Insurance Australia Ltd v Milonas

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

JUDICIAL REVIEW AND APPEALS LIST

S ECI 2020 00541

INSURANCE AUSTRALIA LTD (ACN 000 016 722)	Applicant
v
PANAGIOTA ULA MILONAS	Respondent

---

JUDGE:	McDonald J
WHERE HELD:	Melbourne
DATE OF HEARING:	28 and 31 May 2021
DATE OF JUDGMENT:	22 September 2021
CASE MAY BE CITED AS:	Insurance Australia Ltd v Milonas
MEDIUM NEUTRAL CITATION:	[2021] VSC 602

---

APPEAL — Application for leave to appeal from orders of Victorian Civil and Administrative Tribunal — Swimming pool constructed with incorrect dimensions — Pool had to be demolished and rebuilt — Whether applicant liable to indemnify respondent for cost of demolition and rebuilding pool — Whether incorrect dimensions of pool constituted a latent defect — Whether respondent’s loss occurred when she had actual knowledge of incorrect dimensions — Incorrect dimensions discoverable by exercise of reasonable diligence — Loss occurred when respondent took possession of pool with incorrect dimensions — Applicant liable to indemnify respondent for loss — Grounds of appeal relating to construction of insurance policy having no real prospect of success — Leave to appeal refused — Victorian Civil and Administrative Tribunal Act 1999 ss 148(1), (2A) (‘VCAT Act’).

INTEREST — Applicant ordered to pay interest on $200,000 from the date the respondent filed amended particulars of loss and damage — No finding that it was unreasonable for applicant to have withheld payment of $200,000 from date of filing of amended particulars of loss and damage — Not unreasonable for applicant to have withheld payment — Order for payment of interest set aside — Question of applicant’s liability to pay interest remitted to Tribunal — Insurance Contracts Act 1984 (Cth) s 57.

COSTS — Applicant ordered to pay respondent’s costs of proceeding in Tribunal on solicitor-client basis — Senior Member had regard to applicant’s failure to comply with VCAT Act — No basis for finding applicant failed to comply with VCAT Act — Costs order set aside — Question of cost remitted to Tribunal for further hearing — VCAT Act s 109.

---

APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr S Stuckey QC	Moray & Agnew Lawyers
For the Respondent	Mr P Marzella	Ferraro & Co Pty Ltd

HIS HONOUR:

Introduction

Insurance Australia Ltd (‘IAL’) and Dr Panagiota Milonas (‘Dr Milonas’) each had the serious misfortune of having dealings with the inaptly named ‘Paradise Pools’. In 2006 Dr Milonas undertook significant building works at a property she owned in Elwood. Her builder engaged Paradise Pools to construct a steel reinforced concrete swim spa. The result was nothing short of a disaster. The pool as constructed had numerous defects. Foremost amongst these was the length and width of the pool being shorter and narrower than specified in the approved building plans. As a consequence, the pool could not be used as a swim spa. It had to be demolished, removed and rebuilt. For its part, IAL has the misfortune of standing in the shoes of Lumley General Insurance Ltd (‘Lumley’) which issued an insurance policy in respect of the construction of the pool on 20 October 2006.

The central issue in the present proceeding turns on the construction of a clause in the policy which limits IAL’s liability to indemnify Dr Milonas in respect of loss or damage resulting from defective building work. The question for determination is when Dr Milonas’ loss arising from the construction of the pool with incorrect dimensions occurred. IAL contends that the incorrect pool dimensions constituted a latent defect and that Dr Milonas’ loss did not occur until she had actual knowledge of the defect in March 2017 when she measured the pool for the first time. IAL submits that this loss occurred outside the period prescribed by the policy during which it was liable to indemnify Dr Milonas.

For the reasons set out below, I reject IAL’s construction of the policy. The incorrect pool dimensions did not constitute a latent defect. Consequently, common law principles governing the time when economic loss resulting from a latent building defect occurs are irrelevant to the construction of the policy. In the alternative, if the incorrect dimensions did constitute a latent defect, the loss arising therefrom occurred when the incorrect dimensions were manifest, in the sense of being discoverable by the exercise of reasonable diligence. Dr Milonas’ loss crystallised on 21 November 2008 when she took possession of the defective pool following the termination of the contract between her builder and Paradise Pools. From the time she took possession of the pool the incorrect dimensions were manifest because they were discoverable by measuring the pool. Dr Milonas’ loss was the cost of demolition, removal and reconstruction of the pool. IAL is liable to indemnify Dr Milonas in the sum of $200,000, which is the limit of its liability in respect of defective building works. However, it is necessary to remit the proceeding to the Victorian Civil and Administrative Tribunal (‘the Tribunal’) for further hearing in respect of two issues. First, whether IAL is liable to pay interest on the sum of $200,000 pursuant to s 57 of the Insurance Contracts Act 1984 (Cth). Second, whether IAL is liable to pay Dr Milonas’ costs of the proceeding in the Tribunal, and if so, on what basis.

Background

On 17 October 2006, Construction Facilities Pty Ltd (‘Construction Facilities’) entered into a contract (‘the contract’) with Paramount Building Solutions Pty Ltd trading as Paradise Pools (‘Paradise Pools’) for the construction of a steel reinforced concrete swim spa (‘the pool’) at Lot 1, 56 Marine Parade, Elwood. The respondent (Dr Milonas) is the owner of the land on which the pool was built.

Under the terms of the contract, Construction Facilities was designated as the ‘owner’ and Paradise Pools as the ‘builder’. The contract price, inclusive of GST, was $47,470. The time for completion of the pool was stipulated as 84 days. On 20 October 2006, Lumley issued an insurance policy in respect of the pool (‘the policy’). The applicant (IAL) stands in the shoes of Lumley. It is common ground that Dr Milonas is entitled to the benefit of the policy as the owner of the land on which the pool was constructed and as a person entitled to the benefit of the warranties prescribed in s 8 of the Domestic Building Contracts Act 1995.

It is an understatement to observe that the construction of the pool did not go well. Paradise Pools were not seen on the site after May 2007. Up to this point in time, Paradise Pools had been paid $30,209.[1] When Paradise Pools left the site, the pool was incomplete and its dimensions were not in accordance with the approved plans. As constructed, the pool was 3,700mm in length and 2,340mm in width. The length was 600mm shorter and the width 60mm narrower than specified in the approved plans. In addition, when Paradise Pools left the site, the pool had numerous defects:
[1]CB1003, ‘Progress Claims Summary for Construction Facilities Pty Ltd’.

·     the pool had been set above the ground higher than specified in the Pool Site Plan which forms part of the Building Permit drawings;
·     the swim spa jets in the pool were not installed in accordance with Paradise Pool’s Quotation and the requirement that ‘the swim spa is powered by the SPEC Badu system’;
·     plumbing and electrical fittings were not supplied by Paradise Pools;
·     the corners of the pool were not the radius corners as shown in the approved plans;
·     no edge beam as shown in the approved plans;
·     the side brick fence foundations were not constructed along the line shown in the Fence & Site Plan;
·     pool steps had not been constructed in accordance with the plans and specifications; and
·     automation control equipment was not installed.[2]

[2]Milonas v Insurance Australia Limited (Building and Property) [2020] VCAT 26, [105] (‘Tribunal Decision’).

It is common ground that the non-compliance with the measurements in the approved plans meant that the pool could not be used as a swim spa. It is also common ground that in order to rectify the undersized construction, the reinforced concrete structure had to be completely demolished, removed and replaced. The long list of defects set out above is testimony to the ineptitude of Paradise Pools. However, the particular defect which resulted in Dr Milonas’ loss of $200,000 was the construction of the pool with incorrect dimensions, with the consequence that the pool had to be demolished and rebuilt.

Relations between Dr Milonas and Construction Facilities also deteriorated. On 21 November 2008, Dr Milonas replaced Construction Facilities with another builder, Essential Construction Facilities Pty Ltd (‘Essential Construction Facilities’).

Under the terms of the policy, Dr Milonas had no entitlement to make a claim against IAL until Paradise Pools became insolvent or disappeared. It is common ground that Paradise Pools became insolvent on 1 July 2013 when the company was wound up.[3]
[3]Transcript of Proceedings, T 95 L 22 (28 May 2021).

On 22 May 2013, in response to an inquiry from Dr Milonas, IAL wrote to her advising what steps needed to be taken in order for a claim to be made under the policy.[4] There is no evidence of any claim having been made in or about May 2013 by Dr Milonas. However, subsequently, on 25 November 2014, Dr Milonas did make a claim under the policy. IAL rejected the claim on 3 February 2015. It did so on two grounds. First, that the builder of the pool was Construction Facilities, which was not insured by IAL. Second, that Dr Milonas was a ‘developer’ within the terms of the policy and therefore precluded from claiming any indemnity thereunder.[5] IAL did not subsequently rely on either of these grounds as a basis for refusing to indemnify Dr Milonas.
[4]CB1291.
[5]CB646.

On 1 May 2016, Dr Milonas filed an application in VCAT claiming $42,906 compensation to complete the pool. Dr Milonas filed points of claim on 6 February 2017. On 28 February 2017, IAL filed points of defence. Paragraph 8 of the points of defence records IAL as having issued a ‘Revised Decision’, under which it accepted liability up to the indemnity under the policy for loss from non-completion of works in the amount of $9,494 (being 20% of the contract price).

On 18 May 2017, Dr Milonas filed amended particulars of loss and damage under which she claimed $200,000, the maximum amount payable under the policy. This claim was based on the cost of demolition, removal and construction of a new pool.

The hearing in VCAT commenced on 8 November 2017 before Senior Sessional Member, Judge Jenkins. The hearing continued intermittently over six days until 20 December 2017. Dr Milonas represented herself at this stage of the hearing. On 20 December 2017, the Senior Member expressed concerns that evidence which may have been critical to Dr Milonas’ claim had not been led. The hearing was adjourned to allow Dr Milonas to consider whether she wished to obtain legal representation and lead further expert evidence.[6] The adjournment resulted in a further five days of hearing.[7] This second stage of the hearing commenced on 18 March 2019 and ran intermittently on five days, concluding 13 September 2019. The Tribunal published its reasons for decision and orders on 8 January 2020. The Tribunal made the following orders:

1. Pursuant to s 61(1) of the Domestic Building Contracts Act 1995, the previous decision of the Respondent denying the Applicant’s claim in respect of building defects is annulled.
2. Pursuant to ss 53(2)(b)(ii) and 59A of the Domestic Building Contracts Act 1995, the Respondent pay the Applicant, by way of damages on account of defective building work, the sum of $200,000 plus interest pursuant to statute calculated from 18 May 2017 to date of payment.
3. The Respondent to pay the Applicant’s costs of the proceeding from 21 December 2017 to date, such costs to be assessed by the Costs Court, in default of agreement, on the relevant County Court scale applicable at the time when the costs were incurred and in each case on a solicitor-client basis.[8]

[6]Tribunal Decision (n 2) [9].

[7]Ibid.

