HOUSE BUYING IS CAVEAT EMPTOR ALIVE AND KICKING IN SOUTH

HOUSE BUYING: IS CAVEAT EMPTOR ‘ALIVE AND KICKING’ IN SOUTH AUSTRALIA? Jeremy Coggins1 I INTRODUCTION The common law principle of caveat emptor, qui ignorare non debuit quod jus alienum emitveat emptor’ - in short, caveat emptor (or ‘buyer beware’) - has often been associated with real estate transactions. This Latin maxim translates as: let a purchaser, who ought not be ignorant of the amount and nature of the interest which he is about to buy, exercise proper caution2. In relation to house buying, caveat emptor is often cited as a warning to prospective purchasers with regard to the quality of the house or structure3 they are considering purchasing. A purchaser has, however, traditionally been able to bring a successful action in common law for defects in title of property, as opposed to quality of property, which were not disclosed by a vendor prior to sale. The original premise for caveat emptor in the context of real estate transactions was stated by Pomeranz as follows: The doctrine of caveat emptor as it applies to real estate originated in England during the Middle Ages, a time when agriculture was the sole purpose of land. The doctrine was premised on the purchasers’ ability to discover and protect himself from defects in the property through prior inspection, since the quality of the land took precedence over the quality of the structures of the land. Furthermore, it was assumed that the vendor and purchaser were of equal bargaining positions and engaged in arm’s-length transactions, and that the buyer therefore did not need special protection4. Caveat emptor places responsibility on the prospective house purchaser to be responsible for carrying out their own inspection of any property on land before purchasing the land; the purchaser having no recourse to the common law if any building defects (patent or latent), which are discoverable pre-contract by a normal inspection, are discovered subsequent to sale. 1 2 Lecturer, School of Natural & Built Environments, University of South Australia. Taken from Vendor Disclosure, Tasmania Law Reform Institute, Issue Paper No 6, June 2004. 3 Such as a contravention of the building regulations – see McInnes v Edwards [1986] VR 161. 4 Pomeranz, ‘The State of Caveat Emptor in Alaska as it Applies to Real Property’, (1996) 13 Alaska Law Review, 237 at 238; as seen in Vendor Disclosure, Tasmania Law Reform Institute, Issue Paper No 6, June 2004. AIBS 2007, Coggins, J. “House buying: is Caveat Emptor ’alive and kicking’ in South Australia” 72 Traditionally, the Australian courts have supported caveat emptor in relation to house buying cases. Caveat emptor, however, requires the vendor of a property to disclose very little, if any, information about the quality of that property. This creates a situation where a vendor may have knowledge critical to the quality and, hence, value of the property, and, yet, is under no obligation to volunteer that information to prospective purchasers. In recent times, however, the notion that vendors and purchasers have equality in bargaining power has seen both judicial and legislative challenge in several Australian jurisdictions5. In New South Wales, for instance, the vendor is deemed to make a prescribed warranty to the effect that there is no matter in relation to any building or structure on the land (being a building or structure that is included in the sale of the land) that would justify the making of any upgrading or demolition order or, if there is such a matter, a building certificate has issued in relation to the building or structure since the matter arose6. The Australian Capital Territories (ACT) has taken requirement for vendor disclosure further, requiring the seller to provide prospective purchasers with the opportunity to inspect a building and compliance inspection report from an inspection7, and a pest inspection report8, carried out not earlier than 3 months before the day the property was first advertised or offered for sale or listed by an agent. Similar legislative requirements for a pre-purchase building inspection report were proposed in a private members bill9 in South Australia in 2004; however, the bill did not progress any further through Parliament after its second reading. Current legislation in South Australia10 requires that at least 10 days before settlement the vendor must serve on the purchaser a statement in the form prescribed by regulation setting out, inter alia, any prescribed matters – essentially requiring the vendor to disclose any matter affecting, presently or prospectively, title to, or possession or enjoyment of the land11 12. Vendor Disclosure, Tasmania Law Reform Institute, Issue Paper No 6, June 2004. Conveyancing Act 1919 (NSW) s 52A (2)(b), Conveyancing (Sale of Land) Regulation 2005 (NSW) clause 8; schedule 3 Part 1. 7 Civil Law (Sale of Residential Property) Act 2003 (ACT), s.9 (1) (h) (iii). 8 Civil Law (Sale of Residential Property) Act 2003 (ACT), s.9 (1) (h) (iv). 9 Land and Business (Sale and Conveyancing) (Property Inspections) Amendment Bill (SA) 2004. 10 Land and Business (Sale and Conveyancing) Act 1994 (SA), s.7 (1) (b) (iii). 11 Vendor Disclosure, Tasmania Law Reform Institute, Issue Paper No 6, June 2004. 12 There is nothing contained in the recently tabled Statutes Amendment (Real Estate Industry Reform) Bill 2006 (SA) which significantly alters this requirement. 6 5 AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 73 At a federal level, the Trade Practices Act 1974 (Cth) prevents corporations from engaging in misleading or deceptive or unconscionable conduct in respect to vendor disclosure. Non-corporations engaged in trade and commerce are also prevented from the same by mirror provisions included in state fair trading legislation. The trade practices and fair trading legislation, however, do not apply to private vendors selling owner occupied houses; although, private individuals selling investment properties will be covered under state fair trading legislation. The aim of this paper is to determine, by analysing the 2006 South Australian District Court case of Darling v Carol Clark & E Marcel Estates Pty Ltd T/as LJ Hooker West Lakes & Ors 13 14, the current extent to which caveat emptor applies to the sale of private residential properties in South Australia. Darling15 looks at the question of whether a vendor and real estate agent (the defendants) may be liable to a purchaser (the plaintiff) of residential premises for a rising damp problem discovered a few months after the purchaser took possession. Darling16 considers the issues of misleading or deceptive conduct under the Trade Practices Act17 and Fair Trading Act18, misrepresentation, negligence and collateral warranty. In addition, the Western Australian case of Van Den Esschert v Chappell19 20 is considered by way of an interesting comparison to Darling21. Van Den Esschert22 considers whether the vendor of a residential premises can be held liable under misrepresentation and collateral warranty for a problem with white ant infestation of the premises discovered once the purchaser took possession. Although from a different era (1960) and jurisdiction, Van Den Esschert23 provides an interesting contrast to the decision in Darling24 and an insight into circumstances under which a vendor might still be held liable for building defects at common law. 13 14 Hereafter, referred to as Darling. [2006] SADC 56. 