P and JM De Leo Pty Ltd v Alphonso

IN THE SUPREME COURT OF VICTORIA

Not Restricted

AT MELBOURNE

COMMON LAW DIVISION

JUDICIAL REVIEW AND APPEALS LIST

S CI 2016 04061

P & JM DE LEO PTY LTD (ACN 005 361 679)	Applicant
and
RALPH ALPHONSO	Respondent

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JUDGE:	Ginnane J
WHERE HELD:	Melbourne
DATE OF HEARING:	31 July, 1 August, 9 October 2017
DATE OF JUDGMENT:	19 December 2017
CASE MAY BE CITED AS:	P & JM De Leo Pty Ltd v Alphonso
MEDIUM NEUTRAL CITATION:	[2017] VSC 786

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DOMESTIC BUILDING — Owner’s claim against builder for damages for breach of contract — Appeal on questions of law from VCAT — Identification of defect — Identification of defects released under terms of settlement — Whether owner knew or ought reasonably have known of defect when he signed terms of settlement — Domestic Building Contracts Act 1995 ss 3, 8.

ADMINISTRATIVE LAW — VCAT — Duty to give reasons — Whether reasons adequate —Victorian Civil and Administrative Tribunal Act 1998 s 117.

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APPEARANCES:	Counsel	Solicitors
For the Applicant	Mr F J Tiernan QC with Mr A C Blair	T J Mulvany & Co
For the Respondent	Mr D M McDonald	Pearce Webster Dugdales

HIS HONOUR:

Introduction

The applicant builder, P & JM De Leo Pty Ltd (‘De Leo’), seeks leave to appeal on questions of law from a decision of the Victorian Civil and Administrative Tribunal (‘VCAT’) by which it was ordered to pay the respondent owner, Mr Ralph Alphonso, $117,152. The order of VCAT stated the judgment sum incorrectly as $100,072.30 and the parties agree that the order requires amendment.[1]
[1]The proceeding was out of time but it was agreed that an extension should be granted.

The issue is whether VCAT erred in ordering the Builder to pay damages to the Owner for the faulty construction of two units in East Melbourne. In previous proceedings, the Builder had sued the Owner in VCAT for unpaid fees and they had settled those proceedings and executed Terms of Settlement in 2009. A key question in this proceeding is the meaning and effect of those Terms. The proceeding was originally heard by another judge of the Court who was unable to complete it. I then, having read the transcript and papers of the first hearing, conducted a further hearing on 9 October 2017 after which I reserved my judgment.

Mr Alphonso owned land at 21-25 Hayes Lane, East Melbourne and entered into a contract with De Leo to construct two adjoining double-storey townhouses or units separated by a common wall on the property in accordance with architect’s plans. Work commenced on 21 January 2007 and the slab was poured on 23 February 2007.

On 21 January 2014, Mr Alphonso sued De Leo in VCAT alleging that it had breached warranties contained in the contract being the warranties in s 8 of the Domestic Building Contracts Act 1995 (‘the DBC Act’) by failing to perform the building works in a proper workmanlike manner and in accordance with the plans and specifications, and by supplying materials that were not of good and suitable standard in accordance with the Building Code of Australia and by failing to exercise reasonable care and skill. Mr Alphonso claimed damages of $255,768.60, including a claim for loss of rent and associated tenant’s costs that would be incurred when rectification work was performed.

One of the breaches particularised was ‘rotational movement at the north-east corner of 21 Hayes Lane, including a column being out of plumb’. The particulars referred to further particulars contained in a report of Mr Terence Nott, of Archicentre Ltd (‘Archicentre’), dated 31 October 2012. In summary that report stated that:

(a) Mr Nott observed deflection of the column at the north-east corner of approximately 10mm and that the cement sheeting at the first floor was cracked and loose; and

(b) Mr Nott considered that the rotational movement of the column and the cracking was caused by incorrect footing for the column which was ‘a serious defect’, and should be rectified after first obtaining the professional advice of a structural engineer.

According to Mr Alphonso’s particulars, the rectification work required because of De Leo’s breaches consisted of the temporary propping, but not the replacement, of the north-east column; removal of the blinding concrete upon which the column was fixed; removal of the blinding concrete between the main slab and the north-east column; installation of blinding concrete as appropriate; construction of the pad footing for the north-east column and the beam connecting the main slab to the pad footing including adequate dowelling of the connecting beam to the main slab; and the connection of the north-east column to the pad footing. All of this work was to be in accordance with the original engineering documentation under the contract. The work also included rectification to cracking in the fibre board at the first floor level above the north-east column. The cost of rectifying the rotational movement at the north-east corner, including the out of plumb column, was $77,000.

De Leo denied the breaches alleged by Mr Alphonso and pleaded in the alternative that they fell within the terms of the release of July 2009. Mr Alphonso disputed that they did and alleged that the defects in respect of which he sued were not known or apparent to him during the previous proceeding. With respect to the north-east pad footing and connection to slab, Mr Alphonso pleaded that:

The substructure defects are below ground and it took until after July 2009 for the movement in the north east column to be noticeable.

To give some context to the issues, I will set out details of the witness statements of Mr Alphonso and Mr De Leo. However, I do not do so for the purposes of any finding about disputed questions of fact, other than findings that VCAT made, because the transcript of their oral evidence was not included in the court book. There was little dispute about the key issues of fact.

Mr Alphonso’s VCAT evidence

Mr Alphonso purchased the land in mid-to-late 2005 with the aim of developing it. Once plans were finished, Architecture Works, who had worked with Mr De Leo on several projects, prepared the specifications. De Leo was hired as the builder. Mr Alphonso acted as his own contract administrator and Mr B Meehan performed this role on behalf of De Leo.

The domestic building contract was executed on 12 December 2006. It required Mr De Leo to build two residential units for a fixed price and duration. The clearing and the ground work of the site commenced on 21 January 2007.[2] From then, Mr Alphonso attended on-site meetings with Mr De Leo and, generally each week until 19 June 2007.
[2]Ibid [9]-[10].

By February 2007, it became clear to Mr Alphonso that the footings at the north-east corner supporting the steel column were not constructed in accordance with the engineering specification drawings. The steel columns were being installed onto the pad of blinding concrete and there were no reinforcement bars connecting the slab to the steel column as the engineering drawings required. Mr Alphonso spoke to Mr De Leo about this and advised Architecture Works of the deviation. They told him that any departure from the engineering drawings required signing off by the engineer.

Accordingly, on 7 March 2007, Mr Alphonso emailed Mr Meehan advising that any changes or variations in construction needed to be cleared and documented with the engineers before work would go ahead. He received no response to that email or to follow up emails. Mr Alphonso next discussed the issue with Mr De Leo on-site who advised him that he was confident that the footings built were more than adequate. Mr Alphonso repeated the need for the engineer to sign-off on the variation.

At a site meeting on 19 June 2007, Mr Alphonso asked Mr De Leo to obtain engineering approval for the column footing. Mr De Leo informed Mr Alphonso that Mr Meehan would not be attending any more site meetings and thereafter according to Mr Alphonso, Mr De Leo rarely attended the weekly site meetings and a young De Leo employee struggled with managing the sub-contractors, which was De Leo’s responsibility under the contract.

Mr Alphonso experienced delays and mismanagement in the building of the units and instead of the contracted 8 months, the work took 13 months. The finishes were sub-standard and many errors were made along the way, including ordering the wrong window sizes, all resulting in further delay.

Mr Alphonso and Mr De Leo agreed for Architecture Works to perform the final inspection for practical completion. On 11 March 2008, it provided a completion list with 128 incomplete items.

In November and December 2009, Mr Alphonso contacted Mr Meehan and Mr De Leo about water leaks in Unit One. I interpose that the Terms of Settlement in respect of De Leo’s VCAT proceeding were signed in July 2009.