[8]Ibid 1–2.

By application filed 5 February 2020, IAL seeks leave to appeal against the Tribunal’s orders pursuant to s 148 of the Victorian Civil and Administrative Tribunal Act 1998 (‘VCAT Act’).

The VCAT proceeding and the Tribunal’s reasons

The principal issue in the VCAT proceeding concerned IAL’s liability to indemnify Dr Milonas for the cost of demolition, removal and rebuilding of the pool. IAL contended before the Tribunal that any liability arose under cl 6B of the policy, but only in respect of loss or damage occurring within the period prescribed by cl 6B. Clause 6B provides:

This Policy only provides the indemnities referred to in clauses 1 and 2 in respect of all other loss or damage, including Structural Defects, in respect of loss or damage occurring during the period commencing on the Commencement Day and ending six years after the earlier of:
(a) the Completion Date of the Domestic Building Work; or
(b) the date of termination of the relevant Contract.[9]

[9]CB629.

IAL submitted that the limitation period under cl 6B expired on 21 November 2014, six years after the termination of the contract between Construction Facilities and Paradise Pools. This contention was based on two subsidiary propositions. First, that the parties to the contract were Construction Facilities and Paradise Pools, and that Paradise Pools did not, as was contended by Dr Milonas, enter the contract as Dr Milonas’ agent. Second, that the contract was terminated on 21 November 2008 when Dr Milonas appointed Essential Construction Facilities as builder in lieu of Construction Facilities.

IAL contended that Dr Milonas’ claim for $200,000 was a claim for economic loss based on the cost of demolition, removal and rebuilding of the pool due to the construction of the pool with incorrect dimensions. It submitted that the incorrect dimensions of the pool constituted a latent defect. It contended that under cl 6B loss resulting from a latent defect occurs when an insured has actual knowledge of the defect. It contended that Dr Milonas’ loss occurred in March 2017 when Dr Milonas measured the dimensions of the pool for the first time and thereby had actual knowledge of the incorrect dimensions. IAL contended that this loss occurred after the expiry of the limitation period under cl 6B.

In addition to disputing whether it was liable to indemnify Dr Milonas, IAL disputed the evidence led by Dr Milonas as to the cost of demolition, removal and rebuilding the pool. It submitted that the cost was $123,731[10] whereas Dr Milonas submitted that the cost was well in excess of the $200,000 cap on liability under the policy.
[10]Tribunal Decision (n 2) [257].

Based on the summary set out above, there were four principal issues for determination in the VCAT proceeding:

(i) whether Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent;

(ii) the date of the termination of the contract;

(iii) the construction of cl 6B of the policy, and in particular, when loss or damage occurs; and

(iv) the cost of demolition, removal and rebuilding of the pool.

In respect of the four issues set out above, the Senior Member concluded as follows:

(v) Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent.[11]
[11]Ibid [71].

(vi) The contract was not terminated on 21 November 2008 when Dr Milonas appointed Essential Construction Facilities as builder in lieu of Construction Facilities.[12] The contract was not terminated prior to April 2012, because up until that time Dr Milonas had been seeking to have Paradise Pools fulfil its obligations under the contract.[13]
[12]Ibid [122]–[124].
[13]Ibid [130].

(vii) IAL was liable to indemnify Dr Milonas for the cost of demolition, removal and reconstruction of the pool because the loss she claimed occurred during the period prescribed by cl 6B, which did not expire before 20 April 2018.[14]

(viii) The loss sustained by Dr Milonas, being the cost of demolition, removal and reconstruction of the pool exceeded the $200,000 limit under the policy.[15]

[14]Ibid [131].

[15]Ibid [261].

Having so found, the Senior Member dealt with the issue of interest and costs as follows:

(ix)Dr Milonas was entitled to interest pursuant to statute on the sum of $200,000 from 18 May 2017, being the date Dr Milonas filed amended points of claim;[16] and

(x) Dr Milonas was entitled to an order for costs of the proceeding from 21 November 2017 assessed on the relevant County Court scale on a solicitor-client basis.[17]

[16]Ibid [267].

[17]Ibid [268].

It is regrettable that the Senior Member’s decision spawned an application under s 148 of the VCAT Act comprising 23 questions of law and 24 grounds of appeal. The issues which fall for determination were capable of being clearly articulated, at most, in 10 questions of law. Similarly, the 24 grounds of appeal are unnecessarily prolix and poorly drafted.

Mr Stuckey QC conceded that six questions of law and six corresponding grounds of appeal are of no utility if IAL’s construction of cl 6B is rejected. Rather than proceeding to address each of the questions of law and their corresponding appeal grounds there is utility in addressing, at the outset, the construction of cl 6B. The resolution of this issue informs consideration of whether leave to appeal should be granted in respect of questions of law which are of no utility if IAL’s construction of cl 6B is rejected. It will also shed light on whether appeal grounds related to the construction of cl 6B have a real prospect of success.[18] However, before addressing the construction of cl 6B, it is necessary to set out the relevant provisions of the policy.
[18]Victorian Civil and Administrative Tribunal Act 1998 (Vic) s 148(2A) (‘VCAT Act’).

The policy

Under the terms of the policy, IAL is liable to indemnify the ‘Building Owner’ for ‘loss or damage resulting from all or any of the following events’. The prescribed events under the policy include those set out in cls 1 and 2:

The insurer will indemnify the Building Owner for loss or damage resulting from:
1.All or any of the following events —
a) domestic building work that is defective;
b)a breach of any warranty implied into the domestic building contract by section 8 of the Domestic Building Contracts Act 1995;

Purely as a guide, the warranties detailed in section 8 of the Domestic Building Contracts Act 1995 are:
i)that the work will be carried out in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract;
ii)that all materials be supplied by the builder for use in the work will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new;
iii)that the work will be carried out in accordance with, and will comply with, all laws and legal requirements including, without limiting the generality of this warranty, the Building Act 1993 and the regulations made under that Act;
iv)that the work will be carried out with reasonable care and skill and will be completed by the date (or within the period) specified by the contract;
v)that if the work consists of the erection or construction of a home, or is work intended to renovate, alter, extend, improve or repair a home to a stage suitable for occupation, the home will be suitable for occupation at the time the work is completed;

vi)if the contract states the particular purpose for which the work is required, or the result which the building owner wishes the work to achieve, os [sic] as to show that the building owner relies on the builder’s skill and judgment, then the work and any material used in carrying out the work will be reasonable fit for that purpose or will be of such a nature and quality that they might reasonably be expected to achieve that result.

c)a failure to maintain a standard or quality of building work specified in the domestic building contract;
d)conduct by the builder in connection with the domestic building contract that contravenes a trade practices provision.

2.Non completion of the works

The cover page of the policy states, ‘Subject to the Building Act 1993, the Ministerial Order and the conditions of the insurance contract, cover will be provided to the building owner named in the domestic building contract, and to the successors in title to the building owner’. The ‘Building Owner’ under the policy is identified as Construction Facilities. However, IAL’s potential liability is not limited to a ‘Building Owner’ as specified in the domestic building contract. The policy is to be read subject to the Ministerial Order.[19] It is common ground that the Ministerial Order referred to in the preamble to the policy is the Domestic Building Insurance Ministerial Order No. 98, dated 23 May 2003. Clause 11 of the Ministerial Order provides:
[19]Minister for Planning (Vic), ‘Domestic Building Insurance Ministerial Order’ in Victoria, Victoria Government Gazette, No S 98, 23 May 2003 (‘Ministerial Order’).

The required insurance cover in the policy must extend—
(a)to each person who becomes entitled to the benefit of any of the warranties referred to in clause 8(2)(b); and
(b)to the owner for the time being of the building or land in respect of which the domestic building work is or was being carried out.

Further, cl 23 of the policy provides:

This policy is issued in compliance with the Ministerial Order, and if any term of the policy conflicts or is inconsistent with the Ministerial Order then the Policy must be read and is enforceable as if it does comply with the Ministerial Order.

Notwithstanding the fact Dr Milonas was not the building owner named in the contract, from the time the contract was entered into on 17 October 2006 IAL was potentially liable to indemnify Dr Milonas for loss or damage resulting from a prescribed event under the policy.

Although non-completion of works is a discrete event under cl 2 of the policy, a failure to complete works by the date specified under the relevant contract is also a defined event under cl 1(b)(iv). As such, the fact that building works have not been completed does not preclude an insured from making a claim that the non-completed works are defective. Where a claim by an insured is confined to a claim for non-completion of works, cl 8 provides:

The liability of the insurer as a result of non-completion of the Works by the Builder pursuant to clause 2 shall be limited to the cost of completing the Works, but in any event shall not exceed twenty per cent (20%) of the Contract price.

Clause 7 provides:

The maximum aggregate liability of the insurer shall not exceed $200,000 for all claims in respect of any one home, including reasonable legal costs and expenses incurred by the insured (not being the builder) associated with a successful claim against the insurer.

The Senior Member’s order that IAL pay Dr Milonas the sum of $200,000 reflects the operation of cl 7 of the policy. IAL’s points of defence in the Tribunal proceeding contended that its liability to indemnify Dr Milonas was limited to 20 per cent of the contract price, on the basis that Dr Milonas’ claim was a claim for incomplete works. None of IAL’s questions of law in the present proceeding contend that the Senior Member erred by failing to limit IAL’s liability to 20 per cent of the contract price.

Clause 6A limits the liability of the insurer for claims in respect of Non-Structural Defects:

This Policy only provides the indemnities referred to in clauses 1 to 4 in relation to Non-Structural Defects in respect of loss or damage occurring during the period commencing on the Commencement Day and ending two years after the earlier of:
(a) the Completion Date of the Domestic Building Work; or
(b) the date of termination of the relevant Contract.

Clause 6B limits the liability of the insurer in respect of claims for loss or damage other than in relation to Non-Structural Defects:

This Policy only provides the indemnities referred to in clauses 1 and 2 in respect of all other loss or damage, including Structural Defects, in respect of loss or damage occurring during the period commencing on the Commencement Day and ending six years after the earlier of:
(a) the Completion Date of the Domestic Building Work; or
(b) the date of termination of the relevant Contract.

‘Commencement Day’ is not defined in the policy. However, ‘commencement day’ is defined in the Ministerial Order as follows:

‘Commencement day’ means the earlier of—
(a)the date that the relevant domestic building contract is entered into; or
(b)the date of issue of the building permit for the relevant domestic building work.[20]

It is common ground that for the purposes of cl 6B the Commencement Day was 17 October 2006, the date the contract between Construction Facilities and Paradise Pools was signed.

[20]Ibid.

Clause 6C defines the date of termination as follows:

The date of termination of the relevant Contract for the purposes of clauses 6A and 6B shall be taken to be the date on which either the Builder or the Insured purported to bring the Contract to an end whether pursuant to the terms of the Contract or pursuant to the general principles of law.