15 Ibid. 16 Ibid. 17 1974 (Cth). 18 1987 (SA). 19 [1960] WAR. 20 Hereafter, referred to as Van Den Esschert. 21 [2006] SADC 56. 22 [1960] WAR. 23 Ibid. 24 Ibid. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 74 II DARLING25 - THE CASE FACTS Mrs Rosemary Darling purchased a lakeside residential property located 7 Beeston Way, West Lakes in South Australia in December 2000. Approximately one month after having moved into the house, Mrs Darling noticed blistering paint on several walls within the house. Subsequently, Mrs Darling commissioned two separate building inspections of the house. Both inspections reached the same conclusion: that the house was subject to extensive levels of salt damp in several locations and that the primary cause of the damp was the bridging of the damp-proof membrane by the internal render, the concrete slab and external paving. In other words, the construction of the floor slab and wall bases had been in breach of the performance standard set by the Building Regulations prevalent at the time the house was constructed26. The company which built the house, WG Henderson & Co Pty Ltd, was dissolved in November 1997 but, at the time of constructing the house at 7 Beeston Way, had been widely considered as an experienced and seemingly reputable building company. Upon discovering the extensive nature of the salt damp, Mrs Darling (the plaintiff) decided to initiate litigation in order to recover any loss she may have suffered in purchasing a defective property. The plaintiff’s claim was made against the estate agent, Carol Clark & E Marcel Estates Pty Ltd trading as LJ Hooker West Lakes (the first defendant), and the vendors of the house, Mr and Mrs Taylor (the second and third defendants). Mrs Darling first became aware of the house being for sale several weeks prior to purchase when the estate agent, who coincidentally lived next door to the house, arranged for her to view the property. At the viewing, the plaintiff discovered that she knew the other next door neighbour – Mr Bob McKenzie, and took the opportunity to ask Mr McKenzie whether he knew of anything wrong with the house. Mr McKenzie replied ‘that they had salt damp at one stage but I know it’s all been fixed years ago’. Upon viewing the house, Mrs Darling noticed an area of replastering in the hallway behind the bathroom wall which she assumed was the dampness problem to which Mr McKenzie had referred. Despite having become aware of the dampness problem, Mrs Darling did not ask the estate agent about it, as she claimed she had no intention of 25 26 [2006] SADC 56. These being the Regulations to the Building Act 1970-1971 (SA). 75 AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ buying the house at that stage. Apart from this, however, Mrs Darling thought that the house looked in good condition with nothing to be done to it and nothing to spend. Mrs Darling took a copy of the estate agent’s flyer at the viewing, which she took home and read on a number of occasions. In addition to the first viewing, Mrs Darling sent a friend along to an open inspection to have a look at the house and also visited the house again herself one more time for about fifteen minutes prior to auction and subsequent purchase. On neither of these occasions did Mrs Darling or her friend notice any sign of peeling paint. Other salient case facts included that: • Shortly after the vendors had purchased the house themselves in 1994, they engaged tradesmen to undertake repairs to some internal walls in the form of replastering and retiling some internal walls where signs of dampness were evident. The vendors were advised at this stage by the tradesmen that any unsightly staining on the walls had been caused by rising moisture and would not re-occur. The vendors did not believe or suspect that the staining on the walls was indicative of a widespread rising damp or salt damp problem. • The first defendant estate agent had actually managed the house at 7 Beeston Way as a rental property for previous owners between 1987-1990. In that time, the agent had become aware of slight dampness problems only in the building through the carrying out of routine inspections. In addition, the agent knew that the house had been originally built by Warren Henderson, for whom the agent held high regard as a builder. • Mrs Darling chose not to obtain a building inspection report prior to purchase, as she claimed that she felt confident in the condition of the house as she assumed the estate agent, being the next door neighbour and having frequently visited the house, would have known of any problems. • Mrs Darling was experienced in house buying, having owned several different properties since around 1982. Amongst these purchases were two houses upon which Mrs Darling had commissioned building inspection reports prior to purchase, and discovered that both suffered from rising damp. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 76 • A couple of weeks before Mrs Darling purchased the house, a building inspection was carried out by a building inspector, Mr Kym Buckley, on behalf of some unrelated prospective purchasers. Upon a simple visual inspection, Mr Buckley noted areas of fretting, blistering and peeling paintwork on a number of internal walls which, in his opinion, would have been visible to anyone prepared to spend the time looking carefully. III DARLING27 - THE CLAIM The plaintiff’s case was predicated on three heads of claim: • • • Misleading or deceptive conduct and/or misrepresentation; Collateral warranty; and Negligence. Core to all three heads of claim were two issues: • firstly, a particular statement which the agent hade made on the promotional flyer, and had been ratified by the vendor, which described the house as a ‘quality built residence’; and, • secondly, that the defendants allegedly knew about the presence of salt damp, and the vendors had done work in the house to conceal it to the knowledge (and on the advice) of the agent, and that the defendants had not said anything to the plaintiff about either the presence of salt damp or the concealment works. A Misleading or deceptive conduct and/or misrepresentation; The plaintiff contended that the representation made on the flyer by the agent that the house was a ‘quality built residence’ was an inaccurate statement of fact, which had misrepresented the quality of construction of the house, implying that the house was free of salt damp. As a consequence of this misleading or deceptive conduct, the plaintiff claimed she had been induced into purchasing the house. The plaintiff 27 [2006] SADC 56. 