Damages for negligent misstatement inducing a sale by a real estate agent

A real estate agent who provides inaccurate information to a purchaser is only liable for the consequences of negligently supplying that information.  The agent is not liable to the purchaser for all the consequences resulting from the purchase.  The normal measure of damages is the difference between the price paid and the true market value of the property if it had been correctly described.

The Court of Appeal recently confirmed this approach to loss in negligent misstatement and Fair Trading Act claims in PGG Wrightson Real Estate Ltd v Routhan [2023] NZCA 123, deciding that the diminution in value was $300,000.  Losses sustained by the purchaser as a result of decisions they made after the purchase were outside the scope of the agent’s duty and not causally connected to the misstatement.

The Kaniere Family Trust (Trust) purchased a farm for $2.8m in December 2010.  They were induced into the purchase by PGG Wrightson Real Estate Ltd (PGG)’s misstatement that the farm was producing an average of 103,000kg of milk solids per season when it in fact produced only 98,720 per season and was declining.

Following their purchase, the Trust found it increasingly difficult to meet the represented production figures.  They attempted to improve production levels by investing substantial sums in the farm.  However, a dramatic decline in milk price contributed to the Trust’s inability to service its borrowings.  A mortgagee sale ensued and the Trust was forced to sell the farm at $1.5 million in conjunction with a run-off property, also at a loss.

The Trust sued PGG for negligent misstatement and breach of s 9 Fair Trading Act.  It claimed losses of $3.18 million. The Trust argued that it would have never purchased the farm if it had known its true production levels.

The High Court held that PGG had misstated the milk production figures and was not entitled to rely on a disclaimer.  The Court awarded the Trust damages of $1.7 million comprising of the difference between the purchase price and market value, loss of investment in capital improvements on the farm intended to improve production; forced sale losses; and loss on the subsequent sale of the runoff property.  The High Court reduced the damages award after factoring in the Trust’s contributory negligence.

The primary issue on appeal was the proper measure of damages in a claim for negligent misstatement and breach of the FTA.  The appeal judgment focuses on the principles to be applied when determining this type of tort loss: scope of duty, causation, remoteness of damage and date for assessment of loss.

PGG also appealed against the High Court’s findings that the disclaimer was of no effect, the FTA claim was statute-barred, and Trust’s contributory negligence was only 20%.  The Court of Appeal rejected PGG’s appeal on these issues.  The Trust also unsuccessfully cross-appealed the High Court’s finding that its claim in deceit was not proved.

The proposal produced by PGG containing the misrepresentation included a disclaimer that PGG was not responsible for the accuracy and completeness of information supplied by the vendor.  The Court of Appeal agreed with the High Court that PGG was not protected by the disclaimer on the facts.  PGG did not obtain the milk production information directly from the vendor.  Rather, this came from a prior agent’s brochure, without verifying with the vendor that the information remained correct.

On appeal, PGG argued that soon after settlement, the Trust was on enquiry that the milk production levels were less than represented and if the Routhans had made enquiries they would have discovered that the represented production figure was wrong.  The Court of Appeal rejected this, finding that it was reasonable for the Trust to explore other explanations for the farm’s underperformance.  The FTA claim was not time-barred.

PGG said the Court’s focus on the distinction between a “transaction” and a “no transaction” case led the Court into error in awarding the capital investment and forced sale losses as damages.  PGG also argued that it did not assume a duty to protect the Trust against the capital investment and forced sale losses and there was no causal nexus between these losses and its representation.

The Court of Appeal considered that the evidence established the Trust would not have entered the transaction if it had known the true position.  However, the approach to loss was not dependent on the characterization as a no transaction case.  The key issue was whether the losses claimed were within the scope of PGG’s duty, applying the principle that an adviser will not be liable for the full range of risks associated with a particular transaction if their contribution was limited to advice, or formed only part of the decision to proceed.¹

PGG provided milk production information that was important to the Trust’s purchase decision.  The risk the milk production information was intended to address was that the Trust would pay too much for the farm.  PGG assumed responsibility for the accuracy of this information and was liable for the consequences of negligently getting it wrong.

However, PGG did not advise the Trust on whether it should enter the purchase.  Its representation of the milk production information was only one factor influencing the Trust’s decision. PGG was not involved in the other factors relevant to the Trust’s initial decision to purchase or its post-purchase decisions to make capital investments and/or retain the run-off farm.  PGG therefore did not assume responsibility for the “downstream” capital investment and forced sale losses that the Trust suffered, and it was not liable for them. These losses were outside the scope of PGG’s duty.  PGG could not reasonably have been expected to underwrite the consequences of decisions it had no input into or control over.

Further, the required threshold in negligence of a material and substantial causal link was not made out, nor was there a clear nexus in terms of the FTA.  The Court stated that there was only a “very tenuous causal nexus” between PGG’s representation and the various investment decisions that followed.

The correct measure of loss was therefore the difference between the price paid and the true market value of the property at that time, had it been properly described.  The Court of Appeal held that this loss was $300,000.

PGG’s disclaimer was one commonly used by real estate agents to disclaim liability for information provided by the vendor.  It stated that they provided the information only as a “conduit”.  In this case both Courts had no difficulty rejecting PGG’s claim that the disclaimer applied, because PGG had not in fact received the material information from the vendor.  Agents (and their insurers) should note that the Courts will apply such disclaimers strictly.  They are unlikely to provide protection where the agent receives information indirectly and/or from sources other than the vendor.  Read more about when an agent is a mere conduit of information in Andrea Challis’ article.

More broadly, the Court of Appeal’s judgment is useful for its discussion and application of the SAAMCO and Manchester Building Society principles for determining loss in negligent misstatement and advice cases.  Professionals and their insurers can take comfort that where they provide limited advice, if they get that advice wrong, they will likely only be held liable for the part of the loss attributable to their advice.

1. At [114], citing Lord Leggatt in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20 [2022] AC 783