Fair Trading Administration Corporation v Tebbutt

[2003] NSWSC 340

CITATION:	Fair Trading Administration Corporation v Tebbutt and Anor [2003] NSWSC 340
HEARING DATE(S):	10 March 2003
JUDGMENT DATE:	24 April 2003
JURISDICTION:	Equity Division
JUDGMENT OF:	Palmer J
DECISION:	Appeal from Tribunal allowed; orders set aside.
CATCHWORDS:	FAIR TRADING TRIBUNAL - APPEAL - Statutory construction - what is a "decision" by the Building Services Corporation under the Building Services Corporation Act - what is an "appeal" from such a decision - power of the Tribunal. BUILDING SERVICES CORPORATION INSURANCE SCHEME - CONSTRUCTION - INDEMNITY - Whether Corporation liable under Insurance Scheme to indemnify claim in respect of cost of rectifying defective building work regardless of whether claimant carries out any rectification work or incurs any liability in respect of carrying out rectification work. - HELD: Corporation liable to indemnify only for reimbursement of costs of rectification actually incurred or to save harmless a claimant from liability to pay costs of carrying out rectification work.
LEGISLATION CITED:	Building Services Corporation Act 1989 (NSW) - s.85(1), s.86, s.87, s.88, s.91(1) Building Services Corporation Regulation 1990 (NSW) - Regulation 33 Consumer, Trader and Tenancy Tribunal Act 2001 (NSW) Fair Trading Tribunal Act 1998 (NSW) - s.61(1) Home Building Act 1989 (NSW)
CASES CITED:	- Fair Trading Administration Corporation v The Owners of Strata Plan 54421 (unrep., NSWSC 21.08.2001, Palmer J) [2003] NSWSC 338 - Metal Manufacturers Ltd v Lewis (1988) 13 NSWLR 315 - Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 39 ACSR 305 - Hardy Ivamy "General Principles of Insurance Law" (6th Ed., at p.483) - Shorter Oxford English Dictionary
PARTIES :	Fair Trading Administration Corporation - Plaintiff Ronald Ernest Tebbutt - First Defendant Fair Trading Tribunal of New South Wales - Second Defendant
FILE NUMBER(S):	SC 4758/02
COUNSEL:	P.M. Strickland - Plaintiff R.A. Campbell - First Defendant Submitting appearance - Second Defendant
SOLICITORS:	Solicitor for Department of Fair Trading - Plaintiff N/A (direct access) - First Defendant I.V. Knight - Second Defendant

LOWER COURTJURISDICTION:	Fair Trading Tribunal of New South Wales
LOWER COURT FILE NUMBER(S):	HB 01/70016
LOWER COURT JUDICIAL OFFICER :	Mr J. Smith

Introduction

1 This is an appeal on a question of law from a decision of the Fair Trading Tribunal of New South Wales (“the Tribunal”) pursuant to s.61(1) of the Fair Trading Tribunal Act 1998 (NSW). The appeal was instituted before the repeal of the Fair Trading Tribunal Act and the commencement of the Consumer, Trader and Tenancy Tribunal Act 2001 (NSW) so that it is still governed by the provisions of the former Act.

2    There are in fact two questions of law which arise. The first is whether the Tribunal had jurisdiction to determine the matter before it in the particular circumstances of the case. The second is the true construction of the provisions of an insurance scheme established by the Building Services Corporation Act 1989 (NSW) and the correctness of observations as to the construction of that scheme made by me in obiter dicta in Fair Trading Administration Corporation v The Owners of Strata Plan 54421 , a judgment delivered on 21 August 2001 but now published as [2003] NSWSC 338.

The facts

3    The facts giving rise to the questions for determination are not in dispute and are straightforward. The Building Services Corporation Act 1989 (“BSC Act”), in s.91(1), provided for the establishment of an insurance scheme known as the “Building Services Corporation Comprehensive Insurance Scheme” (“the BSC Insurance Scheme”). The purpose of the Scheme was to indemnify home owners in respect of defective work performed by licensed builders. Regulation 33 of the Building Services Corporation Regulation 1990 and Form 4 therein set out the terms of the BSC Insurance Scheme. The Scheme was terminated on 1 September 1997 upon the commencement of the Home Building Regulation pursuant to the Home Building Act 1989 (NSW) but the Scheme continues to operate in respect of residential building work done under contracts entered into between 21 March 1990 and 1 September 1997.

4    The Plaintiff (“the Corporation”) was and is charged with the duty of administrating the BSC Insurance Scheme.

5    On 16 May 2000 the First Defendant, Mr Tebbutt lodged an insurance claim against the Corporation in respect of defective building work on his property at Cremorne pursuant to a contract entered into in 1996. On 5 December 2000, the Corporation declined Mr Tebbutt’s claim. On 21 December 2000, Mr Tebbutt lodged an appeal to the Tribunal under s.85(1)(d) of the BSC Act.