‘Structural Defect’ is defined as follows:

‘Structural Defect’ in relation to a building, means any defect in a structural element of the building that is attributable to defective design, defective or faulty workmanship or defective materials (or any combination of these) that:
a)results in, or is likely to result in, the building or any part of the building being required by or under any law to be closed or prohibited from being used; or
b)prevents, or is likely to prevent, the continued practical use of the building or any part of the building; or
c)results in, or is likely to result in:
(i)the destruction of the building or any part of the building; or
(ii)physical damage to the building or any part of the building; or

d)results in, or is likely to result in, a threat of imminent collapse that may reasonably be considered to cause destruction of the building or physical damage to the building or nay [sic] part of the building.

In the present proceeding, IAL placed no reliance upon the limitation of liability provided by cl 6A in relation to non-structural defects. Rather, it relies upon the limitation in respect of structural defects in cl 6B.

Dr Milonas contends that IAL is precluded from challenging the Senior Member’s decision by cl 29 of the policy. Clause 29 provides:

Where the Insurer has notice of the relevant proceedings before the Tribunal, the Insurer will accept as determinative of the issues any finding made by the Tribunal:
(a)as to whether any of the following events has occurred:
(i)the non-completion of the work;
(ii)an event referred to in clause 1;
(iii)an event referred to in clause 3 or 4; and

(b)if so, as to the amount of loss or damage suffered by the building owner as a result of the event or events.

Mr Marzella, who appeared for Dr Milonas, submitted that cl 29 precludes IAL from challenging the Senior Member’s decision. I reject this submission. The preamble to the policy provides:

The Insurer will provide insurance cover subject to the terms and conditions set out in this policy, and in compliance with the relevant Ministerial Order issued pursuant to Section 135 of the Building Act 1993 (Victoria), and subject to the governance of the law of the state of Victoria.

Clause 27 of the Ministerial Order provides:
The policy must contain a provision to the effect that if the insurer has notice of the relevant proceedings before the Tribunal, the insurer will accept as determinative of the issues any finding made by the Tribunal—
(a)as to whether any of the following events has occurred—
(i)the non-completion of domestic building work;
(ii)an event referred to in clause 8(2)(a) to (d);
(iii)a breach of warranty referred to in clause 20;
(iv)an event referred to in clause 9 or 21; and
(v)if so, as to the amount of loss or damage suffered by the building owner or purchaser, as the case may be, as a result of the event or events.

Clause 29 of the policy gives effect to cl 27 of the Ministerial Order. The phrase ‘the relevant proceedings’ is not defined in either the policy or the Ministerial Order. A ‘relevant proceeding’ is one which the insurer has notice of. A relevant proceeding is not a proceeding in which the insurer is itself a party. Where an insurer is a party to a proceeding in VCAT, the question of the insurer having notice of the proceeding does not arise. It is squarely placed on notice of the proceeding by reason of being a party to the proceeding. Further, the phrase ‘accept as determinative’ points to a relevant proceeding being one in which the insurer is not a party. Where an insurer is a party to a proceeding in VCAT, it does not have a choice as to whether or not it accepts the outcome of the proceeding as determinative of the issues raised therein. Rather, subject to exercising its rights of appeal, the insurer is bound by the outcome of the proceeding.

Unambiguous words are required to preclude an insurer which is a party to a proceeding in VCAT exercising the rights conferred by s 148 of the VCAT Act 1998. I do not accept that the wording of cl 29 unambiguously precludes an insurer from exercising its right to make an application for leave to appeal. A proceeding in which the insurer is a party is not a relevant proceeding for the purposes of cl 27 of the Ministerial Order and cl 29 of the policy. Clause 29 does not preclude IAL from challenging the Tribunal’s reasons and orders.

Clause 6B of the policy

IAL’s contention that Dr Milonas’ loss occurred outside the period prescribed by cl 6B is based on eight propositions:

(xi)clause 6B prescribes a period during which IAL is ‘at risk’, beginning on the Commencement Day (17 October 2006) and concluding six years after the termination of the contract between Construction Facilities and Paradise Pools;

(xii) contrary to the Tribunal’s finding, Construction Facilities did not contract with Paradise Pools as Dr Milonas’ agent;

(xiii) the contract was terminated by reason of abandonment when Dr Milonas replaced Construction Facilities with Essential Construction Facilities on 21 November 2008;

(xiv) IAL was not liable to indemnify Dr Milonas for loss or damage occurring after the expiration of a six year period post the termination of the contract (21 November 2014);

(xv) the loss claimed by Dr Milonas was a claim for pure economic loss arising from a latent defect in the pool, such loss being the cost of replacing the pool with a new pool;

(xvi) this loss occurred when Dr Milonas had actual knowledge of the defective building works;

(xvii) Dr Milonas had actual knowledge of the defective building works when she measured the pool in March 2017 and became aware for the first time of the discrepancy between the pool dimensions in the approved plans and the dimensions of the pool as built; and

(xviii) the loss occurred in March 2017, outside the period prescribed by cl 6B which expired on 21 November 2014.

IAL accepts that, in order to make good its contention that Dr Milonas’ loss occurred outside the period prescribed by cl 6B, it must establish:

(xix) that Construction Facilities did not enter into the contract with Paradise Pools as the agent of Dr Milonas; and

(xx) that on the proper construction of cl 6B economic loss occurs when a party claiming an indemnity first has knowledge of that loss.

IAL accepts that if, as the Tribunal found, Construction Facilities entered into the contract with Paradise Pools as Dr Milonas’ agent, the contract was not terminated on 21 November 2008 when Dr Milonas appointed Essential Construction Facilities as builder in lieu of Construction Facilities. Putting to one side whether Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent, IAL does not challenge the Tribunal’s finding that until 20 April 2012, Dr Milonas was actively seeking to procure Paradise Pools’ performance of its contractual obligations and did not evince an intention to abandon the contract.[21]

[21]Tribunal Decision (n 2) [130].

IAL accepts that if it fails to overturn the Tribunal’s finding that Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent, the date of termination of the contract is no earlier than 20 April 2012 and the six year period prescribed by cl 6B did not expire until at least 20 April 2018. If, as contended by IAL, Dr Milonas’ loss occurred in March 2017, this would be within the period prescribed by cl 6B.

Construction Facilities did not contract with Paradise Pools as Dr Milonas’ agent

The contract dated 17 October 2006 identifies Construction Facilities as the ‘Owner’ and Paradise Pools as the ‘Builder’. The contract records Paradise Pools’ agreement to construct a steel reinforced concrete swim spa. The contract also records Construction Facilities’ agreement to pay Paradise Pools $47,470 for construction of the pool.[22] There is no reference to Dr Milonas in the contract. No term of the contract supports a finding that Construction Facilities entered the contract as Dr Milonas’ agent.
[22]CB1711–4.

When the contract was put to Dr Milonas during cross-examination on the fourth day of hearing in VCAT, she denied any knowledge of it.[23] Consistent with this denial Dr Milonas gave no evidence of having authorised Construction Facilities to enter the contract as her agent. No evidence was given by any officer or employee of Construction Facilities. As such, there was no evidence from Construction Facilities which could support a finding that the company contracted as Dr Milonas’ agent.
[23]Transcript of VCAT Proceedings, T 303 L 28–30 (18 December 2017).

The Certificate of Home Warranty Insurance dated 20 October 2006 issued by Lumley was in respect of the construction of a concrete pool to be carried out by Paramount Building Solutions Pty Ltd trading as Paradise Pools for Construction Facilities Pty Ltd.[24] Invoices were issued by Paradise Pools to Construction Facilities on 28 November 2006[25] and on two further undated occasions.[26] A progress claim summary by Construction Facilities, signed by Dr Milonas, records a claim by Construction Facilities directed to Dr Milonas for payment in respect of: ‘Pool Paradise Pools’ in the sum of $30,209.[27] This is evidence of payment by Construction Facilities to Paradise Pools followed by a claim for reimbursement from Dr Milonas. This is inconsistent with Construction Facilities having contracted with Paradise Pools as Dr Milonas’ agent, such that Dr Milonas was liable to make payment to Paradise Pools. Rather, Construction Facilities contracted on the basis that it accepted liability to pay Paradise Pools the contract price.
[24]CB1861.
[25]CB1005.
[26]CB1006–7.
[27]CB1003.

The Senior Member concluded that: ‘Construction Facilities entered into the HIA contract subject to the direction of’ Dr Milonas.[28] This falls well short of a finding that Dr Milonas authorised Construction Facilities to contract with Paradise Pools on her behalf, giving rise to a relationship of principal and agent. Dr Milonas’ denial of any knowledge of the contract between Construction Facilities and Paradise Pools is a significant obstacle to a finding that Construction Facilities contracted with Paradise Pools as her agent. The Senior Member erred by making a finding of agency without addressing the question of whether Construction Facilities had been authorised by Dr Milonas to contract with Paradise Pools as her agent. There is no evidence which supports such a finding.
[28]Tribunal Decision (n 2) [73].

The Senior Member’s conclusion that the period under cl 6B did not expire before 20 April 2018 is premised on her finding that Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent. Once the finding of agency is set aside there is no basis for concluding that the policy period did not expire before 20 April 2018. The contract was terminated on 21 November 2008. Dr Milonas gave evidence that Paradise Pools was not on the site post-May 2007. By 21 November 2008 Construction Facilities had been replaced as the builder on the site by Essential Construction Facilities. As at that date, there was no prospect of the mutual obligations of Construction Facilities and Paradise Pools under the contract being performed. By 21 November 2008 Paradise Pools and Construction Facilities had abandoned further performance of the contract.[29]
[29]See generally DTR Nominees Pty Ltd v Mona Homes Pty Ltd (1978) 138 CLR 423; Bakers Investment Group (Aust) Pty Ltd v Caason Investments Pty Ltd [2014] VSC 598, [480].

The limitation period prescribed by cl 6B expired on 21 November 2014, six years after the termination of the contract between Construction Facilities and Paradise Pools. It remains necessary to address IAL’s contention that Dr Milonas’ loss occurred after 21 November 2014, when Dr Milonas had knowledge of the incorrect dimensions of the pool when she measured the pool for the first time.

When did Dr Milonas’ loss resulting from the construction of the pool with incorrect dimensions occur?

IAL submits that loss or damage resulting from the prescribed events in cls 1 and 2 of the policy encompasses economic loss as well as physical loss or damage.[30] IAL submits that Dr Milonas’ claim for $200,000 represents the cost of replacing the pool which was defective because it was not built in accordance with the dimensions in the approved plans. IAL submits that the incorrect dimensions constitute a latent defect. It further submits that at common law under a building contract there can be no loss or damage arising from a latent building defect until the departure from the contract:
[30]Applicant, ‘Appellant’s Submissions’, 7 June 2021, [9].

(xxi) either manifests itself by causing damage to some other part of the structure; or

(xxii) actually becomes known to the owner of the building.[31]

IAL submits that common law principles governing the timing of when economic loss is sustained in respect of a latent building defect also applies for the purpose of determining when economic loss resulting from a latent defect occurs under cl 6B. IAL submits that under cl 6B economic loss resulting from a latent building defect occurs when the defect manifests itself by causing damage to some other part of the insured structure or actually becomes known to the owner (‘the common law latent defect principle’).[32]

[31]Applicant, ‘Appellant’s Amended Submissions’, 19 April 2021, [50].

