Court of Appeal Supreme Court New South Wales

• Medium Neutral Citation: Wood v Balfour [2011] NSWCA 382
• Hearing dates: 25 and 26 October 2011
• Decision date: 09 December 2011
• Before: Giles JA at [1]; Macfarlan JA at [9]; Meagher JA at [151]

Decision

(1) Appeal allowed in part.

(2) Set aside the order for costs that the primary judge made on 20 August 2010 and in lieu thereof order that the appellants pay on the ordinary basis the respondents' costs of the proceedings at first instance.

(3) Appeal otherwise dismissed.

(4) Order the appellants to pay 75 per cent of the respondents' costs of the appeal.

[Note: The Uniform Civil Procedure Rules 2005 provide (Rule 36.11) that unless the Court otherwise orders, a judgment or order is taken to be entered when it is recorded in the Court's computerised court record system. Setting aside and variation of judgments or orders is dealt with by Rules 36.15, 36.16, 36.17 and 36.18. Parties should in particular note the time limit of fourteen days in Rule 36.16.]

• Catchwords: TORTS - deceit - sale of residential property - property had major termite damage which was not patent and which compromised its structural integrity - prior to contemplating sale vendors had undertaken work to repair and cover limited damage - purchasers alleged that the work was done to conceal major damage of which vendors aware and that non-disclosure of that damage at the time of sale amounted to a representation by the vendors that there was no serious termite damage to the property - held that vendors unaware of major damage and did not act dishonestly - whether necessary in considering purchasers' claimed remedy in deceit to consider whether vendors made a representation; APPEAL - application on appeal to adduce further evidence of discovery made after hearing at first instance - appellants purchased property that had major termite damage which was not patent and which compromised its structural integrity -purchasers and their legal representatives made deliberate decision to leave damaged timber beam in situ pending the hearing at first instance - prior treatment of beam only became apparent when beam removed after hearing at first instance - whether requirement of reasonable diligence satisfied
• Legislation Cited: Supreme Court Act 1970
• Cases Cited: AIC Ltd v ITS Testing Services (UK) Ltd [2007] 1 All ER Comm 667; Akins v National Australia Bank (1994) 34 NSWLR 155; Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation (1983) 1 NSWLR 1; Anderson v Daniels (1983) NSW Conv R 55-144; Armstrong v Strain [1951] 1 TLR 856; Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592; Calderbank v Calderbank [1975] 3 All ER 333; Coastwide Steel & Metal Work Pty Ltd v Douglas [2008] NSWCA 330; Council of the City of Greater Wollongong v Cowan [1955] HCA 16; 93 CLR 435; Dare v Pulham [1982] HCA 70; 148 CLR 658; Derry v Peek [1889] 14 App Cas 337; Fox v Percy [2003] HCA 22; 214 CLR 118; Gordon v Selico Co Ltd (1985) 2 EGLR 79; House v R [1936] HCA 40; 55 CLR 499; Koutsonicolis v Principe (White J, SC of SA, 9 September 1986); Magill v Magill [2006] HCA 51; 226 CLR 551; McDonald v McDonald (1965) 113 CLR 529; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357; Nocton v Lord Ashburton [1914] AC 932; Orr v Holmes [1948] HCA 16; 76 CLR 632; Pickering v Dowson (1813) 4 Taunt 779; 128 ER 537; Schneider v Heath (1813) 3 Camp 506; 170 ER 1462; Shirley v Stratton (1785) Bro. C. C. 440; 28 ER 1226
• Texts Cited: Stonham, The Law of Vendor and Purchaser (1964) Law Book Co; Williams on Vendor and Purchaser, (1936) 4th ed, Lightwood, Sweet & Maxwell; Sugden's Vendors and Purchasers, 14th ed (1862)
• Category: Principal judgment
• Parties: Lee Darrell Wood (First Appellant); Lesley Jayne Wood (Second Appellant); David John Balfour (First Respondent); Judith Yvonne Balfour (Second Respondent)
• Representation: Counsel: S T White SC/E A White (Appellants); D W Rayment/L J Friedwald (Respondents); Solicitors: Robilliard & Robilliard (Appellants); Redmond Hale Simpson (Respondents)
• File Number(s): CA 2008/319042

Decision under appeal

• Citation: Wood & Anor v Balfour & Anor [2010] NSWDC 139
• Date of Decision: 2010-07-09 00:00:00
• Before: Levy SC DCJ
• File Number(s): DC 2008/315042

Judgment

1 GILES JA : I agree with the orders proposed by Macfarlan JA and, subject to what follows, with his Honour's reasons.

2 Sugden's Vendors and Purchasers , 14th ed (1862) states succinctly at 335 that "in the absence of warranty or active deceit, the rule caveat emptor applies". If the vendor does not know of a latent defect, it is not the law that the vendor represents that it does not exist. Even if the vendor knows of the latent defect, recourse to a remedy via a representation that it does not exist is difficult. A representation is seen through what is conveyed to the purchaser: why does the fact that the vendor knows of the latent defect, a matter subjective to the vendor, convert what was not a representation into a representation?

3 Macfarlan JA finds a representation that the vendor has not knowingly concealed any significant defects in quality that would otherwise be patent, used then as the basis for an action in deceit. Where it is a question of non-disclosure of a defect, it seems to me that the formulation of a representation is not necessary and can lead to needless complication.

4 The cases suggest that concealment of the defect by the vendor is necessary in order that the purchaser have a remedy. Thus in Shirley v Stratton (1785) Bro. C. C. 440; 28 ER 1226 there was "industrious concealment" of the need to repair a wall; in Schneider v Heath (1813) 3 Camp 506; 170 ER 1462 "means were taken fraudulently to conceal the defects in the ships bottom" (at 509; 1463); in Pickering v Dowson (1813) 4 Taunt 779; 128 ER 537 Gibbs J remembered "the case of the sale of a house in South Audley Square, where the seller being conscious of a defect in a main wall, plastered it up, and papered it over; and it was held that as the vendor had expressly concealed it, the purchaser might recover", but the plaintiffs "did not in their opening state any concealment" (at 785; 540). In more modern times, in Gordon v Selico Co Ltd (1985) 2 EGLR 79 "the concealment of dry rot by Mr Azzam was a knowingly false representation that Flat C did not suffer from dry rot" (at 83), and in Koutsonicolis v Principe (White J, SC of SA, 9 September 1986) the batten which hid the defect "was put there for the purpose of concealment and not beautification or continuation of the panelling".

5 Anderson v Daniels (1983) NSW Conv R 55-144, on which the Woods considerably relied, was decided as a case of representation through dishonest response to inquiry from the purchaser - the purchaser spoke to the vendor about visible cracking and about the wall which had been painted to conceal other cracking, and the other cracking was not disclosed. However, there was also reference to intentional concealment (at 57,055 per Samuels JA and at 57,058 per Moffitt P).

6 The preferable solution, in my view, is to by-pass representation and found the purchaser's remedy directly in deceit. Although Gordon v Selico Ltd spoke of a representation, where there is omission to disclose something analysis through a representation is artificial. The purchaser does not meaningfully rely upon or act upon a representation that a defect does not exist. The purchaser simply goes ahead in ignorance of the defect. There can be deceit causing loss otherwise than through a representation. So it is with misleading or deceptive conduct by which loss is suffered, see Butcher v Lachlan Elder Realty Pty Ltd [2004] HCA 60; (2004) 218 CLR 592 at [32], [108], [179]; Miller & Associates Insurance Broking Pty Ltd v BMW Australia Finance Ltd [2010] HCA 31; (2010) 241 CLR 357 at [15].

7 The direct route to a remedy is that there is fraudulent conduct by the vendor in not disclosing the defect and the purchaser would not have bought, or would have bought for less, had the defect been disclosed. The fraudulent conduct may be an original concealment with intent to prevent discovery and subsequent non-disclosure, or it may be non-disclosure with intent to prevent discovery where the original concealment was for aesthetic or other reasons unconnected with deception. Concealment is an element in the deceit, since the vendor's intervention has deprived the purchaser of the ability to discover the defect. It may be that there is fraudulent conduct where the vendor knows of a non-visible defect, although one which the vendor did not conceal, but more than mere knowledge and non-disclosure will be necessary.

8 If the appeal is addressed simply by asking whether the Balfours' conduct was fraudulent, the result is the same. As Macfarlan JA explains, the Balfours did not act dishonestly. The trial judge found that Mr Balfour did not understand that there was more than the cosmetic damage, which he concealed for aesthetic reasons, and that finding has not been successfully challenged. It was not established that Mr Balfour was conscious of the substantial termite damage but did not disclose it, in order to deceive the Woods. The Balfours' conduct was not fraudulent.

9 MACFARLAN JA :

Table of Contents
Summary of case and conclusions	[10]
The work done by Mr Balfour to repair and cover termite damage	[16]
The Woods' purchase of the property	[23]
The damage discovered after the Woods' purchase	[27]
The Woods' statement of claim	[30]
The Woods' case at first instance on fraud	[33]
The judgment at first instance	[35]
Issues on the appeal	[47]
Whether the Balfours made the alleged representation	[49]
Whether the alleged representation was made to the Woods	[57]
Falsity of the alleged representation	[58]
Whether the Balfours acted dishonestly	[59]
The Woods' reliance on the representation	[108]
Conclusion on deceit claim	[111]
Application to adduce further evidence	[112]
Leave to amend statement of claim: recklessness	[130]
Indemnity costs	[139]
Orders	[150]

SUMMARY OF CASE AND CONCLUSIONS

10 Until August 2004 the respondents, Mr and Mrs Balfour, were the owners of a home located in a Sydney suburb. Prior to 1999 Mr Balfour identified some termite activity in and damage to timbers at the home and arranged for a pest control company to treat the property. In the period 1999 - 2000 he identified three further separate areas of termite damage and took steps to repair and cover the damage in relation to each. The Balfours were not at that time contemplating selling their home.

11 In early 2004 the Balfours put their property on the market for sale. It did not sell immediately, but the appellants, Mr and Mrs Wood, agreed to buy it by contract dated 13 August 2004.

12 Soon after settlement of the purchase Mr and Mrs Wood discovered the termite damage that had been covered, and found that there was extensive further termite damage associated with that damage and elsewhere in the property. They commenced proceedings against a pest inspection company, Ausinspect, that had provided a report to them prior to their purchase. The proceedings were settled upon the basis that Ausinspect pay to the Woods the amount of $106,250. The Woods then commenced the present proceedings against the Balfours alleging that the work that Mr Balfour did in concealing termite damage, and the Balfours' non-disclosure of that work to the Woods, amounted to a representation by the Balfours to the Woods that, in effect, there was no serious termite damage to the property. The Woods alleged that this representation was fraudulent because the Balfours knew that it was false and intended to deceive the Woods.

