Betterment – A Balancing Act
By Julia Batchelor-Smith, senior solicitor, Minter Ellison Rudd Watts

Picture this: four years ago, you bought a six-year-old house. The original owners had painted it an unattractive shade of terracotta. You intended to repaint it in the next few years – and perhaps replace the tiles on the balcony at the same time – but you certainly had no imminent plans to launch into large-scale maintenance when the house was still relatively new.

Fast-forward a couple of years. To your absolute horror, you discover that your home, like many thousands of others in New Zealand, leaks. After a protracted and stressful process of procuring an assessor’s report, remedying the extensive defects, and finally, submitting and progressing your claim, you find yourself at a mediation with the defendants and their lawyers. 

From your perspective, the incomprehensible is happening: not only are these people responsible for your leaking home, but they now have the gall to mercilessly dissect your breakdown of quantum, and argue that they should not be responsible for the full cost of the repairs. Why should we have to pay for that pricey replacement plaster complete with cavity system that you (and most likely, your expert) selected, they ask? Was the change in tiles on the balcony really necessary? And why should we have to subsidise your premium paint choice of Karen Walker Cliff Face Grey, when the original paint was 10 years old and at the end of its usual life?

Fair enough, you may say – you were going to repaint anyway. But what if you weren’t? Maybe the paint still had a few years left in it. And why should you be penalised for having an updated plaster and cavity system when that was now required by the Council?

What is betterment?
Betterment occurs when a plaintiff’s compensation exceeds the loss that has been suffered. This fractious issue often crops up in leaky building cases, when it is difficult (and sometimes impossible) to repair a property without putting it into a better condition than it was prior to the damage occurring.

The question of betterment goes to the measure of damages. The fundamental object of damages is to financially restore the plaintiff, as best as possible, to the position it would have occupied – but no more – if the defendant had not breached its duty to the plaintiff. 

The issue of whether a plaintiff is entitled to a bonus (be it perceived or real) of an increment in value is far from clear-cut. The perceived windfall that the plaintiff has received as a result of the award against the defendant must be weighed against the cost to the plaintiff of that unplanned investment, which is often a difficult and emotionally fraught task.

The traditional view
Until comparatively recently, the established common law rule was that no deduction should be made from the plaintiff’s damages to offset necessary betterment. The general principle was set out in Harbutt’s Plasticine v Wayne Tank and Pump Co Limited [1970] 1 All ER 225 (EWCA): the plaintiff should be entitled to the full replacement cost without deduction for betterment if due to the defendant’s wrongdoing, the plaintiff had no other option but to purchase the substitute item that it did. 

In Harbutt’s, the plaintiff replaced its destroyed factory without adding any additional features in the process. Whilst the plaintiff ended up with a superior asset, Lord Justice Widgery held that a deduction for betterment was not appropriate, as it would be tantamount to forcing the plaintiff to invest its money, which might be highly inconvenient. In the subsequent decision of Bacon v Cooper (Metals) Limited [1982] 1 All ER 397, Justice Cantley opined that this approach would be inappropriate where it would lead to an “absurd” result.

Betterment in New Zealand
The leading New Zealand decision is J & B Caldwell Limited v Logan House Retirement Home Limited [1999] 2 NZLR 99. Mr and Mrs Caldwell owned the land and buildings and Caldwell Limited (Caldwell) owned the rest home business. Mr and Mrs Caldwell agreed to sell the business and property to Logan House Retirement Home Limited (Logan House). It was subsequently discovered that Caldwell had breached the sale and purchase agreement by, amongst other things, removing certain chattels and leaving chattels in an unacceptable condition. 

The District Court found that Caldwell had indeed breached the sale and purchase agreement, and awarded $34,639 to Logan House for missing chattels. Caldwell appealed to the High Court, arguing that the District Court erroneously applied a reasonable replacement cost measure of damages, and ought not to have adopted adjusted book values over valuation evidence. 

In the High Court, Justice Fisher described betterment as “the unexpected improvement in the [plaintiff’s] position”. His Honour considered three key issues pertaining to betterment:

• Would a plaintiff be entitled to a full indemnity where new replacement items were purchased, or must a plaintiff credit for betterment?
• What was the measure of betterment?
• Who had the onus of proving or disproving the presence and extent of betterment?

Justice Fisher examined the competing ways in which overseas Courts have dealt with betterment. At one end of the spectrum, no allowance for betterment was made; however, at the other, it was held to be appropriate to deduct in full the increase in value of the restored or substituted asset with little or no recognition of the cost of the unplanned and unwelcome investment of capital forced upon the plaintiff.