[32]Ibid.

I accept IAL’s submission that the indemnity under cl 6B for loss or damage resulting from the events in cls 1 and 2 of the policy includes economic loss as well as physical loss and damage. However, I reject IAL’s contention that Dr Milonas’ loss did not occur until she first became aware of the incorrect dimensions of the swim spa in March 2017. First, this contention is based on the misconception that the incorrect dimensions of the pool constituted a latent defect. Second, even if the incorrect pool dimensions did constitute a latent defect, loss resulting from a latent building defect does not occur only when the building owner has actual knowledge of the defect. Loss also occurs when the defect is discoverable by the exercise of reasonable diligence.

The incorrect pool dimensions did not constitute a latent defect

The characterisation of the incorrect pool dimensions as a latent defect is critical to IAL’s contention that Dr Milonas’ loss did not occur until March 2017 when she first measured the pool. The common law latent defect principle upon which IAL relies for the purposes of its construction of cl 6B has no application in respect of non-latent defects.

IAL submits that a latent defect is one which is not known at the time of construction. It submits that there is no requirement that, in order for a defect to be latent, it must be concealed or hidden in some way.[33] In support of this proposition IAL cites the judgment of White J in Owners of Strata Plan 50946 v Multiplex Constructions (NSW) Pty Ltd (‘Multiplex Constructions’).[34] Multiplex Constructions does not support IAL’s contention that the incorrect dimensions constituted a latent defect. In Multiplex Constructions White J stated:

The concept of a latent defect in a building is used in the authorities in this area in the sense of something which is not known or manifest. They are the two sides of the one coin. In this area, the concept of what is manifest extends to what is not known but would be discovered through the exercise of reasonable diligence. A defect which is not known or manifest in this sense is latent. Equally, in my view, a defect is latent if it is not known or manifest in this sense. In my view, there is no additional requirement that in order for a defect to be latent it must not be visible, or must be concealed or hidden, although, of course, a defect which is visible and not hidden may be manifest in the sense of being discoverable with reasonable diligence.[35]

[33]Ibid [48].

[34][2006] NSWSC 377 (‘Multiplex Constructions’).

[35]Ibid [20].

White J’s judgment is authority for the proposition that a latent defect is one which is not known and is not manifest in the sense of being discoverable through the exercise of reasonable diligence. IAL is correct when it submits that his Honour stated that there ‘is no additional requirement that in order for a defect to be latent it must not be visible, or must be concealed or hidden’.[36] However, immediately thereafter, White J stated: ‘… although, of course, a defect which is visible and not hidden may be manifest in the sense of being discoverable with reasonable diligence’.[37]This qualification is consistent with his Honour’s statement that a latent defect is one which is ‘not manifest’. The fact that the pool was 600mm shorter in length and 60mm narrower in width could be discovered by the exercise of reasonable diligence by measuring the pool. As such, the discrepancy between the actual length and width of the pool and that prescribed in the approved plans was not a latent defect.[38]
[36]Ibid.
[37]Ibid (emphasis added).
[38]Cf Yeung v Santosa Realty Co Pty Ltd (2020) 60 VR 161, 181 [83].

Loss or damage from a non-latent defect is sustained when it is inflicted or first suffered.[39] The damage from the construction of the pool with incorrect dimensions was sustained when the pool was built in early 2007. However, as discussed below, Dr Milonas’ economic loss resulting from the construction of the pool with incorrect dimensions did not crystallise until 21 November 2008 when she took possession of the pool following the termination of the contract between Construction Facilities and Paradise Pools.

The occurrence of economic loss resulting from a latent defect is not contingent upon the building owner having actual knowledge of the defect

[39]Hawkins v Clayton (1988) 164 CLR, 588 (Deane J) (‘Hawkins v Clayton’).

If I am wrong in reaching this conclusion and the incorrect pool dimensions did constitute a latent defect, I reject IAL’s contention that Dr Milonas’ loss did not occur until she had actual knowledge of the incorrect dimensions.

IAL submits that the test for determining when loss or damage in respect of a latent building defect is sustained is that set out in the judgment of Deane J in Hawkins v Clayton.[40] IAL submits:

Where a building is constructed defectively, it is not damaged or injured. It never existed without the deficiency. Justice Deane in Hawkins v. Clayton (1988) 164 CLR 569 observed that where ‘the building never existed and was never owned without the defect and (in the absence of consequential collapse or physical damage or injury) the only loss which could have been sustained by the owner was the economic loss which would be involved if and when the defect was actually discovered or became manifest, in the sense of being discoverable by reasonable diligence, with the consequence that the damage was then sustained by the owner’. His Honour went on to say that the preferable approach ‘is that any loss or injury involved in the actual inadequacy of the foundations is sustained only at the time when the inadequacy is first known or manifest. It is only then that the actual diminution in the market value of the premises occurs’.[41]

[40](1988) 164 CLR, 569.

[41]Applicant, ‘Appellant’s Amended Submissions’, 19 April 2021, [45] (emphasis in original).

IAL also relies upon the judgment of the Full Court of the Victorian Supreme Court in Pullen v Gutteridge Haskins & Davey Pty Ltd (‘Pullen’).[42] Pullen addressed the question of when time begins to run for the purposes of an action in negligence in respect of a latent building defect consisting of inadequate or unsuitable footings under the State Swimming Centre. The Full Court held that time begins to run when the latent defect first becomes known or manifest.[43] As to when a latent defect is manifest, the Full Court cited with approval the passage from the judgment in Hawkins v Clayton in which Deane J described a latent defect as being manifest ‘in the sense of being discoverable by reasonable diligence’.[44]
[42][1993] 1 VR 27 (‘Pullen’).
[43]Ibid 71.
[44]Ibid 66–7.

In Melisavon Pty Ltd v Springfield Land Development Corporation Pty Ltd[45] McMurdo P, with whom Lyons J agreed, stated:

It is true that Wardley, Bryan v Maloney and Sheldon v McBeath stated that damage was sustained when a latent defect first became known or manifest without repeating Deane J’s qualifying words in Hawkins v Clayton ‘in the sense of being discoverable by reasonable diligence’. But those cases, unlike Pullen, Sherson and the present, did not concern an alleged latent defect of faulty building design where damage appeared incrementally, worsened over time and the defendant, upon whose advice the plaintiff could be expected to rely, advised the damage was caused by matters other than the defendant’s faulty design. The application of the established principles in such cases is particularly difficult. The principles to be applied are those stated by Deane J in Hawkins v Clayton, with which Mason CJ and Wilson J agreed: damage by way of pure economic loss is suffered when the latent ‘defect was actually discovered or became manifest, in the sense of being discoverable by reasonable diligence’.[46]

[45][2015] 1 Qd R 476.

[46]Ibid 504–5 [45] (citations omitted).

McMurdo P also stated:

Until the High Court says otherwise, the cause of action in the present case was complete when the respondent suffered economic loss, that is, when the respondent had actual knowledge of the appellant’s faulty engineering design or when the faulty design itself became manifest or could be discovered by reasonable diligence.[47]

[47]Ibid 506 [53]. See also Damien Cremean, Michael Whitten and Michael Sharkey, Brooking on Building Contracts (LexisNexis Australia, 6^th ed, 2020) ch 10, 241.

IAL’s articulation of the latent defect common law principle is not consistent with the judgment of Deane J in Hawkins. IAL cites Deane J’s judgment but its formulation of the latent defect common law principle ignores that part of the judgment in which his Honour acknowledges that loss arising from a latent building defect occurs when the defect becomes manifest, in the sense of being discoverable by reasonable diligence.

Dr Milonas’ loss occurred on 21 November 2008 when she took possession of the defective pool

In the context of an action for negligence causing economic loss, loss or damage means the harm suffered to a plaintiff’s economic interests.[48] In Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd[49] the plurality stated:

In Hawkins v Clayton, Gaudron J pointed out that in an action for negligence causing economic loss it will almost always be necessary to identify, with some precision, the interest infringed by the negligent act. In that case, it was necessary to identify the interest in order to answer the question as to when the cause of action accrued. Its identification is also necessary for a proper understanding of the harm suffered and for the determination of what acts or emissions may be said to have caused that damage. As her Honour observed economic loss may take many forms. In Wardley Australia Ltd v Western Australia, it was said that the kind of economic loss which is sustained, as well as the time when it is sustained, depends upon the nature of the interest infringed and in some cases, perhaps, upon the nature of the interference to which it is subjected.[50]

[48]Hunt & Hunt Lawyers v Mitchell Morgan Nominees Pty Ltd (2013) 247 CLR 613, 629 [24].

[49]Ibid.

[50]Ibid 629 [25] (citations omitted).

For the purposes of cl 6B, ‘loss or damage’ in respect of a claim for economic loss resulting from a prescribed event in cls 1 and 2, means damage to the insured’s economic interests. The kind of economic loss and the time when it is sustained depends upon the nature of the interest infringed.

The Senior Member’s unchallenged finding was that the pool was ‘fatally defective’ and could not be rectified without a complete demolition and reconstruction. The Senior Member accepted the evidence of Mr Richardson that the pool length and width exceeded the permitted tolerances and therefore constituted a defect.[51] Mr Richardson prepared an expert report at the request of IAL.[52] His evidence regarding the discrepancy between the pool’s width and length exceeding permitted tolerances includes the following:

I measured the pool to have a length of approximately 3700mm and a width of 2340mm.
The permit approved plan and [sic] specified a pool length of 4300mm and width of 2400mm.
The swilling [sic] pool is therefore short in length by 600mm and narrow in width by 60mm. This equates to a reduction in the length by approximately 14% and in width by approximately 2.5%.
The Building Commission Guide to Standards and Tolerances — 2007 — Section 16.03 states that departure from the documented dimension is a defect if it exceeds L/100. With a documented length of 4300mm and width of 2400mm, this gives a tolerance for the length of 43mm and 24mm for the width. The as built pool length and width exceeds this permitted tolerance and is therefore a defect.[53]

[51]Tribunal Decision (n 2) [89].

[52]CB1787–804, Alann Richardson, ‘Inspection Report’, 28 June 2017.

[53]Ibid CB1794–5.

Mr Richardson concluded that in order to rectify the undersized construction of the swim spa and the raised height, the reinforced concrete structure needed to be completely demolished and removed and replaced.[54] Mr Richardson concluded that the incorrect dimensions of the swim spa were likely to prevent the continued practical use of the pool and constituted a structural defect in accordance with the Domestic Building Insurance Ministerial Order definition.[55]
[54]Ibid CB1795.
[55]Ibid.

The construction of the swim spa with incorrect dimensions constituted a structural defect as defined in the policy because it prevented the practical use of the pool as a swim spa. This structural defect was present from the time of construction.