13 After an 11 day hearing in March 2010, Levy DCJ rejected the Woods' claim and entered judgment in favour of the Balfours. His Honour found that the work that Mr Balfour did in relation to the termite damage amounted to a "genuine repair" designed to deal with and, for aesthetic reasons, cover the damage of which he was aware. His Honour thus found that the Balfours did not have knowledge of the falsity of the representation alleged and did not act dishonestly at the time of doing the work or at the time of the sale to the Woods.

14 The primary judge found that the Woods' claim in deceit in any event failed because the alleged representation was not made to the Woods and that even if it was made, it was not false and the Woods did not rely upon it.

15 The Woods challenged these findings on appeal, sought leave to adduce further evidence and challenged decisions of the primary judge, first, refusing them leave to amend their Further Amended Statement of Claim (the "Statement of Claim") to add an allegation of recklessness and, secondly, ordering them to pay costs from prior to the commencement of the hearing on an indemnity basis. In summary my conclusions in relation to these issues are as follows:

(a) By making the property available for inspection by prospective purchasers and their advisers, the Balfours represented that they had not knowingly concealed any major termite damage which was not patent and which compromised the structural integrity of the property (see [48] - [55] below).

(b) The property did have such damage (see [40] below).

(c) The primary judge's findings that the Balfours were unaware of that damage both when Mr Balfour did his work and when they sold the property, and that they did not therefore act dishonestly, were not successfully challenged (see [58] - [63] and [111] below).

(d) As announced at the hearing of the appeal, the Woods' application for leave to adduce further evidence on appeal fails (see [112] - [129] below).

(e) There is no basis for interfering with the primary judge's decision to refuse leave to the Woods to add a claim of recklessness to their Statement of Claim (see [130] - [138] below).

(f) The primary judge's decision to award the Balfours costs on an indemnity basis was flawed (see [139] - [149] below).

WORK DONE BY MR BALFOUR TO REPAIR AND COVER TERMITE DAMAGE

16 The Balfours' home had 3 levels, with access from the street to the middle level. There was a bedroom on the top level that the Balfours' son occupied. The following description of Mr Balfour's work reflects findings that the primary judge made.

17 As a result of locating some termite damage under the house, Mr Balfour arranged in 1995 for Copes Pest Control to inspect and treat the property for termite damage (Judgment [359]).

18 After finding further evidence of termites in 1997, Mr Balfour arranged for Copes Pest Control to undertake further termite treatment (Judgment [360]).

19 The primary judge made the following findings concerning work that Mr Balfour did in 1999:

"362. I find that in 1999, after some limited attempts by Mr Balfour at lightly sanding a small area of the timber beam in the upstairs bedroom of the house, he realised the timber beam in that room had an area of splitting in it. I find that he then decided that instead of replacing that damaged beam, he set about placing some timber cladding over the beam. After cladding the underlying timber beam in this way, Mr Balfour then painted over that cladding in order to match the colours of the other visible timbers in the house. In doing do, Mr Balfour obviated for himself the need to further repair, sand and paint the underlying beam. In doing so, he also achieved the objective of covering up an area on the beam where the timber appeared split."

20 Mr Balfour recognised that the splitting in the timber beam in the upstairs bedroom was caused by termite activity. As the primary judge held:

"Mr Clarke [a pest control expert who gave evidence in the proceedings] explained that those cuts would have been made by termites to enable the mass release of immature winged termite alates from within termite galleries underlying the surface of the timber beam" (Judgment [367]).

21 The primary judge made the following findings as to further work that Mr Balfour did in 1999:

"371. I find that in 1999, whilst in the course of carrying out some painting and decorating work on the interior of the house, Mr Balfour observed that there was some damage to a portion of an exposed timber rafter of the raked cathedral ceiling of the upstairs bathroom. On investigating that damage, reasonably, Mr Balfour came to the conclusion that the damage he had detected, was due to termite activity.

372. I find that Mr Balfour came to the conclusion that as the damage to the rafter was localised, he should apply a filling substance, and then paint over the surface of the area, after it had been repaired in this way. He then set about doing this, as planned. The result was that when the repaired area was viewed from a distance, the previous area of timber defect due to termite damage, was no longer readily apparent to the observer ..."

22 The primary judge described work that Mr Balfour did in 2000 as follows:

"374. I find that in 2000, whilst watching television in the family room of the house, Mr Balfour observed some damage to the overhead timber beam located over the windows of that room. On inspection of that beam he realised that damage had been caused by termite activity. Rather than replacing the damaged beam, Mr Balfour soon afterwards set about cladding that beam with timber. He did so in order to cover the visible signs of termite damage, as he had done with the previously treated timber beam in his son's bedroom, albeit in this instance, he did so on a larger scale, and by using a heavier and a much larger piece of cladding timber.

375. I find that to achieve this, Mr Balfour placed a very heavy, 5.4m long piece of timber in over the lateral surface of the existing beam. He also fitted a cladding timber to the downward facing surface. Fitting the lateral cladding timber involved drilling and counter-boring some bolt holes in the cladding timber and making corresponding drill holes through the existing timber beam through which the securing bolts were fitted. To achieve this, Mr Balfour had to somehow lift the cladding beam into place.

376. The fitting of the cladding timber also involved some other work. Mr Balfour filled a void comprising a termite gallery in the existing beam with expandable filling foam ... When ... component tasks of the works were completed, Mr Balfour painted the cladding timber to match the colour of the other exposed timbers in the house."

THE WOODS' PURCHASE OF THE PROPERTY

Pre-purchase pest report

23 Prior to agreeing to purchase the property the Woods obtained a pre-purchase pest and building report from Ausinspect, prepared by Mr Stephen Koelewyn. The report contained numerous references to termite-related issues. Some of these were as follows:

• "The structure appears to have settled over time and is not plumb and square, concealed termite damage suspected" (Judgment [30]).
• In relation to the kitchen flooring, "conceded [sic for concealed] termite damage is suspected" (Judgment [33]).
• In relation to timber floor framing that had been treated with creosote, "[i]t is suspected that attempts have been made to conceal the fact that past termite damage exists" (Judgment [37]).
• As a general comment "it is suspected that concealed termite damage may exist and further invasive inspection should be considered to determine if termite damage and/or termite activity exists" (Judgment [38]).
• The report "strongly recommended" an invasive termite inspection to determine "the full extent of the termite damage and to determine the location of entry points and to endeavour to locate any termites' nest" and highlighted that "[d]amage may only be found when wall linings, cladding or insulation are removed to reveal previously concealed timbers" (Judgment [50]).

24 The report also said that no visual evidence of current termite activity had been found at the time of inspection (Judgment [49]).

The contractual arrangements

25 The Woods did not have any direct communication with the Balfours concerning the purchase and the Balfours were not present when Mr Koelewyn conducted his inspection. There were no communications between the solicitors who acted for the parties concerning any termite-related issues.

26 The contract of sale contained the following special condition:

"3. The property together with the appurtenances thereto is sold in its present state of repair and the purchaser acknowledges that he buys the property relying on his own inspection, knowledge and enquiries and that he does not rely on any warranties or representation made to him by or on behalf of the vendor. The purchaser shall not call upon the vendor to carry out any repairs whatsoever in relation to the property hereby sold."

THE DAMAGE DISCOVERED AFTER THE WOODS' PURCHASE

27 The primary judge described what occurred after the purchase as follows:

"320. Shortly after the Woods took occupation of the premises, they embarked upon their planned renovation works. In the course of those works, they uncovered past works of a cosmetic nature which had covered signs of past termite activity and damage. This discovery led to a more invasive and progressive investigation and inspection process, which Mr Wood then staged over time. As a result, more extensive evidence was located of past termite activity in the house."

28 His Honour accepted the following expert evidence about the termite damage that was then identified:

"329. Mr Doble, the structural engineer engaged by the plaintiffs, described the damage as affecting timber beams, rafters, wall studs and floor plates of the dwelling. He expressed the opinion that the structural integrity and safety of the upper levels of the house had been compromised. He said that the damage was so extensive that serious consideration should be given to removing the upper two levels of the house to ensure that the termite damage was rectified. In this regard, he stated that some beams and rafters in the house were likely to fail under design loads, which in turn raised safety issues" (see also Judgment [332]).

29 A building expert engaged by the Woods, Mr Anthony Capaldi, estimated the cost of demolition and rectification as $223,388.76 (Judgment [330]). The primary judge accepted this estimate (Judgment [332]), and the decision to do that is not challenged on appeal.

THE WOODS' STATEMENT OF CLAIM

30 Relevant paragraphs of the Woods' Statement of Claim are as follows:

"4. Prior to entering the Contract the defendants actively engaged in conduct in order to conceal damage to the Property caused by termite infestation, (the Concealment Work).

[Particulars were then given of the work that Mr Balfour did in the lounge-room, upstairs bedroom and upstairs bathroom, and on the balcony]

...

6. The Concealment Work was conduct that amounted to a representation by the defendants that the Property was free of termite damage or alternatively that any damage to the Property caused by termites was of a minor nature limited to the sub-floor area of the lower ground floor, and that the structural integrity of the Property was not compromised, (the Representation).

6A. Alternatively, in failing to disclose that they had carried out the Concealment Work, the defendants' conduct by their silence amounted to the Representation.

7. The Representation was made by the defendants with knowledge that it was false and intended to deceive the plaintiffs.

8. The Representation constitutes deceit.

Particulars of Deceit

a. The Concealment Work constituted active concealment of an inherent defect in the Property;

b. The inherent defect in the Property was known to the defendants prior to commencement of the Concealment Work;

c. The Concealment Work was performed by the defendants with the knowledge that such work would deceive any future purchaser of the Property regarding the structural integrity of the Property;

d. At all material times the defendants knew that the plaintiffs were misled as to the true condition of the Property as a result of the Concealment Work;

e. The Representation was made by the defendants with the intention that it should be acted upon by a future purchaser of the Property.

9. Relying upon and induced by the Representation the plaintiffs entered into the Contract.

10. Prior to entering the Contract the plaintiffs engaged a pest inspector to inspect the Property. The Concealment Work caused or contributed to the pest inspector failing to ascertain the full extent of the termite damage.

11. The Concealment Work was such that it prevented discovery of the true nature and extent of termite damage to the Property upon a reasonable or diligent inspection.

12. Further or in the alternative, the Concealment Work caused or materially contributed to the purchase of the Property by the plaintiffs.

...

14. As a result of their reliance upon the Representation the plaintiffs have suffered loss and damage in that they paid to the defendants the amount of $775,000.00 for the Property whereas the value of the Property had the full extent of the termite damage been known was $550,000.00, and have otherwise suffered loss and damage less an amount of $106,250.00 paid to the plaintiffs pursuant to the settlement of the Pest Inspector Proceedings."

31 On the 11 th , and last, day of the hearing, the Woods sought leave to amend their Statement of Claim by adding the following:

"(7A) Alternatively the Representation was made by the defendants recklessly not caring whether it was true or false".