77 AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ claimed that the vendors were vicariously liable for the agent’s misleading and deceptive conduct and/or misrepresentation and, furthermore, the vendors had aided and abetted the misleading and deceptive conduct and/or misrepresentation by performing works to conceal the defects in the house and by their silence with respect to the widespread dampness problem and concealment works. The plaintiff brought her action for misleading or deceptive conduct against the agent under section 52 Part V of the Trade Practices Act 1974 (Cth), and the mirror provisions contained in section 56 of the Fair Trading Act 1987 (SA), which provide: (1) A corporation28 shall not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive. (2) Nothing in the succeeding provisions of this Division shall be taken as limiting by implication the generality of subsection (1). Losses or damages caused by such misleading and deceptive conduct are recoverable under the relevant statutes against the person engaging in the misleading or deceptive conduct or against any person involved in the contravention29. The Trade Practices Act 1974 (Cth) applies to corporations in trade or commerce. The Fair Trading Act 1987 (SA) applies to persons in trade or commerce. Whilst the agent falls under the scope of both of these Acts, the vendor does not. Therefore, a successful action based on either of these two Acts would require the agent to have engaged in misleading conduct. The plaintiff sought to implicate the vendors in the agent’s alleged misleading conduct by relying on section 75B(1) of the Trade Practices Act 1974 (Cth) which defines a person, for the purpose of enforcement and remedies in relation to, inter alia, section 52 actions as a person who ‘has aided, abetted, counselled or procured the contravention’30 or ‘has been in any way, directly or indirectly, knowingly concerned in, or party to, the contravention’31. According to the plaintiff, the vendors had aided and abetted the agent by performing work to conceal the defects in the house and by their silence as to a dampness problem. For the Trade Practices Act, and ‘persons’ for the Fair Trading Act. see section 82 of the Trade Practices Act 1974 (Cth), and section 56 of the Fair Trading Act 1987 (SA). 30 Trade Practices Act 1974 (Cth) section 75B(1)(a). 31 Trade Practices Act 1974 (Cth) section 75B(1)(c). 29 28 AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 78 Further, or in the alternative, the plaintiff sought to rely on section 7 of the Misrepresentation Act 1972 (SA), which provides that: (1) where a contracting party is induced to enter into a contract by a misrepresentation made-(a) by another party to the contract; or (b) by a person acting for, or on behalf of, another party to the contract; (c) by a person who receives any direct or indirect consideration or material advantage as a result of the formation of the contract, and any person (whether or not he or she is the person by whom the misrepresentation was made) would, if the misrepresentation had been made fraudulently, be liable for damages in tort to the contracting party subjected to the misrepresentation in respect of loss suffered by him or her as a result of the formation of the contract… (2) It is a defence to an action under subsection (1)-(a) that the person by whom the representation was made had reasonable grounds to believe, and did believe, that the representation was true; or (b) that the defendant was not the person by whom the representation was made and did not know, and could not reasonably be expected to have known, that the representation had been made, or that it was untrue. B Collateral Warranty The plaintiff contended that the statement ‘quality built residence’ also amounted to a collateral warranty, i.e. a promise made by the vendor during the course of dealing which has become legally binding (either as a term of the main contract or as a separate collateral contract) as a result of the plaintiff entering into the contract to purchase the house. By implication, therefore, the plaintiff contended that the statement constituted a legally binding promise that the house was free of salt damp32. C Negligence The plaintiff argued that the agent owed her a duty of care to ensure that information provided to the plaintiff concerning the house was accurate, and that by failing to ensure that the description in the flyer was accurate, and by failing to ensure that the 32 Darling [2006] SADC 56 at 4 para 14. 79 AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ plaintiff was aware of the concealed defects and concealing works, the agent was negligent and in breach of duty to the plaintiff33. IV DARLING34 - THE JUDGMENT A Misleading or deceptive conduct Her Honour Judge Simpson considered that the question as to whether conduct is deemed as misleading in a particular matter ‘depends very much on the impression it conveyed, considered in the circumstances and context in which it occurred’35 36. Judge Simpson believed the appropriate way to answer this question was to consider the conduct of the agent and the vendors from the plaintiff’s individual point of view; in other words, consider the specific circumstances of the individual plaintiff on a case by case basis rather than treating the plaintiff as a member of a general class affected by the conduct in question37. In order to prove misleading conduct, therefore, Judge Simpson stated that the plaintiff would need to ‘establish a causal link between the impugned conduct and the loss that is claimed’, the establishment of such a link ultimately depending upon the nature of the dealings and conversations between the plaintiff and defendants38. From a contextual viewpoint, Judge Simpson drew the following material observations: (i) both the agent and vendors had knowledge of previous dampness issues in the internal walls of the house39. (ii) both the agent and vendors believed, although incorrectly, that those dampness problems had been addressed40. 33 34 Darling [2006] SADC 56 at 4 para 15. [2006] SADC 56. 35 Mitchell & Anor v Valherie (2005) 93 SASR 76 per Sulan J at 79, referring to Banks v Copas Newnham Pty Ltd [2002] QCA 217 at [6]; per White J at 91. 36 Darling [2006] SADC 56 at 35 para 153. 37 Darling [2006] SADC 56 at 36 para 154. 38 Ibid. 39 Darling [2006] SADC 56 at 37 para 161. 40 Ibid. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 80 (iii) both the agent and vendors did not know that the house was subject to widespread salt damp, or that there had been faulty installation of a dampcourse membrane at the time of construction41. (iv) The remedial work undertaken by the vendors (i.e. replastering and retiling to walls) prior to putting the house on the market was not an attempt to conceal a known problem with salt damp, but rather to present the house in the best light for sale42. (v) Despite the remedial works, signs of dampness remained in the walls which were detectible by ordinary visual inspection, although not noticed by the plaintiff when inspecting the house43. (vi) Despite the plaintiff having become aware from a neighbour that the house had previously had a problem with salt damp, the plaintiff never raised with, or suggested to, the defendants at any time prior to purchase that she had a particular concern about dampness of any kind in the house44. (vii) The plaintiff had formed a belief that, although there had been a damp problem in the past, this problem had been fixed, and there was no longer a damp problem; this belief had been formed without influence from the defendants45. Based upon her observations, Judge Simpson decided that the term ‘quality built residence’ in the flyer could not convey to the ordinary purchaser a representation that the house had no problem with salt damp, especially if the purchaser was forearmed with the information that the house had had a salt damp problem in the past46. Therefore, the agent had not committed misleading and deceitful conduct by describing the house as a ‘quality built residence’ in the flyer. In assessing whether the vendors’ conduct47 was misleading, Judge Simpson stated the relevant test as being ‘whether the conduct is capable of misleading or deceiving 41 42 Darling [2006] SADC 56 at 37 para 162. Darling [2006] SADC 56 at 37 para 163. 43 Darling [2006] SADC 56 at 37 para 164. 44 Darling [2006] SADC 56 at 37 para 165. 45 Darling [2006] SADC 56 at 37 para 166. 46 Ibid. 47 In allegedly aiding and abetting the agent under sections 75B(1) and 82 of the Trade Practices Act 1974 (Cth) by failing to mention what they knew of the problem with dampness to the plaintiff. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 81 another person’48 49. Judge Simpson recognised that misleading or deceptive conduct may comprise acts, omissions, statements or silence; and whether the conduct as a whole is capable of being misleading or deceptive will depend on the circumstances in each case50. Circumstances of particular relevance in this case were that the vendors knew of a dampness problem generally, rather than of widespread salt damp, and that the house had been described in the flyer, to the knowledge of the vendors, as a ‘quality built residence’51. Judge Simpson considered several authorities on the issue of whether silence, as a matter of fact, constitutes misleading or deceptive conduct. She found that52: • the possession by one party, dealing in a commercial situation, of information which, if known by the other party, could affect the other party’s negotiating stance does not in itself impose any obligation on the first party to bring the information to the attention of the other party. Such an obligation would only arise if an obligation of full disclosure existed between the parties by reason, for example, of some feature of the relationship between them53. • Silence by itself under section 5254, cannot be taken in every instance to constitute misleading or deceptive conduct, as the cases in which silence may be so characterised are no doubt many and various. Mere silence, therefore, is unlikely to support the inference that a fact does not exist unless the circumstances are such as to give rise to the reasonable expectation that if some relevant fact exists it would be disclosed55. • In cases where the defendant’s conduct as a whole has involved failure or omission to disclose a fact, the defendant’s silence will only be misleading or deceptive if, objectively assessed, a person in the plaintiff’s position would be entitled to expect or infer that the defendant would disclose56. 48 49 Darling [2006] SADC 56 at 38 para 173. Slinger & Anor v Southern White Pty Ltd (2005) 92 SASR 303 at 321. 50 Darling [2006] SADC 56 at 38 para 173. 51 Darling [2006] SADC 56 at 38 para 172. 52 See Darling [2006] SADC 56 at 39-40 paras 174-177. 53 Lam v Austintel Investments Australia Pty Ltd (1989) 97 FLR per Gleeson CJ at 475. 54 Of the Trade Practices Act 1974 (Cth). 55 Demagogue Pty Ltd v Ramensky & Anor (1992) 39 FCR 31 at 38-39. 56 Slinger & Anor v Southern White Pty Ltd (2005) 92 SASR 303 at 319, referring to Software Integrators Pty Ltd (1997) 69 SASR 288. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 82 • When considering whether there has been misleading or deceptive conduct, silence is to be assessed as a circumstance like any other. The significance of silence always falls to be considered in the context in which it occurs. That context may or may not include facts giving rise to a reasonable expectation, in the circumstances of the case, that if particular matters exist, they will be disclosed57. With respect to her review of the relevant authorities, Judge Simpson stated her opinion that no reasonable purchaser would have expected the vendors or agent to volunteer information that there had been a problem with dampness in the house in the absence of an enquiry from the prospective purchaser. In addition, Judge Simpson believed that the description of the house as a ‘quality built residence’ and the failure to mention a problem with the dampness could not in the circumstances, singly or together, represent, or mislead or deceive a person in the position of the plaintiff into a belief that there was in fact no problem with salt damp in the house58. Furthermore, Judge Simpson found that the vendors did not deliberately conceal a widespread problem of salt damp caused by the method of construction of the house. Rather, the repair work carried out by the vendors prior to sale were undertaken in order to present the house in the best light for sale59. Besides, the repair work was evident, enabling detection of a damp problem upon reasonable inspection. Finally, Judge Simpson stated that liability of the vendors under the Trade Practices Act60, would require that not only were the vendors involved in the contravening conduct of the agent, but that the vendors knew about all the essential elements of the contravention and participated intentionally in it. This would have meant that the vendors would have had to have known that: (i) The agent’s description of the house as a ‘quality built residence’ was a false representation; (ii) The agent was withholding information from the plaintiff about a problem of salt damp; and 57 58 Demagogue Pty Ltd v Ramensky & Anor (1992) 39 FCR 31 per Black CJ at 32. Darling [2006] SADC 56 at 40 para 178. 59 Darling [2006] SADC 56 at 40 para 179. 