In early 2010, Mr Alphonso first noticed a small gap emerging between the north-east column and the northern wall of the units. The gap had not been present when he took photographs of the north-east column on 5 September 2007, nor were the gaps present upon completion of the units in 2008. He monitored this situation throughout 2010 and continued to notify Mr Meehan via email of his concerns regarding the gap in May and June 2010. On 22 June 2010, Mr De Leo attended the site to inspect the units. He said that he did not know the cause of the defects and that he would ‘get back to’ Mr Alphonso.

Mr Alphonso continued contacting Mr Meehan and Mr De Leo throughout 2010 and until August 2011 when Mr Meehan advised him that his concerns had been referred to the plumber, and again to Mr De Leo.

By the end of August 2011, Mr Alphonso noticed that the crack was becoming larger and he was concerned that it might be a structural issue because Mr De Leo had never provided him with a sign off from the engineer for the column’s footing.

In March 2012, Mr Alphonso engaged Archicentre to provide a report. Mr Terence Nott of Archicentre inspected the property in May and again on 31 October 2012. On 10 December 2012, Mr Alphonso received a report from Archicentre about the alleged defects.

Mr Alphonso was travelling for work during mid to late 2013 and he issued proceedings in January 2014. Mr Alphonso gave further evidence about rectification works that he has already paid for, loss of rent owing to rectification work and removal costs.[3]
[3]Ibid [40]-47].

Mr De Leo’s VCAT evidence

Mr Patrick De Leo was a director of the Builder. His evidence was that because of Mr Alphonso’s refusal to pay the outstanding balance of $42,525 owed under the Domestic Building Contract, he instituted proceedings in VCAT in 2007 to recover the sum.[4] Mr Alphonso raised a number of alleged defects or incomplete works, but they did not include the defects about which he later sued in the 2014 VCAT proceeding.[5] The 2007 proceeding settled with the parties executing Terms of Settlement.
[4]Witness statement Mr De Leo (VCAT, 14 December 2015) CB 295 [4].
[5]Ibid [5].

Mr De Leo was served with Mr Alphonso’s claim in the second VCAT proceeding in February 2014. Mr Alphonso alleged a number of further defects in the work carried out under the contract. Mr De Leo wrote to Mr Alphonso querying why it had taken him so long to raise the defects. On 30 April 2014, an expert report by Mr Barry Gale of Barry Gale Engineers Pty Ltd dated 24 April 2014 was served upon Mr De Leo. The report listed the alleged defects and Mr De Leo provided the following response in his VCAT statement concerning the allegations about the north-east column:

Allegation: Movement of the north-east corner of 21

Response: The report contains no defect attributable to Mr De Leo.
The southward lean is due to inadequate slab design or drainage issues.
The movement is not caused by an incorrect footing for the column.
The footing should have been tied in, unlike the design provided by the engineer. Mr De Leo informed Mr Alphonso that starter bars would be stronger and that he would follow this course instead. The tying in of the column to the pad is preferable than a freestanding column and this work was carried out in a proper and workmanlike manner.

Allegation: The sub-structure of the column is faulty
Response:There are a number of incorrect assertions about the laying of the cement for the north east column.
It is incorrect to state that the blinding concrete was not reinforced, it was in fact reinforced with 20 mm steel bars.
The emails between the owner and the builder with respect to the differently constructed footing refer to the other columns, and not the northeast column as claimed, and nothing is alleged by way of deflection of these columns.

Allegation:Cracking of fibre board
Response:This is due to slab heave due to inadequate slab design or lack of surface or sub-surface drainage which was Mr Alphonso’s responsibility.
Allegation: Warping of interior of north wall of 21
Response:This is caused by slab heave.[6]
[6]Other items described in the report were also attributed to heave.

Matters not in dispute

The parties agreed that the footings in the northeast corner, supporting the steel columns, were not constructed in accordance with the engineer’s specification drawings. Mr Alphonso was aware of this when he signed the Terms of Settlement. Mr De Leo, when giving evidence, confirmed that there was no reinforcement bar connecting the slab to a pad on which the steel columns were placed as required by the engineering drawings. De Leo never obtained the engineer’s approval for variations to the construction of the units. Instead, De Leo constructed the column with a pad that was tied to the slab by starter bars, which were then drilled into the slab. However, the Member stated that he did not provide any evidence as to whether the starter bars were an appropriate means of tying the pad footing to the slab. De Leo conceded that the failure to construct a north-east footing in connection to the main slab in accordance with the plans and specifications was a defect. That concession in turn was the foundation of its argument that the release given in 2009 prevented Mr Alphonso’s 2014 claim.

Expert witnesses

I will next refer to the expert evidence as contained in witness statements that were led before VCAT on the relevant issue concerning the north-east corner and again noting that the transcript of their oral evidence was not in the Court book. Again I do so primarily to give the context of the issues that were before VCAT in deciding the 2014 proceeding and to its reasons.

Mr Terence Nott, who as previously mentioned, was an architect of Archicentre, provided a report having inspected the property in 2012. He stated in respect of the movement of the north-east corner of 21 as follows:

I observed that the column at the north-east corner was out of plumb. Deflection was approximately 10 mm over the spirit level. I also observed that the cement sheeting at the first floor was cracked and loose. I understand that the concrete base of the steel column was not poured integral with the main slab as documented.
My opinion is that the rotational movement has been caused by the incorrect footing for this column. This is a serious defect. I recommend that this be rectified after first obtaining the professional advice of a structural engineer. I also recommend that the bases of the other two columns be checked to establish whether they have been correctly tied to the main slab.

Mr Nott listed ten other defects which Mr Alphonso formed part of Mr Alphonso’s points of claim.

Mr Barry Gale, an engineer, inspected the property in January 2014. As mentioned, his firm had been engaged by Mr Alphonso to provide the structural engineering design and structural certification for the two unit development. His expert report discusses the movement at the north-east corner of 21. He provided a sketch showing the alignment of the column in the east-west direction. His report states as follows:

The alignment is approximately vertical with 3 to 4 mm to the east from the base to within 500 mm of the first floor.
Above this point the column leans further to the east by an additional 5 mm.
The overall lean from the ground to the first floor is therefore approximately 8 mm.
It is likely that the column was constructed with the slight bend of 5 mm at the top.
Australian Standard AS4100 – Steel Structures Clause 15.3.3 specifies a maximum erection tolerance of height /500. This equates to approximately 6 mm.
The current overall lean of 8 mm is greater than this.
Australian Standard AS4100 – Steel Structures Appendix B Clause B.2 specifies the in service deflection limit of height/150. This equates to approximately 19 mm.
The current overall lean of 8 mm is less than this.
It can be concluded that the alignment in the east-west direction does not comply with the erection tolerance in the Australian Standard, but does comply with the in service deflection of the Australian Standard.
Sketch No 6K2
Sketch No 2 shows the alignment of the column in the north-south direction.
The column leans approximately 17 mm to the south from the ground to the first floor.
Australian Standard AS4100 – Steel Structure Clause 15.3.3 specifies a maximum erection tolerance of height/500. This equates to approximately 6 mm.
The current overall lean of 17 mm is greater than this. Australian Standard AS4100 – Steel Structure Appendix B Clause B.2 specifies the in-service deflection limit of height/150. This equates to approximately 19 mm.
The current over lean of 17 mm is less than this.
It can be concluded that the alignment in the north-south direction does not comply with the erection tolerance in the Australian Standard, but does comply with the in-service deflection of the Australian Standard.
The superstructure appears to be structurally adequate to support the imposed loading.