32 The primary judge rejected this application by judgment delivered on that day.

THE WOODS' CASE AT FIRST INSTANCE ON FRAUD

33 The final submissions at first instance were largely in writing. The Woods' written submissions included the following:

"533. The plaintiffs submit that ... the concealment of termite damaged beams by cladding and or other means to hide the damage as carried out by the defendants, together with the fact that the concealment was done consciously, means that fraud may be inferred. The only explanation which might provide the defendants with a defence is that in carrying out the concealment work they held an honest belief (albeit erroneously) that the work was a genuine repair of the damaged timber.

534. In other words, notwithstanding the clear representation that the beams in question were structurally sound as a result of the 'repair' work, when in fact that was not the case, if the defendants (at the relevant time) held an honest belief that the 'repair' work they had done was genuine repair work and not concealment, that may exclude the mens rea or intent required to prove fraud; it may provide the defendants with a defence in that they did not have knowledge that the representation was false namely that the beams were unsound [original emphasis].

535. It is submitted that it is clear that the representation was consciously made, the question is, was it honestly made?

536. Accordingly, it may well be that the primary decision for the Court is to determine whether the 'repair' work was in fact genuine repair work as claimed by the defendant[s] such that they can maintain an honest belief that the representation was true, namely that the beams were 'repaired' and that the property was free of termite damage or that any termite damage was limited to the sub-floor area of the lower ground floor.

...

585. If the evidence shows that Mr Balfour took no steps to determine the extent of the termite damage in the beams themselves and other timbers in the house, knowing that termites migrate though timbers from the ground up, then it is submitted that as he was never aware of the extent of the damage how could he claim to have an honest belief that he had carried out genuine repairs?"

34 The effect of these submissions, when read with the Statement of Claim, appears to have been that Mr Balfour acted dishonestly because when he completed the "concealment work" he knew that there remained (or at least probably remained) significant termite damage to the timbers, affecting their structural integrity, which was unrepaired by him and concealed by his work. The issue thus posed for resolution by the primary judge was whether Mr Balfour's work constituted "genuine repairs" in the sense that Mr Balfour held an honest belief that the repairs adequately repaired the damage of which he was aware and that he did not know or believe that there was significant other damage to the timbers.

THE JUDGMENT AT FIRST INSTANCE

Whether the Balfours made the alleged representation

35 The primary judge held that the Balfours did not make the alleged representation because, in essence, the Balfours did not have any communication with the Woods or their pest inspector and did not deliberately absent themselves from the property during inspections for the purpose of avoiding "questioning or making unsolicited disclosures" (Judgment [418] - [421]).

36 In a separate section of his judgment in which he considered whether the Balfours were subject to a relevant duty of disclosure, his Honour quoted passages from Stonham, The Law of Vendor and Purchaser (1964) Law Book Co, which included the following:

" Concealment of Patent Defects by Vendor

359.The vendor must not actively conceal defects in quality that would otherwise be patent, as, for example, plastering up a defect in a wall and papering it. A representation by the vendor that a house is substantial and well built relieves the purchaser from the necessity of inspecting the house for himself, although the defect is patent. A vendor must not lull a purchaser's suspicions, if inquired of respecting defects known to the vendor, by giving misleading answers, or answers lacking in frankness. Conduct calculated to mislead a purchaser regarding some material fact, or to divert him from inspection or inquiry, which would discover a defect, known to the vendor, may be fraudulent, and may be ground for avoiding the contract at law, as well as resisting specific performance" (at 231, footnotes omitted).

37 The primary judge also quoted passages from Williams on Vendor and Purchaser (1936), 4 th ed , by John Lightwood, Sweet & Maxwell which included the following:

"If the vendor represents that a house is in good repair, or is not damp, or that the drains are in good order, or the cellars dry, or that a farm is in a high state of cultivation, or sells land as being fit for building purposes, or as business premises, then any latent defect, which prevents this representation from being fulfilled, will be a good ground of objection by the purchaser to his completing the contract. If however, the defect was patent or obvious, then the purchaser may be obliged to perform the contract, notwithstanding the representation, on the ground that he must be taken to have bought with notice of the defect. But any active concealment of defects which would otherwise be discoverable by inspection is a fraud; and if a purchaser is deceived thereby he may avoid the contract accordingly.

Thus if cracks in the walls of a house are papered or painted over with intent to conceal them, and the house is then sold, though without any warranty or verbal representation as to its state of repair, to a purchaser who has inspected it, the contract is voidable for fraud. And any conduct calculated to misled a purchaser with respect to some material fact, or to divert him from inspection or inquiry, which would discover a defect known to the vendor, is equally fraudulent, and may be a ground for avoiding the contract at law as well as resisting its specific performance" (at 764).

38 The primary judge rejected the Woods' contention that the Balfours' non-disclosure of the work done by Mr Balfour amounted, as alleged in paragraph 6A of the Statement of Claim (see [30] above), to the making of the representation alleged (Judgment [449] - [476]). His Honour gave four principal reasons for rejecting this contention. These included that the purchase was conducted at arm's length; that there were no dealings between the Woods and the Balfours personally and no relevant questions asked by the Woods of the Balfours; and that at the time the property was marketed there was no evidence of current termite activity (Judgment [470] - [472]). His Honour referred to another relevant factor in the following terms:

"473. The fourth such factor was Mr Balfour's [lack of?] understanding that the bedroom beam had as much termite damage then, as has now been revealed to be the case after destructive investigation. Mr Balfour considered the family room beam to have been properly repaired and the Balfours themselves saw fit to live in the property for a number of years, during which time it was in the same condition in which it was sold to the Woods. This was in circumstances where it is evident that Mr Balfour and Mrs Balfour were house proud people and had fastidiously kept their home well maintained, rendering it unlikely that they would have had any misgivings about the adequacy of the repairs that they had undertaken, or concerning the condition of the property at the time of sale."

Whether the alleged representation was made to the Woods

39 The primary judge concluded that if there had been a basis for the Woods' contention that the Balfours made the alleged representation, it was not a representation that was made to the Woods. It is difficult to understand how the representation could have been made in any relevant sense, yet not made to the Woods. Nevertheless, in reaching this conclusion, his Honour relied, first, on the existence of Special Condition 3 in the contract, secondly, on the fact that the Woods obtained a pest inspection report referring to "suspected or possible concealed termite activity" and, thirdly, on the fact that the Balfours took "no active steps ... to assert the house was free of termite damage" (Judgment [422] - [427]).

Falsity of the alleged representation

40 Notwithstanding the primary judge's finding that the representation, if made, was not false (Judgment [498]), it is apparent from his detailed findings as to the damage that the Woods and their experts discovered after the Woods' purchase that the representation, if made, was in fact false (see [27] - [29] above). Contrary to the primary judge's view, it is permissible on this issue to have regard to what subsequent investigations revealed as to the facts at the time of purchase (compare Judgment [492] - [498]).

Whether the Balfours acted dishonestly

41 The essence of the primary judge's conclusions on this issue are evident from the following parts of the judgment:

"394. When the 13 points of argument raised by the plaintiffs [set out in Judgment [392]] are analysed, it becomes plain that the plaintiffs seek an inference, by the various formulations expressed in [those 13 points] that the work was carried out not only with the intention that the termite damage be concealed from view, but that this was done to deceive them and their pest inspector by misrepresenting the true position with regard to the extent of termite damage in the house, so as to induce the plaintiffs to buy the property .

395. All of these points so raised depend upon the assumption that at the time the covering work was undertaken by the Balfours, it was intended by that work to conceal the underlying damage from purchasers, particularly the plaintiffs.

...

398. In my view, in the light of the fact that the relevant work was undertaken in 1983, 1999 and 2000, and in the absence of evidence that it was done at a time when the defendants specifically contemplated selling their house, the argument relied upon by the plaintiffs cannot be sustained to support the contended inference. I therefore decline to draw that inference. In my view, the highest the argument can rise is that the covering work was capable of preventing a non-invasive inspection arranged by future purchasers from revealing the concealed termite damage.

399. In my view this position falls far short of establishing the motives relied upon by the plaintiffs. In this regard I consider that the plaintiffs have failed to demonstrate by evidence, admissions or reasonably drawn inferences from available evidence, that at the time the work was carried out, the defendants did so with the intention to deceive, either prospective purchasers generally, or the plaintiffs in particular with regard to the extent of termite damage to the timbers of the house.

...

410. I find that the conceded concealment work was carried out for reasons of cosmetic amenity and enjoyment of the appearance and aesthetics of the structures that were covered. I construe the concealment work to have been carried out with the intention that it covered the termite damage from ordinary everyday view to add to the amenity and enjoyment of the occupancy of the house whilst the Balfours continued to live there. I find that the work was not undertaken for the nefarious purpose of concealment of the termite damage aimed at deceiving prospective purchasers. I do not accept submissions made on behalf of the plaintiffs to the contrary, for the reasons I have outlined " (see also [473] quoted in [38] above).

42 The primary judge referred in the following terms to the Woods' submissions as to the Balfours' knowledge of the falsity of the alleged representation:

"509. The submissions made on behalf of the plaintiffs criticise the defendants for having 'purposely abstained from enquiring as to the extent of termite damage in the house' so as to preclude 'any honest belief about the extent of termite damage' in the house after 1999, apparently basing that submission on the acknowledgment by Mr Balfour that he understood, when he found the termite damage in the upstairs bathroom rafter, that termites wrought their damage by working their way from the ground up to the highest point in the house. The plaintiffs also rely on these same matters for their assertion that 'in failing to determine the extent of the damage the defendants could not have had an honest belief that they had effected genuine repairs' and, claiming there was no 'repair' element associated with the front balcony joists and the upstairs bathroom rafter, and that the repair to the upstairs bedroom beam was not 'adequate'. The plaintiffs' submissions were also critical of whether the work carried out to the family room beam 'can amount to a repair'."

43 His Honour rejected these submissions for reasons that included the following:

"513. Thirdly , it appears that the plaintiffs are seeking to sustain an allegation of fraud by reference to a failure to make enquiries in the face of termite damage. I consider that approach entirely ignores the evidence of Mr Balfour, to the effect that after the termite treatments in 1995 and 1997 he believed, correctly according to the subsequent expert evidence commissioned by the plaintiffs, that the termite infestation of the property had been properly and effectively treated. On that basis, which I accept on the facts of this case, it was open for Mr Balfour to regard the termite activity on the premises as having been eradicated, leaving him free to cover the visible signs of damage. He was not then obliged in those circumstances, to carry out an investigation of the extent of the damage in the manner and to the extent that was subsequently undertaken by Mr Wood - or at all. It was entirely up to him as to how he sought to cover the visible signs of such damage particularly as it has not been demonstrated that Mr Balfour knew that there were structural problems to do with safety as a result of the termite activity. It is noteworthy that the opinions to this effect were only enabled by a partial dismantlement of the house, which revealed far more detail than was available to Mr Balfour . "

44 His Honour's conclusion on this issue was expressed as follows:

"515. I therefore reject the plaintiffs' attack upon the defendants concerning their state of knowledge and belief of the extent of termite damage to the premises and the characterisation as inadequate, of the repair works carried out by the defendants that covered the visible signs of such damage. I reject the submission that these circumstances amounted to fraudulent concealment or misrepresentation on the part of the defendants, as has been alleged."