6    By letter dated 25 June 2001, the Corporation informed Mr Tebbutt’s legal adviser that Mr Tebbutt’s claim had been “reassessed” in the light of a building report which had been provided. The letter requested that Mr Tebbutt obtain three quotations based upon the report and forward them to the responsible officer at the Corporation. Eventually, three quotations were provided and, according to an affidavit by Mr Loke, the Corporation’s solicitor, on about 20 March 2002 the Corporation “determined quantum” . Mr Loke then informed Mr Tebbutt that the Corporation accepted liability under the BSC Insurance Scheme to pay $100,000 for rectification of the building work.

7    The Corporation sent to Mr Tebbutt a draft Deed of Release providing for a compromise of Mr Tebbutt’s appeal to the Tribunal. The draft Deed provided for the payment to Mr Tebbutt of the sum of $100,000 in full settlement of all claims arising out of the defective building work and contained a release of the Corporation by Mr Tebbutt. Clauses 4 to 7 of the draft Deed provided that Mr Tebbutt would expend the sum of $100,000 paid under the Deed in rectification work to his property; that any amount not so expended by 31 July 2004 would be repayable to the Corporation; that if Mr Tebbutt sold the property during any period for which a claim might be made under the BSC Insurance Scheme by a subsequent owner of the property, Mr Tebbutt would notify the purchaser of the building work defects and that his claim relating to those defects under the BSC Insurance Scheme had been paid; and that if Mr Tebbutt failed to give such notice to a purchaser and the purchaser subsequently claimed under the BSC Insurance Scheme, Mr Tebbutt would indemnify the Corporation in respect of that claim.

8    On 9 July 2002, Mr Tebbutt returned an executed copy of the Deed of Release to the Corporation. However, Clauses 4 to 7 had been deleted from the Deed. The Corporation did not agree to the deletions and Mr Tebbutt’s appeal to the Tribunal proceeded.

9    The appeal was heard by a Member of the Tribunal, Mr J. Smith, on 23 August 2002. At the conclusion of the hearing the Tribunal made the following orders:

“1. The Tribunal orders that FAIR TRADING ADMINISTRATION CORPORATION of Level 3, 1 Fitzwilliam Street Parramatta NSW 2150 is to pay RONALD ERNEST TEBBUTT of 47 Young Street Cremorne NSW 2090 the sum of $100,000 by the following payments; $50,000.00 on or before 23 September 2002 and $50,000.00 on or before 23 October 2002.

2. The Tribunal further orders that the whole of the sum received pursuant to order No 1 is to be expended by the applicant only on remedial works necessary to ensure compliance, to the extent that the funds allow, with the original contract documents and good building practice.”

10    As at the date of the hearing in the Tribunal and as at the date of hearing of this appeal, Mr Tebbutt had not entered into a contract for the carrying out of any rectification work to his property.

The Tribunal’s decision on jurisdiction

11    In reasons for judgment published on 25 September 2002, Mr Smith considered whether the Tribunal had jurisdiction to hear the matter. He noted my decision in Fair Trading Administration Corporation v The Owners of Strata Plan 54421 , in which I had held that, in the particular circumstances of that case, the Tribunal did not have jurisdiction to determine an issue as to when and how the Corporation should pay to the appellant a sum payable pursuant to a compromise. The parties to that appeal had reached agreement on the morning of the appeal and the only issue presented to the Tribunal for determination was the time and manner of payment pursuant to that compromise agreement.

12    Mr Smith distinguished the case before him on the facts. He said:

“The dispute before me was not a situation in which agreement had been reached, or partially reached, by the parties as it was in the case before Palmer J. From my perusal of the Tribunal’s record of the progress of this application I am able to say that the parties had, during the course of their negotiations, moved from a position where liability had been denied through to acceptance of liability but uncertainty as to quantum, to acceptance of liability and quantum, but inability to complete the agreement because of refusal by the respondent to pay the amount, for which liability was admitted, directly to the applicant.

The Tribunal was therefore called upon to make a decision. In doing so, it is required to make a decision that the Corporation could have made at the time of the claim on the Insurance Scheme. Such a decision, if it called for payment of money, necessarily also required a decision to be made as to who the money was to be paid to and when it was to be paid.

The applicant has alleged that the respondent is indebted to him in the sum of $100,000, pursuant to a claim made on the respondent under the BSC Comprehensive Insurance Scheme. The respondent has elected not to defend the matter and has admitted liability in the sum of $100,000, but has declined to make the payment.

Consequently I am satisfied that this dispute is distinguished from that considered by Mr Baker and by Palmer J in FTAC v Owners of Strata Plan 54421 and that the Tribunal does have the jurisdiction to consider the matter.”

The Tribunal’s decision as to payment

13    Before Mr Smith, the Corporation relied upon the decision in FTAC v The Owners of Strata Plan 54421 in support of a submission that the BSC Insurance Scheme did not authorise the Corporation to indemnify Mr Tebbutt unless and until he had incurred a liability in respect of the carrying out of rectification work. It submitted that the Scheme did not authorise payment in circumstances in which Mr Tebbutt could be free not to carry out any rectification work, spend the money on whatever he liked, and then sell the property, so that a new owner would be entitled to make a fresh claim against the Corporation under the BSC Insurance Scheme for the same rectification work.