60 1974 (Cth). AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 83 (iii) That the repairs of the blistering paintwork covered over the widespread salt damp in the house. The circumstances of the case indicated none of the above contravening acts to be borne out and, therefore, the vendors were not found to be liable under section 52. B Misrepresentation Judge Simpson was unequivocal in her opinion that the term in the agent’s flyer describing the house as a ‘quality built residence’ did not amount to misrepresentation, as to constitute a representation the statement must be a representation of fact rather than, as in this case, exaggerated commendatory opinion61. As Judge Simpson put it, the statement was a ‘commendatory opinion, designed to attract the interest of a prospective purchaser, who was about to inspect the house and form an opinion of her own’62. Furthermore, the flyer read as a whole conveyed an impression of promotional hyperbole, ‘a common, even expected, feature of real estate advertising’63. In other words, the statements made on the flyer constitute mere puffery, and cannot be reasonably relied upon as literal statements of fact. Therefore, the term ‘quality built residence’ could not be reasonably interpreted as a factual representation about the structural integrity of the property or the method used by the builder for damp-proofing64. Notwithstanding that the statement in the flyer was deemed, in the circumstances, merely the agent’s opinion or puff, Judge Simpson considered that the use of the term ‘quality built residence’ by the agent was based on reasonable grounds; such grounds being that the agent and vendors believed the statement themselves at the time it was made based upon the perceived reputation of the builder. 61 62 Mitchell & Anor v Valherie (2005) 93 SASR 76 per White J at 90-91. Darling [2006] SADC 56 at 42 para 189. 63 Ibid. 64 Darling [2006] SADC 56 at 42 para 190. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 84 C Collateral Warranty In order to determine whether the statement in the flyer constituted a warranty, Judge Simpson referred to Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 at 61, where Gibb CJ said: … a statement will constitute a collateral warranty only if it was “promissory and not merely representational” 65, and it is equally true that a statement which is “merely representational” – i.e. which is not intended to be a binding promise – will not form part of the main contract. Judge Simpson considered66 that whether a statement made constitutes a promise (or part of the contractual arrangements between the parties) depends on the intention of the parties67, such intention being a matter of objective assessment by the court68. In assessing whether the statement was promissory in nature, Judge Simpson considered relevant the words used and conduct of the parties, the knowledge or expertise of the parties respectively, whether the words used were still operative in inducing the contract at the time it was entered into, and whether the statement was included in any written agreement executed by the parties69. With respect to these relevant considerations, Judge Simpson noted that: • the words ‘quality built residence’ were used in a descriptive sense by the agent with no specific reference being made to a warranty, guarantee or assurance70. • A representation of fact, or a statement of opinion which implies that the maker of the statement knows facts to justify his opinion, is more likely to be one intended to have contractual effect than a simple statement of opinion71. The statement in question was made in the context of a promotional flyer In J.J. Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 at 442; and Ross v Allis Chalmers Australia Pty Ltd (1980) 55 ALJR 8 at 10-11. 66 Darling [2006] SADC 56 at 47 para 216 & 217. 67 Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41 per Gibb CJ at 61. 68 J.J. Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435 at 442; and, at first instance, Blakney v JJ Savage & Sons Pty Ltd (1968) [1973] VR 385 at 388; Oscar Chess Ltd v Williams [1957] 1 WLR 370 at 375; Ellul and Ellul v Oakes (1972) 3 SASR 377 at 381, 387. 69 Darling [2006] SADC 56 at 47 para 218. 70 Darling [2006] SADC 56 at 47 para 219. 71 Darling [2006] SADC 56 at 48 para 221. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 85 65 containing several highly subjective statements about the house, such as ‘elegant entrance foyer’ and ‘spectacular views’. All of these statements were related to subjects upon which the plaintiff could be expected to have her own opinion and exercise her own judgement72. Furthermore, the term ‘quality built residence’ was the agent’s own subjective assessment based on the agent’s knowledge of the builder, the agent living next door to the house, an outward comparison with other comparable properties, and the agent’s experience73. These factors led Judge Simpson to conclude that the statement in question could not be considered to be of the same character as such a statement made by a technical expert, such as a qualified builder, architect or engineer.74 • It is unlikely that the words ‘quality built residence’ contained in the flyer were operative in the mind of the plaintiff as an inducement to enter into a contract at the time of purchase75 76 77. • The contract contained no reference to a ‘quality built residence’, but the contract did contain an acknowledgement by the purchaser that she had inspected the property, or had had the opportunity to do so and/or declined to, and purchased the property in the condition it was at the time of contract78. Judge Simpson accordingly concluded that it is was not appropriate to characterise the words ‘quality built residence’ in the flyer as amounting to a contractually binding promise or warranty79. D Negligence Judge Simpson considered that there is no general duty of care under the law of negligence owed by an agent to avoid foreseeable and significant risk of harm to a 72 73 Darling [2006] SADC 56 at 48 para 224. Darling [2006] SADC 56 at 48 para 223. 74 Darling [2006] SADC 56 at 48 para 225. 75 Darling [2006] SADC 56 at 49 para 227. 76 Cutts v Buckley (1933) 49 CLR 189 at 202. 77 See ‘Causation’ on page 12 below for further explanation. 78 Darling [2006] SADC 56 at 49 para 228. 79 Darling [2006] SADC 56 at 49 para 229. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 86 prospective purchaser of real property. However, Judge Simpson did theorise that such a duty of care may arise in certain circumstances, namely where a relationship of proximity has been formed between the agent and purchaser. By reference to Bryan v Maloney80, Judge Simpson recognised that the existence of a contract between two parties (in this case, between the agent and vendor), by its content, could either have the effect of establishing a relationship of proximity between the contractual parties and a third party (such as a prospective purchaser), or the contract could conversely exclude a relationship of proximity with a third party81. In addition, Judge Simpson considered that a duty to take reasonable care to avoid causing mere economic loss, as distinct from physical injury, ‘may be inconsistent with community standards in relation to what is ordinarily legitimate in the pursuit of personal advantage’82 83. With respect to these common law principles, Judge Simpson found that: • the agent’s contract with the vendor defined and limited the scope of the agent’s relationship with prospective purchasers84; • the agent was obliged to observe the conditions of its agency agreement with the vendors in the event of a conflict between its duty to the vendors and a duty, if any, to prospective purchasers85; and • nothing in the circumstances imposed a duty on the agent to ensure that the term used in the promotional flyer was technically accurate, in the sense that the agent was obliged to explore the question of the structural integrity of the house and its construction before describing it as a ‘quality built residence’86. Thus, Judge Simpson held that no duty of care existed from the agent to the purchaser in the circumstances. Technically, therefore, the issue of breach did not need to be considered. However, Judge Simpson added that even if a duty of care had existed, no 80 81 (1994-1995) 182 CLR 609 at 621. Darling [2006] SADC 56 at 43 para 195. 82 Bryan v Maloney (1994-1995) 182 CLR 609 at 618. 83 Darling [2006] SADC 56 at 43 para 196. 84 Darling [2006] SADC 56 at 44 para 197. 85 Ibid. 86 Darling [2006] SADC 56 at 44 para 198. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 87 breach of it had occurred for the same reasons as she had found no misrepresentation or misleading or deceptive conduct on the part of the agent had been made out87. E Causation In addition to the plaintiff’s three heads of claim, Judge Simpson considered in her defence the issue of causation, i.e. in order to recover damages, the plaintiff must establish that she suffered loss or damage as a result of having been induced into the purchase of the house by a misrepresentation made by the defendants or by negligence of the agent88. In order for the necessary inducement to be inferred, Judge Simpson required that the plaintiff should show reliance upon a material representation made by the defendants89. Inducement, or reliance, could be rebutted if it was shown, for example, that the plaintiff either knew the true facts before entering into the contract, or that she did not rely on the representation90. In the circumstances of this case, Judge Simpson concluded that the evidence presented by the plaintiff did not support a finding that the plaintiff placed any reliance on the description in the flyer of the house being a ‘quality built residence’ for the following primary reasons: • the plaintiff knew, prior to inspecting the house, that there had been a dampness problem in the walls of the house, and work had been done to rectify it. During the inspection, the plaintiff saw where remedial works had been carried out and assumed that was where the problem had been corrected91. • The plaintiff made no enquiry of the vendors or the agent about the salt damp which, she had been told, had been a problem but had been fixed92. Darling [2006] SADC 56 at 44 para 199. Darling [2006] SADC 56 at 44 para 200. 89 See Holmes v Jones (1907) 4 CLR 1692, at pp 1707, 1711; Smith v Chadwick (1884) 9 App Cas 187 at 196. 90 Darling [2006] SADC 56 at 44 para 201. 91 Darling [2006] SADC 56 at 45 para 204. 92 Darling [2006] SADC 56 at 45 para 205. 88 87 AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 88 • The plaintiff only decided to purchase the house some weeks after she had been given the promotional flyer. Her reliance on any statements made in the flyer after such a lapse of time is less likely93. • The plaintiff chose not to arrange for a building inspection, despite knowing there had been a damp problem in the house and despite having had experience in obtaining building inspection reports on other properties. The plaintiff instead relied on the assurance given by the next door neighbour, Mr McKenzie, that the problem of salt damp in the house had been fixed94. • The evidence indicated that the plaintiff had been determined to purchase the house because of its location on the lake, and she was eager to move in by Christmas in order to entertain over the holiday period95. Accordingly, Judge Simpson did not accept that, in all the circumstances, the description in the flyer, and the failure of the defendants to mention a dampness problem or to point out the repairs, was influential in the plaintiff’s decision to purchase96. Judge Simpson believed that it may have been a natural response for a person in the plaintiff’s position to have genuinely convinced themselves in retrospect, upon learning of the extent of the dampness, that they had relied upon the term in the flyer that the house was ‘quality built’. However in Judge Simpson’s view, such a claim, although honestly believed by the plaintiff, would have inevitably been based upon evidence derived as a result of a reconstruction of events which portrayed the facts to cast the best possible light on the claim being made 97 98. 93 94 Darling [2006] SADC 56 at 45 para 206. Darling [2006] SADC 56 at 45-46 paras 207&208. 95 Darling [2006] SADC 56 at 46 para 209. 96 Darling [2006] SADC 56 at 46 para 211. 97 Smith v State Bank of NSW Limited [2001] FCA 946 at [59] per Gray J. 98 Darling [2006] SADC 56 at 46 para 210. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 89 V A COMPARISON WITH VAN DEN ESSCHERT v CHAPPELL99 The Western Australian case of Van Den Esschert100 provides an interesting comparison to Darling101. Both cases involved building defects which are commonplace throughout Australia – white ants (or borers) and salt damp, respectively. In addition, both cases involved claims based upon making similar legal issues – misrepresentation102 and collateral warranty. Yet, whilst in Darling103 the court held that the defendant was not liable for making either a misrepresentation or collateral warranty, in Van Den Esschert104 the Full Court of the Supreme Court of Western Australia found the appellant vendor to be liable under both fraudulent misrepresentation and collateral warranty. In Van Den Esschert105, the respondent purchaser asked the appellant, before signing the contract, whether there were any white ants in the house and received an assurance that there were none. The vendor, according to the respondent, said, ‘No, no, no, if there had been any I would have taken steps to eradicate them’106. On receiving the assurance, the respondent signed the contract. Some months later, the purchaser discovered extensive manifestations of the presence of white ants in the house which, according to an expert, showed that the ants had been in the house for at least twelve months. The purchaser subsequently had the premises treated to eradicate the ants. All three justices107 hearing the appeal case held that the vendor had committed a fraudulent misrepresentation in stating that the house did not have white ants. Their honours found fraud in the vendor’s statement because, at the time it was made, the vendor should have already been aware of the presence of white ants because any reasonable inspection by the vendor would have established their presence. Yet, the vendor still made the false statement108. Wolff CJ109, therefore, concluded that the 99 [1960] WAR. Ibid. 101 [2006] SADC 56. 