Whether the Woods acted in reliance on the alleged representation

45 For the reasons following, the primary judge found that the Woods did not rely upon the alleged representation:

"539. In view of the contents of the pest inspector's report, ... I conclude that the reading and interpretation of that report by Mr Woods [sic] unfortunately ignored numerous, significant and clearly expressed warnings that ought to have alerted him to the fact that concealed termite damage could be present in the house, and that in order to address this risk, an invasive inspection was recommended. I find that Mr Wood exercised his own judgment in considering and assessing the risk that the house may have been affected by termite damage, and in this regard he chose to act in reliance of his own judgment, rather than on any alleged representation.

540. I have come to this view because it is clear that the plaintiffs not only did not seek to ask any questions of the pest and building inspector whom they had engaged, but also chose not to seek to ask the Balfours anything about the termite history or other structural history of the house. In my view it is clear that Mr Wood based his judgment on his own interpretation of the pest and building inspection report. In my view, these circumstances clearly confirm that Mr Wood had made up his mind to go ahead with the purchase based on his own judgment . "

Damages

46 The primary judge did not finally assess the damages to which the Woods were entitled if they succeeded on liability but it was agreed on appeal that the approximate cost of demolition and rectification was $225,000.

ISSUES ON THE APPEAL

47 I have noted in [14] - [15] above the matters that are in issue on the appeal. I shall deal with each of them in turn.

WHETHER THE BALFOURS MADE THE ALLEGED REPRESENTATION

48 Neither the Woods nor the Balfours contended at first instance or on appeal that the statements of principle that the primary judge quoted from Stonham and Williams (see [36] - [37] above) do not represent the law. In these circumstances, and as they are consistent with the decision of this Court in Anderson v Daniels (1983) NSW Conv R 55-143, I shall proceed on the assumption that they do.

49 I add to these statements of principle, that in Salmond on Torts , 17 th ed (1977) Sweet & Maxwell at 388 which was approved in Anderson v Daniels at 57,044:

"Active concealment of a fact is equivalent to a positive statement that the fact does not exist. By active concealment is meant any act done with intent to prevent a fact from being discovered; for example, to cover over the defects of an article sold with intent that they shall not be discovered by the buyer has the same effect in law as the statement in words that those defects do not exist".

This passage appears in substantially the same terms in the 21 st edition of Salmond on Torts (1996) Sweet & Maxwell at 370.

50 In my view it is implicit in these statements of principle that the making available of a property for inspection, coupled with silence as to the existence of any latent defects, gives rise to a representation that the vendor has not knowingly concealed any significant defects in quality of the property that would otherwise be patent (patent defects being those defects that are "either ... visible to the eye, or arise by necessary implication from something visible to the eye": Stonham at [356]). If it is proved that a vendor fraudulently concealed defects in quality, an action in deceit is available (subject of course to questions of causation and damage). The primary judge's reasons do not indicate that his Honour appreciated that the principles so stated contemplate that there may be deceit where the vendor has engaged in "conduct calculated to deceive a purchaser" and that such conduct may be constituted by works of concealment undertaken with the purpose of preventing a prospective purchaser observing on an inspection of the property defects in quality that, but for the concealment work, would have been patent.

51 As I read the representation pleaded in paragraph 6 of the Statement of Claim (see [30] above) a finding that either of its limbs was true would preclude a finding that the representation as a whole was false (quite apart from any question as to the Balfours' states of mind). Thus a finding that the property was not, as represented in the first limb, "free of termite damage" would not require a conclusion that the representation as a whole was false. The representation was not false if the property was not "free of termite damage" but, as the second limb envisaged might be the case, such damage was only of a minor character and did not affect the structural integrity of the property. It was thus incumbent upon the Woods to prove not only that the property had some termite damage but also had major termite damage that compromised the structural integrity of the property.

52 In my view the conclusion to be drawn in the present case is therefore that, by presenting the property for inspection by prospective purchasers and their advisers, the Balfours represented that they had not knowingly concealed any major termite damage which was not patent and which compromised the structural integrity of the property.

53 This formulation embodies an element relating to the Balfours' states of mind. The inclusion of that element is not of critical significance in the present case, which is only concerned with an action in deceit, as the Woods would have had to prove that the Balfours had guilty minds in any event. Whether a representation was confined to one as to the representor's state of mind would assume more significance in a statutory action relating to misleading and deceptive conduct, as in such an action it is not necessary to prove knowledge of falsity of a representation.

54 Since preparing this judgment in draft, I have had the advantage of reading Giles JA's draft judgment in which his Honour expresses a preference for founding the purchaser's remedy "directly in deceit" rather than as flowing from a representation made by the vendor.

55 For a number of reasons, I prefer the course that I have taken above of identifying the relevant representation that the Woods made to the Balfours. First, the Balfours' case was pleaded and presented as a representation case. Secondly, authorities on the tort of deceit almost invariably describe the foundation of the tort as a representation made by the defendant (see for example [58] below). Thirdly, the principal judgment in Anderson v Daniels , a decision of this Court concerned with concealment of defects by vendors, took as its starting point a statement of principle which effectively treated the relevant issue as one of whether active concealment gave rise to a representation (see [49] above). Fourthly, it seems to me that it is conducive to clarity of analysis of the wrong done by a vendor to a purchaser by concealment of defects to consider the precise character of the false impression, and therefore representation, conveyed to the purchaser.

WHETHER THE REPRESENTATION WAS MADE TO THE WOODS

56 Contrary to the primary judge's conclusion, I consider that the representation was made to the Woods. If the representation was made (as I have found to be the case), the Woods were clearly the people to whom it was made. The first and second reasons that the primary judge gave for his contrary conclusion (see [39] above) were matters relevant not to the present issue but to the question of reliance (to which I will turn later), and the third was relevant to the question of whether a relevant representation was made, which I have considered above.

FALSITY OF THE ALLEGED REPRESENTATION

57 As I have indicated in [40] above, the factual proposition concerning the property that is embodied in the representation to which I have referred in [52] above was false. Whether the Balfours knew it to be false and acted for the purpose of concealing the defective state of the property (with the consequence that the representation as a whole is false) is of course another matter, to which I now turn.

WHETHER THE BALFOURS ACTED DISHONESTLY

58 The elements of the tort of deceit were summarised in the plurality judgment in Magill v Magill [2006] HCA 51; 226 CLR 551 at [114] as follows:

"The modern tort of deceit will be established where a plaintiff can show five elements: first, that the defendant made a false representation; secondly, that the defendant made the representation with the knowledge that it was false, or that the defendant was reckless or careless as to whether the representation was false or not; thirdly, that the defendant made the representation with the intention that it be relied upon by the plaintiff; fourthly, that the plaintiff acted in reliance on the false representation; and fifthly, that the plaintiff suffered damage which was caused by reliance on the false representation. Generally, the elements of the tort have been found to exist in cases which concern pecuniary loss flowing from a false inducement and the need to satisfy each element has always been strictly enforced, because fraud is such a serious allegation" (footnotes omitted).

59 If a plaintiff establishes these elements it will have demonstrated that the defendant acted dishonestly. The fact that a finding that a defendant is liable in deceit involves a conclusion that the defendant has acted dishonestly has been emphasised in many cases (for example Derry v Peek [1889] 14 App Cas 337 at 374; Nocton v Lord Ashburton [1914] AC 932 at 954 and AIC Ltd v ITS Testing Services (UK) Ltd [2007] 1 All ER Comm 667 at [256] - [259]). As Gleeson CJ said in Magill v Magill , "[t]he tort of deceit provides a legal remedy for harms suffered in consequence of dishonesty ..." (at [17]).

60 It was not sufficient for the Woods to prove that the Balfours were aware of some termite damage. Plainly Mr Balfour was aware of that from the work that he did. In order to satisfy the second element of the tort of deceit, to which the plurality in Magill v Magill referred, it was necessary for the Woods to further prove that the Balfours were aware that the property had substantial termite damage that compromised the property's structural integrity. If it had been shown that the Balfours were so aware there would have been little difficulty in concluding that the third element, that is, that "the defendant made the representation with the intention that it be relied upon by the plaintiff" was satisfied. The pleaded representation referred to a defect in the property of such seriousness that the Balfours could not have failed to appreciate its seriousness, and therefore materiality, to the Woods. If these circumstances had existed, a finding of dishonesty would have been appropriate.

61 These considerations lay behind the parties' focus at first instance on the question of whether the work that Mr Balfour did constituted "genuine repairs". As noted in [34] above this was a shorthand expression for the question of whether Mr Balfour knew when he completed the "concealment work" that there remained (or probably remained) significant hidden termite damage to the timbers that affected their structural integrity. As the Woods pointed out on appeal this was a question related to the remaining damage, not a question of whether there remained any active termites, which the Woods said did not reflect any allegation that they made. With some justification, therefore, they were critical of parts of the primary judge's reasoning that focused on a question as to whether there was any current termite activity at the time of Mr Balfour's work in 1999 and 2000 (for example Judgment [441] and [442]).

62 However in other parts of his judgment the primary judge did address the correct question and determined it against the Woods. For example in Judgment [447] the primary judge said:

" ... The plaintiffs have not persuaded me that the affected structures, which were the subject of repairs, were to Mr Balfour's understanding at the time, structurally unsound due to termite damage such that the repairs in question could not be reasonably considered to be genuine and as such, required disclosure to purchasers " (See also [394], [399], [441], [442] and [473]).

63 The primary judge made it clear that this conclusion was partly based on his assessment of the credibility of Mr and Mrs Balfour (Judgment [446]). As the finding was credit-based, the Woods' challenge to it needed to surmount the hurdles identified in Fox v Percy [2003] HCA 22; 214 CLR 118. In substance, it was incumbent upon the Woods to demonstrate that the finding was contrary to "incontrovertible facts or uncontested testimony" or was "glaringly improbable" or "contrary to compelling inferences" (at [28] - [29]).

Mr Balfour's knowledge of termite behaviour

64 Mr S White SC (who appeared with Mr E White for the Woods) stated in the following terms one of the ways in which the Woods sought to surmount those hurdles:

"WHITE: Your Honour, in relation to Justice Macfarlan's question about Fox v Percy and what is the incontrovertible evidence, we submit the incontrovertible evidence was Mr Balfour's knowledge of termite behaviour in 1999 and 2000, namely that they entered the premises or the house via the beams or timber at the subfloor area and gained access to the top floor beam via the internal beams and internal frame of the house. We submit, by reason of that knowledge he must have known the damage could not have been localised in the beam in the upstairs bedroom. We submit, it follows that he knew or was recklessly indifferent to the likelihood of there being extensive damage beyond the localised area in the bedroom beam, the bathroom rafter and the downstairs family room beam.