14    Mr Smith said

“In FTAC v Owners Strata Plan 54421 , Palmer J, having come to the conclusion that the Tribunal did not have jurisdiction to consider the issue before it, was not called upon to make a determination on whether the Tribunal could order the agreed sum be paid directly to the beneficiary. Nevertheless Palmer J did discuss that issue in some detail and gave an opinion on it. He did however, preface his discussion with the statement that “These remarks are, of course, purely obiter” .

Mr Loke placed considerable reliance on Palmer J’s remarks, and I do not lightly disagree with them. However, the Tribunal is not bound by those remarks and with the greatest respect I decline to follow the reasoning expressed.

The BSC Comprehensive Insurance Scheme upon which the applicant relies is to be found in the Building Services Corporation Regulation 1990, Schedule 1.

Form 4 under that schedule sets out the terms and conditions of the insurance scheme and clause 5 identifies the “losses indemnified under the Scheme”.
…
Palmer J in considering the construction of that provision took the view that “losses” wherever used in that section means “liabilities” and then went on to argue that the Corporation is not liable for contingent liabilities but only for actual liabilities.

It is my view that by adopting such a construction and the necessary result, there is an unnecessary and unfair burden placed on the beneficiary. I prefer the principle of general insurance law to which Palmer J referred early in his judgment “… where, under the particular terms of a policy, an insured is entitled to be paid its losses suffered from certain events, the insured is entitled to be paid regardless of whether the insured uses the proceeds of the claim to reinstate damaged property” .

There are, in my view, important practical reasons for giving effect to this principle when dealing with claims in the Tribunal against a refusal by the Corporation to meet claims made upon the Scheme.

It should be remembered that when a beneficiary ultimately enters into a contract with a builder to carry out the remedial work it is no longer pursuant to a successful insurance claim in which the insurer may have an interest in the supervision and approval of the work and in effect stands in the shoes of the beneficiary. The contract will be a bi-lateral contract between builder and beneficiary only. In those circumstances one may reasonably ask “why would a builder enter into a contract to carry out work when

(a) the home-owner does not have funds to pay for the work,

(b) progress payments on the work are contingent upon the Corporation’s approval of (and supervision of) the works,

(c) the Corporation is not a party to the contract,

(d) the builder is not in a position to enforce any remedy against the Corporation should there be default in payment?”

It is my view that the inevitable result of a requirement that the Corporation make periodic payments to the builder will be that the beneficiary will have great difficulty in finding a builder who is prepared to do the work.

I am also not persuaded that the word “losses” wherever appearing in clause 5 should, as suggested by Palmer J , be equated with “liabilities”. The normal rule in construction of legislation is to give words their natural meaning. Two of the many definitions of “loss” to be found in the Macquarie dictionary are “coming to be without something which one has had” and “failure to recover the costs of a transaction or the like, in the form of benefits derived” .

I am satisfied that in this sense, the beneficiary, once the builder has failed to build in accordance with the contract, has suffered a loss and that (pursuant to clause 5(1)(d)) it is a loss that is indemnified under the scheme.

Furthermore, there is no practical reason for following the construction urged on the Tribunal by Mr Loke. The Corporation’s concern was that it should be protected from a repeat claim by a successor in title if the beneficiary did not have the remedial work done. I accept that is a valid and important concern. However, the submissions made by Mr Gruzman in that regard are in my view correct and would provide the protection the Corporation requires. In addition I have addressed that concern in the second order made that requires the whole of the sum received by the applicant to be expended on remedial works.”

The appeal

15    By its Summons filed on 23 September 2002 the Corporation seeks an order setting aside Order 1 of the Tribunal for the payment of money to Mr Tebbutt on the specified dates. In the alternative, it seeks a declaration that the Tribunal had no jurisdiction to make the order and that the order is a nullity.

16    The grounds of appeal are that:


– the Tribunal had no jurisdiction to make the order;

– the order was not authorised by the provisions of the BSC Act and the BSC Regulation.


17    The two grounds of appeal raise the same point. The Corporation says that the Tribunal had no jurisdiction to make the order which it did because that order was not one which could be made under the provisions of the BSC Act and Regulation.

Jurisdiction of Tribunal and competence of appeal

18    At the outset of argument, Mr Strickland of Counsel, who appeared for the Corporation, raised another issue of jurisdiction. In the Corporation’s written outline of submissions provided to the Court prior to the commencement of the hearing, the Corporation had submitted that the Tribunal was correct in holding that the facts of the present case were distinguishable from those in FTAC v The Owners of Strata Plan 54421 and that the Tribunal had jurisdiction to make the decision which it did. However, in his oral submissions Mr Strickland contended for the opposite conclusion. Mr Campbell of Counsel, who appeared for Mr Tebbutt, then adopted the submission first advanced by the Corporation, that is, that the Tribunal was correct in holding that it had jurisdiction to make the orders which it did, for the reasons which the Tribunal gave.

