RIVEROAKS FARM LIMITED & ORS AS TRUSTEES OF THE INGODWE TRUST V W B HOLLAND & ORS (TRADING IN PARTNERSHIP AS HOLLAND BECKETT) HC TAU CIV-2010-470-584

RIVEROAKS FARM LIMITED & ORS AS TRUSTEES OF THE INGODWE TRUST V W B HOLLAND & ORS (TRADING IN PARTNERSHIP AS HOLLAND BECKETT) HC TAU CIV-2010-470-584 16 February 2011IN THE HIGH COURT OF NEW ZEALAND TAURANGA REGISTRY CIV-2010-470-584BETWEEN RIVEROAKS FARM LIMITED & ORS AS TRUSTEES OF THE INGODWE TRUST Appellants AND W B HOLLAND & ORS (TRADING IN PARTNERSHIP AS HOLLAND BECKETT) Respondent Hearing: 24 November 2010 Appearances: G B Lewis for appellants S R J Hamilton for respondents Judgment: 16 February 2011JUDGMENT OF ALLAN JIn accordance with r 11.5 I direct that the Registrar endorse this judgment with the delivery time of 4 pm on Wednesday 16 February 2011Solicitors: Grimshaw & Co, Auckland gareth.lewis@grimshaw.co.nz Kennedys, Auckland s.hamilton@kennedys-law.co.nz[1] This is an appeal against a costs determination of the Weathertight Homes Tribunal (the Tribunal) dated 16 June 2010, in which the Tribunal ordered that the appellants pay costs of $36,312.38 to the respondent.Legal principles[2] The Tribunal's jurisdiction arises under the Weathertight Homes Resolution Service Act 2006 (the Act). Section 91 of the Act provides:91 Costs of adjudication proceedings(1) The tribunal may determine that costs and expenses must be met by any of the parties to the adjudication (whether those parties are or are not, on the whole, successful in the adjudication) if it considers that the party has caused those costs and expenses to be incurred unnecessarily by— (a) bad faith on the part of that party; or (b) allegations or objections by that party that are without substantial merit. (2) If the tribunal does not make a determination under subsection (1), the parties to the adjudication must meet their own costs and expenses.[3] Section 91 was first considered in this Court by Simon France J in Trustees Executors Ltd v Wellington City Council.1 There His Honour said:[44] The scheme of the Weathertight Homes Resolution Services Act 2006 is that costs lie where they fall unless the adjudicator considers that unnecessary expense has been incurred by reason of: a) bad faith; or b) allegations or objections that are without substantial merit [46] On appeal I take the approach that the existence or otherwise of "substantial merit" is a matter subject to general appellate review. However, if that is properly found to exist, the decision whether to award costs is an exercise of discretion and so subject to the normal appellate rules applying to such decisions. [51] The second question is that, given the threshold is met, should an award of costs be made notwithstanding the scheme of the Act is that1 Trustees Executors Ltd v Wellington City Council HC Wellington CIV-2008-485-739, 16 December 2008.generally costs should lie where they fall. I remind myself that an appellate Court will not interfere with the exercise of this discretion unless there has been an error of principle or the decision reached is plainly wrong. Obviously meeting a threshold test of no substantial merit must take one a considerable distance towards successfully obtaining costs, but they are not synonymous. There is still a discretion to be exercised. [52] The issues that I see as important are whether the appellants should have known about the weakness of their case, and whether they pursued litigation in defiance of common sense.[4] More recently, in White v Rodney District Council, 2 Woodhouse J noted that the onus is on an applicant for costs to demonstrate that a case comes within one or both of the provisions of s 91(1), and that if the onus is met, there is a discretion for the Tribunal to award costs. 3 The Judge also noted that in determining the question of substantial merit it was impermissible to apply hindsight.4[5] The task of determining costs under s 91 ought therefore to be approached in two stages. The first inquiry is as to whether the claim in question lacked substantial merit. If the answer is in the affirmative, the Tribunal must then consider whether, in the exercise of its discretion, it is appropriate to make an award of costs. [6] In respect of the first step, this Court ought on appeal to apply the principles relating to general appellate review confirmed in Austin, Nichols & Co Inc v Stichting Lodestar.5 The appeal is by way of rehearing. This Court must make its own assessment of the facts and will substitute its own findings if it considers that the Tribunal was wrong. [7] In respect of the second step, which involves the review of a discretion, an appellate court will not interfere unless there has been an error of principle or the decision reached is plainly wrong. 