102 Note that Van den Esschert predated the Trade Practices Act 1974, and Fair Trading Act 1987 (WA), precluding a claim for misleading or deceptive conduct. 103 [2006] SADC 56. 104 [1960] WAR. 105 Ibid. 106 [1960] WAR at 115 per Wolff CJ. 107 Wolff CJ, Jackson SPJ and D’Arcy J. 108 Van Den Esschert [1960] WAR at 115 per Wolff CJ. 109 Ibid. 100 AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 90 vendor’s statement was either made with knowledge of the falsity or recklessly without caring whether it was true or false110. The court also held111 that the vendor’s statement amounted to a collateral warranty. In his judgment, Wolff CJ cited from case authorities referred to by Denning LJ (in Oscar Chess Ltd v Williams112) when considering the circumstances in which a precontractual statement could be considered as a collateral warranty: firstly, that ‘an affirmation at the time of sale is a warranty, provided it appears on evidence to be so intended’113; and, secondly, that the intention of the parties can only be deduced from the totality of the evidence, and not merely by looking into the minds of the parties to see what they themselves intended114. In other words, the question whether a warranty was intended depends on the conduct of the parties, on their words and behaviour rather than their thoughts115. Accordingly, in Wolff CJ’s view, although the vendor’s statement was not expressly designated as a warranty or condition of the contract between the parties, it was intended by the parties to form a condition subject to which the contract was entered (i.e. was a collateral warranty) when considered in the totality of evidence. Of particular importance in Wolff CJ finding that the vendor’s statement was a warranty was the widespread prevalence of white ants as a problem in Australian housing. As Wolff CJ stated116: I would think that on the purchase of a house in this country an inquiry regarding the presence of white ants was most important: when (as in this case) the prospective purchaser immediately before signing a contract makes a specific request to be informed about that matter and gets an affirmative answer such as the purchaser got in this case it was intended to be made part and parcel of the contract and was to be regarded as a term. Thus, despite the fact that a seemingly full written contract was signed by the parties, Wolff CJ was prepared to give the vendor’s oral statement such weight as to overcome the parol evidence rule, which forbids the introduction of pre-contractual communications in order to alter the terms of the written contract. 110 111 Derry v Peek (1888), 14 App. Cas.337. by a majority of two to one. 112 [1957] 1 All ER 325 at 328. 113 In Crosse v Gardner (1688), Carth. 90, and Medina v Stoughton (1700), 1 Salk. 210. 114 Heilbut, Symons & Co. v Buckleton [1913] A.C. 30 per Lord Moulton. 115 Van Den Esschert [1960] WAR at 116 per Wolff CJ. 116 Van Den Esschert [1960] WAR at 116 per Wolff CJ. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 91 Jackson SPJ117, however, was uncomfortable with the notion that a single, short conversation, not expressed in terms of a warranty, nor included in a written agreement, could be considered as a binding promise in the form of a collateral warranty. He felt that had the parties intended that the vendor’s statement be a warranty, it would most likely that they would have included it in the written agreement. Thus, Jackson SPJ appeared in favour of upholding the parol evidence rule under the circumstances; his, however, was the minority view on this issue. VI CONCLUSION In the absence of sterner legislation regarding vendor disclosure, such as exists in ACT118, the primary recourse at law for a purchaser of residential real estate in South Australia who discovers a building defect subsequent to taking occupation is to bring a claim against the vendor and/or real estate agent under the following heads: • misleading or deceptive or unconscionable conduct under section 52 of the Trade Practices Act 119 and/or the mirror provisions120 contained in the Fair Trading Act 1987 (SA); and/or • • misrepresentation under the Misrepresentation Act 1972 (SA); and/or the granting of a collateral warranty at common law. Claims under the Trade Practices Act121 and Fair Trading Act122 will only have a chance of succeeding if the vendor is either a corporation or person engaged in trade or commerce. Thus, these Acts will not generally provide protection for a purchaser who has contracted with a private vendor of an owner occupied home. The Acts, however, may provide protection against real estate agents who are acting on behalf of such private vendors if misleading or deceptive conduct can be proved. To show misleading or deceptive conduct requires a plaintiff to establish a causal link in all the particular circumstances of the case. Clearly, Darling123 has demonstrated that such a 117 118 Van Den Esschert [1960] WAR at 116 & 117. Civil Law (Sale of Residential Property) Act 2003 (ACT). 119 1974 (Cth). 120 Fair Trading Act 1987 (SA), s.56. 121 1974 (Cth). 122 1987 (SA). 123 [2006] SADC 56. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 92 link will be difficult to establish based upon a statement made in an agent’s promotional flyer coupled with silence as to a building defect; particularly in circumstances where the plaintiff could have reasonably discovered signs of the defect for themselves, the agent had an honest belief that the building defect had been repaired and the plaintiff failed to enquire as to the nature or extent of the defect of which they were aware had existed at one time. Furthermore, silence about a building defect will not amount to misleading or deceptive conduct unless objectively assessed, in all the circumstances, a person in the plaintiff’s position would be entitled to reasonably expect that the defendant would disclose. Darling124 has shown that generally vendors or agents will be under no obligation to volunteer information about a defect, such as dampness, unless the prospective purchaser had made an enquiry about such. It may be possible for a private vendor to be held liable for their agent’s misleading or deceptive conduct if it can be proved that the vendor had aided and abetted the agent in the contravening conduct. However, as demonstrated in Darling125, proof of such vendor involvement would require the purchaser to establish that the vendor was fully aware of all the essential elements of the contravention; this would be tantamount to a conspiracy between the agent and vendor to mislead prospective purchasers, which may be difficult to prove. Darling126 shows that statements made in promotional flyers are highly likely to be regarded as commendatory opinions, or advertiser’s puffs, rather than representations of fact which are necessary for misrepresentation to exist. In contrast, Van Den Esschert127 shows that a statement made in response to a prospective purchaser’s question about the presence of a building defect may amount to fraudulent misrepresentation if the vendor’s response is one which is conveyed as though fact and turns out to be inaccurate. Such a vendor’s statement is likely to be judged as reckless, at the very least, if the defect in question could have been detected by the vendor upon a reasonable inspection. Furthermore, a successful action in misrepresentation would require the purchaser to have, at least to some extent, been induced to enter into the sales contract by the vendor’s statement. Where, such as in 124 125 Ibid. Ibid. 126 Ibid. 127 [1960] WAR. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 93 Darling128, there is evidence that the purchaser has relied on their own judgement as to the existence, or absence, of a building defect prior to purchase, then inducement is less likely. Also, a statement made early on in the negotiation process, such as contained in an initial flyer, is less likely to be an inducement. For a statement to be held as a collateral warranty, it must be promissory. A factual statement made by a person of superior knowledge is more likely to be regarded as being intended to be binding. A statement of opinion, such as contained in the agent’s promotional flyer in Darling129, is by definition subjective and cannot be regarded as being intended to have binding effect. Statements in flyers are highly likely to be regarded as the agent’s own views, and not those of a technical construction professional. On the other hand, oral statements made by vendors, or agents, in response to a prospective purchaser’s pre contractual enquiry may amount to collateral warranties if the circumstances of the case merit such. Van Den Esschert130 indicates that if the statement was in response to a question about the existence of building defect of significant and widespread nature in the locality, then the court is more likely to deem the statement as a warranty even if the statement was not expressly alluded to in the sales contract. In addition to the three heads of claim above, a purchaser may consider a claim against a real estate agent in tort of negligence, for breaching a duty of care to provide the purchaser with accurate information about the premises. However, such an action is only likely to have a chance of succeeding if a relationship of proximity can be established between the agent and purchaser. It would appear from Darling131 that such a relationship of proximity is highly unlikely to exist, especially where a standard form of real estate agency contract exists between the agent and vendor which has the effect of limiting the scope of the agent’s relationship with prospective purchasers. In conclusion, it would appear that, by analysis of Darling132, the common law maxim of caveat emptor is still very much ‘alive and kicking’ in South Australia. As such, a 128 129 [2006] SADC 56. Ibid. 130 [1960] WAR. 131 [2006] SADC 56. 132 Ibid. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 94 prospective purchaser would be well advised to, first and foremost, commission a building inspection report either prior to signing a sales contract or during the statutory two day cooling off period133. Furthermore, Darling134 and Van Den Esschert135 have shown that a prospective purchaser should query the real estate agent, and/or vendor, with regard to any suspicions he or she may have about the possible existence of building defects in a premises. As yet, the South Australian Parliament has not enacted legislation to substantially erode the application of caveat emptor to residential real state transactions; the failure of the Land and Business (Sale and Conveyancing) (Property Inspections) Amendment Bill (SA) 2004 to successfully pass through Parliament may suggest that the Parliament do not support the erosion of the caveat emptor principle, as has occurred in other States, at this time. However, with the media reporting a problem with vendor “cover-ups” of building defects prior to putting properties on the market136, it may only be a matter of time before sufficient pressure is exerted on Parliament to enact legislation to oblige full vendor disclosure as to the construction quality of residential buildings for sale. 133 134 Land and Business (Sale and Conveyancing) Act 1994 (SA), s.5. [2006] SADC 56. 135 [1960] WAR. 136 Louise Treccasi, Warning on cover-up of home faults, The Advertiser Newspaper (Adelaide, Australia), 3 November 2006. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 95 BIBLIOGRAPHY Articles/Books/Reports Pomeranz, The State of Caveat Emptor in Alaska as it Applies to Real Property, (1996) 13 Alaska Law Review, 237. Tasmania Law Reform Institute, Vendor Disclosure, Issue Paper No 6, June 2004. Treccasi Louise, Warning on cover-up of home faults, The Advertiser Newspaper (Adelaide, Australia), 3 November 2006. Bills Land and Business (Sale and Conveyancing) (Property Inspections) Amendment Bill (SA) 2004. Statutes Amendment (Real Estate Industry Reform) Bill 2006 (SA). Case Law Banks v Copas Newnham Pty Ltd [2002] QCA 217. Bryan v Maloney (1994-1995) 182 CLR 609. Crosse v Gardner (1688), Carth. 90. Cutts v Buckley (1933) 49 CLR 189. Darling v Carol Clark & E Marcel Estates Pty Ltd T/as LJ Hooker West Lakes & Ors [2006] SADC 56. Demagogue Pty Ltd v Ramensky & Anor (1992) 39 FCR 31. Derry v Peek (1888), 14 App. Cas.337. Ellul and Ellul v Oakes (1972) 3 SASR 377. Heilbut, Symons & Co. v Buckleton [1913] A.C. 30. Holmes v Jones (1907) 4 CLR 1692. Hospital Products Ltd v United States Surgical Corporation (1984) 156 CLR 41. J.J. Savage & Sons Pty Ltd v Blakney (1970) 119 CLR 435. Lam v Austintel Investments Australia Pty Ltd (1989) 97 FLR. McInnes v Edwards [1986] VR 161. Medina v Stoughton (1700), 1 Salk. 210. Mitchell & Anor v Valherie (2005) 93 SASR 76. Oscar Chess Ltd v Williams [1957] 1 WLR 370. Ross v Allis Chalmers Australia Pty Ltd (1980) 55 ALJR 8. AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 96 Slinger & Anor v Southern White Pty Ltd (2005) 92 SASR 303. Smith v Chadwick (1884) 9 App Cas 187. Smith v State Bank of NSW Limited [2001] FCA 946. Software Integrators Pty Ltd (1997) 69 SASR 288. Van Den Esschert v Chappell [1960] WAR. Legislation Building Act 1970-1971 (SA). Civil Law (Sale of Residential Property) Act 2003 (ACT). Conveyancing (Sale of Land) Regulation 2005 (NSW). Conveyancing Act 1919 (NSW). Fair Trading Act 1987 (SA). Land and Business (Sale and Conveyancing) Act 1994 (SA). Misrepresentation Act 1972 (SA). Trade Practices Act 1974 (Cth). AIBS 2007 Coggins J, “House buying: is Caveat Emptor’ alive and kicking’ in South Australia’ 97