19    In my opinion, the Tribunal was correct in holding that it had jurisdiction, essentially for the reasons which it gave. The procedure for review by the Tribunal of a decision of the Corporation provided by s.85 to s.88 of the BSC Act, although referred to in s.85 as “an appeal” from a decision of the Corporation, does not provide for an appeal in the usual sense of that word as understood in the context of appeals from judicial determinations.

20    For example, under s. 85(d) a person may appeal to the Tribunal from a decision of the Corporation refusing a claim for indemnity under the BSC Insurance Scheme, a decision which is entirely administrative in character. Likewise, under s.85(a) a person may appeal to the Tribunal from a decision of the Corporation relating to the issue or alteration of a contractor licence or an owner-builder permit under the BSC Act. Further, in such an appeal to the Tribunal either party may not only introduce evidence which was not before the Corporation when it made its decision, but it may introduce evidence “in substitution” for any evidence which was before the Corporation: see s.87(b). This means that both parties to the appeal may lay before the Tribunal a set of circumstances completely different from that upon which the Corporation made its original decision. Section 88(b) provides that the Tribunal may substitute for the Corporation’s decision any other decision or order that the Corporation might have made.

21    It is clear, therefore, that the appeal process provided by s.85 to s.88 of the BSC Act is by no means confined to determining whether or not the Corporation’s original decision was correct in the light of the material upon which it made that decision. The appeal process simply starts with a decision of the Corporation with which a person is aggrieved and then enables the Tribunal to consider the whole question afresh, possibly in the light of circumstances materially different from those which founded the Corporation’s decision.

22    In the present case, the Corporation’s original decision was not to indemnify Mr Tebbutt under the BSC Insurance Scheme in respect of the costs of rectifying defective building work on his property. The Corporation later sought to impose a condition upon Mr Tebbutt in consideration for an agreement to indemnify but that condition was not accepted. Accordingly, as at 23 August 2002 when the Tribunal commenced hearing the matter, the Corporation’s decision not to indemnify Mr Tebbutt still stood. The reason why it refused to indemnify had changed twice since it first made its decision in December 2000 but, for the reasons which I have given above, that changed circumstance did not prevent the Tribunal from properly entertaining the appeal and from making any order or decision which was within the power of the Corporation to make.

23    I hold, therefore, that the Tribunal was validly seized of the appeal by Mr Tebbutt and that it was within the power of the Tribunal to make a decision in that appeal. I should add that, having had the benefit of the Tribunal’s reasoning in the decision now under appeal and having had the opportunity of further reflection, I do not think that my decision in FTAC v The Owners of Strata Plan 54421 on the question of the Tribunal’s jurisdiction was correct. I doubt whether the facts of that case are sufficiently distinguishable from the facts of the present case. Rather, I think that the reasoning of the Tribunal in the present case, which I have adopted with some elaboration, is equally applicable to the facts in FTAC v The Owners of Strata Plan 54421 and I would not, therefore, wish the decision in that case to retain any currency as an authority on the question of the Tribunal’s jurisdiction.

24 Finally, I am satisfied that the appeal to this Court from the Tribunal’s decision is an appeal on a question of law, within the provisions of s.61(1) of the Fair Trading Tribunal Act , because it requires determination of the proper construction of the BSC Insurance Scheme and whether the decision of the Tribunal was a decision which the Corporation, and consequently the Tribunal, had power to make in accordance with the BSC Insurance Scheme.

The relevant provisions of the BSC Insurance Scheme

25    Clause 5 of the BSC Insurance Scheme provides:

“(1) Subject to the maximum payment provisions (clause 6), the method of assessing claim benefits (clause 8) and the exclusions specified in this Scheme (clause 9), the Corporation will indemnify the following losses reasonably incurred by a beneficiary in respect of residential building work:

(a) the deposit paid by the beneficiary under a contract to do insured building work, where the work has not commenced;

(b) the difference between the total payment made by the beneficiary under a contract to do insured building work and the reasonable market cost of the work done in accordance with the contract;

(c) the cost of completion of insured building work done under a contract;

(d) losses in rectifying defects in insured building work or insured owner-builder work due to:
(i) bad workmanship; or
(ii) faulty or unsuitable materials; or
(iii) failure to comply with plans and specifications;
(iv) faulty design used by the contractor in a design-and-construct contract; or
(v) faulty design provided by the beneficiary when the design fault should have been obvious to a reasonably competent holder of an appropriate licence; or
(vi) failure to comply with legislation or subordinate legislation applicable to the work;

(e) losses in repairing:
(i) damage caused to the dwelling by a defect in the insured building work or insured owner-builder work; or
(ii) damage to the dwelling in or on which insured building work is done, being damage caused by the holder of the licence doing the work under a contract or by that holder’s agents or employees.