6[8] The principal submission for the appellant in this case is that the Tribunal was wrong to determine that the appellant's case against the respondent lacked substantial merit. It is therefore necessary to consider what the Legislature must be2 White v Rodney District Council HC Auckland CIV-2009-404-1880, 12 March 2010.3 At [80].4 At [83].5 Austin, Nichols & Co Inc v Stichting Lodestar [2008] 2 NZLR 141 (SC).6 Trustees Executors at [51].taken to have intended when it chose the phrase "substantial merit". In Trustees Executors Simon France J said:7[66] I conclude by noting that it appears this case was the first where costs under this Act have been awarded. The other cases to which I was referred seem very different in their individual merits, and I did not find them of assistance. The Act gives the power to award costs, but only if one of two situations exists. In policy terms, whilst one must be by wary of establishing disincentives to the use of an important Resolution Service, one must also be wary of exposing other participants to unnecessary costs. The Act itself strikes the balance between these competing concerns by limiting the capacity to order costs to situations where: a) unnecessary expense; has been caused by b) a case without substantial merit. [67] I see no reason to apply any gloss to the legislatively struck balance. The outcome in this case should not be seen as sending any message other than that the Weathertight Homes Resolution Service is not a scheme that allows a party to cause unnecessary costs to others through pursuing arguments that lack substantial merit. The fact of a very reasonable settlement offer not long before the hearing should also be borne in mind by any who might see the decision as having precedent value.[9] To those observations, with which I agree, I add a further consideration. The starting point in respect of costs is that each party to an adjudication must meet their own costs and expenses. 8 Jurisdiction to make an award of costs arises only where a party has incurred costs and expenses unnecessarily, either by reason of bad faith on the part of another party, or by reason of allegations or objections by that other party that are without substantial merit. The mere fact that an allegation or argument is not accepted or upheld by the Tribunal will not of itself expose the party concerned to liability for costs. In many cases a party will advance a claim or argument that requires careful consideration by the Tribunal, but which is ultimately rejected. Such claims may properly be characterised as of substance, as opposed to lacking substance. In other words they are "substantial". In my opinion, the Legislature has used the expression "substantial merit" in s 91(1)(b) in that sense, as denoting claims which do require serious consideration by the Tribunal.7 Trustees Executors at [66]-[67].8 Weathertight Homes Resolution Service Act 2006, s 91(2).[10] Claims which have substantial merit, even if ultimately rejected, will not attract an order for costs. The appellants argue that their claim against the respondent was a claim having "substantial merit" and that the Tribunal had no jurisdiction to make an order for costs against them in favour of the respondent. Mr Lewis likens the proper approach to the "serious question" test commonly applied in respect of applications for interim injunctions. While in some cases the inquiry may be similar, it is preferable in my view to adopt the approach of Simon France J in Trustees Executors and to refrain from applying any gloss to the legislatively struck balance. 9 The facts of individual cases will vary widely and the better course is simply to approach the necessary inquiry by reference to the language of the subsection.Factual background[11] The appellants are the trustees of a family trust settled by or on behalf of Mr and Mrs Thurnell. In 2004 they purchased a residential property situated at 37 Riveroaks Drive, Tauriko, Tauranga. They consulted Mr Collett, a partner in the respondent law firm, who carried out the necessary legal work. Weathertightness problems emerged in respect of the residence. The appellants registered with the Weathertight Homes Resolution Service (the Service) late in 2005. The Service issued a report in January 2006 which recommended repairs to the roof guttering. Such repairs were undertaken in 2006 and 2007. [12] But the problems continued. The appellants re-registered with the Service in 2007. In a further report, the Service recommended that the dwelling be fully reclad at an estimated cost of $495,000. In May 2008, the appellants filed a claim in the Weathertight Homes Tribunal. They claimed against the vendors, the respondents, an architect, various contractors and two employees of a private certifier. [13] The claim against Holland Beckett had alleged that Mr Collett failed to provide proper advice in relation to the purchase of the residence, and in particular that he had negligently failed to recommend the insertion of a clause making the9 At [67].agreement for sale and purchase conditional upon receipt of a satisfactory building report. [14] On 4 February 2009, the appellants filed with the Tribunal their written statements of evidence. They included statements from Mr and Mrs Thurnell; from Mr Clinton Smith (their building expert) and from Mr Robert Eades (a conveyancing expert). [15] In late February 2009, the respondents filed their statements of evidence. These included statements from Mr Collett and from Mr Timothy Jones (another conveyancing expert). There were reply statements from Mr Thurnell and Messrs Smith and Eades. [16] On 4 March 2009, the respondents applied to be removed from the claim pursuant to s 112 of the Act. The following day, 5 March 2009 saw a telephone conference during which the Tribunal heard oral argument in relation to that application. On 6 March 2009, the Tribunal issued a written decision declining