Mr Gale reported in respect of the substructure:

Based on discussions with the owner and the builder, it is apparent that the extension of the edge beam to the F1 pad footing was not cast continuously with the raft slab as specified on Barry Gale Engineers (BGE) drawing number 6D120 S2 Rev. A.
…
The owner has advised that blinding concrete was poured before construction of the stiffened raft and extended out to form the pad footing for the column.
The owner has advised that the blinding concrete is not reinforced.
Both the owner and the builder have advised that the builder drilled and installed diagonal reinforcements through the stiffened raft edge beam into the blinding concrete.
There is no pad footing and no projecting beam.
We understand that the blinding concrete has been used in lieu of the pad footing and projecting beam.
The blinding concrete under the column is normally only 300mm wide in the north-south direction and not 600 mm wide pad footing as specified on (Barry Gale’s engineering drawing).
The emails between the owner and the builder clearly request that the builder confirm the differently constructed footing with Barry Gale Engineers.
Barry Gale Engineers was not contacted by the builder to comply with this request by the owner.
Based on this information it is clear that the footing system for the column was not constructed in accordance with the contract documentation.
Based on this information the edge beam and the F1 pad footing are not structurally adequate.
It is possible that the footing under the column has settled, inducing movement and cracking higher in the building.
This is consistent with the observed cracking and movement.
The use of unreinforced building concrete in lieu of the documented pad footing and projected beam is not structurally accepted.

Under the heading ‘Cracking in Fibre Board’ the report stated:

A separation between the column and the sheeting at the first floor level on the north side of approximately 10mm at the first floor level tapering to zero at the roof was observed.

The photographs taken by the owner show that this separation was not present at the time of construction.
Also a horizontal crack at the fibreboard was also noted at the first floor level on the inside face of the balcony.
We believe these movements are caused by settlement and movement of the inadequate footing system below the column in the north-east corner.
There is some evidence of slight movement and cracking of sheeting at the connection points at the base of the first floor level on the north wall.
This may be caused by the overtightening of the fixing screws.
If the cracking was caused be movement of the base structure then it would be occurring at many other points.
The cracking needs to be repaired.

The Member referred to Mr Gale’s report in the following passage:

It was the builder’s view that by drilling the starter bars into the slab it should have made the pads stronger than those designed by [Mr Alphonso’s] engineers – Mr Gale disagreed. In Mr Gale’s view, by drilling the starter bars into the slab the pad was likely to move by twisting under the column.[7]

[7]Alphonso v P & JM De Leo Pty Ltd (Building and Property) [2016] VCAT 1459 [56] (‘Tribunal Reasons’).

Mr Timothy Gibney,[8] a consulting, structural and geotechnical engineer, prepared a report on behalf of Mr Alphonso dated 6 August 2015. From his site inspection he stated:

Internally there is minor to moderate plaster cracking and door frame distortion across the northern side of number 21. There is significant deflection in the upper level floor jolts and vibration when the heel drop test was conducted. There is significant deflection across the rear sliding doors and at the first floor level cracking was observed.
Superstructure distress has developed in the northern side of the town house at 21 Hayes Lane.

[8]Of Tim Gibney & Associates Pty Ltd.

Mr Gibney stated that the superstructure distress was caused by heaving. This heave had been caused by a build-up of soil and moisture under the edge causing the dry clay to swell and lift the edge beam. A minor edge heave had occurred at the rear north-western corner of the property. The drainage designer should have taken account of the localised site cut at the rear of the property and should have detailed the side drainage to account for the side cut and the Builder should have graded the site away from the perimeter walls. Poor workmanship in pouring the slab-on-ground footing system, and the construction of the frame, first floor framing and first floor ceiling structure were also causes of the distress.

Mr Gibney was asked whether relevant parts of the building that were the subject of the alleged defects have been constructed in accordance with the building plans and specifications endorsed on 24 January 2007. He wrote that, ‘It would appear that the townhouses were constructed in accordance with the endorsed plans although there is a question about the front portal frame pad footings being continuous into the slab footings’. He was then asked whether the relevant parts of the building were in variance from endorsed building plans and specifications endorsed on 24 January 2007. His view was that ‘The slab-on-ground and the first floor framing has been constructed outside the tolerances allowed in both AS2870–1996 and the Guide to Standards and Tolerances – 2007.’ He considered that the variance had caused a defect.

Mr Roy Harding, a chartered building professional and private building surveyor, provided a report on behalf of Mr Alphonso dated 5 August 2015. He said that ‘the first floor of unit 1 is noticeably out of level and is not acceptable’. In his report he wrote that, ‘It is accepted as alleged by the owner that columns to the front portal frame are not supported on footings tied to the building and this matter requires making good in accordance with an engineer’s design’. He noted that ‘the gap between the column and the cladding as well as the cracked external wall sheeting can be readily viewed from a normal viewing distance away’. He made recommendations for rectification.

Mr John Merlo, a registered building practitioner, provided a report to Mr De Leo dated 14 July 2014. He described the key source of the alleged defects as follows:

The alleged building defects as recorded by Archicentre predominantly relate to the implications of lack of drainage around the high sides of the building which has caused substantial heave/lifting of the floor-slab particularly around the N.W. section of the dwellings. This is graphically illustrated not merely by the substantial fall floor level misalignment of the first and ground floors, but also the reversal of the floor along the box gutter of the dwelling.

The Member said of Mr Merlo’s evidence:

Mr Merlo states that the builder is not responsible for any issue concerning the floor slab by reason of the fact that the Building Surveyor responsible for the inspections issued the certificate of final completion confirming that all work had been correctly carried out by the builder. He also notes that a certificate of occupancy was also issued confirming that the building was suitable for health and safe occupation. I do not accept this.[9]
[9]Tribunal Reasons [57].

The questions of law

The questions of law proposed to be relied upon by the applicant are as follows:

1.With respect to the findings made by the Member (paragraphs 44 to 58) that the Applicant failed to construct a north-east concrete pad footing in connection to the slab in accordance with the engineering drawings (‘the north-east pad footing and connection to slab defect’), did the Member fail to deal with the Applicant’s submission that:
(a)in the event that the Member found the defect proven, the defect fell within paragraphs 4 and 5 of the Terms of Settlement entered into [in] July 2009 between the Applicant and the Respondent in settlement of prior VCAT proceeding number D284/2009; and that
(b)accordingly, the Applicant was released from any liability with respect to the north-east pad footing and connection to slab defect on the basis that it was a defect and/or incomplete work of which the Respondent was, or ought reasonably to have been aware as at the date of the Terms of Settlement?

2.Whether the Orders were invalid because section 117 of the VCAT Act required the Tribunal to give Reasons but the Reasons given failed to:
(a) include its findings on material questions of fact; and/or
(b) disclose a path of reasoning
in respect of why the defect did not fall within paragraphs 4 and 5 of the said Terms of Settlement?
3. Further and in the alternative, did the Member err by failing to find that the defect fell within paragraphs 4 and 5 off the said Terms of Settlement?
…[10]
6. Whether the Orders were invalid because Section 117 of the VCAT Act required the Tribunal to give Reasons but the Reasons given failed to:
a) include its findings on material questions of fact; and, or,
b) disclose a path of reasoning,
in respect of the proper assessment of consequential damages for loss of rent and associated tenant expenses for both Units 1 and 2?

[10]Questions of law 4 and 5 were not pressed.

The Grounds of Appeal are:

1. Member Pennell erred in law by failing to find that the north-east pad footing and connection to slab defect fell within the terms of the release granted in favour of the Applicant by the Respondent pursuant to the terms of settlement entered into the parties in VCAT proceeding number D284/2009.
2. Member Pennell erred in law and breached section 117 of the VCAT Act by failing to give any or sufficient reasons for his decisions that:
a) included findings on material questions of fact;
b) displayed an examination of and an understanding of the evidence and the weight of evidence presented at the trial so as to disclose a path of reasoning.

