STOKOLOSA v WEEKS PEACOCK QUALITY HOMES PTY LTD No. SCGRG-00-387 [2000] SASC 266

2 The respondent's case was that Pinnington had no authority to bind it in contract. If however, an agreement was reached, it was too vague to be enforceable. In any event, no damage had been proved.

3 The learned magistrate dismissed the appellant's claim. He found Pinnington lacked actual or ostensible authority to bind the respondent in contract. Had agency been made out, His Honour would have found there to be an enforceable contract. His Honour found that the appellants sustained loss. All witnesses were found to be credible.

4 On appeal, the appellants abandoned their claim for relief pursuant to the provisions of the Trade Practices Act 1974 (Cth).

5 In or about 1986, the appellants built a new house. They engaged Venture Homes and dealt with one of their sales persons. All went well. In 1995, the appellants purchased a block of land with a view to building another new home. They set about selling their existing home. Whilst that property was listed, they visited various show homes, including the display villages of the respondent.

6 They were "enticed" by an advertisement of the respondent and made a number of visits to its display villages. They met Pinnington, in a show home at one of the display villages. They told him they wanted to build a two storey house with a double garage and a balcony under the main roof. They gave him a sketch. They said their budget limit was $115,000.00. Pinnington told them to leave the sketch with him and that he would consider their requirements and would be in touch.

7 Some days later, Pinnington called at the appellant's home with plans that he had drawn. The plans included both a ground floor and first storey. Details on the plans indicated the size of the rooms, and other specifications. They again emphasised to Pinnington, that their budget was $115,000.00 and that they would be sticking to it. The plans were left with the appellants.

8 Having added some matters of detail to the plans, the appellants met with Pinnington at the Display Village. They returned the plans and enquired how soon the building could begin. Pinnington replied that he would have to get approval from his manager. When cross-examined Mr Stokolosa said Pinnington had used the expression "run it by his manager" (referring to approval for the plans at the price of $115,000.00.)

9 A few days later, Pinnington telephoned Mr Stokolosa and said the proposal was approved. They made arrangements to meet the following Sunday morning to fill out and sign a contract.

10 On this occasion, Pinnington came to the Stokolosa's home. He produced a form of contract being the standard Housing Industry Association building contract. Pinnington filled out the contract form. The appellants initialled and signed the contract which they dated 19 May 1996. At the time of signing, they told Pinnington they wanted to get the house underway as quickly as possible.

11 A form provided with the contract advised that the respondent could ask for payment in advance, of monies that had to be paid to third parties. It gave monies for soil reports as an example.

12 Pinnington said the next step was to obtain a soil report. He indicated that this would cost $1,500.00 which the appellants paid in two instalments. The first payment was for $500.00. This was paid by Pinnington into the respondent's account. The second instalment was taken by Pinnington and applied for his own purposes. The cost of the soil report was part of the $115,000.00 contract price.

13 Mr Stokolosa said in cross-examination that it was his expectation that more detailed plans would need to be prepared before council approval for the building could be obtained. He agreed that he had expected to have been given the opportunity to check these plans and confirm the matters of detail. The contract allowed for minor variations until Council approval was obtained.

14 Mrs Stokolosa's evidence confirmed her husband's account. She said that Pinnington had advised that he would need to get approval. This was said at an early stage in the negotiations. Later, he advised that approval had been given. She said that the contract had been entered into and everything was going ahead.

15 The learned magistrate outlined events thereafter which I respectfully adopt:

"Shortly thereafter Mr Rowland contacted Mr Stokolosa and informed him that no contractual documents had been completed. Even more disturbing to Mr Stokolosa and his wife was an indication that the defendant was not prepared to build, the premises in question, at the figure of $115,000. In fact, Mr Rowland did some costings and said that the company could only construct the dwelling at a cost of $125,000. At about that time, it appears to have been discussed that Mr Pinnington was allegedly acting without authority and, to some extent, had acted fraudulently.

The plaintiffs, quite reasonably, were greatly disconcerted at the train of events. They therefore sought legal advice and failing being able to reconcile their differences, with the defendant, legal proceedings were commenced."

16 The respondent repudiated the contract on the basis that the company had not executed the document. The appellants accepted the repudiation and built a similar but different house using another builder.

17 The appellants' case was that the contract was formed at the time of signing. Pinnington's presentation of the contract documents and his advice that managerial approval had been obtained, constituted an offer. The signing of the papers by the appellants amounted to an acceptance of the offer. A contract then came into existence.

18 It was argued in the alternative, that even if no contract was existing, the conduct of the respondent, through its agent, was sufficient to bind the respondent. The course of Pinnington's dealing was such that the plaintiffs had a binding contract.

19 Who should ultimately bear the loss occasioned by a fraudulent agent is a question that has troubled courts for more than a hundred years. Whilst the legal principles governing agency are settled, the determination of this quandary must of necessity turn on the individual facts of each case.