True it is that he may have covered up those areas to improve the amenity of the house in which he proposed to continue living but it was also with the knowledge or recklessly indifferent to the fact that he had not eradicated the defect, that it remained. We submit that is why the judge, faced with that incontrovertible evidence and the only logical inferences that can be drawn from it, should have found that Mr Balfour had that state of mind at that point in time. Such that when in 2004 he came to sell the property he was obliged to disclose the nature of the concealment, absent which he engaged in deceit.

If I can't persuade your Honours in relation to that point then the outcome is assured because I need to persuade your Honours of why his Honour's finding in that regard is wrong. I accept that it was not put to Mr Balfour in terms, you had no basis to believe that the damage was localised, I accept that, but we have evidence that he knew how they worked, he knew how they operated, he knew where the damage was, and I submit he could not have honestly held that belief" (Appeal Transcript pp 28 - 29).

65 In my view this reasoning falls a long way short of proving dishonesty on the part of Mr Balfour and, a fortiori , on the part of Mrs Balfour. So far as it relates to knowledge, as distinct from recklessness, this reasoning is to the effect that because Mr Balfour knew that there was some termite damage in the upper part of the house and knew that the termites would have entered through the subfloor area and travelled to the top of the house, he must have known that there was extensive termite damage beyond that which he observed and sought to repair and cover up.

66 This reasoning is flawed because it does not assert (much less establish) that in travelling from the bottom to the top of the house the termites must necessarily have caused extensive damage which was not visible to Mr Balfour, and that Mr Balfour knew this to be the case. Neither that fact, nor Mr Balfour's knowledge of it, was proved. Indeed the only evidence on the topic before the primary judge was to the contrary of the proposition: evidence that Mr Capaldi gave included the following:

"Q. ... Termite activity means damage, doesn't it"

A. No, it doesn't.

Q. The reason one would stop termite activity is to stop damage though, isn't that right?

A. To stop potential damage, yes. We - I - if I can just make things clear, to give you an example, I inspected a home in Balmain which is a three-storey full brick terrace home. The - the termites started in the subfloor, did not touch any timber in the subfloor, they tracked along the timber but didn't damage any timber. They went up three stor[ey]s in a cavity wall and ate the roof. So where - where I look at how termites perform, termite activity doesn't mean termite damage; I mean it's potential damage" (Transcript pp 264 - 6).

67 It follows that the Woods' submission does not demonstrate that the primary judge erred in concluding that Mr Balfour did not know that there was extensive termite damage beyond that which was visible to him.

68 Counsel's submission quoted in [64] above referred also to recklessness. Later in this judgment (see [130] - [138] below) I deal with the challenge to the primary judge's decision not to permit the Woods to amend their Statement of Claim to add an allegation of recklessness. As I have concluded that that challenge must fail and that recklessness was not therefore in issue in the proceedings, it is unnecessary to refer further to recklessness under the present heading.

69 There are two additional reasons why the submission quoted in [64] above does not assist the Woods' case.

70 First, even if the Woods had proved that Mr Balfour had knowledge of extensive further termite damage when he completed his work in 1999/2000, it would have been necessary for the Woods to persuade the Court that Mr Balfour was conscious of that fact at the time of sale and that he decided not to disclose it for the purpose of deceiving the Balfours. Proof that Mr Balfour knew the fact in 1999/2000 would not of itself mean that he acted dishonestly in not disclosing it in 2004. As Devlin J said in Armstrong v Strain [1951] 1 TLR 856 (affirmed on appeal: [1952] 1 KB 232) at 871:

"A man may be said to know a fact when once he has been told it and pigeon-holed it somewhere in his brain where it is more or less accessible in case of need. In another sense of the word a man knows a fact only when he is fully conscious of it. For an action of deceit there must be knowledge in the narrower sense; and conscious knowledge of falsity must always amount to wickedness and dishonesty. When Judges say, therefore, that wickedness and dishonesty must be present, they are not requiring a new ingredient for the tort of deceit so much as describing the sort of knowledge which is necessary."

71 The Woods' submission did not provide a basis for a conclusion that such consciousness existed.

72 Secondly, as was recognised in counsel's submission, it was not put to Mr Balfour in cross-examination that he knew of extensive termite damage beyond that which he sought to repair and cover in 1999/2000. The cross-examiner put to him that the termites that caused the damage which Mr Balfour saw must have come up from the lower areas of the house but did not put to him what the Woods later contended was the logical consequence of that, namely that Mr Balfour knew that those termites must have caused extensive damage beyond what he saw in the upper areas of the house. This did not in my view afford to Mr Balfour the fairness to which he was entitled as a person accused of dishonesty. He was entitled to the opportunity to respond to the inference that the Woods said followed from what was put to him in cross-examination. The evidence of Mr Capaldi to which I have referred in [66] above is indicative of the type of response that Mr Balfour may have given if he had been afforded the opportunity.

73 Mr Balfour was also entitled to have put to him in cross-examination the proposition that not only was he aware of extensive further termite damage in 1999/2000 but that he was conscious of that damage in 2004 and decided not to disclose it to the Woods. The credence that the Court might have given to a denial of such knowledge would no doubt have been influenced by the finding that the Court made (assuming that it did make such a finding) as to the extent of the further damage of which Mr Balfour was aware. The existence of a limited amount of further damage might have been capable of being forgotten. Very extensive further damage might not have been.

74 The applicable principle is stated in the following well-known passage from the judgment of Hunt J in Allied Pastoral Holdings Pty Ltd v Commissioner of Taxation [1983] 1 NSWLR 1 at 16:

"It has in my experience always been a rule of professional practice that, unless notice has already clearly been given of the cross-examiner's intention to rely upon such matters, it is necessary to put to an opponent's witness in cross-examination the nature of the case upon which it is proposed to rely in contradiction of his evidence, particularly where that case relies upon inferences to be drawn from other evidence in the proceedings. Such a rule of practice is necessary both to give the witness the opportunity to deal with that other evidence, or the inferences to be drawn from it, and to allow the other party the opportunity to call evidence either to corroborate that explanation or to contradict the inference sought to be drawn. That rule of practice follows from what I have always believed to be rules of conduct which are essential to fair play at the trial and which are generally regarded as being established by the decision of the House of Lords in Browne v Dunn (1894) 6 R 67".

75 As Hunt J pointed out in Allied Pastoral :

" ... it would be unfair to accept the submission by the Commissioner that I should disbelieve the evidence led by the taxpayer by reason of the inference said to be available from the evidence as a whole that the 'staged development' theory operated in relation to the taxpayer's property. No application was made by the Commissioner for the taxpayer's witnesses to be recalled to give them the opportunity to deal with his suggestion. The stand was simply taken that it was unnecessary to do so. The Commissioner's argument is rejected" (at 26).

76 The present is not a case in which Mr Balfour had clear notice through pleadings, or by other means, of the allegations to be made against him, such that it was unnecessary to put them to him in cross-examination. The Woods clearly alleged in their Statement of Claim that the Balfours acted dishonestly by making a knowing false representation that, in effect, there was no substantial termite damage to the house. However the Balfours were not put on notice by the pleadings or otherwise of how the Woods' case against them was to be constructed. In particular they had not been given the opportunity to respond to the argument that is embodied in the submission that I have quoted in [64] above.

The Themen & Associates' pest report

77 By a written submission dated 26 October 2011 senior counsel for the Woods gave a further summary of the matters upon which the Woods relied in order to satisfy the test stated in Fox v Percy and successfully challenge the primary judge's finding that Mr Balfour was aware of extensive further termite damage. I shall deal with the matters referred to in that submission in turn.

78 The first two points related to a pest report of Themen & Associates dated 3 February 2004 which was obtained by persons (not being the Woods) who were then interested in purchasing the property, but subsequently did not proceed.

79 The report included the following statement:

"VISIBLE evidence of subterranean termite damage and/or workings was not found at the time of our inspection, but vendor did advise of past damage to the rear left side of the dwelling " (original emphasis).

80 In his affidavit of 17 April 2009 Mr Balfour gave the following evidence about a conversation with the inspector from Themen & Associates who attended at the property on or about 3 February 2004:

"I recall being asked about whether there was any termite damage in the past. I didn't really know anything that had happened past 2000. I remembered that from my dealings with the pest controller that I used years ago there was some damage to the floor and the rear left side of the house. I told the pest inspector all that I could think of at the time. I also showed the pest controller how to get under the house. I then let the pest controller do his job" ([63]).

81 Mr Balfour was cross-examined in detail about the conversation. His evidence in cross-examination included the following:

"Q. Is there any reason why you didn't point out to this pest inspector the termite damage that you found and recognised in 1983 to the front deck?

A. No, this conversation with this inspector took place - it was a 30-second conversation as he was trying to work his way into the hole to get under the house. He had done the inspection of the house. He had been there for quite some time. He came up into our kitchen area and asked how could he get under the house? So I took him down, showed him where to get under the house and as he was crawling in under the house, I pointed out to him where there was some damage - had been in the past, trying to be helpful.

...

Q. You say, do you, that in putting the question in those circumstances he was only asking you about the immediate vicinity that he was searching in under the house?

A. That's as I understood it at the time" (Transcript pp 558-9 and 562).

82 In his judgment the primary judge set out the relevant parts of Mr Balfour's affidavit (Judgment [168]) and referred in detail to Mr Balfour's cross-examination on the topic (Judgment [208] - [210]). Later his Honour referred to the Woods' reliance in submissions upon Mr Balfour's evidence upon this topic and said that the Woods "have sought to cast it into a turpitudinous light" (Judgment [520]). Although not expressly saying that he did not regard the evidence as reflecting adversely on Mr Balfour's credit, shortly thereafter in his judgment his Honour said that he considered that the Woods' submissions (which must have included the submissions on this issue) were flawed (Judgment [524]).

83 I do not consider that the Themen & Associates report and Mr Balfour's corresponding evidence constitute material that indicates that the primary judge erred in accepting Mr Balfour's evidence as to his lack of knowledge of extensive further termite damage. The material was certainly capable of bearing on Mr Balfour's credit but his Honour was well aware of the evidence and clearly did not regard it as undermining Mr Balfour's credit in any significant fashion. The terms of the Themen & Associates report called for an explanation from Mr Balfour, which he gave in terms that were not obviously groundless. It was in my view open to his Honour to accept Mr Balfour's explanation.

Copes Pest Control report of 15 July 2004

84 The Woods next relied upon the terms of a pest report dated 15 July 2004 prepared by Copes Pest Control at the request of Mr Balfour. The Woods pointed out that the report said in relation to possible previous termite treatment "TREATED APPROX 7 YEARS" (p 3).