The Terms of Settlement

As previously mentioned, in 2009 Mr Alphonso had sued De Leo in the VCAT. By July of that year, they had settled that proceeding. The Terms of Settlement provided:

WHEREAS:
A. The Applicant (De Leo) was engaged by the Respondent (Alphonso) to carry out work in connection with a property at 25 Hayes Lane, East Melbourne in the State of Victoria (‘the works’);
B. The Applicant and the Respondent entered into a Contract dated 12 December 2006 relating to the construction of the works;
C. A dispute has arisen between the parties regarding the works wherein the Applicant claimed that it was owed the sum of $42,515.00 and interest thereon;
D. Although the Respondent has not lodged a Defence in the proceeding, it contends that the Applicant is not entitled to the amount claimed or any part thereof on the basis that there were numerous defects and/or incomplete works;
E. The parties have agreed to resolve the dispute and contentions between them as outlined above, upon the terms set out below:-

IT IS AGREED THAT:
1. The Respondent shall pay the Applicant the sum of $32,500.00 on or before 7 August 2009.
…
3. Subject to compliance by the Respondent with these Terms of Settlement and in consideration thereof, the Applicant agrees to release and forever discharge the Respondent from all actions, claims, demands and suits whatsoever being the subject matter of this proceeding or in any way connected therewith.
4. Subject to compliance by the Applicant with these Terms of Settlement and in consideration thereof, and subject to the matters set out in paragraph 5 below, the Respondent (ie Alphonso) agrees to release and further discharge the Applicant from all actions, claims, demands, suits whatsoever being the subject matter of this proceeding or in any way connected therewith.
5. Save for the items of alleged defect and/or incomplete work referred to in the documents attached as Schedule 1 hereto, and save for any other items of defect and/or incomplete work of which the Applicant[11] is aware or ought reasonably be aware, these Terms of Settlement do not otherwise affect or settle the Respondent’s right to claim from the builder or its insurer for defects of the kind for which the builder is otherwise required to be insured under Part 9 of the Building Act 1993.
…

[11]The word ‘Applicant’ was clearly in error and should be read as ‘Respondent’ meaning Mr Alphonso.

Schedule 1 to the Terms of Settlement consists of nine pages of 129 items said to require the Builder’s attention dated 14 December 2009 prepared by Architecture Works Pty Ltd. They include items such as Item no. 34 ‘Kitchen highlight roof windows are not plumb, and not caulked all round’ and Item 53 ‘Sliding door has a bow in it at the top. Handles do not line up with each other, and gap between door is still large’. They also included a letter to Mr Alphonso from Steven Kyzintas on the letterhead of Architecture Works dated 19 June 2009 which stated in its introductory paragraph:

Re: 25 Hayes Lane, East Melbourne – Practical Completion List
Upon a recent site inspection (18.06.09) at 25 Hayes Lane, East Melbourne, the outstanding items, which have not been resolved from the practical completion and 3-months defect list, are as follows:

There follows a list of 10 items or observations cross referenced in most instances to items detailed in the list of 12 December 2007, but also to a list compiled on 11 March 2008, which was not part of Schedule One.

The insurance

A matter of relevance in interpreting the Terms of Settlement is the insurance which domestic builders must have. Reference is made to it in clause 5 of those Terms. The issue is regulated by the Domestic Building Insurance Ministerial Order number S98[12] which specifies the insurance that a builder was required to be covered by or under s 135 of the Building Act 1993. Clause 8(2)(a) and (b) of the Order provided that:

A policy must also indemnify the building owner in respect of loss or damage resulting from 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.

[12]State of Victoria, Domestic Building Ministerial Order, No S 98, 23 May 2003.

Section 3 of the Domestic Building Contracts Act defines ‘defective’ in relation to domestic building work to include:

(a)a breach of any warranty listed in s 8 of the Domestic Building Contracts Act 1995;
(b)a failure to maintain a standard or quality of building works specified in the relevant domestic building contract.

The warranties contained in s 8 of the Domestic Building Contracts Act 1995 was expressly incorporated into the subject contract under clause 11. The statutory warranties are based upon common law concepts relating to defective building work. The workmanlike manner requirement and the obligation to carry out the work with care and skill are different expressions of the same obligation.

Provisions in any agreement or instrument which seeks to contract out of breaches of s 8 warranties are void by reason of s 10.

VCAT’s reasons for decision

VCAT found that there was no evidence that Mr Alphonso was aware or ought to have been aware of the claimed defects in respect of which he sued at the time of signing the Terms of Settlement. Therefore the release did not bar the claim.

The Builder relied on the principle of accord and satisfaction to allege that the Owner’s cause of action had been extinguished by the Terms of Settlement.

In respect of the interpretation of the release, the Member referred to Grant v John Grant & Sons Pty Ltd[13] in which the plurality of the High Court stated:

The principle which it is thus sought to apply was expressed by Lord Westbury in London & South Western Railway Co v Blackmore as follows:
The general words in a release are limited always to that thing or those things which were specially in the contemplation of the parties at the time when the release was given. It was expressed by Taunton J in Upton v Upton in this way: ‘…the general words of release may be limited by the particular matter out of which the release springs and the particular intent of the parties by whom the release is executed’ (citations omitted).

[13](1954) 91 CLR 112 at 123.

The High Court concluded that a release should be construed as not including liabilities that were not the subject of any dispute between the actual releaser and the actual release.

The Member’s reasoning in analysing the Terms of Settlement was as follows:

Save for the sliding door defects, there was no evidence that the owner was aware or ought to have been aware that the claimed defects at the time of signing the Terms of Settlement.
Accordingly, the owner is not prevented from bringing this proceeding against the builder for defects of the kind for which the builder is otherwise required to be insured under Part 9 of the Building Act 1993 to which he was not aware and ought not to have been reasonably aware.[14]

[14]Tribunal Reasons [29]-[32].

In dealing with the ‘Rotational movement at the north east corner of the property’, which was one of the ‘Claimed Defects’, the Member found:

The façade columns of the property are not in alignment. The alignment of the column in the east west direction has a 3-4mm lean to the east for the base to within 500mm of the first floor. Above this point the column leans further to the east by an additional 5mm. The overall lean from the base to the first floor is 8mm.
A noticeable gap has opened up between the portal frame and the external wall cladding above the first floor level at the north-east corner of unit one looking southward. The cement sheet wall cladding adjacent to the column is fractured at its lower eastern corner where the movement has occurred. The gap between the column and the cladding together with external cracking of the external wall sheeting is clearly visible.
The builder contends that the movement in the façade columns, and in particular the column on the north east corner of the building, are a result of heave in the north west corner of the concrete slab. It says that the slab heave is as a result of poor design and failure by the applicant to carry out proper surface and subsurface drainage.
It says that the heave of the slab has cause[d] the wall to lift and move toward the column causing damage to the wall and the pushing the column out of alignment.
However, while Mr Gibney accepted that some heave may have occurred at the north western corner of the slab due to the poor drainage along the western boundary he said that it was not the likely cause of the damage to the wall or movement in the column.
The owner says that the movement in the column has been caused by settlement and inadequate footing system beneath the column at the north-east corner.
The owner states that prior to the works commencing he had engaged contractors and co-ordinated electricity, telecommunication, water and gas to the site. The builder knew the final position of the pits for the services prior to clearing the site. Photos produced by the applicant showed the service pits having been installed at the time that builder commenced the ground works for the footings on 21 January [2007].
The owner states that the builder conducted the ground works for the footing in stages. The trench was excavated to the required depth for the footings and blinding concrete was poured to bring the level up to the base slab. He then says that he witnessed the blinding concrete being poured in the north-east corner where the pad for the column was to be positioned.
The slab was prepared with reinforced mesh, under floor electrical cable, plumbing and other services. The slab was inspected by the building surveyor and was poured on 23 January 2007. The photograph of the slab being poured shows the line pipe which appeared to have had the under floor electric cable attached.
It was agreed that the footing in the north-east corner supporting the steel columns were not constructed in accordance with the engineer’s specification drawings. The steel column was installed onto the pad of binding. During the course of his evidence Mr De Leo on behalf of the builder, confirmed that there was no reinforcement bars connecting the slab to a pad on which the steel columns was placed in accordance with the engineering drawings.
By an email dated 7 March 2007 the owner advised the builder’s contract administrator that any changes or variations to slab’s construction needed to be cleared by the owner’s engineer. The builder never obtain[ed] the engineer’s approval for any variation in the construction of the building.
Mr De Leo says that the footing constructed for the column was a 600 x 500mm pad. He states that the pad was tied to the slab by starter bars of approximately 12mm diameter which were drilled into the slab. He provided a diagram that showed the manner in which he said the pad was tied to the slab but did not provide any independent evidence relating to the construction of the column pad. In particular, as to whether the starter bars were an appropriate manner to tie the pad footing to the slab.
It was the builder’s view that by drilling the starter bars into the slab it should have made the pads stronger than those designed by the applicant’s engineers — Mr Gale disagreed. In Mr Gale’s view, by drilling the starter bars into the slab the pad was likely to move by twisting under the column.
Mr Merlo states that the builder is not responsible for any issue concerning the floor slab by reason of the fact that the Building Surveyor responsible for the inspections issued the certificate of final completion confirming that all work had been correctly carried out by the builder. He also notes that a certificate of occupancy was also issued confirming that the building was suitable for health and safe occupation. I do not accept this.