(2) Claims may be made under one only of the heads of claim in subclause (1)(a), (b) or (c), and each applies only when the contract to do insured building work is rescinded or determined, otherwise than by the fault of the beneficiary, before the work has been completed.”


Clause 8 relevantly provides:

“(2) The Corporation may decline to pay claims where:

(a) the work the subject of the claim was rectified or completed, or the kit home the subject of the claim was remedied or delivered, by a person other than the original contractor without the Corporation’s written approval; or

(b) without the Corporation’s written approval, the beneficiary refuses to allow the contractor to rectify defective work or to remedy a defective kit home or to deliver a kit home; or

(c) an earlier claim by a beneficiary in respect of the same residential building work or the same supply of a kit home has been settled and accepted by the beneficiary.

…

(5) For the purposes of a claim under clause 5(1)(d) or (e) in relation to the losses incurred in rectifying defects or repairing damage to common elements in a partly residential and partly non-residential building, the Corporation’s liability, in respect of the rectification or repair of structural elements in the non-residential part which supports or gives access to the residential part, is limited to:

(a) where the building is subject to a strata scheme or leasehold strata scheme, within the meaning of the Strata Titles Act 1973 or the Strata Titles (Leasehold) Act 1986, the proportion of the loss equal to the proportion of the total of the unit entitlements of the residential part of the building to the aggregate unit entitlements; and

(b) where the building is not subject to a scheme referred to in paragraph (a), the proportion of the loss equal to the proportion of the total floor area of the residential part of the building to the total floor area of the building.

(6) The indemnity for the cost:

(a) of completing incomplete work or of rectifying defective work;
…
in relation to a claim lodged more than 6 months after the Corporation has notified a beneficiary that it was unable to resolve a complaint about that work … will be assessed on the reasonable market costs prevailing at the end of that 6 months.

(7) When assessing a claim for the cost of rectifying defective work …, the Corporation may have regard to the reasonableness and cost of various methods of rectification in view of the practical effect that the defective work … has on the beneficiary or the beneficiary’s household and to any other relevant circumstance in deciding:

(a) the most appropriate method of rectification in all the circumstances; and

(b) whether rectification is warranted.”

Whether Tribunal’s order within power

26    Mr Campbell submits, first, that the Tribunal’s construction of Clause 5 of the BSC Insurance Scheme was correct, for the reasons which the Tribunal gave. Second, Mr Campbell, like the Tribunal, places strong emphasis on the proposition that the Scheme should be construed so as to effectuate, rather than to frustrate, the purpose for which it was instituted. Mr Campbell submits that the purpose of the legislation establishing the BSC Insurance Scheme is to protect persons such as Mr Tebbutt and that to construe Clause 5 of the Scheme in the manner submitted by the Corporation would frustrate the rights of a beneficiary who is not able to pay for rectification work out of his or her own resources.

27    Third, Mr Campbell points to the wide introductory words of Clause 5(1) of the Scheme, namely: “… the Corporation will indemnify the following losses reasonably incurred by a beneficiary in respect of residential building work” . Mr Campbell says that:
“… the words “in respect of” would import an adjectival relationship between the subject of the indemnity and the indemnity to be provided. It is submitted that in this context, the beneficiary of the insurance is entitled to be compensated because he has suffered losses in respect of residential building work and therefore there is no interpretation that necessarily requires the losses to be incurred in respect of repairing to be past losses; simply losses in respect of residential building work.”

28    Fourth, Mr Campbell submits that the words in Clause 5(1)(e) of the Scheme “losses in repairing” are capable of meaning “presently ascertainable losses which will be incurred when repair work is done in the future”. He says that those words should be given this wide interpretation in order to effectuate the legislative purpose of the Scheme.

29    Fifth, Mr Campbell draws attention to what are said to be the practical difficulties caused to persons in a position such as Mr Tebbutt’s if the Corporation’s construction of the BSC Insurance Scheme is upheld. Those difficulties are referred to in the Tribunal’s decision. Such difficulties, says Mr Campbell, militate against the construction which the Corporation seeks to place on the Insurance Scheme.

30    I have borne in mind that my decision in FTAC v The Owners of Strata Plan 54421 was ex tempore and that what I said there as to construction of the BSC Insurance Scheme was obiter dictum. I have also given weight to the views expressed by a Tribunal which is a specialist body with great experience in matters pertaining to the administration of the BSC Act and the BSC Insurance Scheme. Nevertheless, after careful consideration, I remain of the views which I expressed in FTAC v The Owners of Strata Plan 54421 as to the true construction of the BSC Insurance Scheme. My reasons, which largely accord with the Corporation’s submissions, are as follows.