the application for removal. Prior to the hearing, the appellants settled with the architect and the private certifiers. [17] The appellants' case was heard by the Tribunal on 16 and 17 March 2009. Its written determination was issued on 5 August 2009. The Tribunal upheld the appellants' claims against the vendors and a contractor, but it rejected their claim against the respondents. The respondents made an application for costs which was dealt with on the papers. On 16 June 2010, the Tribunal issued its costs determination awarding costs to the respondents on the basis that the appellants' claim: 10 " lacks substantial merit and the weaknesses should have been known by the claimants".Substantial merit[18] In order to succeed against the respondents, the appellants had to show that the respondents owed them a duty of care, either generally or in the special10 Tribunal's Cost Determination, 16 June 2010, at [22].circumstances of the case, that they were in breach of that duty and that the breach caused the appellants loss, either wholly or in part. The Tribunal held against the appellants in respect of each of these issues. [19] I consider first the question of the scope of the duty. Mr Collett had acted for the Thurnells on previous occasions when they had been involved in property transactions. On 19 July 2004, he was consulted again by Mr Thurnell who asked him to prepare an agreement. It appears there was first a handwritten agreement in respect of which the vendor's solicitors sought an amendment. Later that same day, a typed agreement was prepared. It was signed by the vendor the following day. [20] Mr Thurnell's evidence in chief in respect of his dealings with Mr Collett was as follows:Agreement for sale and purchase16. On Monday 19 July 2004 I contacted Simon Collett of Holland Beckett, a solicitor who had undertaken conveyancing work for us in the past. I asked him to prepare an agreement and to structure the purchase in a manner that was the most advantageous for us. We talked about the property being put in the name of a trust or LAQC, and we agreed that the purchaser in the agreement for sale and purchase should be described as 'Chris Thurnell or nominee'. I advised Mr Collett that we did not need a LIM report as we had visited the Council offices and checked the property file with a senior planner. 17. I attended Holland Beckett's offices on 19 July 2004 and signed a handwritten agreement prepared by Mr Collett, who then faxed the agreement to the Olsson's lawyer, Mr Atwood. The letter and exhibit is at exhibit B. The Olsson's solicitor requested an amendment. This facsimile is at exhibit C. Mr. Collett then had the amended agreement typed up and I visited Mr Collett again later in the day to sign the new agreement. Holland Beckett's file indicates that Mr Collett forwarded the agreement to the Olsson's solicitor the next morning, on Tuesday 20 July 2004, by e-mail. The e-mail and typed agreement is at exhibit D. The Olsson's solicitor returned a signed copy of the agreement. A copy of the letter and signed agreement is at exhibit E.Advice from Mr Collett18. At one of my meetings with Mr Collett on 19 July 2004, I believe it was the second meeting, Mr Collett asked me what sort of house it was. I said that it was described in the sales sheet as 'Tuscany style'. Mr Collett asked if the house was monolithic. I didn't know what that was. He asked what the house was made of. I said that itlooked like square concrete slabs but apparently was plaster over polystyrene. Mr Collett asked if it had a cavity. I said I didn't know. He asked what the roofs were like. I said that they were flat and that you couldn't see the roofs from the outside of the house. Mr Collett asked if it had internal gutters. I said that I didn't know what those were. Mr Collett asked if the house had gutters running around the perimeter of the house. I said that I didn't think so. 19. I didn't think much of this conversation at the time, but I understand that in light of the risks associated with houses of the type we purchased, Mr Collett ought to have advised me to insert a condition in the sale and purchase agreement making it conditional upon a satisfactory building report on the property. 20. I have considered what we would have done had Mr Collett given us such advice. I am sure that we would have followed his advice and inserted the clause. This was the purchase of our biggest asset. If we were aware that there could be risks with this type of house we would not have been happy to proceed without having the house checked thoroughly by a qualified independent building inspector. If the Olssons had not agreed to this condition we would have walked away from the purchase. If the building report had disclosed that there were any problems or potential problems with the house, similarly we would not have proceeded with the purchase.