It is the builder’s responsibility to ensure that the building is constructed in accordance with the architectural and engineers plans and specifications. In this case the builder has clearly failed to construct the slab and footings in accordance with the engineers design.[15]

[15]Tribunal Reasons [44]-[58] (citations omitted).

Under the heading ‘Damages’ the Member stated that Mr Alphonso had:

engaged Mr Daniel Fleming of Kadaabra Group to provide him with a quotation to perform the rectification works on the property. Mr Fleming is a registered builder.
…
The builder did not lead any expert evidence as to quantum nor did it challenge Mr Fleming in relation to his quotation for carrying out the work for each item. However, in cross examination Mr Fleming did concede that his quotations contained ‘a bit of fat’ due to the fact that he was having to reinstate works for which he had not been responsible.[16]

[16]Ibid [90] and [94].

He then set out part of Mr Fleming’s quote as follows:

…
D. Footings and portal frame column repair: $70,000. This quotation is based upon items 90.01, 90.03, 91.012, 91.07, 92.01 to 92.07 and 93.01 of the Harding Report. It includes obtaining engineers’ design for new work, removing the blinding concrete between slab and the column, all excavation, installation of new blinding construction of pad, reinstate column, replacement of cracked sheeting. Mr Fleming has allowed 80 hours labour, material of $22,000, hire of equipment $15,000, excavation $8,500, all safety measures $7,500, engineer’s cost $2,500, supervision $5,500, permits $6,500. Based on Mr Fleming’s costs and in the absence of any direct evidence to the contrary I will allow the amount claimed.

The findings made by the Tribunal in paragraphs 96(a), (b) and (c), which awarded sums of $5,000, $8,500 and $4,540 respectively to Mr Alphonso were not contested. Those sums total $18,040.

The particulars of loss and claim of $77,935 were based on a report by structural engineer, Mr B Gale. His recommended rectification work involved the excavation and removal of the north-east footing and its replacement with a new footing which accorded with the contract documentation. There was no rectification work necessary in relation to the north-east column itself.

Mr De Leo’s submissions about the first and third questions of law and the first ground of appeal

Mr De Leo summarised its submissions on the first and third questions of law in three points which it submitted required decision, but which the Member had failed to decide:

(a) first, what defect was the subject of Mr Alphonso’s claim in the VCAT proceeding insofar as it related to paragraph (i) of the particulars to paragraph 4 of the points of claim (‘the rotational movement paragraph’)?

(b) secondly, what does ‘defect’ mean in paragraph 5 of the Terms of Settlement?

(c) thirdly, having decided what defect was claimed by Mr Alphonso under paragraph (i) of the particulars to paragraph 4 of the Points of Claim, was that defect captured by clause 5 of the Terms of Settlement?

Mr De Leo’s case was that the defect on which Mr Alphonso relied in particular (i) of paragraph 4, was Mr De Leo’s failure to construct the north-east pad footing and connection to slab in accordance with the engineer’s drawings. Mr Alphonso knew of, or ought to have known, of that failure at the time he signed the Terms of Settlement. Accordingly, the defect fell within the release. The deflection in the north-east column and the cracking of the cement sheeting was the damage allegedly caused by the defective footing. The actual defect on which Mr Alphonso sued was distinguishable from the damage or distress to the building that flowed from that defect.

Mr De Leo submitted that the Member erred in law by not finding that its failure to construct the north-east pad footing in connection to the slab was ‘a defect’ within the meaning of paragraph 5 of the Terms of Settlement. Mr Alphonso knew in late 2007 that the footing to the north-east column and the connection of the footing to the slab had not been carried out in accordance with the engineer’s contract drawings. When signing the Terms of Settlement, Mr Alphonso had not insisted on the exclusion of the north-east corner footings from the Terms. He could have done so, because Mr De Leo’s failure was a breach of contract and a repudiation of the contract which he could have accepted.

As mentioned, counsel for Mr De Leo submitted that the Tribunal must determine, as a matter of law, what the actual defect complained of was, as distinct from the damage and distress to the buildings that flowed from the alleged defect and then apply that against the release contained in the Terms of Settlement.[17] The alleged defect should be characterised as the Builder’s construction of the north-east column pad footing other than in accordance with the plans and specifications and without variation approval. That defect was different from the subsequent damage that is alleged to have flowed, being the deflection of the steel column and the deformation and the cracking in the external cladding to the building. The subsequent rotational movement of the column and the cracking of the fibre board was damage caused by the defective construction of the north-east footing. Accordingly, the north-east column was not itself a defect giving rise to any loss or damage.
[17]CB 623.

The recitals to the Terms of Settlement made clear that they covered many defects and incomplete works alleged by Mr Alphonso.

But, Mr Alphonso was his own contract administrator and was ‘hands-on’ and was on site a lot of the time. He saw the footings being constructed and observed by late February 2007, that the north-east footing in connection to the slab was not being constructed with the engineer’s design. He was aware of that defect. The lean in the north-east column and the cracking in the gap between the column and the wall were the result and damage caused by that defect. Accordingly, this defect fell within paragraph 5 of the Terms of Settlement.

As mentioned, Mr De Leo conceded that the failure to comply with the plans and specifications was a ‘defect’. It was therefore a breach of the statutory warranty contained in s 8 of the DBC Act and was a defect and defective work. That identification reflected the understood meaning of ‘defect’. The textbook Hudson’s Building & Engineering Contracts states:

Defective work is work which fails to comply with the requirements of the contract and so is a breach of contract. For large construction or engineering contracts, this will mean work that does not conform to the express descriptions or requirements, including any drawings or specifications, together with any implied terms as to its quality, workmanship, performance or design.[18]

[18]N Dennys and R Clay, Hudson’s Building and Engineering Contracts (2015, 13^th ed, Sweet & Maxwell), 590 [Para 4–071].

In accordance with principles applicable to the construction of contracts, the meaning of ‘defect’ in this case should be determined by reference to the Terms of Settlement alone from the objective standpoint of what a reasonable person would have understood them to mean. However, as stated in Toll (FGCT) Pty Ltd v Alphapharm Pty Ltd,[19] that determination normally requires consideration not only of the text of the agreement, but also of the surrounding circumstances known to the parties, and the purpose and object of the transaction.
[19](2004) 219 CLR 165 at 179 [40].

