Facts

The Supreme Court's recent decision in the long-running case of Marlborough District Council v Altimarloch Joint Venture Ltd ([2012] NZSC 11) addressed the interplay of contractual and tortious liability in New Zealand, as well as the appropriate measure of damages for breach of contract.

The case concerned Altimarloch's purchase of land from the Moorhouses for establishing a vineyard. In purchasing the property, Altimarloch relied on statements from the vendor's agents and from the Marlborough District Council regarding the extent of water rights that went with the property. Both overstated the available rights. The council's misstatement was contained in a land information memorandum (which records characteristics of a particular property). It was only after Altimarloch began to plant vines on the property that it became aware of the misrepresentations.

Altimarloch sued the council for negligence and sued the Moorhouses and their agents under Section 6(1) of the Contractual Remedies Act 1979. That section provides that if a party has been induced into a contract by a misrepresentation, it is entitled to damages in the same manner and to the same extent as if the representation were a term of the contract which has been broken.

The court had to address:

• whether a public body, such as a district council, owes a duty of care to a purchaser when it makes a negligent misstatement in a land information memorandum issued to the purchaser;
• if the answer to the above was yes, whether loss caused by the district council to Altimarloch was cancelled out by the vendor's liability for damages in contract;
• if loss was caused by the district council, whether the vendors could obtain a contribution towards damages from the council; and
• the correct measure of loss against the vendors – loss of value or performance measure of damages.

Decision

The Supreme Court rejected the council's argument that it does not owe a duty of care to a purchaser when it issues a land information memorandum. The court unanimously held that there is sufficient proximity between a district council and a user of its paid services (the relationship effectively being quasi-contractual) to impose a duty of care.

On loss by the council, the majority of the court rejected the council's argument that, even if it had breached its duty of care towards Altimarloch, it had effectively caused no loss to the plaintiff. The council's argument was based on the proposition that Altimarloch could not recover the same damage twice. The damages Altimarloch would receive in contract from the Moorhouses would compensate it for the loss that it had suffered through the misrepresentation of the water rights. In this way, the council argued, it could not be said to have caused Altimarloch loss in tort, because the damages it received from the Moorhouses in contract would put Altimarloch back in the position that it had been in before the misrepresentation was made. The majority of the court rejected this approach and held that the council had in fact caused Altimarloch loss.

In essence, the court had to choose between two competing English approaches: the House of Lords decision in Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2) ([1997] 1 WLR 1627) and the English Court of Appeal decision in Eastgate Group Ltd v Lindsey Morden Group Inc ([2002] 1 WLR 642). In Nykredit the House of Lords held that in deciding what loss had been sustained, the value of another party's liability for damages must be taken into account (as the council argued). However, in Eastgate it was held that although any actual diminution in loss would obviously be taken into account in assessing the claim, that does not include the value of a potential claim against a third party, which – if pursued successfully – would void the loss. A majority of the Supreme Court favoured the approach in Eastgate.

The majority held that the existence of a right against another party (in this case, the Moorhouses) and even a judgment setting out that right is not the same as payment. This would put Altimarloch (which may be blameless) at risk of under-recovery, especially because there is no such thing as a 'sure thing' defendant (citing the recent Christchurch earthquake litigation against insurers as an example).

The minority rejected this approach and held that in order for there to be liability in tort for damages, there must be a net contractual loss. Here, the council's negligent land information memoranda caused Altimarloch to enter into a contract that entitled it to a property worth less than what it had paid. As the contract had been entered into, the court then had to decide what, if any, loss Altimarloch suffered from entering into the contract. The minority found that it was only to the extent that Altimarloch was left with a shortfall of damages for breach of contract that it could be said that the council's negligence had caused the purchaser loss.

The next question was whether the council was required to contribute towards the Moorhouses' damages for breach of contract. A different majority of the court rejected this argument, holding that the council and the Moorhouses had not committed acts of the same nature, and that a tortfeasor cannot be liable to contribute to a loss for which it has no liability to the plaintiff. The dissenting judges held that this was too technical an approach – the liability arose because each party misrepresented to the purchaser the extent of water rights associated with the land which became the subject of the contract, whether in contract or in tort.

The final question for the court to determine was the appropriate measure of damages under the Contractual Remedies Act. A majority held that the Moorhouses should be liable for a performance measure of damages. All of the judges accepted that a performance measure of damages was unusual and should not normally be applied, but the majority held that it was not unreasonable to require the Moorhouses to pay the cost of cure. This meant paying damages of NZ$1.055 million in respect of a property valued at NZ$2.55 million and for which Altimarloch paid NZ$2.675 million. The majority held that in this case, the loss of value measure (which would amount to NZ$125,000) would be inadequate, because Altimarloch could not sell the land and establish another vineyard elsewhere for the equivalent price (because land values had increased materially during the relevant period). In short, Altimarloch would be worse off because of the Moorhouses' breach of contract. The court also appears to have been influenced by the fact that Altimarloch was an innocent party and the delay which increased the cost of the claim was not attributable to the purchaser, but rather to the Moorhouses and third parties, who ran the risk that the amount of damages could increase when they disputed Altimarloch's claim.

Comment

The Supreme Court's decision in Altimarloch shows that New Zealand courts will not readily excuse parties whose negligence induces entry into a contract, even a public body such as a district council. The court's findings on contribution identify a need for a legislative cure. Finally, a plaintiff that sues in contract may receive more than the ordinary loss of value measure – the difference between the two measures of damage in this case being NZ$930,000. The Supreme Court might have considered that an award of a performance measure of damages would be rare, but the reality is that the facts of Altimarloch (innocent misrepresentation followed by delay caused by litigation) are not particularly unusual, especially in sale contracts.