85 The Woods submitted that this statement indicated that Mr Balfour had told the pest inspector that there had been treatment of the property in 1997 (seven years prior to 2004) but did not tell him that Mr Balfour had done termite-related work on the property in 1999/2000. However, as the Balfours pointed out in submissions, the report also referred to "Termite Damage and/or Workings" not only to the "subfloor" but also to the "Interior". This tends to suggest that Mr Balfour had not withheld information from the inspector as the termite damage located prior to 1999 does not appear to have been to the interior of the house (Mr Balfour's Affidavit dated 17 April 2009 [15] - [25])

86 In cross-examination Mr Balfour said that he was not able to recall what happened when the inspector attended in July 2004 but did say that he had been from the same firm that had treated the property with arsenic dust in 2000 (Transcript pp 582 and 584). This also pointed to the unlikelihood of Mr Balfour withholding information. Further, as the Balfours pointed out in submissions, the reference in the report to "TREATED APPROX 7 YEARS" is ambiguous and might have referred to a period of treatment rather than to treatment occurring at a point of time some seven years before.

87 In my view the material that the Woods relied upon does not constitute compelling evidence that the primary judge's acceptance of Mr Balfour's evidence as to his state of mind was flawed. The point that the Woods make in this instance is a minor one which does not reach the level of significance necessary to satisfy the Fox v Percy tests. The Woods did not suggest that the primary judge had overlooked the evidence relating to the Copes' report. In fact the primary judge regarded Mr Balfour's actions in leaving a copy of the Copes' report "at the house after the settlement for the information of the plaintiffs" as "inconsistent with an intention on his part to perpetrate a deceit" (Judgment [525]).

Mr Rubbi's statement

88 Prior to the District Court hearing the Woods served an affidavit of Mr Rubbi, a former neighbour of the Balfours, that attached a statement of Mr Rubbi dated 5 October 2005 giving some recollections of information that Mr Rubbi said he obtained from conversations with Mr Balfour over a period of years. Mr Rubbi said that "[t]he actual dates of conversations and the exact details of each conversation are now lost in time."

89 Mr Rubbi's statement included the following:

"5. Termite activity was found in timbers at the front of the house (at ground level, second floor) and a pest control person was called in. This person injected arsenic into the termite 'chambers' within the affected timbers. I understand that termite activity was also found upstairs from this floor i.e. the bedrooms, but the damage was minimal".

90 When the Woods did not read Mr Rubbi's affidavit at the hearing, the Balfours tendered it in their case, no doubt at least in part because the last sentence of paragraph 5 appeared to provide strong support for Mr Balfour's evidence about his state of mind. On appeal the Woods however submitted that, as the information in the statement was said to come from Mr Balfour, the references in paragraph 5 (and elsewhere in the statement) to termite "activity" indicated that Mr Balfour was aware, contrary to his evidence, of the existence of active termites when he did his work in 1999/2000. (This seems to have been largely, if not wholly, a credit point as the Woods' allegations on liability were concerned with the existence of further damage in 1999/2000, not with the presence of active termites at that time: see [61] above).

91 The Woods' construction of the statement cannot be accepted. The statement uses the term "termite activity" to refer to evidence of termites found in a number of areas of the house including some where it is clear on the evidence that there was no current activity at the relevant time. In my view the reference to termite "activity" cannot be regarded as indicating the presence of live termites. The fact that the affidavit to which the statement was attached was prepared at the Woods' behest precludes them from adopting an interpretation favourable to them of what in my view is an ambiguous expression.

92 As a result Mr Rubbi's statement also does not assist the Woods to surmount the Fox v Percy hurdles.

The termite swarming event

93 Submissions that the Woods made in their written submissions of 26 October 2011 as to the consequences of Mr Balfour's knowledge of termite behaviour overlapped to a significant extent with the Woods' oral submissions with which I have dealt in [64] - [76] above. However the following additional matters require mention.

94 First, the Woods put the following submission concerning cuts that Mr Balfour observed in the upstairs bedroom timber beam that he repaired:

"A swarming event occurred in relation to the upstairs bedroom beam prior to cladding whereby thousands of juvenile termites were released from swarm cuts in the beam. Whilst Mr Balfour denied knowledge of the swarming event such a denial is unbelievable and the trial Judge's finding as to how such an event could have taken place without notice to Mr Balfour is but speculative and not founded in evidence. It is inconsistent with the evidence of Shane Clarke which was uncontested that termites only emerge when conditions are near perfect. The termites, contrary to the scenario suggested by his Honour, would have emerged because the conditions in the bedroom were 'near perfect' and would not emerge in order to exit via a window. In those circumstances the Balfour[s] must have known of [the?] swarming event. As termites are blind they would not be aware of an open window and further, the ambient temperature is likely to have been significantly different from the 'near perfect' conditions of the bedroom. The suggestion therefore that the [alates] exited via an open window is contrary to Mr Clarke's evidence" (Written Submissions [7], references omitted).

95 Contrary to the implication of this submission there was no clear evidence that there must at some stage have been "thousands of juvenile termites" released from the upstairs bedroom beam. The evidence of Mr Clarke, the pest expert that the Woods called to give evidence, was that "many thousands of termites can emerge" (Report dated 31 August 2009 [8.07], emphasis added) and that:

"You're talking about thousands of termites, generally, you know, unless it's a very small and immature nest and looking at the degree of damage in this house I'd say that's not the case and so you'd expect large numbers of termites ... " (Transcript p 405, emphasis added).

96 The former evidence was not definitive as to the numbers necessarily involved and the latter evidence was not specifically related to the upstairs bedroom beam.

97 The basis for the proposition that the swarming termites could not have exited via an open window was also weak. There was no explicit evidence from either of the relevant experts who gave evidence that the termites could not have exited through a window. Furthermore, the Woods' contention that this could not have occurred because termites are blind is speculative, and the reference that the Woods gave to support the contention indicates that termites have other means of sensory perception (Transcript p 424). Likewise the submission that the Woods made comparing temperatures outside the bedroom with those inside the bedroom (see the second last sentence in the submission quoted in [94] above) was not supported by expert evidence and the topic is not one about which the Court, if unaided, could form its own views.

98 The matters that the Woods relied upon are nowhere near sufficient to provide the factual basis for an inference of fraud on the part of the Balfours.

The family room beam

99 The Woods' next submission was that although Mr Balfour accepted that the family room beam was significantly damaged, he took no steps to determine the structural integrity of the beam, carried out an inadequate repair of the beam and gave in evidence an explanation for what he did that was "less than frank" (Written Submissions of 26 October 2011 [8]).

100 I do not consider that this submission has any substance. Whilst the engineering experts suggested that the work Mr Balfour did to reinforce the family room beam would not have been effective (Report of Mr Doble dated 11 August 2009 [3.02]; see also Report of Mr Capaldi dated 13 February 2009 [3.2.8]); Mr Capaldi also said that the attempted repair was such that it could have been intended by the person who effected it as a genuine repair. In any event the fact that experts might have considered the work that Mr Balfour did to be ineffective does not indicate that Mr Balfour knew it to be so. There was in my view nothing about the explanation that Mr Balfour gave in evidence that reflected, at least in any compelling fashion, adversely on his credit. Indeed the fact that he attempted to reinforce the beam in the family room is some indication that he did not believe that there was any structural problem in respect of the beam in the upstairs bedroom as, if he had believed that, presumably he would have sought to reinforce it, particularly as his son slept in the room.

101 The fact that Mr Balfour took no steps to determine the structural integrity of the beam in the family room other than forming his own view on the question is similarly not of assistance to the Woods. It does not indicate that he had knowledge of significant termite damage beyond that which he observed. It is a factor pointing against Mr Balfour having known of any compromise to the structural integrity of the property that he and his family continued to live there, occupying the rooms in which the beams were located.

The timber beam tap test

102 A further submission of the Woods related to the following findings of the primary judge:

"402. In my view, in seeking to make their argument that the defendants concealed the termite damage with the intention to deceive purchasers, the plaintiffs have failed to demonstrate an essential element of their argument that the claimed deceit, namely, actual knowledge on the part of both defendants at the time the covering works were undertaken, that the method of detecting whether a timber beam was solid or not was to tap on it for inconsistent sounds, in the context of the timber being tested or inspected for evidence of suspected termite damage.

403. Whilst an elementary understanding of basic physics, as would be expected from an aircraft maintenance engineer such as Mr Balfour, would support a conclusion that differing resonant sounds emerging from a tapped timber beam could base suspicion of hollowness or non-uniform solidity, this is a very different notion to assuming that firstly, Mr Balfour actually obtained such an understanding, secondly, that he knew the differing sounds were due to termite activity and thirdly, that he deliberately withheld knowledge that he had done these things and achieved such an understanding".

103 The Woods first submitted that the matter to which his Honour referred as an "essential element" of their argument was not in fact essential. That seems correct although the Woods' argument, at least as interpreted by his Honour, did include that matter as one of its elements (Judgment [392]). It seems to me, with respect, to be an overstatement to describe it as an "essential" element but this was only one of many parts of the Woods' argument by which the primary judge was not persuaded. Bearing in mind the numerous reasons his Honour gave for finding that the Woods' claim failed, I do not consider that this overstatement was of any significance.

104 Next the Woods submitted that:

"[They] established that Mr Balfour was aware cladding would prevent a tap test from revealing termite damage (T578.1-41) and Mr Balfour conceded the cladding covered the termite damage from visual inspection" (Written Submissions on the Appeal [16]).

105 These propositions are correct but Mr Balfour gave evidence, which went unchallenged, that in 2004 he did not know what type of test the Woods' pest inspector would carry out (Transcript p 579).

106 In these circumstances the Woods' point was of limited significance in the primary judge's consideration of their allegation concerning Mr Balfour's knowledge. It was a point that the primary judge took into account and with which he was unimpressed. In these circumstances it does not in my view assist the Woods in satisfying the Fox v Percy tests.

Generally

107 Neither individually nor in combination do the points that the Woods raised indicate that the primary judge's conclusions concerning the Balfours' knowledge and dishonesty were contrary to "incontrovertible facts or uncontested testimony", "glaringly improbable" or "contrary to compelling inferences" ( Fox v Percy at [28] - [29]). Their challenge to these conclusions must accordingly fail.

THE WOODS' RELIANCE ON THE REPRESENTATION

108 I respectfully disagree with the primary judge's conclusion (see [45] above) that the evidence indicated that the Woods did not rely upon the alleged representation (assuming it to have been made). The effect of his Honour's conclusions was that Mr Wood relied upon his own assessment of the risk of termite damage rather than upon the representation that the Balfours were alleged to have made. However in my view, in a case such as the present which is, or at least includes, an allegation of non-disclosure, the principal question that must be asked is whether the plaintiffs would have acted any differently if the disclosure had been made. Asking that question in this case produces a different answer to that at which the primary judge arrived.

