  Did the contract provide for the risk of mistakes, and was S obliged to assume that risk?

3  If not, should S’s conduct in causing the mistake disentitle him to relief?

4  In that event, has there been a substantially unequal exchange of value proved by the plaintiff?

Issue 1 

To be influenced means that both parties must have “mistakenly accepted in their minds the existence of some fact which affects to a material degree the worth of the consideration given by one of the parties”.

The judge considered that entry into the Agreement should be viewed as a continual event from the moment the Agreement is first signed until it becomes unconditional.

And also that residual issues as to the effect of the inspection and due diligence conditions of the Agreement should be relevant, not whether the mistake was made on entering into the Agreement and/or when the Agreement went unconditional.

Both S and O believed that the house did not leak, and were both influenced in their decision to enter into the contract by the same mistake.

Issue 2 

The Agreement did provide for the risk of mistakes insofar as it provided an opportunity to cancel the agreement if the building was unsatisfactory, and if the purchaser was dissatisfied with any unremedied aspect of the building report.

The Agreement conferred a discretion to cancel it following the completion of the due diligence process (and also allowed for an ongoing assessment of the building), but did not allocate the risk of mistake to S.

S obtained a report and then asked O whether the building leaked. S did not assume the risk of mistake in declaring the Agreement unconditional, due to O’s advice.

Issue 3 

Section 28 of the Contract and Commercial Law Act 2017 (the “Act”) gives the court power to make any order it thinks just, including relief by way of restitution or compensation.

As the Act deals with qualifying elements for mistakes that are not relevant to this case, the judge considered that the reasonableness of S’s reliance on O’s representations was appropriate in considering the justness of relief.

The judge held that S’s reliance on O’s representations were unreasonable, as S had obtained a report saying the building had defects, had chosen to favour O’s representations about the house not leaking, and had then failed to seek a warranty from O that the house did not leak.

However, but for O’s representations, S would not have entered into the unconditional Agreement, so the judge was not satisfied that S’s unreasonableness should entirely disqualify him from relief.

Issue 4 

The judge considered that a good starting point for quantifying loss attributable to the mistake was the difference in purchase price and resale price, which was approximately $1.5 million.

This number reflected the movement in the market value over the period after the defects were considered, and the fact that S had acted reasonably in mitigating his loss.

It was found that there was an unequal exchange of value.

Relief 

The judge considered that there should be some relief to mitigate the effects of the mistake. However, S should bear the burden of the unequal exchange to a greater extent than O.

The judge ordered a 70/30 split between S and O for the burden of mistake. The judge ordered an award of $450,000 plus interest in S’s favour. O was awarded 50% of his costs.

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