Johnson decision is water under the bridge for leaky home litigation

by 14 Feb 2014
Article by: Mark Colthart BA, LLM (Hons), FAMINZ(Arb), FCIArb and Frances Everard BA, LLB (Hons)

The High Court decision of Johnson v Auckland Council appeared to signal a new wave of cases, where leaky home owners who failed to protect their own interests could end up paying the lion’s share of damages through contributory negligence claims (up to 70% as in this case). Johnson also held that the correct measure of loss for leaky buildings claims was diminution in value, not the cost of repairs.

The case was reheard in the Court of Appeal where the Court confirmed that the Council should bear the bulk of the burden for constructing a leaky home, in accordance with public policy under the Building Act. Furthermore, it held that the correct measure of loss for leaky building claims is the cost of repairs for pure negligence, not diminution in value for negligent misstatement. 

The owners in Johnson bought a leaky home for $3,900,000.00 at a mortgagee sale in 2009. They were aware that it could have been leaky, but they failed to obtain a LIM report or a pre-purchase inspection report and they did not negotiate any terms of the contract. They only obtained a code compliance certificate from 2004, which Woodhouse J found did not relate to the re-cladding of the house.  Furthermore, the Judge found that the Johnsons would have received adequate legal advice but they chose to ignore it.

The Johnsons’ claim was reduced by 70% in the High Court due to their contributory negligence in failing to protect their interests. Woodhouse J held that diminution in value was the appropriate measure of loss in accordance with the tort of negligent misstatement in Altimarloch.  His reasoning was that the Johnsons should only be awarded damages for the difference between the price paid for the property and its true condition. Since they could have reduced their damages by taking reasonable steps, the Judge did not deem the cost of repairs an appropriate measure of the loss. 

The Court of Appeal agreed that the Johnsons were contributorily negligent. However, it found that the code of compliance certificate did in fact cover re-cladding and it rejected Woodhouse J’s finding that the Johnsons would have received adequate legal advice. Furthermore, by applying the reasoning of Venning J in Byron Avenue, the Court held that the majority of the responsibility should lie with the council. The Johnsons’ contributory negligence was thus reduced to 40%.

The Court held that the cost of repairs is the correct measure of loss, in accordance with pure negligence and the duty of care owed by council to home owners. By contrast, diminution in value for negligent misstatement is a strained approach which requires an element of reliance on a specific statement. As long as the cost of repairs is reasonable when compared with the diminution in value ($1.7 m vs. $1.5 m in this case), then the cost of repairs is the appropriate measure.

The Court also endorsed the cost of repairs approach for practical reasons: because it was a family home that the Johnsons had specifically searched for and one which they could not have lived in had the repairs not been carried out.

What this decision means for litigation lawyers

The Court of Appeal decision in Johnson affirms that the majority of the responsibility for a leaky home lies with those involved in the construction of the house (including the Council), not the owners who bought the house. Following this decision, it would have to take an owner who is bordering on reckless in his or her decisions pre-purchase, to lift the amount of contributory negligence beyond 50%.  Otherwise the lion’s share of damages will rest with those involved in the construction. The cost of repairs, not diminution in value, has been confirmed as the preferred measure of loss in leaky building claims.

The Court of Appeal decision brings some further certainty to a field which is notorious for contradictory decisions as cases progress up the appellate chain. That has to be a welcome development. Neither party has appealed and so, for now, the Court of Appeal’s decision remains the final word on these important issues.