31    I note that the Tribunal commences its discussion as to the construction of the BSC Insurance Scheme by expressing the view that to adopt the construction contended for by the Corporation would place “an unnecessary and unfair burden” on the beneficiary. Apparently, in order to avoid what the Tribunal conceived to be such an unjust result, the Tribunal preferred to rely upon a general principle of insurance law to which I had referred in FTAC v The Owners of Strata Plan 54421 . That principle is stated thus in Hardy Ivamy General Principles of Insurance Law (6th Ed) at p.483:
“The liability of the insurers to make good the loss under the policy is a liability to do so by a payment in money. Though any other mode of discharging their liability may be substituted with the consent of the assured, they cannot without his consent insist on making good the loss by what is usually known as ‘reinstatement’, i.e. by replacing what is lost or repairing what is damaged. Nor can they, after payment of the loss, insist, in the absence of any contract or statute to that effect, that the assured shall himself expend money paid in reinstatement.”

32    It will be observed that the principle that an insured is not required to expend the payment made under a policy on reinstatement is not absolute; it is subject to modification by contract or statute. In the present case, however, even before one gets to a consideration of the question “does the BSC Insurance Scheme require expenditure of the indemnity monies on rectification”, one must first answer the question “what does the Insurance Scheme indemnify?” This is the question to which the obiter remarks in FTAC v The Owners of Strata Plan 54421 were directed, that is, whether the Corporation was obliged to indemnify a beneficiary under Clause 5(1)(d) or (e) of the BSC Insurance Scheme prior to the beneficiary incurring a liability for the cost of actually carrying out rectification work: see FTAC v The Owners of Strata Plan 54421 at para.20.

33    The answer to this question depends first and foremost upon the construction of the words of the Scheme itself. This is especially important because one is not construing an insurance policy of a standard type which may be commonly offered in the insurance market, where certain terms may have glosses or well understood meanings. One is here dealing with a special statutory scheme in which competing social interests and policies have been reconciled in the words which the legislature has enacted. As was said by Mahoney JA in Metal Manufacturers Ltd v Lewis (1988) 13 NSWLR 315, at 326:

“Even where the policy or purpose of the legislation is clear judges may differ as to what follows from it and how the policy or purpose operates in the individual case. The danger that a judge may see a policy or purpose behind the legislation for reasons which are idiosyncratic has been referred to: see Halsbury’s Laws of England , 4th ed, vol 44, para 903(4) at 555.

But to see the key to the meaning of a section in the policy or purpose of the legislation is, in my opinion, to take a less than sophisticated view of the art of the parliamentary draftsmen. In many cases, the interpretation of a provision is difficult, not because the policy or purpose of the legislation is not clear, but because the section is directed, not simply to effecting that policy or purpose, but to achieving a compromise between it and other considerations.”

See also Southern Cross Interiors Pty Ltd (in liq) v Deputy Commissioner of Taxation (2001) 39 ACSR 305, at 329.


34    In the present case, with great respect, I do not think that the Tribunal has actually engaged itself in the task of construing the words of the BSC Insurance Scheme.

35    The Tribunal commences its commentary on the reasoning in FTAC v The Owners of Strata Plan 54421 by expressing the opinion that the construction of the Scheme contained in that reasoning placed “an unnecessary and unfair burden” on the beneficiary. It was said that there were important practical reasons for giving effect to the general principle of insurance law as to the requirement to expend money on reinstatement. I will return to these “practical reasons” shortly but I may say that I do not see the force of what is said about them.

36    The only endeavour made by the Tribunal to construe the words of the BSC Insurance Scheme itself appears in the following passage:

“I am also not persuaded that the word “losses” wherever appearing in clause 5 should, as suggested by Palmer J , be equated with “liabilities”. The normal rule in construction of legislation is to give words their natural meaning. Two of the many definitions of “loss” to be found in the Macquarie dictionary are “coming to be without something which one has had” and “failure to recover the costs of a transaction or the like, in the form of benefits derived” .

I am satisfied that in this sense, the beneficiary, once the builder has failed to build in accordance with the contract, has suffered a loss and that (pursuant to clause 5(1)(d)) it is a loss that is indemnified under the scheme.”

37    It appears that the Tribunal has selected its two preferred dictionary meanings of “loss” by reference to the “practical reasons” to which the Tribunal referred and not by reference to the meaning of the word “losses” ascertained from the context in which the word appears in the BSC Insurance Scheme. Further, I am unable to see how the two dictionary meanings preferred by the Tribunal throw any light on the task of construction in the present case. It is to the words of the Scheme themselves that one must go first.

38    Clause 5(1) of the Scheme provides that the Corporation “will indemnify the following losses reasonably incurred … in respect of residential building work” . It is not permissible to stop at these introductory words, as Mr Campbell does in his third submission, and to say that the words “losses … in respect of residential building work” must be construed widely. Such a contention simply ignores the words “the followin g losses” and disregards the fact that the only losses “in respect of residential building work” which are to be indemnified are such losses as are particularised in subparagraphs (a) to (e) of Clause 5(1).

