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District Court 9 July 2010

Wood & Anor v Balfour & Anor

[2010] NSWDC 139

Fraud & dishonesty
TORTS ACTION FRAMED IN DECEIT PURCHASE OF DOMESTIC DWELLING WHETHER DECEIT ESTABLISHED RELEVANCE OF MAXIM OF CAVEAT EMPTOR EQUIVALENT TO AN ALLEGATION OF FRAUD

Citation: Wood & Anor v Balfour & Anor [2010] NSWDC 139
Court: District Court of New South Wales
Date: 9 July 2010
Judge(s): Levy SC DCJ

Background

The purchasers (a husband and wife) bought a domestic dwelling in Kareela, NSW in August 2004 from the vendors, a couple who had owned and occupied the property for 24 years. After settling, the purchasers discovered termite damage more extensive than they had anticipated, and brought proceedings in the tort of deceit against the vendors.

The purchasers alleged that the vendors had deliberately undertaken cosmetic repair work in three areas of the house to conceal the nature and extent of termite damage, thereby fraudulently inducing them to buy the property at an inflated price. The vendors admitted there had been past termite activity that had been treated, and that cosmetic work had been done, but denied any fraudulent intent.

Before exchange of contracts, the purchasers had commissioned a pre-purchase pest and building inspection. That report flagged suspected concealed termite damage and recommended an invasive inspection. The purchasers did not follow up on that recommendation before proceeding with the purchase.

  • Whether the vendors' cosmetic repair work constituted concealment amounting to a fraudulent misrepresentation
  • Whether non-disclosure of the termite damage could constitute a relevant representation in deceit
  • Whether the elements of the tort of deceit (as established in Derry v Peek) were made out, including the required standard of proof equivalent to fraud
  • Whether the maxim of caveat emptor (buyer beware) applied in the circumstances
  • Whether Special Condition 3 of the contract for sale, under which the purchasers acknowledged reliance on their own inquiries rather than any representations, affected the outcome
  • What damages would be appropriate if deceit had been established, based on competing valuations of the property

Decision

The court found against the purchasers on all elements of the deceit claim. After a detailed review of both lay and expert evidence across an eleven-day hearing, the court was not satisfied that the vendors had acted fraudulently, recklessly, carelessly, or dishonestly. The standard required to establish deceit is equivalent to proving fraud, and the evidence did not meet that standard.

On the question of concealment, the court found that while the vendors had carried out work covering visible signs of termite damage, this work could not be characterised as fraudulent concealment in the legally relevant sense. The court was not satisfied that any representation was made, or that the vendors intended to deceive the purchasers into buying a property they would not otherwise have purchased.

The court also found that causation was not established. The purchasers' own pre-purchase pest inspection report had put them on notice of suspected concealed termite damage and expressly recommended an invasive inspection. The purchasers chose not to pursue that recommendation, apparently as a result of a limited and selective reading of the report. By proceeding without the recommended invasive inspection, the purchasers effectively assumed the risk that the house might be more seriously affected by concealed termite damage than was then apparent.

The combined effect of the caveat emptor principle and the disclaimer in Special Condition 3 of the contract reinforced that the purchasers bore that risk. The financial loss ultimately suffered when the damage became apparent during renovation works did not, in those circumstances, constitute damage caused by the vendors' conduct.

Orders Made

  • Verdict and judgment for the defendants
  • The plaintiffs are to pay the defendants' costs on the ordinary basis unless otherwise ordered
  • Exhibits may be returned
  • Liberty to apply on 7 days' notice if further orders are required

Key Takeaways

  • The District Court confirmed that the standard of proof required to establish the tort of deceit is equivalent to proving fraud, consistent with Derry v Peek and the Briginshaw v Briginshaw standard. A plaintiff must establish that the defendant acted knowingly, recklessly, or dishonestly.
  • Cosmetic repair work by a vendor covering visible termite damage does not, without more, constitute fraudulent concealment. The court examined the character and purpose of the work closely before determining whether it crossed the threshold into legally actionable deceit.
  • Where a pre-purchase inspection report flags suspected concealed damage and recommends further investigation, a purchaser who proceeds without following that recommendation may bear the risk of any damage later discovered. This finding was central to the court's rejection of the causation element.
  • The maxim of caveat emptor and a contractual special condition acknowledging reliance on the purchaser's own inquiries both operated to reinforce that the purchasers carried the risk of undiscovered defects in the property.
  • Non-disclosure alone will not necessarily constitute a representation giving rise to liability in deceit. The court examined whether there was a duty to disclose and whether silence in the circumstances amounted to a relevant representation, concluding on the facts that it did not.

Legislation and Cases Referenced

Legislation:
- Evidence Act 1995 (NSW), s 135

Cases:
- Derry v Peek [1889] UKHL 1; (1889) 14 AC 337
- Briginshaw v Briginshaw [1938] HCA 34; (1938) 60 CLR 336
- Krakowski v Eurolynx Properties Pty Ltd [1995] HCA 68; (1995) 183 CLR 564
- Demagogue Pty Ltd v Ramensky (1992) 39 FCR 31
- Edgington v Fitzmaurice (1885) 29 ChD 459
- Angus v Clifford [1891] 2 Ch 449
- Armstrong v Strain [1951] 1 TLR 856
- Akerhielm v De Mare (1959) AC 789
- Luxton v Vines [1952] HCA 19; (1952) 85 CLR 353
- AIC Ltd v ITS Testing Services (UK) Limited [2006] EWCA Civ 1601
- Vairy v Wyong Shire Council [2005] HCA 62; (2005) 223 CLR 442
- Civil Service Co-operative Society of Victoria Ltd v Blyth [1914] HCA 17; (1914) 17 CLR 601
- Australian Steel & Mining Corporation Pty Limited v Corben [1974] 2 NSWLR 202
- John McGrath Motors (Canberra) Pty Ltd v Applebee [1964] HCA 1; (1964) 110 CLR 656
- Gould v Vaggelos [1985] HCA 85; (1984) 157 CLR 215
- Clancy v Prince & Ors [2001] NSWSC 85