Justice Fisher concluded that neither extreme properly accords with the fundamental object of damages. His Honour instead adopted a “middle ground”, which deems a deduction for betterment appropriate only after allowance to the plaintiff for any disadvantages associated with the involuntary nature of any additional investment that has been made. 

The result in Caldwell was suboptimal for the appellants: Justice Fisher concluded that they had failed to prove the existence and extent of betterment given their failure to lead evidence on the subject beyond establishing that the valuer knew the meaning of the word “betterment”.

Caldwell in a leaky homes context
The Caldwell decision was considered in a leaky homes context in La Grouw v Cairns (2004) 5 NZCPR 434. La Grouw involved a successful appeal by Ms La Grouw against quantum of damages awarded in the District Court. La Grouw (in her capacity as trustee) originally commenced proceedings against Mrs Cairns, alleging she misrepresented to her at the time of purchase that there were then no leaks in the house. La Grouw sought judgment of a total of $93,700.82 ($84,000 for remedying leaks based on a report by her expert, Mr O’Sullivan, and costs already incurred) and $20,000 general damages for distress and inconvenience. In the District Court, Judge Cadenhead awarded La Grouw $30,000 for damages, but declined to award any sum for general damages.

On appeal, Justice O’Regan decided that the appropriate way of calculating damages was to start with providing a solution which will clearly make the house one which is appropriately constructed to avoid water damage from leaking (as proposed by La Grouw’s expert, O’Sullivan). O’Sullivan had accepted that the proposal to replace the roof was more than remedial. This led to the consideration of whether an allowance for betterment ought to be made, because the house would be built to higher standards than those applied in the building of the house.

Justice O’Regan referred to Caldwell as summarising the law relating to betterment. Applying that case, Justice O’Regan held that it was necessary to determine whether the property, after the completion of the work suggested by O’Sullivan, would be more valuable than a property complying with the contract (that is, a house which did not have a leaking problem, but which otherwise had the characteristics of the property purchased by La Grouw). His Honour held that the next step was to make allowance for the involuntary nature of what would effectively be an additional investment in the property by La Grouw. Justice O’Regan noted that Justice Fisher held in Caldwell that a defendant had the onus of showing that betterment had occurred, and that in his Honour’s view, the defendant had failed to discharge that onus.

Whilst Justice O’Regan concluded that the evidence advanced by Cairns did not establish betterment in a Caldwell manner, his Honour did make allowance for betterment of less than $2,000 in calculating the breakdown of costs for the net repair of the building.

Issues for counsel
As the vast majority of leaky homes cases never go to trial, it often falls to lawyers to battle out the issue of betterment across the mediation table. Clearly, counsel will need to consider quite different factors when acting for a plaintiff than when acting for a defendant. 

So who does establishing the onus of proof fall to – the plaintiff or the defendant? In Caldwell, Justice Fisher concluded that once the plaintiff has discharged the onus of proving the existence and amount of the unexpected expenditure caused by the defendant’s default, the onus shifts to the defendant to prove not only the presence of betterment, but also its quantum or value. In other words, the plaintiff has the onus of proving both the presence and quantum of its loss, while the defendant has the onus of showing that betterment has occurred.

From a defendant’s point of view, counsel will need to be vigilant in assessing claims for betterment, and taking appropriate analytical steps to prove that betterment has occurred. In La Grouw, Justice O’Regan held that the defendant must advance an analysis of the respective values of the house which did not leak (but was built of the original materials in accordance with the building codes applying at the time of the house’s construction), against the house as it would be after the completion of the work suggested by O’Sullivan. That would allow for a quantification of betterment, and then an appropriate allowance would be made for the involuntary investment required on the part of La Grouw in achieving that betterment, in accordance with the approach outlined by Justice Fisher in Caldwell.

When acting for a plaintiff, counsel will need to ensure that their client’s claim is as best insulated against an assertion of betterment as possible. In a leaky homes context, steps that can (and should) be taken include appointing an appropriately qualified expert to assess and implement remedial decisions, and pre-emptively deducting any known betterment (such as re-painting, when such painting was clearly appropriate) from the claim quantum.

A balancing act
After deciding that a defendant is liable and the quantum of that liability, the Court, the Weathertight Homes Tribunal, or more often than not, lawyers and experts at mediation, must ascertain whether remedial works will do (or have done) more than merely restoring the property to the condition it would have been in if it had not been a leaky home. 

Fairly identifying and quantifying betterment is a balancing act which will continue to challenge the judiciary, counsel, plaintiffs, and defendants alike.