"An act of an agent within the scope of his actual or apparent authority does not cease to bind his principal merely because the agent was acting fraudulently and in furtherance of his own interests." [1]

21 A principal will be bound by the acts of its agent if the agent has been cloaked with authority.

22 Sales consultants were the public face of the respondent. The appellants and members of the public alike, had no direct dealings with management. They only dealt with sales consultants. Throughout the whole of the appellants' dealings with the respondent, all negotiations were conducted through the sales consultant, Pinnington. The respondent placed its sales consultants in a position which portrayed them to the outside world as having authority to enter into a transaction of the kind in question. For a non standard house, approval would be needed. Approval would be obtained by the sales consultant. They would then advise the customer and proceed with the transaction.

23 The learned magistrate noted the appellants' familiarity with the house building process because of their earlier experience of dealing with a display home. That experience involved placing trust and reliance in a sales consultant. Their case was that they could rely on the respondent to perform its obligations. The appellants engaged the respondent in good faith and expected that they would be dealt with accordingly.

24 Mr Rolland said that he formally signed all contracts. However, he accepted that the sales consultants had authority to reach agreement with customers for standard houses, without the requirement of prior consultation with management. Mr Rolland explained that if a nonstandard house was required, (as in the appellants' case), sales assistants were to obtain approval from management, and then proceed to advise the customer. The following evidence of Mr Rolland deals with the practice in regard to nonstandard houses:

"Q. And if it is a special house or something that isn't standard, such as the house that the Stokolosa's wanted, they would, that is the sales staff, get details of the house and submit those details to you for you to have a look at.

Q. And assuming that you had enough detail and were able to do a costing, you would advise the sales agent accordingly, that is we can do it at this price or we can do it at their price, or what ever.

Q. And the sales agents in those circumstances would return to the customer and advise the customer accordingly.

25 The appellants expected Pinnington to obtain approval from management. He advised them of this procedure and then later informed them that he had in fact, obtained the necessary approval.

26 The sales consultants were authorised to convey to the customer that approval had been given. This was the usual, if not inevitable, practice.

27 In Freeman & Lockyer (A firm) v Buckhurst Park Properties (Mangal) Ltd[2] Diplock LJ summarised the law as to actual and apparent or ostensible authority. When dealing with apparent authority he said at (503-504):

"The representation which creates 'apparent' authority may take a variety of forms of which the commonest is representation by conduct, that is, by permitting the agent to act in some way in the conduct of the principal's business with other persons. By so doing the principal represents to anyone who becomes aware that the agent is so acting that the agent has authority to enter on behalf of the principal into contracts with other persons of the kind which an agent so acting in the conduct of his principal's business has usually 'actual' authority to enter into."

28 The conduct of the respondent was to have its sales consultants strike the bargain with the customer. Where managerial approval was necessary it was the sale consultants who would advise the customers that approval had been given. The respondent instructed and permitted the sales consultants to conduct the respondent's business with its customers. In so doing the respondent cloaked the sales consultants with authority. This was apparent or ostensible authority. The conduct of the respondent of having sales consultants act in this way, in regard to these matters, gave them apparent authority on which customers would then rely.

29 The learned magistrate was referred by both counsel to the House of Lords decision of Armagas Ltd v Mundogas SA[3]. That case involved the application of well settled principles to a particular factual circumstance. Lord Keith at page (782-783) said:

"At the end of the day the question is whether the circumstances under which a servant has made the fraudulent misrepresentation which has caused loss to an innocent party contracting with him are such as to make it just for the employer to bear the loss. Such circumstances exist where the employer by words or conduct has induced the injured party to believe that the servant was acting in the lawful course of the employer's business. They do not exist where such belief, although it is present, has been brought about through misguided reliance on the servant himself when the servant is not authorised to do what he is purporting to do, when what he is purporting to do is not within the class of acts that an employee in his position is usually authorised to do, and when the employer has done nothing to represent that he is authorised to do it ..."

30 These remarks are a restatement of the principles enunciated in Freeman & Lockyer (A firm) v Buckhurst Park Properties (Mangal) Ltd. In advising the appellants that approval had been given, Pinnington, was acting within the class of acts that sales consultants were usually authorised to do. The respondent was responsible for this practice as it instructed its sales consultants to act in this way. In my opinion, the learned magistrate failed to have regard to the respondent's conduct. The acts of Pinnington were within the class of acts that the respondent's sales consultants were usually authorised to do.

31 Counsel for the respondent asserted that the no offer was made and that Pinnington's statements and conduct were simply preliminary negotiations.

32 I reject this submission. More had been done than merely stating a negotiating position. Pinnington told the appellants that approval to build the house, in accordance with the plans, for a price of $115,000.00 had been given. They then accepted that offer. I share the view of the learned magistrate that an offer was made by Pinnington and then accepted by the appellants.

33 Counsel further submitted that the agreement could not be enforced because its terms were too vague and uncertain. He pointed to the lack of detail about the mode of construction and the absence of a 'building schedule', which according to the contract formed part of those documents collectively referred to as 'contract documents'. I reject these submissions.