Dr Milonas’ economic interests were damaged when she took possession of the fatally defective swim spa which was of no practical utility.[56] This occurred on 21 November 2008 upon the termination of the contract between Construction Facilities and Paradise Pools. The measure of her loss was the cost of the rectification works to remedy the defects in the pool and provide her with a swim spa capable of being used. These rectification works required the demolition, removal and rebuilding of the pool. This loss resulted from a prescribed event in cl 1(b)(i) of the policy: the failure of Paradise Pools to carry out construction of the pool in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract. The prescribed event occurred when the pool was constructed in early 2007.
[56]Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2005] NSWCA 248, [69] (‘Brewarrina’); Bellgrove v Eldridge (1954) 90 CLR 613, 617.

The judgment of the New South Wales Court of Appeal in Brewarrina Shire Council v Beckhaus Civil Pty Ltd (‘Brewarrina’)[57] is an example of economic loss in the form of the cost of rectification works crystallising upon a party taking possession of defective building works following the termination of a construction contract. In Brewarrina the Council entered into a contract for the construction of levy banks around the town of Brewarrina. When Beckhaus Civil Pty Ltd advised the Council the construction work had reached practical completion and requested certification of that fact, the Council refused to do so. The Council also refused to certify a progress claim by the builder. Beckhaus Civil Pty Ltd commenced proceedings and the Council counterclaimed, alleging inter alia that the works had not been completed in accordance with the contract, and that as a result the Council had suffered loss and damage, being the cost of rectification works. As to the question of when the Council had sustained loss, Ipp JA (Hodgson and McColl JJA agreeing) stated:

Accordingly, as at the judgment date, the Council rightly denied that practical completion had been achieved. But, it continued — at that stage — to hold Beckhaus to its contractual obligations to perform the work. Thus, on the Council’s contention, at the date of judgment, the work remained in Beckhaus’ possession; the Council, in effect, having refused to accept possession.
While, on this assumption (the Contract still being on foot), the Council may have been entitled to claim damages for delay arising out of Beckhaus’ failure to achieve practical completion by the date for practical completion, it could not sue Beckhaus for defective or incomplete work. As long as the Council maintained that the Contract was alive and had not been terminated, and held Beckhaus to its obligation to complete the work in accordance with the specification, on its contention the work remained lawfully in Beckhaus’ possession. In other words, it was an inevitable incident of the Council’s argument that the work had not been delivered to and accepted by the Council (Beckhaus — on the Council’s argument — being in possession of and obliged to complete the work). While the work was in Beckhaus’ possession, the Council suffered no loss by reason of defective or incomplete work; the work, not being in the Council’s possession, did not at that stage form part of its patrimony.
This situation would have changed when the Contract was terminated. When that occurred, the work (in its defective and incomplete state) was handed over to the Council. At that stage, the Council suffered loss by being in possession of defective and incomplete work.[58]

[57][2005] NSWCA 248.

[58]Ibid [67]–[69] (emphasis added).

Whilst the contract between Construction Facilities and Paradise Pools was on foot, Dr Milonas did not suffer loss by reason of the construction of the pool with incorrect dimensions. While the contract remained on foot there was a prospect of Paradise Pools complying with its contractual obligations and building a pool in accordance with the approved plans. However, once the contract was terminated, there was no longer any prospect of this occurring. Once Dr Milonas took possession of the defective pool, her economic loss crystallised.

IAL submitted before VCAT that under cl 6B there is no loss or damage unless and until the departure from the contract:

(a) either manifests itself by causing damage to some other part of the structure; or

(b) actually becomes known to the owner of the building.[59]

This submission, which was repeated in the present proceeding,[60] fails to acknowledge that loss arising from a latent defect will also be sustained when the defect ‘became manifest in the sense of being discoverable by reasonable diligence’.[61] Contrary to IAL’s submission, there is no requirement for an insured to have actual knowledge of a latent defect in order for loss or damage to result from the latent defect. Irrespective of whether the incorrect pool dimensions constituted a latent or non-latent defect, Dr Milonas’ loss occurred on 21 November 2008 when she took possession of the pool with incorrect dimensions which were discoverable with reasonable diligence.

[59]CB299, Respondent, ‘Outline of Submissions’, January 2018, [96].

[60]Applicant, ‘Appellant’s Amended Submissions’, 19 April 2021, [50].

[61]Hawkins v Clayton (n 39) 588; see also Multiplex Constructions (n 34) [26].

The Senior Member did not make any express finding as to whether the incorrect pool dimensions were discoverable through the exercise of reasonable diligence. The absence of such a finding reflects the manner in which the proceeding was conducted before the Tribunal. Neither IAL nor Dr Milonas submitted in the Tribunal that Dr Milonas’ loss occurred at the time the incorrect pool dimensions were discoverable through reasonable diligence. IAL did submit that Dr Milonas’ loss arising from the incorrect dimensions was the result of a latent defect. However, it submitted that the loss only occurred when Dr Milonas had actual knowledge of the loss. Although the Senior Member did not address the question of whether the incorrect dimensions were discoverable through the exercise of reasonable diligence, the Senior Member did make a finding that Dr Milonas became aware of the incorrect dimensions when she measured the pool in March 2017 by reference to the approved plans.[62] In the present proceeding, Mr Marzella submitted that the incorrect pool dimensions were discoverable by reasonable inquiry.[63] Mr Stuckey QC did not submit the contrary. There is no impediment to the Court making a finding that from the time of construction in early 2007 the incorrect pool dimensions were manifest in the sense of being discoverable by reasonable diligence.
[62]Tribunal Decision (n 2) [218].
[63]Transcript of Proceedings, T 145 L 24 (31 May 2021).

I reject IAL’s construction of cl 6B of the policy. My reasons for doing so differ from those of the Senior Member. Before addressing the Senior Member’s reasons, it is appropriate to set out IAL’s written submissions at first instance regarding the question of when loss or damage occurs for the purposes of cl 6B:

This State adopted the reasoning of Deane J. in Hawkins v. Clayton (1988) 164 CLR 569 to the effect that where ‘the building never existed and was never owned without the defect and (in the absence of consequential collapse or physical damage or injury) the only loss which could have been sustained by the owner was the economic loss which would be involved if and when the defect was actually discovered or became manifest, in the sense of being discoverable by reasonable diligence, with the consequence that the damage was then sustained by the then owner’. His Honour went on to say that the preferable approach ‘is that any loss or injury involved in the actual inadequacy of the foundations is sustained only at the time when the inadequacy is first known or manifest. It is only then that the actual diminution in the market value of the premises occurs’.

In Owners of Strata Plan 50946 v. Multiplex Constructions (NSW) Pty Ltd [2006] NSWSC 377 at [20] Justice White expressed the view that there was no additional requirement that, for a defect to be latent, it must be not visible or that it must be concealed or hidden in some way. His Honour observed that a defect ‘may be, and often will be, different from the physical thing which may be observed. For example, there may be a latent defect in the design of a building where a temporal external wall is too thin to carry a load even though the thickness of the wall and the size of the roof it carries is plainly visible’. This observation was referred to with approval in the Court of Appeal decision of Cyril Smith & Associates Pty Ltd v. Owners Strata Plan No. 64970 [2011] NSWCA 181 at [22].
The effect of these authorities is, it is respectfully submitted, that for loss or damage occasioned by a latent building defect to ‘occur’, so as to commence time running of the purposes of the Limitation of Actions Act and its equivalents, time is treated as running, and damage as having occurred, from the time when the defect becomes known or manifest.
What is the ‘loss or damage or expense’ claimed by Dr Milonas in this proceeding? She claims the cost of removing the swimming pool and re-building it 60cm larger. Plainly she did not incur that expense during the relevant period of six years because she has never incurred that expense. It is doubtful that she would ever incur that expense.
There was no diminution in the value of unit 1, 54 Marine Parade during the relevant period of six years because the defect was unknown to Dr Milonas or any other relevant person. The use of the pool was not impeded in any way during the relevant period because, for reasons very peculiarly her own, Dr Milonas has refused to put water in it.
The test under the policy is whether the loss, damage or expense ‘occurs’ during the relevant six year period. Although that loss, damage or expense must arise by reason of a defect in the works, the existence of the defect is not co-extensive with the existence of loss, damage or expense. If a building interior is painted a shade of white different to that specified in the contract there is a relevant ‘defect’, but if the owner never notices the difference or, more strikingly, prefers the different shade then there is no loss, damage or expense sustained by reason of the existence of that defect.
Although those types of issue no doubt prove complicated in practice, the core point is that there can be no loss, damage or expense unless and until the departure from the contract:—
(a)either manifests itself by causing damage to some other party of the structure; or

(b) actually becomes known to the owner of the building.[64]

[64]CB298–9, Respondent, ‘Outline of Submissions’, January 2018, [91]–[97] (emphasis in original).

IAL’s submission as set out above contained the following errors. First, it proceeds on the false premise that the incorrect pool dimensions constituted a latent defect. Second, it ignores Deane J’s formulation of a latent defect being manifest in the sense of being discoverable by reasonable diligence. Third, it contends that there is no loss or damage under cl 6B unless an insured incurs actual expense. Fourth, it addresses the question of whether there was loss or damage by reference to whether there was a diminution in the value of Unit 1, 54 Marine Parade. Dr Milonas’ loss was not diminution in property value by reason of the development of a latent defect. Her loss was the cost of demolition, removal and rebuilding of the pool.

The Senior Member rejected IAL’s construction of cl 6B. The Senior Member did not directly address the question of when the loss claimed by Dr Milonas occurred. That loss was economic loss comprising the cost of demolition, removal and rebuilding of the pool. Dr Milonas’ loss occurred on 21 November 2008 when she took possession of the defective pool.

The Senior Member equated Dr Milonas’ knowledge of the pool defects with the time when loss occurred:

To the extent that defects within the meaning of the Policy were included within the November 2014 Claim, the Applicant can be said to have been aware of them within the Policy Period. Furthermore, the Applicant was aware that there were defects which she raised during her meeting on site with Mr McNees, as outlined above. It was not until March 2017 that she actually measured the Pool against a copy of the Pool permit drawings which she obtained on discovery.
However, even if the Applicant is taken to have become aware of defects in March 2017, that was nonetheless within the Policy Period which expired on 20 April 2018 for the reasons referred to above.[65]

[65]Tribunal Decision (n 2) [218]–[219].

The Senior Member’s reasoning as set out above failed to address the question of when Dr Milonas’ loss, resulting from the construction of the pool with incorrect dimensions, occurred. Further, the Senior Member erred in concluding that the period prescribed by cl 6B did not expire prior to April 2018. Although the Senior Member’s reasoning was erroneous, her ultimate conclusion that IAL was liable to indemnify Dr Milonas for the cost of demolition, removal and rebuilding of the pool was clearly correct.[66]
[66]Cf Kozanoglu v Pharmacy Board of Australia (2012) 36 VR 656, 676 [121]; Forster v Legal Services Board (2013) 40 VR 587, 610 [113].