109 There can be little doubt that the Woods would have acted differently if the Balfours had disclosed to the Woods what the Woods allege the Balfours knew and should have disclosed, namely, that the home being sold had serious termite damage which compromised the structural integrity of the property. It can readily be inferred that in such circumstances the Woods would not have purchased the property upon the terms that they did. Even if otherwise effective, Special Condition 3 in the contract of sale (see [26] above) could not in my view be construed as an acknowledgment by the purchasers that they did not rely on any fraudulent representation arising out of the concealment of what would otherwise have been serious patent defects in the property.

110 I accordingly conclude that if the Woods had established other elements of their claim, the requirement that they be induced to act by the alleged fraudulent representation would have been satisfied.

CONCLUSION ON DECEIT CLAIM

111 For the reasons above and subject to the further matters with which I deal below the Woods' appeal against the primary judge's dismissal of their deceit claim fails because they have not successfully challenged his Honour's finding that the Balfours did not act dishonestly.

APPLICATION TO ADDUCE FURTHER EVIDENCE

112 By Notice of Motion dated 9 February 2011 that was heard during the course of the appeal hearing, the Woods sought leave to adduce further evidence. The further evidence was contained in a report dated 3 February 2011 of Mr Clarke, who had provided an earlier report that was tendered at the hearing at first instance. Mr Clarke was cross-examined at that hearing. The application to adduce further evidence in this Court was supported by affidavits of Mr Wood and of his solicitor, Mr George Angelinas. After hearing evidence and argument on the application at the appeal hearing, the Court announced to the parties its conclusion that the application should be dismissed for reasons to be provided in due course. The following are my reasons for joining in that dismissal of the Woods' application.

113 In his affidavit Mr Wood said that after the resolution of the proceedings in the District Court he decided to rectify the termite damage in his house and in particular to replace the timber beam in the upstairs bedroom. When he sought to do this "the bottom half of the beam split away from the top half at about the mid-point horizontally" and he observed a pink powder residue which he said that he recognised as arsenic dust (a substance used in termite treatment). He said that whilst he had partially removed the cladding on timber beams in the house prior to the District Court hearing:

"[i]n consultation with my legal representatives it was agreed that the damage to timber beams should remain in situ pending the hearing of the District Court Proceedings and in anticipation of a view of the Property by the Court" ([8]).

114 Mr Angelinas gave evidence that he had, by letter to the Balfours' solicitors, requested that the Balfours identify which parts of the property had been treated with arsenic dust. Despite a verbal follow-up, he did not receive a response. He said that he had been aware at that time, from the report of Mr Capaldi which was tendered at the hearing, that "arsenic dust had been located in a beam in the downstairs family room" (Affidavit dated 7 February 2011 [12]).

115 As a result of Mr Wood's post-hearing discovery, Mr Clarke was commissioned to provide a further report.

116 Mr Clarke's conclusions after his further inspection were as follows:

"Further to my previous reports concerning the above property, I returned to [the subject property] on 16 November 2010 and 5 January 2011 to examine new evidence uncovered during reconstruction work at the property. Specifically I was asked to inspect the exposed bedroom beam in the upstairs westerly bedroom - the 'beam'.

The beam had previously been reported by me as having swarming cuts from flighting reproductive termites known as 'aletes', leaving the workings or termite galleries within the beam. Upon removal of the beam, prior to my attendance at the property, it split in two, length ways, exposing the interior of the beam behind the swarming cuts. Inspection of this area revealed the presence of dead aletes (the winged reproductives), present in the damaged timber confirming that termites did indeed swarm from the beam. The damage to the entire beam was extensive and severe. A lay person would not consider using the beam for a structural component of a house.

Also visible on the aletes and on the damaged timber was pink dust consistent with Arsenic Trioxide, known as arsenic dust, used in the treatment of termites by Pest Control companies. This dust is blown into the active galleries using a small puffer. The mixture of air and a small amount of arsenic dust will often spread a considerable distance from the point of application. The arsenic dust is applied through small holes drilled into the timber - upon close inspection these drill holes were visible. Although I observed and referred to the swarm cuts in the beam in my earlier report dated 31 August 2009 (page 5) I did not observe the drill holes which can be seen in Image (1) below. At the time of my earlier inspection I did not see the drill holes because, by their very nature, they must be as small as possible so as not to disturb the natural activity of the termites inside as the logic behind the use of the arsenic dust is to have the termites pick up the dust and take it back to the nest. Accordingly, the drill holes are about 1.5mm in size. The other reason I did not observe the drill holes is because I had no reason to believe the beam had been previously treated by a pest controller, and I was not looking for any such tell-tale signs.

The termites had closed up the mud workings over the swarming cuts and the presence of dead aletes within the damaged timber indicates that the treatment was applied before the swarming process had been completed. Many of the swarm cuts had been opened on subsequent inspections, after the termite dust had been applied, to check for live termites. Termites will often cease swarming because of changing conditions. If, for example, a window was opened or a breeze commenced or arsenic dust was blown into the workings, termites will close over the swarming cuts and wait for the correct conditions to be present.

The arsenic was applied before the beam was clad with the veneer timber and while the termites and/or aletes were active. Arsenic dust is not used to treat timbers unless they contain active termites. Arsenic is a natural poison that occurs in nature so termites will avoid where concentrations are high as is the case here. The dead aletes would therefore have been present and alive when the dust was applied.

My inspection of the deconstructed timber beam indicates that the cladding of the beam was carried out after the termites had been discovered; no doubt as a result of the swarm event, and treatment had been attempted with arsenic dust" (Report pp 1-2).

117 As the Balfours pointed out, the only arguably significant information that this report provided, additional to that before the District Court, was that arsenic dust had been used to treat the beam and that this must have been done "before the beam was clad with the veneer timber and while the termites and/or aletes were active" (Report p 2).

The applicable principles

118 The Court's power to receive further evidence is found in s 75A Supreme Court Act 1970 which relevantly provides:

"(7) The Court may receive further evidence.

(8) Notwithstanding subsection (7), where the appeal is from a judgment after a trial or hearing on the merits, the Court shall not receive further evidence except on special grounds.

(9) Subsection (8) does not apply to evidence concerning matters occurring after the trial or hearing".

119 As Clarke JA (with whom Sheller JA agreed) stated in Akins v National Australia Bank (1994) 34 NSWLR 155 at 160, in general, the following three conditions must be satisfied before the Court admits further evidence, that is, additional evidence that is not evidence of matters occurring after the date of the hearing:

"(1) It must be shown that the evidence could not have been obtained with reasonable diligence for use at the trial; (2) The evidence must be such that there must be a high degree of probability that there would be a different verdict; (3) The evidence must be credible".

120 Statements in the High Court well support his Honour's view that there must be a "high degree of probability that there should be a different verdict". In Orr v Holmes [1948] HCA 16; 76 CLR 632 at 642, Dixon J concluded that the "evident purpose" of the stringent requirement for the admission of further evidence is to:

" ... ensure that new trials will not be granted because of fresh evidence unless it places such a different complexion upon the case that a reversal of the former result ought certainly to ensue. The fact which the new evidence tends to prove, if it does not itself form part of the issue, must be well nigh decisive of the state of facts upon which the issue depends. The evidence must be so persuasive of the existence of the fact it tends to prove that a finding to the contrary, if it had been given, would, upon the materials before the court, appear to have been improbable if not unreasonable."

121 In Council of the City of Greater Wollongong v Cowan [1955] HCA 16; 93 CLR 435 at 444 Dixon CJ stated the test as follows:

"It must be reasonably clear that if the evidence had been available at the first trial and had been adduced, an opposite result would have been produced or, if it is not reasonably clear that it would have been produced, it must have been so highly likely as to make it unreasonable to suppose the contrary".

The requirement of reasonable diligence

122 It is apparent from the passage in Mr Woods' affidavit to which I have referred in [113] above that a deliberate decision was made by the Woods and their legal representatives to leave the damaged timber beams, and in particular that in the upper bedroom, in situ pending the hearing in the District Court. This was so notwithstanding that the Woods alleged at the District Court hearing that the damage to the beams was likely to be substantially greater than visible on the surface (even when unclad). The Woods and their advisers must have known that dismantlement of the beams would have revealed precisely the nature and extent of the damage to the beams and might well have shed light upon the nature of any treatment to the beams, and therefore upon the Balfours' knowledge of the extent of termite damage. As I have noted, Mr Angelinas acknowledged that he was aware prior to the District Court hearing that at least one of the beams had been treated with arsenic dust and he had sought but not obtained information as to the extent of arsenic dust treatment of the house. Mr Clarke, who provided advice to the Woods, must also have known of the fact, which he asserted in his subsequent report, that the discovery of treatment of the upper bedroom beam with arsenic dust would have indicated the presence of live termites at the time of treatment.

123 In these circumstances my view is that the requirement of reasonable diligence was not satisfied. The prospect of the Woods obtaining evidence of the type that they did subsequently obtain and that they have now sought to lead was eminently foreseeable to them and their advisers. They decided to proceed with their case without further investigation and must abide the consequences of that decision. The fact, as stated by Mr Wood in his affidavit, that this decision was made when the Woods apparently anticipated that the Court would have a view of the property does not assist the Woods. It is difficult to see how a view would have assisted the Court in light of the availability of photographs. Presumably the primary judge's conclusion was similar, as a view did not in fact occur. Nevertheless the Woods sought to obtain the benefit of having a view at the expense of further investigations that might have advanced their case. It is not now open to them to claim the benefit of a second opportunity to conduct these investigations once the case has been decided against them.

The requirement of credibility

124 The Balfours submitted that the fresh evidence was deficient because it did not prove with certainty that the dust found was arsenic dust. I do not accept this submission. I consider that Mr Clarke's view on that issue was sufficient, at least for present purposes.

The requirement of materiality

125 In my view the evidence was not of sufficient materiality to warrant its admission on appeal.

126 Evidence of the use of arsenic dust to treat the timber beam in the upstairs bedroom would no doubt have been of some use to the Woods in their cross-examination of Mr Balfour at the hearing at first instance. However I cannot conclude that it would have been likely to be decisive in the Woods' favour concerning Mr Balfour's credibility and state of mind.

127 The occurrence of that treatment does not of itself indicate that Mr Balfour acted dishonestly. There are a number of ways in which the apparent inconsistency between evidence that he gave that the beam was not so treated and the evidence that it was treated might have been reconciled in a way that did not reflect adversely on Mr Balfour's honesty. Importantly Mr Clarke's evidence did not identify and could not have identified, when the arsenic dust treatment occurred. It may have occurred when arsenic dust was used in the family room with Mr Balfour forgetting that it was also used in the upstairs bedroom. Alternatively Mr Balfour may simply not have known that arsenic dust was used in the upstairs bedroom.