[21] Mr Collett, for his part, denied in evidence that there was ever any discussion with Mr Thurnell in respect of any structural issues relating to the house. On his evidence, the discussion outlined by Mr Thurnell at paragraph 18 of his evidence in chief simply never occurred. [22] Each side called expert conveyancing evidence. Mr Eades for the appellants and Mr Jones for the respondents, are each highly regarded senior practitioners who have given evidence on many occasions on issues relating to proper conveyancing practice. Each is routinely accepted as a very experienced expert witness in the field. [23] Mr Eades said that both a special and a general duty rested upon Mr Collett. The special duty arose from the discussion between Mr Collett and Mr Thurnell (denied by the former). Mr Eades said that if the conversation had occurred, then a practitioner in Mr Collett's situation should have suggested a report by a suitably qualified building inspector and recommended an appropriate condition in the contract.[24] But quite apart from that conversation, Mr Eades expressed the opinion that, as a general proposition, a lawyer acting for the Thurnells should at the time at which Mr Thurnell signed the unconditional contract, have explored whether a building report was necessary or desirable, and whether the agreement ought to contain a suitable condition. Mr Eades accepted that it will not always be necessary to raise that possibility with a purchaser client. Examples of situations in which such advice might be unnecessary are cases in which the purchasers themselves are experienced and knowledgeable; where the purchasers have already made adequate inspection or inquiry, or where the age or nature of the house or the reputation or experience of a builder or architect renders such advice unnecessary. Mr Eades said he was not aware that any of these or similar exceptions applied in this case, and that Mr Collett ought to have raised the matter with Mr Thurnell for his consideration. A failure to do so constituted a failure to take a step which ought to be taken by a reasonably prudent solicitor. [25] In respect of the alleged special duty, the Tribunal preferred Mr Collett's evidence. It found him to be an experienced and conscientious conveyancing solicitor who displayed a significant degree of diligence and care in all aspects of the transaction. It considered that if "watertight" matters had been raised, Mr Collett would have advised his clients appropriately. It said: 11The Tribunal concludes this conversation did not take place at the time stated by Dr Thurnell. Dr Thurnell genuinely believes that this conversation took place, but the Tribunal considers he is honestly mistaken.[26] But, importantly, the Tribunal also said: 12The Tribunal agrees that if the conversation described by Dr Thurnell had taken place, Mr Collett would have been negligent and failed to act within the scope of his retainer in failing to suggest a report be obtained from a suitably qualified building inspector.[27] For present purposes, the question for the Court's determination is whether there was substantial merit in the appellants' claim that Mr Collett owed a special duty to them, by virtue of the alleged conversation of 19 July 2004. The mere fact that the Tribunal rejected Mr Thurnell's account does not of itself mean that the11 Tribunal's Final Determination, 5 August 2009 at [77].12 At [82].appellants' case lacks substantial merit. The failure of a claim or argument is simply a factor to be taken into account. [28] Mr Lewis submits that Mr Thurnell was likely to have a better recollection of the circumstances than Mr Collett, who handled hundreds of property transactions each year. For Mr Thurnell on the other hand, this was an important transaction involving very substantial expenditure. He could have been expected to remember such an important discussion. Mr Lewis further submits that the Tribunal's finding was reached, and could have been reached, only after listening to the witnesses and making a credibility assessment at the hearing. The appellants were not to know the Tribunal would prefer Mr Collett's evidence. Accordingly, they were justified in proceeding to a hearing, and to have their case heard. [29] For the respondents, Mr Hamilton submits that the appellants' argument for a special duty lacked substantial merit because Mr Thurnell lacked credibility as a witness, and because it was inherently not sensible for him to suggest that there had been such a conversation with Mr Collett. [30] On the credibility point, Mr Hamilton refers to: a) An apparent inconsistency between an entry on a report made by an assessor employed by the Weathertight Homes Resolution Service to the effect that Mr Thurnell had indicated that he had "recently returned from the UK" on the one hand, and the fact that Mr Thurnell had been living in New Zealand for three years on the other; b) Mr Thurnell's concession in cross-examination that he had instructed Mr Collett to prepare an unconditional contract, a point omitted from Mr Thurnell's brief of evidence in chief. [31] Mr Hamilton submits also that it was inherently implausible that Mr Collett should have asked Mr Thurnell a series of questions with respect to the style of design, materials and construction methods used on the subject residence, then failed to ask Mr Thurnell whether he would like to obtain a pre-purchase inspection report.If in fact asked, Mr Collett's questions could only have been designed to assess for himself whether the property was at risk of weathertightness defects. [32] In the Tribunal's costs determination of 16 June 2010, there is no explicit reference to the special duty argument, or to the Tribunal's preference for the evidence of Mr Collett over that of Mr Thurnell on the point. But