Questions of Law

IAL’s 23 questions of law and 24 grounds of appeal are annexed to this judgment. The questions of law address eight issues:

(xxiii) whether Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent (questions 1 to 3);

(xxiv) whether the contract between Construction Facilities and Paradise Pools was terminated on 21 November 2008 when Dr Milonas appointed Essential Construction Facilities as builder in lieu of Construction Facilities (question 4);

(xxv) when Dr Milonas’ loss resulting from the defective construction of the pool occurred (questions 5 to 9);

(xxvi) breach of natural justice: estoppel (questions 10 to 12);

(xxvii) breach of natural justice: breach of duty of good faith (questions 13 to 15);

(xxviii) quantification of loss and damage (questions 16 to 17);

(xxix) interest (questions 18 to 19); and

(xxx) indemnity costs (questions 20 to 23).

Issues (i) to (iii) and the nine related questions of law comprise the three limbs of IAL’s construction of cl 6B. As set out earlier in this judgment, I agree with IAL’s contentions in respect of issues (i) and (ii) that:

(a) Construction Facilities did not contract with Paradise Pools as Dr Milonas’ agent;

(b) the contract was terminated on 21 November 2008 when Dr Milonas appointed Essential Construction Facilities as builder in lieu of Construction Facilities; and

(c) the prescribed period under cl 6B commenced 17 October 2006 and concluded on 21 November 2014.

However, the four questions of law and the related appeal grounds in respect of issues (i) and (ii) are of no utility unless questions 5 to 9 and the related appeal grounds in respect of issue (iii) have a real prospect of success.

The questions of law and appeal grounds related to issue (iii) are in aid of IAL’s challenge to orders 1 and 2 made by the Senior Member on 8 January 2020. To succeed in its challenge to these orders, IAL must establish that Dr Milonas’ loss resulting from the construction of the pool with incorrect dimensions did not occur within the period 17 October 2006 to 21 November 2014. For the reasons set out earlier in this judgment, IAL’s challenge to orders 1 and 2 has no real prospect of success. Its challenge is premised on two misconceptions. First, that the incorrect pool dimensions constituted a latent defect. Second, that the loss arising from this defect did not occur until March 2017 when Dr Milonas first had actual knowledge of the incorrect dimensions.

Section 148(2A) VCAT Act provides that the Trial Division of the Supreme Court may only grant an application for leave to appeal under s 148 if it is satisfied that the appeal has a real prospect of success. Questions 5 to 9 do not have a real prospect of success. IAL’s arguments in support of its construction of cl 6B are fundamentally flawed. I refuse IAL’s application for leave to appeal on questions 5 to 9.

IAL has a real prospect of success in relation to its challenge to the Tribunal’s findings that Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent and the rejection of IAL’s contention that the contract was terminated on 21 November 2008. Although IAL has a real prospect of success in respect of these issues, the Court retains a residual discretion as to whether leave to appeal should be granted.[67] A consideration relevant to the exercise of the discretion is whether the Senior Member’s error of law made a difference to the Tribunal’s order.[68] The Senior Member concluded that Construction Facilities contracted with Paradise Pools as Dr Milonas’ agent. As a result of this finding, the Senior Member concluded that the limitation period under cl 6B did not expire until April 2018. Although these two findings were erroneous, the Tribunal’s ultimate finding that Dr Milonas’ loss occurred within the period prescribed by cl 6B was clearly correct. Questions 1 to 4 are of no utility because IAL’s challenge based on questions 5 to 9 has no real prospect of success. I refuse leave to appeal on questions 1 to 4.
[67]Glass (a pseudonym) v Chief Examiner (2015) 50 VR 577, 598 [81].
[68]Chopra v Department of Education and Training [2019] VSC 488, [21]–[23].

Mr Stuckey QC accepted that if IAL’s construction of cl 6B is rejected, there is no utility in questions 10 to 15 in respect of issues (iv) and (v). I refuse leave to appeal in respect of questions 10 to 15.

Quantification of loss

Issue (vi) relates to quantification of loss and damage. Questions 16 and 17 are as follows:

· Did the Tribunal misapprehend the evidence before it in relation to the quantification of loss and damage?

· Did the Tribunal fail to give reasons that disclose the path of reasoning to explain why it was adopting the amounts additional to the estimate of Mr Preller that it awarded?

The Senior Member concluded that the reasonable cost of demolition and reconstruction of the pool far exceeded the policy limit of $200,000.[69] IAL challenges this finding. IAL submits that the Senior Member misunderstood the nature of the evidence before her. IAL challenges a finding of fact. A finding of fact will not constitute an error of law unless the finding was not open on the evidence. IAL bears the onus of establishing that there was no evidence to support the relevant finding.[70]
[69]Tribunal Decision (n 2) [261].
[70]Myers v Medical Practitioners’ Board of Victoria (2007) 18 VR 48, 58–60 [42]–[46]; S v Crimes Compensation Tribunal [1998] 1 VR 83; O’Connor v County Court [2014] VSC 295, [38]–[39]; Crown Melbourne Ltd v Cosmopolitan Hotel (Vic) Pty Ltd [2013] VSC 614, [18].

The Senior Member made the following findings in respect of the cost of demolition, excavation and reconstruction of the pool:

Having regard to the cost estimates made by the Applicant’s experts, the Applicant claims a total of $327,068.87 inclusive of GST for the reasonable cost of demolishing and reconstructing the Pool in accordance with the plan and specification and drawings, made up as follows:
(1)       Preliminaries $35,607;
(2)       Demolition $17,518.07;
(3)       Excavations & Earthworks $120,873.70;
(4)       Pool Construction $90,500;
(5)       External Works $47,165.87;
(6)       Gas services $10,256;
(7)       Electrical Services $2,574.15; and
(8)       Plumbing sewer and stormwater $2,574.15.
In marked contrast, the estimate prepared by the Respondent’s expert is $123,731 (inclusive of a retention allowance).
The above totals are not directly comparable. In written submissions, Applicant’s Counsel has provided a comprehensive analysis and breakdown of the differences. For some items, Mr Preller did not provide a specific estimate in his report but gave an estimate in oral evidence. Mr Preller was also instructed to assume that all equipment supplied could be reused. In my view this is an unrealistic assumption and for the reasons advanced by Applicant’s Counsel, an allowance should be made for the supply of new equipment which will carry current warranties. Finally, I accept the reconstruction methodology recommended by Mr Turnbull, which will entail removal and replacement of the front fence; access from the front and underpinning by way of bore piers.
Accordingly, taking Mr Preller’s estimate (excluding retention allowance) as a baseline ($108,791), I would add:
a.        $18,090 for Preliminaries, in accordance with the Applicant’s estimate;
b.        $2,218 for Demolition, in accordance with the Applicant’s estimate;
c.The Applicant’s estimate for Excavation and Earthworks ($120,873) is substantially greater than the corresponding item in Mr Preller’s report ($2,090) by reason of the differing methodology. As indicated, I accept Mr Turnbull’s evidence and would therefore add $118,783 in accordance with the Applicant’s estimate.

At this point the reasonable estimate of the cost of demolition and reconstruction of the Pool is $247,181, which already exceeds the $200,000 Policy limit.
I do not propose to deal any further with the expert evidence or competing cost estimates. I am satisfied that the reasonable cost of demolition and reconstruction of the Pool far exceeds the Policy limit.[71]

[71]Tribunal Decision (n 2) [256]–[261].

The $247,181 referred to by the Senior Member as the cost of demolition and construction of the pool is comprised of $108,791 based on the evidence of Mr Preller, plus $141,181 for preliminaries, demolition, excavation and earthworks in accordance with Dr Milonas’ estimate, less $2,090 for excavation and earthworks estimated by Mr Preller. The principal component of Dr Milonas’ estimate for the cost of excavation and earthworks of $120,873 was an amount of $90,000, being the midpoint of Mr Turnbull’s estimate that the cost of underpinning by way of bore piers would be in the range of $80,000 to $100,000.[72]
[72]CB304, Respondent, ‘VCAT Applicant’s Submission, 26 June 2019, CB404–6 [587]–[595].

Mr Turnbull is a structural engineer who gave evidence on behalf of Dr Milonas. The Senior Member considered Mr Turnbull’s qualifications and experience to be ‘impressive and very appropriate to the task. He was an impressive witness who provided a sound explanation for his opinions’.[73] IAL objected to Mr Turnbull’s evidence that the cost of excavating the pool and associated earthworks would be $80,000 to $100,000 but the objection was overruled.[74] The Senior Member accepted the reconstruction methodology recommended by Mr Turnbull which entailed removal and replacement of the front fence; access from the front and underpinning by way of bore piers.[75]
[73]Tribunal Decision (n 2) [251].
[74]Transcript of VCAT Proceedings, T 672 L 29–36 (18 March 2019).
[75]Tribunal Decision (n 2) [258]; Transcript of VCAT Proceedings, T 671 L 19–22 (18 March 2019).

Mr Turnbull disagreed with the report prepared by Mr Richardson on behalf of IAL that the cost of excavation and earthworks would be $14,000. Mr Turnbull’s evidence was that Mr Richardson’s evidence was ‘fivefold short of the exercise’.[76] Mr Turnbull’s evidence was that:

I would have thought that something closer to 80 to 100 thousand dollars would be the sort of mark. The piles would be sort of five — four or five thousand dollars … work, 14 piles there and plus the steel, plus the infill. Yes, I would expect … more. In general figures, around $100,000 or $80,000.[77]

This evidence provides a foundation for the Senior Member accepting the submission advanced on behalf of Dr Milonas that the cost of underpinning by way of bore piers would be $90,000.

[76]Transcript of VCAT Proceedings, T 673 L 44–5 (18 March 2019).

[77]Transcript of VCAT Proceedings, T 673 L 46–47, T 674 L 1–2 (18 March 2019).

Unless IAL can establish that the Senior Member erred in accepting the evidence of Mr Turnbull, there is no basis for its challenge the Senior Member’s finding that the cost of demolition, removal and rebuilding of the pool exceeded the $200,000 limit under the policy. Mr Preller accepted that the cost of demolition, removal and rebuilding of the pool was $123,731, inclusive of a retention allowance.[78] This sum allowed $2,090 for excavation and earthworks.[79] Unless the Senior Member erred in accepting the evidence of Mr Turnbull that the cost of installing bore piers was in the range of $80,000 to $100,000, the cost of demolition, removal and rebuilding of the pool exceeds the $200,000 limit under the policy.
[78]Tribunal Decision (n 2) [257].
[79]Ibid [257].

In truth, IAL challenges the weight accorded by the Senior Member to the evidence of Mr Turnbull compared to the evidence of Mr Preller and Mr Richardson. This does not constitute an error of law. IAL’s challenge to the Senior Member’s finding that the cost of demolition, removal and rebuilding of the pool exceeded the $200,000 policy limit has no real prospect of success. Leave to appeal is refused in respect of questions 16 and 17.