128 The second aspect of Mr Clarke's new evidence similarly does indicate that Mr Balfour acted dishonestly. Although Mr Clarke's view is that arsenic dust is not used unless there are active termites present, the person who used it in the upper bedroom, presumably a pest inspector, may not have adhered to what Mr Clarke considers normal or appropriate practice and may have intended to use it, perhaps misguidedly, preventatively. It is also significant again that it is not known when the arsenic dust was used. Accordingly it may have been used at a time in the past when there had been live termite activity even on Mr Balfour's evidence.

129 Another matter that militates against the Woods' arguments is that, as the Balfours submitted, it is difficult to see what motive Mr Balfour would have had to falsely deny knowledge of the treatment of the upstairs bedroom beam with arsenic dust. There is some force in the Balfours' submission that "[t]here could be no better way to establish the 'genuineness' of the repair to the bedroom beam than by adducing evidence that it had been professionally treated by a pest inspector" (Written Submissions [53]).

LEAVE TO AMEND STATEMENT OF CLAIM: RECKLESSNESS

130 The primary judge's judgment of 29 March 2010 rejecting the Woods' application to amend their Statement of Claim to allege that the Balfours made the alleged representation recklessly (see [31] - [32] above) included the following:

" ... The defendants opposed the application, claiming as yet unformulated prejudice, such prejudice not being capable of being refined and formulated on the run, but nevertheless existing by reason of the nature and timing of the amendment.

The application arises at a time when the defendants had already given their evidence, they were not on notice of it and did not know that it would be alleged against them that they had acted recklessly, not caring whether the alleged representation made was true or false. It is not difficult to imagine that different forensic approaches would have been taken for the structuring of the questions asked of the defendants in chief, and possibly in re-examination had there been such prior notice. If the allegation now sought to be relied upon had been squarely made on notice prior to the commencement of the hearing, in my view it is clear that a different forensic approach would have been taken. It is not necessary for me to outline those different forensic measures other than to recognise that the defendants' complaint of prejudice is a real one" (pp 1 - 2).

131 On appeal, the Woods submitted that:

"In circumstances in which the Respondents denied treating the beam (other than installing cladding) and conceded taking no steps to determine the extent of the termite damage because they assumed that it was 'locali[s]ed' it is difficult to understand on what basis the case could have been run differently" (Written Submissions on Appeal [21]).

132 The primary judge's decision was a discretionary one to which the principles in House v R [1936] HCA 40; 55 CLR 499 apply. The Woods sought to satisfy those principles by submitting that the Balfours did not identify, at least not with sufficient precision, any prejudice that they would suffer if the amendment were allowed.

133 They submitted that "it is difficult to understand on what basis the case could have been run differently" (Written Submissions on the Appeal [21]). As Allsop P pointed out in Coastwide Steel & Metal Work Pty Ltd v Douglas [2008] NSWCA 330 at [8], in the context of an application to allow a new point to be raised on appeal, the assessment and articulation of what a party would have done differently if a new point had been raised earlier can be very difficult.

134 Here the application to amend was made on the last day of an 11 day trial during which many witnesses had been cross-examined at length. In particular Mr Balfour had given evidence-in-chief, and had been cross-examined for over a day, in the context of a case in which it was alleged that he had made a knowingly false representation. A case of recklessness would have required different issues to be addressed. These matters are in my view sufficiently indicative of prejudice to constitute an answer to the Woods' challenge to the rejection of their amendment application.

135 In an alternative submission the Woods referred to various statements that were made at the hearing in the District Court for the purpose of establishing that they were entitled to press an allegation of recklessness even though it was not pleaded. To succeed on this submission the Woods had in my view to establish that the case was one "where the parties [chose] to disregard the pleadings and to fight the case on issues chosen at the trial" ( Dare v Pulham [1982] HCA 70; 148 CLR 658 at 664). The references that the Woods gave do not in my view establish that this was such a case.

136 In opening the case, the Woods' counsel referred to the principles applicable to a claim in deceit, including that the required mental element may be constituted by recklessness as to whether the representation in question was true or false (Transcript p 2). However this reference seems to me to have been made in the course of a general overview of the relevant principles rather than as part of a description of the allegations in the case before the primary judge. Support for this view is derived from the fact that after referring to these principles, counsel said "[n]ow returning to the case in point" (Transcript p 2).

137 The Woods also referred to various questions that were asked of witnesses that were capable of going to an issue of recklessness. However the questions were not in my view unequivocally directed to recklessness. At one point the Woods' counsel did say that a question that he asked "probably might just go to a recklessness in relation to the representation" (Transcript p 537) but earlier on the same day counsel for the Balfours had clearly stated his position that recklessness had not been pleaded and was not in issue (Transcript p 506). In light of this, in my view it cannot be said that there was an agreement between the parties as to manner in which the case would be conducted of the type envisaged in the passage from Dare v Pulham quoted in [135] above.

138 My conclusion therefore is that the Woods did not plead recklessness and the manner in which the District Court hearing was conducted did not otherwise entitle them to rely on recklessness there or in this Court.

INDEMNITY COSTS

139 The Woods' Amended Notice of Appeal included a challenge to the primary judge's judgment dated 20 August 2010 ordering that the Balfours' costs from 18 December 2008 be paid on the indemnity basis. Discussion occurred at the hearing in this Court as to whether, in light of s 101(2)(c) Supreme Court Act the Woods required leave to appeal against that judgment. That subsection provides that an appeal does not lie to this Court, except by leave, in respect of a judgment "as to costs only which are in the discretion of the Court". The Balfours indicated that they would consent to the grant of leave if leave were necessary. In my view the Court should adopt the same course as adopted in Dillon v Gosford City Council [2011] NSWCA 328 at [57] - [58], namely, in the absence of a challenge to the existing line of authority and practice, it should conclude that leave is not required where a challenge to a costs order is made in association with a challenge to substantive orders made in the same proceedings.

140 The application for indemnity costs that the Balfours made to the primary judge was founded upon a Calderbank offer communicated by letter dated 17 December 2008 (see Calderbank v Calderbank [1975] 3 All ER 333) and an Offer of Compromise pursuant to UCPR r 20.26 of the same date. There was no presently relevant difference between the offers. The former offered to compromise the proceedings on the basis that the Woods' claim was dismissed with no order as to costs. The latter offered to compromise them on the basis that there was a verdict for the Woods with each party to bear his or her own costs.

141 The offers were preceded by a letter dated 20 June 2008 from the Woods' solicitors to the Balfours' solicitors outlining the Woods' allegations. The Woods' original Statement of Claim was issued on 15 September 2008. The Balfours' Defence was filed on 28 October 2008 but it does not appear that their solicitors responded to the letter of 20 June 2008. The Balfours' solicitors' letter of 17 December 2008 said the following in support of the offer that the Balfours made in that letter:

"The representation alleged cannot arise from the conduct in question. At best, it could be a representation that there was no termite damage to the relevant beams.

In any event, even if such a representation could arise from the conduct in question and even if it were intentional (which are both vehemently denied), the documents in the court file in proceedings 5256/2005, indicate that your clients placed no reliance on the representation alleged. Furthermore, there is no avoiding the fact that your clients were sufficiently on notice of termite damage that they saw fit to retain a professional pest inspector prior to the sale."

142 The primary judge rejected the Woods' contention that the offers were not genuine offers of compromise. There was nothing that the Woods put on appeal that I consider indicates that the primary judge made an error of principle in reaching that conclusion or that the conclusion was otherwise flawed.

143 The primary judge also concluded that the Woods acted unreasonably in not accepting the offer. However his Honour's view that the Woods did not rely upon any representation that the Balfours made formed a significant part of his Honour's reasoning in this respect. For example, having referred to difficulties that his Honour thought that the Woods should have foreseen that they would have in proving an intention to deceive, his Honour said:

"Secondly, Mr Wood was never in a position to show that he relied upon any representations made by the defendants. In fact, his evidence was to the contrary, he relied upon his pest inspector's report" (Judgment of 20 August 2010 p 2).

144 Later, having referred to the Woods' argument that it was only at the end of the litigation that they had the opportunity to fully evaluate the Balfours' position, his Honour said:

"Such an evaluation ought to have been undertaken at a much earlier stage and was available to be undertaken, particularly on the issue of reliance on the alleged representations. In my view, the problems with the plaintiffs' case were apparent from Mr Wood's own position in the litigation and his strained interpretation of the pest inspector's report" (ibid p 4).

145 I have concluded earlier that the primary judge's views on the question of reliance were erroneous. It follows that I consider that as his Honour's decision on indemnity costs was significantly affected by those erroneous views, that decision cannot stand. It is necessary in these circumstances for this Court to re-exercise his Honour's discretion as to indemnity costs.

146 In my view the Woods acted reasonably in not accepting the offers that the Balfours made. On my views, the only issue upon which the Woods fail in their proceedings is that of dishonesty of the Balfours. Whilst the primary judge was able to reach a firm conclusion, with which I agree, that the Balfours did not act dishonestly, his Honour arrived at that conclusion after hearing their and the other evidence in the proceedings. The Woods were entitled to consider prior to the District Court hearing that the circumstances of which they were aware called for explanation by the Balfours and that their claim had some prospects of success: they had purchased a home with extensive termite damage which had been concealed by Mr Balfour's work.

147 The Balfours' solicitors' letter of 17 December 2008 asserted that the Woods would be unsuccessful on a number of issues on which they in fact ultimately succeeded: whether a representation was made, whether the Woods relied on the representation and whether the Woods were "sufficiently on notice of termite damage". The solicitors also conveyed a vehement denial that any representation was "intentional" (presumably intended to encompass an assertion that if the Balfours made any representation, they did not know it was false) but did not give the Woods any reason to reconsider their position on this issue, for example, by telling them when and why Mr Balfour had done the work.

148 For these reasons I would set aside the order for costs that the primary judge made insofar as it ordered the Woods to pay costs on the indemnity basis.

149 In my view the issue of indemnity costs (upon which the Woods are entitled to succeed) was a discrete issue. Their success on it entitles them to a reduction in the costs of the appeal that they must pay to the respondents. Although argument on this issue occupied only a limited time, I infer from the length of the hearing in the District Court and on appeal that costs are a very significant aspect of the litigation. In these circumstances I would reduce the respondents' entitlement to costs to 75 per cent of their costs of the appeal.

ORDERS

150 For the reasons I have given, I propose that the following orders be made:

(1) Appeal allowed in part.

(2) Set aside the order for costs that the primary judge made on 20 August 2010 and in lieu thereof order that the appellants pay on the ordinary basis the respondents' costs of the proceedings at first instance.

(3) Appeal otherwise dismissed.

(4) Order the appellants to pay 75 per cent of the respondents' costs of the appeal.

151 MEAGHER JA : I agree with the observations made by Giles JA. Subject to those observations, I agree that the orders proposed by Macfarlan JA should be made for the reasons he gives.

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Amendments

28 June 2012 - Typographical error
Amended paragraphs: [119]

Decision last updated: 28 June 2012