39    As Clause 5(2) makes clear, the loss to be indemnified under subparagraph (a) is the loss of a deposit which has been paid under a contract where the contract has been terminated for breach by the builder in failing to commence building work. Where the builder has commenced building work but the contract has been terminated before completion of that work, the loss incurred in completion of the work is indemnified under subparagraph (c).

40    In a claim falling under Clause 5(1)(a), a loss will have been incurred by the beneficiary as soon as the builder fails to return the deposit and the contract is terminated: obviously, the beneficiary will have received nothing in consideration for payment of the deposit. Such a claim is, therefore, a claim for an existing loss.

41    A claim for indemnity under Clause 5(1)(c) is a claim which also arises where a contract has been terminated for breach by the builder but in this case the building work will have been commenced but not completed by the time of termination. Under the law of contract the beneficiary would have a right to damages against the builder for breach of contract but the measure of damages is not necessarily merely the cost of completing the building work. The beneficiary might be entitled, in addition, to liquidated damages or to consequential damages for delay and other losses reasonably within the contemplation of the parties at the time of the contract.

42    The indemnity under Clause 5(1)(c) does not, however, compensate the beneficiary for these losses. It indemnifies only in respect of a specific cost “reasonably incurred” by the beneficiary, as the introductory words of the clause require. That cost is the cost of completion of the work. One cannot say whether the cost of completion is “reasonably” incurred until one knows what is the amount of the cost and upon what particular items of work it is to be expended. As made clear by Clause 8(5), (6) and (7) to which the liability of the Corporation under Clause 5(1) is expressly made subject, it is by reference to the costs “of completing incomplete work or rectifying defective work” that the Corporation is to assess whether such costs are reasonable and therefore may be the subject of indemnity.

43    Further, one cannot say that the cost of completion, if reasonable, has been “incurred”, as required by the introductory words of Clause 5, until the beneficiary is under an obligation to pay that cost. The primary meanings of “incur” are “to make oneself subject to [danger, displeasure, etc]; bring on oneself [expense, obligation, etc.]” : Shorter Oxford English Dictionary .

44    The loss which is to be indemnified under Clause 5(1)(c) is a loss which is caused when the beneficiary has “incurred” the cost of completion. To “incur a cost” does not mean only “bringing upon oneself expense” in the sense of having actually paid the cost; it includes also “bringing upon oneself the obligation” to pay the cost. Accordingly, the liability of the Corporation under Clause 5(1)(c) to indemnify arises not only in the case where a beneficiary has actually paid the cost of completion and seeks reimbursement, it arises also when the beneficiary has incurred an obligation to pay the cost of completion and seeks that the Corporation save him or her harmless from the loss which will otherwise be suffered when that obligation is discharged.

45    Where a beneficiary seeks indemnity under Clause 5(1)(c) in the form of reimbursement of a payment already made for completion of building work, the Corporation will be required to reimburse if the cost of completion was reasonable. Where the beneficiary seeks indemnity in the sense of being saved harmless from the loss arising from payments to be made in discharge of obligations incurred in completing the work, the Corporation will be required to indemnify if the obligations are shown to have been actually incurred by the beneficiary pursuant to a contract for completion of the building work and if the contractual cost of the building work is reasonable. The Corporation will discharge its obligation to save harmless the beneficiary from the obligation to pay under the contract by making the payment on his or her behalf at the time stipulated in the contract.

46    I now turn to the critical clause in this case, Clause 5(1)(d). Construed together with the introductory words of the clause, the obligation of the Corporation under Clause 5(1)(d) is to “indemnify losses reasonably incurred by a beneficiary … in rectifying defects” . When the words of the clause are read and attention is paid to Clause 8(5), (6) and (7), in my view it is plain, for the reasons I have given in relation to Clause 5(1)(c), that the losses to be indemnified are either payments already made by the beneficiary in the course of carrying out rectification work or else payments for the carrying out of rectification work for which the beneficiary has incurred a contractual obligation. In the first case, the Corporation is liable to indemnify by making reimbursement; in the second case the Corporation is liable to indemnify by saving the beneficiary harmless and making payments on his or her behalf at the time stipulated in the contract for rectification work. What is essential, however, is that the reimbursement or saving harmless be in respect of loss incurred “in rectifying defects”, that is, in actually carrying out rectification work.

47    When a beneficiary discovers defects in building work requiring rectification, he or she may be said to have suffered a loss in the sense that he or she has paid for, but has not received, a building which is free from substantial defect. But that is not a loss which Clause 5(1)(d) indemnifies because the beneficiary may choose to do no rectification work. The Corporation’s liability arises only when the beneficiary’s loss is incurred “in rectifying”, and not otherwise.

48    This construction is supported, if it needs support, by Clause 8(2) of the BSC Insurance Scheme, which provides that the Corporation may decline to pay a claim under Clause 5 where the work was rectified or completed by a person other than the original contractor without the Corporation’s approval. This clause clearly predicates that work has actually been carried out and that the beneficiary claims either reimbursement of amounts already paid in consideration of that work or else indemnity in respect of a contractual obligation of the beneficiary to pay for that work.