Interest

The Tribunal ordered IAL to pay Dr Milonas’ interest pursuant to statute on the sum of $200,000 from 18 May 2017 until the date of payment. Dr Milonas’ further and better particulars of loss dated 18 May 2017 included a claim for interest pursuant to s 57 of the Insurance Contracts Act 1984 (Cth). Section 57(1) and (2) of the Insurance Contracts Act provides:

(1)Where an insurer is liable to pay to a person an amount under a contract of insurance or under this Act in relation to a contract of insurance, the insurer is also liable to pay interest on the amount to that person in accordance with this section.
(2)The period in respect of which interest is payable is the period commencing on the day as from which it was unreasonable for the insurer to have withheld payment of the amount and ending on whichever is the earlier of the following days:
(a) the day on which the payment is made;
(b)the day on which the payment is sent by post to the person to whom it is payable.

The Senior Member did not make any finding that it was unreasonable for IAL to have withheld payment of $200,000 from 18 May 2007. Mr Marzella submitted that it is implicit in the Tribunal’s order that the Senior Member had determined, in accordance with s 57(2) that it was unreasonable for IAL not to have made payment of the sum of $200,000 to Dr Milonas immediately upon receipt of the further and better particulars of loss and damage.[80] I do not accept this submission. The power to make an order pursuant to s 57 of the Insurance Contracts Act is contingent upon a finding that it was unreasonable for IAL to have withheld payment of $200,000. The Tribunal’s order that IAL pay interest from 18 May 2017 required a finding that it was unreasonable for IAL to have withheld payment of $200,000 once it received Dr Milonas’ particulars of loss and damage.
[80]Transcript of Proceedings, T 243 L 16–20 (31 May 2021).

Although the particulars of loss and damage claimed payment of $200,000, the components of the claim included amounts which form no part of the Senior Member’s assessment of Dr Milonas’ loss. The particulars of claim include a claim for $54,000 for ‘interest on original damages’ and a claim for punitive damages in the sum of $34,397.[81] It was not unreasonable for IAL to have withheld payment of $200,000 prior to being put on notice of evidence supporting a conclusion that the cost of demolition and reconstruction of the pool would exceed $200,000.
[81]CB246, Respondent, ‘Particulars of Loss and Damage Claimed’.

Mr Turnbull gave evidence in respect of the cost of excavation and earthworks being $80,000 to $100,000 on 18 March 2019. This evidence, which was critical to the Senior Member’s finding that the cost of excavation, demolition and removal of the pool would exceed $200,000, was not foreshadowed prior to 18 March 2019. Prima facie, it was not unreasonable for IAL to have withheld payment of $200,000 prior to this evidence being led before the Tribunal. However, whether it was unreasonable for IAL to have done so post 18 March 2019 will be a matter for the Tribunal to give further consideration to upon remittal of the question of interest to the Tribunal.

I grant IAL leave to appeal on questions of law 18 and 19 and uphold the challenge to that part of order 2 requiring IAL to pay Dr Milonas interest pursuant to statute on the sum of $200,000, calculated from 18 May 2017 to date of payment.

Costs

The Senior Member ordered IAL to pay Dr Milonas’ costs of the proceeding from 21 December 2017 to 8 January 2020, such costs to be assessed by the Costs Court, in default of agreement on the relevant County Court scale applicable at the time when the costs were incurred on a solicitor-client basis. Rule 1.07 of the Victorian Civil and Administrative Tribunal Rules 2018 provides a default scale of costs as follows:

Unless the Tribunal otherwise orders, if the Tribunal makes an order as to costs, the applicable scale of costs is the County Court costs scale as defined in Rule 1.13 of Chapter I of the Rules of the Country Court.

The County Court no longer has its own scale of costs. The County Court Civil Procedure Rules 2018 r 1.13(1) provides that ‘County Court costs scale’ means a fee or charge that is 80 per cent of the applicable rate in Appendix A to Chapter I of the Supreme Court (General Civil Procedure) Rules 2015, or in the case of a circuit fee, the amount in schedule 1 to the County Court Civil Procedure Rules 2018. Rule 63A.01 of County Court Civil Procedure Rules 2018 requires the Supreme Court Appendix to be read as though each reference to the Supreme Court was a reference to the County Court.

The Supreme Court (General Civil Procedure) Rules 2015 do not make provision for the award of costs on a solicitor-client basis. Costs are awarded on either a standard or indemnity basis. There is therefore an internal inconsistency in the order requiring IAL to pay Dr Milonas’ costs on a solicitor-client basis in accordance with the County Court costs scale. The County Court costs scale now operates by reference to the Supreme Court costs scale which makes no provision for solicitor-client costs. Putting this inconsistency to one side, it appears that the Senior Member intended to make a special costs order. IAL’s primary challenge to this order is that it was not afforded an opportunity to make submission on the question of costs before being subject to a special costs order.

The Senior Member concluded that there were grounds pursuant to ss 109(3)(a)(ii); 109(3)(b) and 109(3)(e) of the VCAT Act to order IAL to pay Dr Milonas’ costs of the proceeding for the period commencing immediately after 20 December 2017 to the date of judgment.[82] Prior to 20 December 2017 Dr Milonas had represented herself. Section 109(2) and (3) of the VCAT Act provides:
[82]Tribunal Decision [266].

(2)At any time, the Tribunal may order that a party pay all or a specified part of the costs of another party in a proceeding.
(3)The Tribunal may make an order under subsection (2) only if satisfied that it is fair to do so, having regard to—
(a)whether a party has conducted the proceeding in a way that unnecessarily disadvantaged another party to the proceeding by conduct such as—
(i)failing to comply with an order or direction of the Tribunal without reasonable excuse;
(ii)failing to comply with this Act, the regulations, the rules or an enabling enactment;
(iii)asking for an adjournment as a result of (i) or (ii);
(iv)causing an adjournment;
(v) attempting to deceive another party or the Tribunal;
(vi)vexatiously conducting the proceeding;

(b)whether a party has been responsible for prolonging unreasonably the time taken to complete the proceeding;
(c)the relative strengths of the claims made by each of the parties, including whether a party has made a claim that has no tenable basis in fact or law;
(d)the nature and complexity of the proceeding;
(e)any other matter the Tribunal considers relevant.

The Senior Member did not make any finding that the conduct engaged in by IAL constituted a failure to comply with the VCAT Act, regulations, rules or an enabling enactment. Any such finding would reflect adversely on IAL. Before the Senior Member had regard to s 109(3)(a)(ii) IAL should have been afforded an opportunity to address any provisional finding that it had failed to comply with the VCAT Act, regulations or rules. Further, it is implicit in the Senior Member’s reliance upon s 109(3)(b) that she considered that IAL was responsible for unreasonably prolonging the time taken to complete the proceeding. The basis of any such finding is not disclosed in the reasons. The litigation was hard fought on both sides. The adjournment of the proceeding following the first six days of hearing was a direct consequence of Dr Milonas having represented herself and having failed to lead evidence which the Senior Member considered may have been critical to her claim succeeding. Based on my review of the transcript of the proceeding it does not appear that IAL was responsible, any more so than Dr Milonas and her legal representatives, for unreasonably prolonging the time taken to complete the proceeding.

Ultimately, the Senior Member might conclude that Dr Milonas is entitled to an order for costs based on the nature and complexity of the proceeding. The legal and factual issues in the proceeding were certainly complex. Dr Milonas succeeded in the proceeding. It is a matter for the Tribunal re-exercising the discretion conferred by s 109(2) as to whether, and if so, and to what extent the Tribunal has regard to s 109(3)(d) of the VCAT Act. On remittal, the Senior Member will also have to reconsider the question of whether any costs order, if made in Dr Milonas’ favour, should be made on a standard or indemnity basis. If the Senior Member proposes to exercise the discretion to order costs on an indemnity basis, it will be necessary to identify the matters which justify the making of such an order.

I grant IAL leave to appeal on questions of law 20 and 21. I refuse leave to appeal in respect of questions 22 and 23. Mr Stuckey QC disavowed any reliance on question 22.[83] No submission was made in respect of question 23 during the hearing on 28 and 31 May 2021. I uphold IAL’s challenge to order 3 of the Tribunal’s orders on the basis of questions 20 and 21.
[83]Transcript of Proceedings, T 110 L 11–17 (28 May 2021).

Conclusion

I shall provide the parties with an opportunity to make submissions on the costs of the proceeding. My provisional view is that any order for costs should reflect the relative success of the parties in the proceeding. Dr Milonas has succeeded in upholding the Tribunal’s order that IAL is liable to indemnify her in the sum of $200,000. IAL has successfully challenged the Tribunal’s orders in respect of interest and costs. The primary issue in the application for leave to appeal concerned the construction of cl 6B of the policy. My provisional view is that, based on Dr Milonas’ success in respect of the principal issue in the proceeding, IAL should pay 75 per cent of her costs, including reserved costs, on a standard basis to be taxed in default of agreement. If either party wishes to put a different position, they will be afforded an opportunity to do so.

I propose to make the following orders:

1. The applicant’s application for leave to appeal on questions of law 1 to 17, 22 and 23 is dismissed.

2. The applicant is granted leave to appeal on questions of law 18, 19, 20 and 21 and the appeal on those grounds is upheld.

3. Paragraph 2 of the Tribunal’s orders of 8 January 2020 is varied by deleting the words ‘plus interest pursuant to statute calculated from 18 May 2017 to date of payment’.

4. Paragraph 3 of the Tribunal’s orders of 8 January 2020 is set aside.

5. The proceeding be remitted to the Tribunal constituted by Judge Jenkins, Senior Sessional Member, for hearing and determination of the following issues:

(a) whether Insurance Australia Ltd should be ordered to pay interest on the sum of $200,000, and if so, from what date; and

(b) whether Insurance Australia Ltd should be ordered to pay Dr Milonas’ costs of the proceeding in the Tribunal, and if so, on what basis.

6. If Judge Jenkins is not available, the Tribunal shall be constituted as determined by the President of the Tribunal.

---

ANNEXURE

Questions of Law
A. Parties to Contract

Did the Tribunal err in finding that the written contract between Construction Facilities Pty Ltd and Paramount Building Solutions Pty Ltd (trading as Paramount Pools) was as a matter of law entered into by Construction Facilities as agent for the Respondent?

Whether there was any evidence to support the Tribunal’s finding that the written contract between Construction Facilities Pty Ltd and Paramount Building Solutions Pty Ltd (trading as Paramount Pools) was as a matter of law entered into by Construction Facilities as agent for the Respondent?

Did the Tribunal fail to give reasons that disclosed its path of reasoning to explain why it was rejecting the objective meaning of the written contract between Construction Facilities Pty Ltd and Paramount Building Solutions Pty Ltd and concluding that Construction Facilities entered into it as agent for the Respondent?

B. Termination of the Contract

Should the Tribunal have concluded on the evidence before it that the contract between Construction Facilities Pty Ltd and Paramount Building Solutions Pty Ltd ended at or about the time the Respondent dismissed Construction Facilities Pty Ltd as builder from the site?