Mr De Leo contended that the release contained in the Terms of Settlement discharged it from Mr Alphonso’s claim. Paragraph 3 of the Terms released any claims that were ‘in any way connected’ with the subject matter of the proceeding. Paragraph 5 contained a carve out from the release of identified defects drawn with the statutory requirement for builders to hold particular insurance under Part 9 of the Building Act in mind. The word defect in clause 5 of the Terms of Settlement included work which was not constructed in a proper manner in accordance with the plans and specifications. In order for Mr Alphonso to avoid the effect of the Terms of Settlement he had to establish that the claim was of a kind for which the Builder was otherwise required to be insured. The Member had to consider what were the defects of the kind which the Builder was otherwise required to be insured under Part 9 of the Building Act, but did not do so.

Mr Alphonso had not alleged that there were any facts or circumstances external to the Terms of Settlement which demonstrated that the north-east footing was not intended to be included as a defect the subject of the release thereunder. The carve out in the Terms of Settlement identified the ‘defects’ in respect of which Mr Alphonso’s rights to claim against Mr De Leo or its insurers were retained. Accordingly, the parties should be presumed to have intended that the meaning of defective work under the DBA Act applied to the meaning of ‘defect’ in paragraph 5 of the Terms of Settlement. As a result, the failure to build the north-east footing in connection to the slab in accordance with the engineer’s contract drawings, was a defect within the meaning of paragraph 5 of the Terms of Settlement.

Mr Alphonso’s case as presented to VCAT was that the rotational movement of the column complained of was caused by Mr De Leo’s failure to build the north-east column pad footing in accordance with the engineer’s design. But, Mr Gale, a structural engineer, reported that while there was some small deflection in the north-east column it complied with the ‘in service deflection of the Australian standards’, in other words, it was not defective. No rectification work was proposed by Mr Gale in relation to the north-east column itself. The column merely needed to be propped during the carrying out of the first part of the rectification works. The column when constructed was vertical and the cement sheeting had no cracking.

Mr De Leo pointed out that most of the damages awarded to Mr Alphonso by VCAT were not for the column and the crack, but for the removal of the north-east footing and its replacement with a new footing. There was no apparent cost of rectification of the column. That work had not been done and the damages were awarded on the basis of future loss.

Counsel for Mr De Leo relied on Mr Nott’s statement that the rotational movement had been caused by the incorrect footing which was described as a serious defect. Mr Alphonso sought Mr Nott’s advice, not because he noticed any lean in the column, but rather he had noticed a crack between the north-east column and the wall of unit one The defects in the north-east column were inextricably linked to the defects in the footing.

There was a dispute about what caused the rotational movement. Mr De Leo’s experts stated that it was due to heave caused by lack of drainage and the resultant expansion of clay soils and lifting of the footing. The Member did not decide this issue, holding that Mr De Leo failed to construct the slab and footings in accordance with the engineer’s design.

Counsel for Mr De Leo submitted that Mr Alphonso’s identification of the defect on which he relied had varied between the VCAT hearing and the Supreme Court hearing. I am not persuaded that that is the case, but in any event the issue remains whether VCAT made the alleged error of law in deciding the case put to it.

Mr Alphonso’s submissions on the first and third questions of law and the first ground of appeal

Mr Alphonso submitted that there had been no dispute as to what defects his case at VCAT was based on; they were the defects listed in his points of claim. The relevant defect was accepted as the rotational movement in the north-east corner, except in the closing submissions of counsel for Mr De Leo and in the terms of a few questions in cross-examination of Mr Alphonso. In paragraph 7 of the Member’s reasons he included the list of the defects that he understood the case raised. While Mr De Leo did not construct the units in respect of the north-east corner in accordance with the plans and specifications, that was not the defect identified in Mr Alphonso’s points of claim.

Mr Alphonso described Mr De Leo’s case an attempt to reframe the ‘defect’ that was the subject of his VCAT claim so as bring it within the Terms of Settlement. He submitted that the defect for the purposes of paragraph 5 of the Terms of Settlement was the deflection in the north-east column. The north-east column is a steel beam which should be vertical and attached firmly to the wall. But now there is a separation between the column and the side of the building.

Mr Alphonso submitted that the failure of the column was the defect on which he relied, not its underlying cause. His argument was that the relevant ‘claimed defect’ was only the rotational movement of the column of the north-east corner and that that was not covered by the release. That rotation had been not visible and he had no knowledge of it at the time the Terms of Settlement were signed. At that time of completion the column was vertical and there was no visible defect and Mr Alphonso had no knowledge that it was going to fail. Nor would he have been able to sue in respect of it. If he had sued the Builder for not complying with the plan, when the column appeared upright and effective, he would have been unable to obtain any damages because of the principle in Bellgrove v Eldridge[20] that the undertaking of works necessary to produce conformity with the contract must be a reasonable course to adopt. In 2007, there had been no rotational movement and the column exhibited no damage that would have supported a claim for damages for its rectification.
[20](1954) 90 CLR 613.

In identifying the defect, the focus should be placed on physical defects, something that is observable, not a defect that followed from a failure to follow plans and specifications. All the defects listed in the Schedule to the Terms of Settlement were observable defects.

Mr Alphonso said in VCAT that he only became aware of the claimed defects in late 2009 and early 2010, that is, after signing the Terms of Settlement, as a result of water leaks occurring above the stairs in unit one and gaps emerging between the north-east column and wall of unit one. Save for the sliding door defects, there was no evidence that he was aware or ought to have been aware of the claimed defects when he signed the Terms of Settlement. The north-east column subsequently moved and this became evident when a small gap appeared in early 2010. The gap widened over time and it was noticeably wider by August 2011. By the end of 2011, he was concerned it might be a structural issue because Mr De Leo had not provided him with a sign off from the engineer for the footing. He then engaged Archicentre and that led to Mr Nott’s report.

The Member found that there was no evidence that Mr Alphonso was aware or ought to have been aware of the defect, other than the sliding door defects, when he signed the Terms of Settlement.

Analysis
The first and third questions of law and first ground of appeal

In my opinion, the Member did deal with Mr De Leo’s submission that in the event that the Member found the defect proved, the defect fell within the Terms of Settlement and Mr De Leo was released from liability. But he did not accept that submission.

But I do not agree that the Member found that the defect was that Mr De Leo had ‘failed to construct a north-east concrete pad footing in connection to the pad in accordance with the engineering drawings’. Rather the Member treated as the relevant defect for Mr Alphonso’s claim the item described in the particulars of breach of the agreement and warranties being:

i. Rotational movement at the north east corner of 21 Hayes Lane, including a column being out of plumb.

The Member listed that item and another ten items after the introductory words, ‘the owner alleges the following defects’.[21] The Member referred to the ‘claimed defects’ in considering the issue of the application of the Terms of Settlement in the following passage:

The owner says that he only became aware of the claimed defects in late 2009 and early 2010 as a result of water leaks occurring above the stairs in unit one and gaps emerging between the northeast column and the northern wall of unit one. Save for the sliding door defects, there was no evidence that the owner was aware or ought to have been aware of the claimed defects at the time of signing the terms of settlement.[22]

[21]Tribunal Reasons [7].

[22]Ibid [29].

The Member used the term ‘defect’ in accordance with its ordinary meaning as a shortcoming, a fault or imperfection. He was adopting that use in a context where it was common ground between the parties that the Builder had not constructed the north-east pad footing in accordance with the drawings and specifications and that the Owner knew that before signing the Terms of Settlement. The Member’s finding, that I have previously set out, accepted that that failure was the cause of the rotational movement,[23] but he accepted that the rotational movement was a defect. The Member found that the cause of the defect was that ‘the builder has clearly failed to construct the slab and footings in accordance with the engineer’s design’.[24]
[23]Ibid [62].
[24]Ibid [58].