49    The construction is further supported by consideration of the manifestly improvident consequences which would result if the Tribunal’s reasoning is adopted and beneficiaries are entitled to payment out of the BSC Insurance Scheme even though they have not incurred, and never do incur, any costs in actually carrying out rectification work.

50    Clause 10 of the Scheme extends the liability of the Corporation to make payments to beneficiaries for ten years after the commencement of residential building work. By Clause 4(1)(c) “beneficiaries” include successors in title to the owner of the land on which the work was done. Clause 8(2)(c) entitles the Corporation to decline to pay a claim where an earlier claim by a beneficiary in respect of the same residential building work “has been settled or accepted by the beneficiary” , that is, where the claim has been compromised by the beneficiary. Clause 8(2)(c) does not authorise the Corporation to decline payment where the earlier claim has actually been paid by the Corporation.

51    The omission in Clause 8(2)(c) to exclude the Corporation’s liability where an earlier claim for the same work has been paid makes sense if payment of the earlier claim has been made in respect of the actual completion or rectification of defective work: in such a case there would be no need to bar a subsequent claim for the same work because the defects would already have been rectified as a consequence of the Corporation paying the earlier claim. But if no rectification work had been done despite the payment of an earlier claim because the beneficiary is entitled to payment of a claim without having incurred liability for actually carrying out the work, then the Corporation could be obliged to pay successive claims for the same work by successors in title to the owner, each successive owner being under no obligation to carry out the work the subject of the claim and the payment by the Corporation. It is difficult to believe that such a result could have been intended by the legislature.

52    For these reasons, I cannot agree with the Tribunal’s conclusion that the Corporation’s liability to pay a claim under Clause 5(1)(d) of the BSC Insurance Scheme is not dependent and conditional upon expenditure by the beneficiary on rectification work and that the general principle of insurance law as to the insured’s obligation to reinstate is applicable.

53    I cannot see that my construction of the Insurance Scheme results in any practical difficulty or unfairness to a person in the position of Mr Tebbutt. The Corporation called for quotes for the rectification work and Mr Tebbutt provided them. The Corporation decided that it accepted liability to indemnify up to the maximum amount available under the BSC Insurance Scheme, $100,000. Mr Tebbutt could have presented to the Corporation a building contract with a builder prepared to do the work, which provided for progress payments in the normal way. He could have sought the approval of the Corporation to the new builder under Clause 8(2). He could have sought a written indemnity from the Corporation both to himself and to the builder stating that, if he entered into the contract, the Corporation would indemnify him and save him harmless from the progress payments by making those payments directly to the builder on his behalf at the times and upon the conditions stipulated in the building contract. I can see no reason why the Corporation could refuse to give that undertaking, which would impose no greater obligation than it had under Clause 5(1)(d) of the BSC Insurance Scheme. I cannot see why a builder having the benefit of that undertaking would be reluctant to enter into a contract with Mr Tebbutt. The builder would be in a position very similar to that in which many builders find themselves when owners enter into building contracts on the basis that payments to the builder are to be provided by a financier upon certification of progress payment claims.

54    Nothing in the BSC Insurance Scheme prevents a method of indemnification such as I have outlined from being adopted, and the Corporation could have made a decision to indemnify Mr Tebbutt by that method. Under s.88(b) of the BSC Act the Tribunal could have made the same decision and imposed it on the Corporation. The decision which the Tribunal actually made, however, was not a decision which the Corporation could have made. The Tribunal simply ordered the Corporation to make payments to Mr Tebbutt at specified times. The terms of the order were not conditioned upon whether at those times Mr Tebbutt had actually entered into a contract for rectification work and had actually incurred any expense in rectification, either in the sense of having made payment or in the sense of having incurred an obligation to make payment. The order was, therefore, not an order that the Corporation indemnify Mr Tebbutt for losses incurred “in rectifying defects” in the sense which I have explained.

55    It is true that the Tribunal ordered Mr Tebbutt to expend the sums received from the Corporation on building works. But that was not a condition of payment by the Corporation and there was no order that Mr Tebbutt enter into a contract for rectification work prior to receipt of the payments from the Corporation. Mr Tebbutt was at liberty to enter a building contract whenever he chose, possibly a long time after receiving the payments. Accordingly, the payments, at the time they were to be made by the Corporation to Mr Tebbutt, would bear no necessary nexus either to reimbursement to Mr Tebbutt of amounts already paid by him for work “in rectifying defects”, or to saving him harmless from contractual obligations to make payment for work done “in rectifying defects”.

56    For these reasons I conclude that the Corporation would have had no power under the BSC Insurance Scheme to make a decision in the terms of the Tribunal’s orders so that the Tribunal itself had no power to make those orders under s.88(b) of the BSC Act.

Orders

57    The appeal is allowed. Orders 1 and 2 of the Tribunal made on 23 August 2002 are set aside. The proceedings are remitted to the Tribunal for determination in accordance with law.

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Last Modified: 04/28/2003