C. When is Loss and Damage Sustained for Defective Building Work

Did the Tribunal fail to identify the correct legal test for when loss and damage was suffered in relation to defects within the meaning of clauses 6A and 6B of the Home Warranty Insurance policy?

Did the Tribunal err in concluding that the time that loss and damage is sustained in relation to defects within the meaning of the Home Warranty Insurance policy is different to the time that it is sustained under the common law, namely at the time the defect is discovered or manifests itself?

Did the Tribunal fail to properly identify the test for when loss and damage is sustained in relation to defects within the meaning of the Home Warranty Insurance policy?

Whether there was evidence upon which the Tribunal could conclude that the Respondent was aware of any defect (unspecified) as at November 2014?

Did the Tribunal fail to give reasons capable of explaining or disclosing its path of reasoning for determining how and when the Respondent suffered loss and damage within the meaning of the Home Warranty Insurance policy?

D. Breach of Natural Justice: Estoppel

Did the Tribunal act contrary to its obligation under section 98(1)(a) of the Victorian Civil and Administrative Tribunal Act to comply with the rules of natural justice in permitting the Respondent to rely, in final submissions, upon the contention that the Appellant was estopped from relying upon clause 6A of the Home Warranty Insurance policy, where the Appellant had had no notice of the claim at the time evidence was adduced?

Did the Tribunal err in concluding that its findings of fact raised an estoppel precluding the Appellant from relying upon the terms of the Home Warranty Insurance policy?

Did the Tribunal fail to give reasons that disclosed its path of reasoning to explain why it was rejecting the evidence of Mr McNees as to what occurred on his attendance at the Respondent’s property and adopting the contrary evidence of the Applicant?

E. Breach of Natural Justice: Breach of Duty of Good Faith

Did the Tribunal act contrary to its obligation under section 98(1)(a) of the Victorian Civil and Administrative Tribunal Act to comply with the rules of natural justice in permitting the Respondent to rely, in final submissions, upon the contention that the Appellant had breached its duty of utmost good faith, where the Appellant had had no particulars or notice of the claim at the time evidence was adduced?

Did the Tribunal err in its identification of the meaning and content of the duty of utmost good faith under sections 13 and 14 of the Insurance Contracts Act?

Did the Tribunal fail to give reasons that disclosed its path of reasoning to explain:

(a)what findings of fact it was making about the Appellant’s conduct; and
(b)why that conduct was in breach of the duty of utmost good faith?

F. Quantification Loss and Damage

Did the Tribunal misapprehend the evidence before it in relation to the quantification of loss and damage?

Did the Tribunal fail to give reasons that disclosed its path of reasoning to explain why it was adopting the amounts additional to the estimate of Mr Preller that it awarded?

G. Interest

Did the Tribunal correctly identify the statutory test for awarding interest upon any award?

Did the Tribunal fail to make the necessary factual findings or give reasons that disclosed its path of reasoning to explain why it determined to make the award of interest that it did?

H. Indemnity Costs

Did the Tribunal act contrary to its obligation under section 98(1)(a) of the Victorian Civil and Administrative Tribunal Act to comply with the rules of natural justice in not affording the Appellant a right to make submissions on the question of costs after making its findings and before ordering the award of costs on an indemnity basis?

Did the Tribunal make the necessary factual findings or give reasons that disclosed its path of legal reasoning that explained:

(a)how the Appellant had failed to act with due regard to the legitimate interests of the Respondent;
(b)how the Appellant failed to make adequate disclosure to the Respondent;
(c)how the Appellant failed to act fairly to the Respondent;
(d)how the Appellant failed to give a timely and informed response to the Respondent’s initial claim;

so as to identify why a cost order for indemnity costs of the proceeding was appropriate?

Did the Tribunal identify any legal principle abrogating the Appellant’s right to rely upon the terms of the Home Warranty Insurance policy in respect of an indemnity of $200,000 inclusive of reasonable legal costs?

Did the Tribunal act contrary to its obligation under section 98(1)(a) of the Victorian Civil and Administrative Tribunal Act to comply with the rules of natural justice in granting the Respondent the right run a further trial after the initial trial had concluded and the Appellant filed its final submissions?

Grounds of Appeal
A. Parties to Contract

The Appellant agreed to issue a policy of Home Warranty Insurance for a contract between Construction Facilities Pty Ltd and Paramount Building Solutions Pty Ltd which was established at trial and accepted by the Tribunal as the relevant written contract. There was no legal basis for the Tribunal’s conclusion that the true contract was otherwise than as contained in the written document.

There was no evidentiary basis for the Tribunal’s conclusion that the true contract was entered by Construction Facilities as agent for the Respondent. The Respondent had denied any knowledge of that contract by Construction Facilities and all of the documentary evidence was inconsistent with that conclusion, including the Home Warranty Insurance policy issued by the Appellant.

The findings of the Tribunal at [70] do not disclose any basis for a finding that Construction Facilities, in signing a contract in its own name, should be held to have done so as an agent for the Respondent or why the Appellant should be fixed with such a characterisation.

B. Termination of that Contract

The Respondent’s evidence was generally to the effect that Paramount Building Solutions was not seen on site after April 2007. Her evidence was that Construction Facilities was dismissed from the site in November 2008 or even earlier. That state of affairs was supported by the documentary evidence.

If the two parties to a construction contract have both ceased to perform it and have no further commercial interest in having it performed it should be inferred that they have abandoned it. On the evidence neither Construction Facilities nor Paramount Building Solutions took any step to further perform the contract after April 2007. For the purposes of calculating the policy period the building contract had ended by the end of 2008 after Construction Facilities was dismissed from the site.

C. When is Loss and Damage Sustained for Defective Building Work

The Tribunal determined that the test for when loss and damage is sustained for the purposes of the Home Warranty Insurance policy is a different test to the common law in Victoria and Australia for when loss and damage is sustained by building work that is carried out that contains defects, namely when the defect is discovered or otherwise becomes known or manifest.

The Tribunal did not identify a clear alternative measure in rejecting the common law position, nor explain when loss and damage would be sustained under the terms of the Home Warranty Insurance policy.

The correct measure is the same as in the common law and the decision was in error: loss and damage was only sustained when the Respondent discovered that the pool was too short.

The alternative finding of the Tribunal that the Respondent was aware of ‘defects’ in November 2014 is made in the absence of any evidence from the Respondent that she was aware of any particular defect in the pool that was not part of its incomplete state.

In making that alternative finding the Tribunal failed to identify what that defect was or any circumstance by which that conclusion was arrived at, including any aspect of the Respondent’s evidence to that effect.

D. Breach of Natural Justice: Estoppel

The Respondent in final submissions on 26 June 2019 sough to raise a range of legal arguments as to liability, including an argument that the Appellant should be estopped from relying upon the requirement that loss must occur within the policy period because the Respondent had given evidence that before she completed a claim form in November 2014, an unidentified person at the Appellant had told her over the phone to tick the box relating to incomplete works. This argument had not been advanced previously when the Respondent was cross-examined in November and December 2017. There was no opportunity to cross-examine her in light of this contention. The Appellant objected to it being relied upon but the Tribunal considered and accepted it. This was manifestly unfair to the Appellant.

The Tribunal does not seek to identify with precision what it was that the Appellant represented to the Respondent. It does not seek to identify what the Respondent did or refrained from doing as a result of any representation. It does not seek to address how any representation might continue operating after the rejection of the Respondent’s claim in February 2015. It does not seek to identify with precision how the Respondent would be injured if the estoppel was not imposed.

The Tribunal’s argument that a claim that the pool has not been completed necessarily means that the pool is defective and that, therefore, both the owner and the insurer should be treated as being aware of all defects in the construction of the pool is contrary to the terms of the Home Warranty Insurance policy.

E. Breach of Natural Justice: Breach of Duty of Good Faith

At the time the Respondent gave evidence and was cross-examined, no notice or particulars of this allegation had been given. To allow it to be argued in final submissions was a breach of natural justice.

The test apparently applied required an insurer to respond not simply to the claims made upon it formally and informally, but to undertake an investigation on behalf of the insured to identify those claims that an insured might bring against it. That misapprehends the scope of the duty.

The Tribunal does not, in its reasons, make clear what test or standard it was holding the Appellant to, nor what conduct it concluded had breached the duty. The Tribunal’s finding was general and non-specific and did not seek to explain how the duty was breached. It is not possible to ascertain whether the Tribunal is of the view that the Appellant acted dishonestly or negligently, or to some other standard.

F. Quantification Loss and Damage

The Tribunal had before it the evidence of Mr Preller for the Appellant whom it assessed as ‘an impressive witness who gave considered evidence and also made appropriate allowances’. It also had Mr Mladichek whose evidence was so unreliable that the Respondent disavowed reliance upon it.

The Tribunal did not make reasoned determination about the scope of the work or the reasonable costing of those works. Instead it took Mr Preller’s costing and added approximately $140,000 to it without explaining how it was making that assessment. In fact it was simply accepting the submissions of the Respondent that were in turn not based upon any coherent evidence.

G. Interest

Interest was only awardable in respect of an insurance claim under section 57 of the Insurance Contract Act, which permits an award from the date that it was unreasonable for the insurer to have withheld payment. The Tribunal allowed interest from the date the Respondent first raised a claim for defects with the pool in the unsupported amount of $47,470, being May 2017. That was the first possible day that the Appellant could have paid the Respondent anything in respect of her claim for defective construction.

The Tribunal did not give reasons as to why by that date, or any other date, it was unreasonable for the Appellant to have withheld payment of $200,000 from the Respondent, particularly in light of the Tribunal’s rejection of the Respondent’s own evidence (as opposed to submissions) as to the proper quantification. The Tribunal has misapprehended the test it was required to apply.

H. Costs

The Tribunal did not afford the Appellant the opportunity to make submissions as to the question of costs under section 109 of the VCAT Act in light of its finding in the proceeding. In making such a special costs order without giving the Appellant an opportunity to be heard it failed to accord it natural justice.

The Tribunal did not, in its reasons make clear findings of fact nor explain why they caused it to exercise its discretion as it did. It’s [sic] purported findings are at such a high level of generality that they cannot be attributed to any of the evidence or findings of fact, but they do all appear to relate to conduct prior to the commencement of proceedings, not the conduct of the proceedings itself. As such they would not satisfy the criteria for a costs order nor a special costs order.

Whilst recognising that the Home Warranty Insurance Policy limited the indemnity to $200,000 including the reasonable costs of enforcing the Home Warranty Insurance policy against the insurer, the Tribunal held that the Appellant had abrogated its right to rely upon that limitation by unidentified but reprehensible conduct. There is no legal principle that would abrogate the limit of the indemnity and so enlarge it.

I. Failure to Afford Natural Justice

The Tribunal afforded the Respondent so many indulgences that the cumulative effect was to breach the rules of natural justice by unfairly subjecting the Appellant to unfair prejudice.

[2021] VSC 602

22 September 2021