But it was also uncontradicted that the Owner only became aware of the movement or rotation in the northeast corner after signing the Terms of Settlement and it was not suggested that he ought to have known that that would occur. Mr De Leo’s evidence was that he had adopted a satisfactory method with starter bars drilled into the footings with blinding concrete. He said that he told Mr Alphonso that starter bars would be stronger, that he would follow that course and that tying in the column to the pad was preferable to a freestanding column.

The Builder submitted that the Member was faced with two opposing arguments as to the identity of the defect – the Builder maintaining that it was the failure to construct the northeast footing in accordance with the plans and specifications and the Owner saying that the defect was the rotation of the column in the north-east corner. The Member failed to deal with those two competing arguments. The Builder also submitted that the failure to construct the northeast footing in accordance with the plans and specifications could not be distinguished from the rotational movement of the northeast corner.[25]
[25]Tribunal Reasons [58].

But the Member clearly accepted the claimed defects on which Mr Alphonso relied as defects which breached the statutory warranties and the terms of contract.[26]
[26]Tribunal Reasons [58].

The key issue was the identification of the defect that Mr Alphonso relied on and whether it could validly be described as a defect both in ordinary building practice, but also in the application of the Terms of Settlement. Mr Alphonso claimed that the defect was the rotational movement in the north-east column, including a column being out of plumb. That was caused by defective work and was a breach of the statutory and contractual warranties. It was open to the Member to decide that that claimed defect was in law a defect. The Member proceeded on the basis that the particulars of claim described items that were properly to be regarded as defects and that, with one exception, Mr Alphonso did not know about them at the time he signed the Terms of Settlement. As previously mentioned, the Member stated that:

the owner says that he only became aware of the claimed defects in late 2009 and early 2010 as a result of water leaks occurring above the stairs in Unit 1 and gaps emerging between the north-east column and the northern wall of Unit 1. Save for the sliding door defects, there was no evidence that the owner was aware or ought to have been aware of the claimed defects at the time of signing the terms of settlement.[27]

[27]Tribunal Reasons [29].

I consider that it is also relevant in considering Mr Alphonso’s submissions to set out the following passages in his counsel’s submissions which concerned his identification of the defect:

Certainly, Mr De Leo did not construct it in accordance with the plans and that was known. But what the applicant (Alphonso) says is that the defect complained of is not that it wasn’t constructed in accordance with the plans, but that it’s been constructed in a way which Mr De Leo determined it to do. So although it could be said that Mr De Leo as a builder is not normally liable for design work, in this case he did design the footings, and he did build in accordance with that design, and the column has now moved and left a gap, which is why it became apparent.
….
Member: So in that particular instance Mr McDonald, what is put against you is that you knew that the engineering designs weren’t complied with as far as the fittings were concerned.
Mr McDonald: That is correct.
Member: And therefore an offence of a – is a defect in the construction that was known at the time, you say, well, no, because what’s – notwithstanding the fact that the – none of the designs were done in accordance with what’s written down by the engineer. That it’s a design by Mr De Leo and then that in effect is not the defect itself, the defect is---
Mr McDonald: The moving of the column.
Member: Of the column and footing you say.
Mr McDonald: The footings have moved, the column has moved, and that probably does flow from Mr De Leo’s design. However, at the time of completion it was vertical, there was no visible defect, and there was no knowledge we could have had that it was going to fail. The other two columns have not failed. How they were constructed is not entirely known to us, but in any event, if the column had been in its original position and had not failed, it would hardly be possible to bring an action claiming for a defect. So it’s the failure of the column which is the defect, not the underlying cause which resulted in it.
Member: Thank you. [28]

[28]CB 630-2.

The Member’s finding did not mean that there was no other defect of which Mr Alphonso was aware when he signed the Terms of Settlement. He knew that the Builder had failed to follow the plans and specifications, but that had not caused any visible defect or damage at the time that the Terms were signed. But that was not the breach that the Member was considering. Rather he was asked to consider and did accept that the rotational movement was a defect for the purposes of the contractual warranties and the Terms of Settlement.

In my opinion, the movement of the north-east corner of the site was a defect. Its cause was the failure to construct the documented pad footing and to use blinding concrete instead, but it was still a defect for the two relevant purposes.

The term ‘defective’ is defined in s 3(1) of the DBC Act as meaning a breach of the statutory warranties and secondly a failure to maintain a standard or quality of work specified in the contract.

‘Defect’ is not a technical term. The Macquarie Dictionary gives the ordinary meaning of ‘defect’ as:

1. A falling short; a fault or imperfection.
2. Want or lack, especially of something essential to perfection or completeness; deficiency.[29]

[29]Susan Butler (ed), Macquarie Dictionary (Macquarie, 7^th ed, 2017) 401.

The term ‘defect’ is a common building term — it is not limited to a failure to follow the plans and specifications. The term ‘defects’ was used in recital D to the Terms of Settlement. Schedule 1 listed many defects and incomplete work observed during inspections. In clause 5 of the Terms these are referred to as ‘items of alleged defect and/or incomplete work’. The particulars of breach were drawn with that understanding of defect and they were the matters that the Member had to adjudicate.

I do not consider that it is decisive that the column itself required little rectification and still complied with the Australian Standard for in service deflection. The rotational movement at the north-east corner was still a defect.

The consequence of the Member’s acceptance of the claimed defect of rotational movement as a defect was that Mr De Leo was not released by the Terms of Settlement from Mr Alphonso’s claims. The wide words of the release extended to ‘all actions, claims, demands and suits whatsoever being the subject matter of this proceeding or in any way connected therewith’. However, they were subject to the exceptions contained in clause 5 and did not apply to the rotational movement at the north-east corner if Mr Alphonso was not aware of it or ought not reasonably have been aware of it when he signed the Terms of Settlement. It was one thing for Mr Alphonso to be aware that the north-east corner was not constructed in accordance with the plans and specifications. But it is quite another thing, of which he was unaware that, despite Mr De Leo’s assurance that the ‘starter bars would be stronger’,[30] that the footing was of an inferior kind than the specification, and that in time, it would cause the column which it supported to rotate and cause warping and cracking the walls of the building.
[30]Witness statement Mr De Leo (VCAT, 14 December 2015 [17].

There was another aspect of the release. Under clause 5, Mr Alphonso retained his right to claim from Mr De Leo or its insurer for defects of the kind for which the Builder was otherwise required to be insured under the Building Act. I have previously set out the details of the insurance that builders are required to hold which relates to claims for breach of the warranties implied by the Act. The Terms of Settlement do seem to have been drawn with that insurance in mind. But I do not consider that to be a decisive factor in this instance. The issue still is can the defective footings be a separate breach and defect. I consider that they can be.

I also consider that the interpretation of ‘defect’ that I have adopted when appearing in the Terms of Settlement is consistent with the principles governing the interpretation of commercial contracts. In Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd[31] French CJ, Nettle and Gordon JJ stated:

The rights and liabilities of parties under a provision of a contract are determined objectively, by reference to its text, context (the entire text of the contract as well as any contract, document or statutory provision referred to in the text of the contract) and purpose. In determining the meaning of the terms of a commercial contract, it is necessary to ask what a reasonable businessperson would have understood those terms to mean. That inquiry will require consideration of the language used by the parties in the contract, the circumstances addressed by the contract and the commercial purpose or objects to be secured by the contract. Ordinarily, this process of construction is possible by reference to the contract alone.[32]

[31](2015) 256 CLR 104 [46].

[32]Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104 [46]-[48].