there is a reference to the Tribunal's finding that there had been no breach of the general duty of care despite the evidence of Mr Eades to the contrary. It appears that the Tribunal has simply overlooked, in its costs determination, the special duty aspect of the appellants' claim and its findings on that issue. [33] An important policy consideration plainly underpinning s 91(1)(b) is that of deterring claimants from bringing cases that are lacking merit and so causing other parties needless cost and expense. The special duty argument in the present case turned upon whether the Tribunal accepted Mr Thurnell's account of his alleged conversation with Mr Collett on 19 July 2004. The Tribunal held against him, but in so doing it accepted that Mr Thurnell genuinely believed that the conversation had taken place, finding that he was honestly mistaken. [34] Against that background, it is not possible in my view to say that the appellants' case, insofar as it concerned the existence of a special duty of care, lacked substantial merit. The argument turned on a credibility determination which could not be predicted in advance. The points made by Mr Hamilton as to Mr Thurnell's credibility are insufficient to impact measurably upon the merits of the appellants' argument. [35] Viewed in advance of trial and without hindsight, it cannot be said that the appellants' argument for the existence of a special duty and the breach of that duty lacked substantial merit. The Tribunal appears to have overlooked the separate special duty argument in its costs determination. [36] The Tribunal held that in the circumstances of the case there was no general duty of care on the part of Mr Collett. It is unnecessary to review that finding byreason of my conclusion that there was substantial merit in the appellants' case for the existence of a special duty of care. [37] The next question is therefore that of causation. The case for the appellants was that, had Mr Collett given appropriate advice as to the inclusion of a building report condition, Mr Thurnell would have followed that advice, and that had the report been negative in the sense of identifying a high risk of potential problems, then he would not proceed with the purchase. In support of this aspect of their case, the appellants relied on the evidence of Mr Thurnell and of Mr Clinton Smith, a building expert of some standing, who gave evidence as to what a pre-purchase inspector would have identified, upon inspecting the property. Mr Smith was the subject of favourable mention by Heath J in Body Corporate 188529 v North Shore City Council.13 The Thurnells were entitled to entertain a measure of confidence in his experience and expertise. [38] In his evidence in chief, Mr Smith said this about the likely contents of a pre- purchase report:215. The WHRS service was set up by the New Zealand Government in November 2002 in response to the 'leaky home' problem. 216. BRANZ with the assistance of the Building Industry Authority reacted quickly in 2002 to produce a Weathertightness Identification of Risk Chart and circulated this through the industry by suppliers and Councils [exhibit 16]. 217. This chart included the following areas of high risk construction: i) Parapets; ii) Internal gutters; iii) Deck barrier penetrations; iv) Flat top barriers; v) Ground clearances; vi) Penetrations into claddings. 218. Therefore in July 2004, when the claimants purchased the property, the issue of leaky homes was well established within the industry. 219. In February 2002 BRANZ produced a bulletin on pre-purchase inspections (bulletin number 423) [exhibit 17] which outlines what a report should cover and included the following:13 Body Corporate 188529 v North Shore City Council [2008] 3 NZLR 479 (HC) at [57].i) Roof claddings including gutters and downpipes; ii) Waterproof decks; iii) Wall claddings. 220. Specific areas that should be inspected included: i) Subfloor clearances; ii) High risk water entry points (ie) balcony barrier walls, parapets, waterproof decks and low slope roofs. 221. Interior inspections should cover: i) Roof space. 222. From this I conclude that had a competent pre-purchase inspector carried out an inspection prior to the claimants purchasing, it would have identified the following defects: i) Ground levels to the dwelling too high; ii) Retrofitting of the waterproof membrane to the parapets; iii) The patch work to the internal gutters; iv) The lack of fall to the upper level deck; v) Apparent leaking to accessible roof spaces. 223. I would have expected the pre-purchase inspector to point out to the claimants that the house was of a high risk construction susceptible to leaking and internal damage, particularly in light of the defects listed above which ought to have been identified.