34 It is important to note that the respondent's display village was available for inspection by the public. Customers would inspect the display houses. The point of the display was to represent to the customer, the standard of construction and finish that the defendant offered. It was maintained with a view to inducing persons to enter into contracts for the construction of similar houses. The contract contained an implied term that the house would be constructed according to the same specifications and to the same standards of work and materials as those of the houses inspected.

35 In the absence of additional specifications, it is to be inferred that the finishes would be as seen in the display house. They would be as they were displayed to the appellants by Pinnington, subject only to their personal preference as to colours, patterns etc.

36 Counsel further submitted that the contract was conditional and referred in particular to the terms considering finance and the settlement of the sale of the appellants' existing property. Those conditions were not, as such, a counter offer. There was, in place, a contract with conditions. The appellants paid and the respondent received money for the soil report. This payment accorded with the contract and the accompanying forms. I agree with the learned magistrate's conclusions. A contract was entered into, it was conditional, it was part-performed and then it was repudiated by the respondent.

37 Damages for breach of contract are awarded for loss of expectation; that is the expectation created of receiving the performance of the contract. The law aims to place the appellants in the position that, so far as money can, they would have been in had the contract been performed as expected.

38 In addition to expenditure or liability incurred in reliance on the contract, the appellants are entitled to recover the margin, if any, by which the value of the defendant's performance, would have exceeded the cost of the appellant's own performance. Damages awarded for loss of expectation are also called loss of bargain damages. The termination of the contract is a basis of claim for loss of profit or bargain. Lawful termination of a contract for a breach entitles the appellants to full expectation damages.

39 However, in assessing damages the law takes into account benefits which result from the termination of the contract. If resources are saved or regained, this may diminish the amount of damages.

"I did hear from Mr Rowland who satisfied me that he had expertise to be able to give evidence, in relation to costings on the particular proposal. Mr Rowland's evidence was that the defendant company could not construct the premises for any lesser figure than $125,000. Mr Milazzo appeared to be content to accept this witness' evidence."

41 Counsel for the respondent described this figure as a preliminary costing, forming part of discussions between the parties who were trying to find a solution to the problems created by the fraudulent sales consultant. He submitted that it was not an assertion of a price at which the house could be built.

42 There is no suggestion on the evidence, that Mr Rolland had any difficulty in providing the price of $125,000.00. The evidence does not support the submission of counsel for the respondent. Had Mr Rolland found those documents too vague and uncertain, he would have been unable to cost the job and offer the price of $125,000.00. The magistrate's conclusion was correct.

43 The appellants had a binding contract for the house to be built at a cost of $115,000.00. Later, they were told by Mr Rolland that the respondent could not build the house for under $125,000.00 The house was not built. This resulted in a loss of the bargain of $10,000.00.

44 The respondent repudiated the 'contract' on the basis that it was not signed by Mr Rolland. The appellants then attempted to mitigate their loss by engaging the services of another builder, McCracken Homes. As a result, they advanced a claim for the difference between the amount they expected to pay the respondent and the amount paid to McCracken Homes. In addition, they sought damages because the house that was actually built was inferior to that which the respondent had agreed it would build.

45 I have had considerable difficulty in quantifying the extent to which the appellants suffered detriment by engaging a new builder and having a different house built. Like the learned magistrate, I am satisfied that the appellants suffered some loss. In the circumstances, the better and more appropriate measure of loss is the expectation loss or loss of the bargain.

46 It was submitted that the appellants benefited from the delay involved in engaging another builder. As a consequence of this delay, they did not have to outlay their money at the time they expected. Accordingly, they did not have to borrow or expend money, and thereby avoided paying interest and benefited from the opportunity to spend that money in other ways. Any such gain was in my view offset by the expense incurred in renting other accommodation for the extended period.

47 The $500.00 paid by the appellants for the soil report was later refunded by the respondent. Ultimately, that soil report was used by McCracken Homes. This was clearly beneficial to the appellants. A failure to adjust any damages award accordingly would lead to unjust enrichment. Counsel agreed that the value of the report was $500.00 and it was accepted that credit should be given for this amount.

48 Interest was claimed at 10 percent as provided in the Magistrates Court Rules. I fix interest at a lump sum of $3,500.00 pursuant to section 34(3) of the Magistrates Court Act 1991.

50 Pinnington, as agent, had ostensible authority to bind the respondent in contract. The appellants entered into a legally binding contract with the respondent for the construction of a house, as detailed in the plans and contract. The contract price was $115,000.00. Mr Rolland was able to cost the project at $125,000.00, despite the absence of the building schedule and the details of other specifications. The terms of the contract were sufficiently certain to enable it to be enforced. Upon repudiation, the appellants lost their bargain.

51 I assess the appellants' loss at $9,500.00 and award a lump sum of $3,500.00 for interest.

52 I order that the appeal be allowed, the order of the learned magistrate dismissing the claim be set aside, and that judgment be entered for the appellants in the sum of $13,000.00.

1 London Sweet & Maxwell 1996 16th Edition, at 402.

2 [1964] 2 QB 480

3 [1986] AC 770

[2] [1964] 2 QB 480

[3] [1986] AC 770