[39] In its costs determination the Tribunal said: 14[15] All the following relevant matters were facts known to the claimants well before the hearing, and were not disputed. The certifier issued a Code Compliance Certificate certifying the house was code compliant only six months prior to Mr Still's inspection on behalf of the claimants. His inspection also found no defects. The applicants were aware of the extent of their considerable experience as purchasers of residential properties. These factors should have indicated to the claimants the potential weaknesses in their case. [16] Another major weakness was the assertion that any inspector doing a pre-purchase inspection would have detected the leaks that subsequently developed. If the claimants seriously considered they had a meritorious case one would have expected them to have produced some evidence as to the availability of pre-purchase inspectors in Tauranga and the scope of investigations undertaken by inspectors doing a visual inspection, as well as addressing the standard form disclaimers invariably contained in the retainer contract. No such evidence was adduced. [17] The claimants would have also been aware of the first WHRS assessor's report showing no moisture metre readings outside the range of 10-18%. They would have known from the report that this was within14 At [15].acceptable parameters. This was a report done well after the purchase by an expert who found no major problems. Again this should have raised real questions as to the likelihood of the claimants being able to establish that a visual non-invasive pre-inspection report was likely to uncover leaks. [21] The claimants had to navigate the strictures of causation. They had to prove that a pre-purchase inspector would have or would [have been] likely to have, found leaking. They had to prove the solicitor owed a duty of care to advise the necessity of obtaining a pre-purchase inspection. They had to establish that it was more likely than not that a pre-purchase inspector would detect damage on such a scale as to warrant cancellation of the contract. [22] I am of the view that this claim lacked substantial merit and the weaknesses should have been known by the claimants. It is appropriate for costs to be awarded. I order costs in favour of the seventh respondent, the sum being in accordance with the District Court Rules referred to in s 125(3) of the Weathertight Homes Resolution Services Act 2006.[40] It will be noted that there is no reference in these paragraphs to the evidence of Mr Smith. [41] Earlier the Tribunal had decided in its Final Determination that even if Mr Collett had given advice as to the inclusion of a pre-purchase report, the chances of Mr Thurnell accepting that advice were very low. [42] Mr Lewis submits that this finding appears to have been based upon the Tribunal's conclusion that the Thurnells were costs conscious. That conclusion in turn seems to have been based upon claims by Mr Collett that Mr Thurnell formed a company by himself, that he first instructed Mr Collett by reason of a competitive fee estimate, and that the Thurnells had purchased other properties in the recent past. It is difficult to see how considerations of that sort would have much impact upon the taking of advice as to the desirability of a pre-purchase building report. The advice itself would have taken very little time to give and the preparation of an appropriate clause very little more, particularly given Mr Collett's experience. [43] Mr Hamilton refers to a number of other circumstances which support the Tribunal's costs finding however. These are that:a) The Thurnells had made their own inquiries, which included several visits to the property and a check on the Council property file, which revealed that a code compliance certificate had been issued; b) They had received advice from Mr Still, who seems to have been a part-time builder recommended by the vendor. Mr Still appears to have conducted a brief informal inspection; c) The Thurnells had negotiated the purchase in the first instance and arranged finance themselves; d) Mr Thurnell had initially instructed Mr Collett to prepare an unconditional agreement; e) A file note from a previous transaction recorded that Mrs Thurnell had rejected earlier advice to obtain a geotechnical report at the time of the purchase of a section; f) A statement in a report by a Service assessor recorded that Mr Thurnell had indicated that the vendor had given him assurances about the quality of the house and waterproofing, so that no pre- purchase inspection was undertaken. [44] Some of these factors are more probative than others, but even when taken cumulatively, they are no more than factors to be taken into account by the Tribunal in assessing Mr Thurnell's evidence as to what he would have done, had he received advice in respect of the inclusion of a building report condition. In a sense they are weaknesses, in that they must be taken into account and weighed, alongside Mr Thurnell's own evidence. The Tribunal ultimately decided that the chances of Mr Thurnell accepting any advice to include such a condition were "extremely low". [45] But to place great weight upon that finding is to resort to hindsight. The proper inquiry is as to what the Thurnells and their advisers properly considered the strength of their case to be. In my opinion, it would not be right to hold that theappellants ought to have appreciated all of the factors which the Tribunal might take into account in assessing Mr Thurnell's evidence, and to have predicted the likely outcome. [46] Most of the reasons provided in the costs determination for the Tribunal's decision to award costs are concerned with shortcomings in that part of the appellants' case upon which Mr Smith gave evidence. Mr Hamilton analyses these supposed deficiencies by reference to what he calls the "objective evidence", namely: a) None of the defects which Mr Smith says should have been detected were in fact identified at a final building inspection of the property in December 2003, carried out by building certifiers on behalf of the Tauranga City Council; b) None of those defects was identified either at an inspection of the property on about 10 July 2004 by Mr Still; c) When the first Weathertight Homes Resolution Service assessor inspected the property on 5 December 2005, he discovered only one of the defects listed by Mr Smith, namely problems with the internal guttering on the roof. The assessor also took moisture readings, none of which were outside the normal range. [47] Again, those are considerations which the Tribunal was entitled to take into account. But Mr Smith gave evidence to the effect that a pre-purchase report would in part cover different ground from the earlier inspections. In particular, the report would be expected to identify the method of construction used, and the potential for future problems as distinct from the identification of existing difficulties. Mr Lewis submits that the Tribunal has overlooked Mr Smith's evidence as to what a pre- purchase inspector would inspect, together with supporting material from BRANZ. Mr Lewis's submission appears to be correct.[48] In its costs determination the Tribunal also referred to the absence of evidence as to the availability of pre-purchase inspectors in Tauranga, as to the scope of investigations undertaken by inspectors doing a visual inspection, and as to the standard form disclaimers invariably contained in a retainer contract. It is difficult to see why the appellants ought to have been expected to call evidence of the type identified by the Tribunal. Such evidence appears not to be essential to the appellants' case. [49] In its final determination, the Tribunal decided that, despite Mr Smith's evidence, (to which no reference at all is made in the costs determination), a pre- purchase report would not have thrown up problems sufficient to justify the Thurnells in refusing to make an agreement for sale and purchase unconditional. In taking that view the Tribunal no doubt considered Mr Smith's evidence and tested it against the countervailing considerations appearing in the final determination. The Tribunal's ultimate conclusion was adverse to the appellants. [50] But it does not follow that the appellants' case did not have substantial merit. The Thurnells called Mr Smith, an experienced and well regarded expert, in whom the Thurnells were entitled to place their confidence. In other words, there was tenable evidence to support the appellants' claim. The fact that the Tribunal eventually preferred other evidence, cannot be determinative of the substantial merit question. In particular, it is noteworthy that no expert evidence called for the respondents directly challenged Mr Smith's conclusions. [51] In the exercise of the s 91(1)(b) jurisdiction, the Court must bear in mind the interests of those who may be exposed to unnecessary costs by parties determined to advance an unmeritorious case. On the other hand, care must be taken in order to ensure that those who may wish to resort to the jurisdiction of the Tribunal, are not dissuaded by an unduly rigorous approach to the requirement to establish the existence of a case with substantial merit for costs purposes. [52] The onus in showing that the appellants ought to pay costs rested upon the respondents. In my opinion they failed to discharge that onus. On the contrary, the appellants advanced a case having substantial merit, which nevertheless wasinsufficient to persuade the Tribunal to make a finding in their favour against the respondents. I consider the Tribunal to have been wrong to determine that the respondents had made out a case for an award of costs. [53] Questions as to proof of consequential loss, and the calculation of that loss, were not argued on appeal.Discretion[54] I heard from counsel at length on the question of the proper approach to the second step in the relevant two step inquiry, involving the exercise of a discretion. In its costs determination the Tribunal appeared to conflate the two steps into one, although it cited the Trustees Executors' decision and referred to the observation of Simon France J to the effect that in the course of the exercise of the Court's discretion at the second stage it would be relevant to take into account what a party should have known about the weakness of its case, and whether litigation was pursued in defiance of commonsense. Those factors, identified as discretionary factors by Simon France J, appear to have been regarded by the Tribunal as lying at the heart of the first stage inquiry, namely as to the identification of substantial merit. Although I accept that there will be a degree of overlap, it is important to note than Simon France J considered these factors to have been especially relevant at the second, discretionary, stage. [55] However, given my earlier conclusion, it is unnecessary to say anything more about discretionary factors in this case.Result[56] For the foregoing reasons the appeal is allowed. The orders for costs made by the Tribunal against the appellants in favour of the respondents are quashed. The appellants are entitled to costs. Counsel may file memoranda if they are unable to agree.C J Allan J