Their Honours further stated:

However, sometimes, recourse to events, circumstances and things external to the contract is necessary. It may be necessary in identifying the commercial purpose or objects of the contract where that task is facilitated by an understanding ‘of the genesis of the transaction, the background, the context [and] the market in which the parties are operating’. It may be necessary in determining the proper construction where there is a constructional choice. The question whether events, circumstances and things external to the contract may be resorted to, in order to identify the existence of a constructional choice, does not arise in these appeals.
Each of the events, circumstances and things external to the contract to which recourse may be had is objective. What may be referred to are events, circumstances and things external to the contract which are known to the parties or which assist in identifying the purpose or object of the transaction, which may include its history, background and context and the market in which the parties were operating. What is inadmissible is evidence of the parties’ statements and actions reflecting their actual intentions and expectations.
Other principles are relevant in the construction of commercial contracts. Unless a contrary intention is indicated in the contract, a court is entitled to approach the task of giving a commercial contract an interpretation on the assumption ‘that the parties … intended to produce a commercial result’. Put another way, a commercial contract should be construed so as to avoid it ‘making commercial nonsense or working commercial inconvenience’.[33]

[33]Ibid, 117 [49]-[51] (citations omitted).

I consider that a reasonable businessperson would have understood the word ‘defect’ in the Terms of Settlement to refer to things that Mr Alphonso knew or ought to have known, particularly observable items of faults or imperfections. Schedule 1 to those Terms contained examples of such defects. There is an important difference between being aware that the footings did not follow the plans and specifications and knowing that they contained faults or imperfections. The thrust of Mr Alphonso’s case in this regard as De Leo identified in its written submissions was:

that the deflection to the north east column and the cracking of the cement sheeting was the damage allegedly caused by the defective footing and connection to slab. [34]

[34]P & J M De Leo Pty Ltd v Alphonso, ‘The Applicant’s Outline of Submissions’ S CI 2016 0401, 28 April 2017, 7 [25].

The Member found that it was the Builder’s responsibility to ensure that the building was constructed in accordance with the plans and specifications. In this case, the Builder has clearly failed to construct the slab and footings in accordance with the engineer’s design.[35] That was the cause of the defect which led to the rotational movement in the north-east corner. But that cause was not known to Mr Alphonso at the relevant time, nor ought he have reasonably known it.
[35]Tribunal Reasons [58].

It followed from the Member’s findings that he awarded damages to enable rectification of that defect. Mr Alphonso provided evidence that the cost of that rectification would be $70,000 for: portal frame column repair, including engineer’s design for new work; removing the blinding concrete between slab and the column; all excavation; installation of new blinding concrete; construction of pad; reinstatement of column; and replacement of cracked sheeting.[36] No contrary evidence on quantum was called by Mr De Leo.
[36]Ibid [95].

The bulk of the damages that were awarded were not for the column and the crack, but for the replacement of the north-east footing. But the $70,000 damages almost all comprised the cost of work involved in taking out the north-east footing which had not been constructed in accordance with the plans and specification and replacing it with a new conforming footing.

But in my opinion, it was no answer to Mr Alphonso’s claim that the north-east column required little in the way of repair other than propping up, it was the replacement of the footings and the construction of the pad that would cause the expense.

Finally, I consider that the Member did address the three issues that Mr De Leo identified in its submissions in this Court:

(a) he identified that the defect that was the subject of Mr Alphonso’s claim in the VCAT proceeding. The first item claimed by Mr Alphonso, being the rotational movement including the column being out of plumb, was a defect;

(b) he considered that such a defect was a defect within the meaning of the Terms of Settlement;

(c) he decided that the defect was not captured by the Terms of Settlement, because there was no evidence that Mr Alphonso knew or ought to have known of the rotational movement in the north-east corner, or that he knew or ought to have known that the variation in the method of construction adopted by De Leo was defective, at the relevant time.

I would add that, in my opinion, the Member correctly found that the relevant item for which Mr Alphonso claimed in respect of the north-east corner was a defect as it was a fault or imperfection that breached the statutory and contractual warranties. Although Mr Alphonso did know that the north-east footings did not conform to the plans and specifications, Mr De Leo informed him that the variation using the starter bars was a stronger method of construction. Mr Alphonso did not know, and could not have known when he signed the Terms of Settlement, that the variation involved faults that would cause movement in the north east corner.

The second and sixth questions of law and second ground of appeal – the adequacy of the reasons

Section 117 of the VCAT Act states:

(1) The Tribunal must give reasons for any order it makes in a proceeding, other than an interim order, within—
(a) 60 days after making the order; or
(b) such other period as is specified by the rules or the President.
(2) If the Tribunal gives oral reasons, a party, within 14 days, may request the Tribunal to give written reasons.
(3) The Tribunal must comply with a request under subsection (2) within 45 days after receiving it.
(4) The President may extend the 45-day period referred to in subsection (3), but must give reasons for the extension to the party who requested the written reasons for the order.
(5) If the Tribunal gives written reasons, it must include in those reasons its findings on material questions of fact.
(6) The reasons for an order, whether oral or written, form part of the order.

The law is clear that the Tribunal must give reasons which include findings on material questions of fact and which disclose its path of reasoning for reaching its decision.[37] The parties must be able to understand the basis of the Tribunal’s decision. If reasons fail in that respect, they will not enable the losing party to know why the case was lost. That will tend to frustrate a right of appeal, and the inadequacy will, in such circumstances, amount to an error of law.
[37]State of Victoria v Turner (2009) 23 VR 110.

Mr De Leo’s submissions about inadequacy of reasons

Mr De Leo’s second question of law and related ground of appeal alleged that the Member’s reasons were inadequate and did not comply with s 117 of the VCAT Act. This was argued to be apparent from the Member’s failure to deal with and provide reasons on the issue of the meaning to be attributed to ‘defect’ in paragraph 5 of the Terms of Settlement; in failing to deal with the issue of whether the failure by Mr De Leo to construct the north-east footing in connection to the slab was a ‘defect’ within the meaning of paragraph 5 of the Terms of Settlement, or at all; and in failing to deal with the issue as to whether the deflection of the north-east corner and/or the cracking of the cement sheeting was a ‘defect’ within the meaning of paragraph 5 of the Terms of Settlement, or at all. De Leo argued that the Member did not explain why he rejected its definition of defect and did not give his own definition of defect.

Instead, the Member simply proceeded on the basis that the ‘rotational movement of the north-east corner of the property, including a column being out of plumb’ was one of the ‘defects’ which ‘the owner says he only became aware of…. in late 2009 and early 2010 as a result of water leaks occurring above the stairs in Unit 1 and gaps emerging between the north-east column and the northern wall of Unit 1.’ The Member could not decide that rotational movement at the north-east corner was the defect without considering the evidence and saying something about the cause of that issue.

The Member in his reasons repeatedly used the term ‘claimed defect’, but never defined what the term meant. For instance, he did not say that the cause of the deflection in the north-east column and the cracking was the rotation of the column. He stated:

It is the builder’s responsibility to ensure that the building is constructed in accordance with architectural engineer’s plans and specifications. In this case the builder has clearly failed to construct the slab and footings in accordance with the engineer’s design.[38]

[38]Tribunal Reasons [58].

The Member decided that the defect that required rectification was the footings and portal frame repair. Because the Member never identified the defect, he never decided whether the Builder had to be insured for it under Part 9 of the Building Act, only stating:

Accordingly, the owner is not prevented from bringing this proceeding against the builder for defects of the kind for which the builder is otherwise required to be insured and at Part 9 of the Building Act 1993 and to which he was not aware and ought not to have reasonably been aware. The terms of settlement had to be reviewed objectively and it did not matter what someone thought was a defect. [39]

[39]Ibid [30].

Yet, there was evidence that the Owner was aware or ought to have been aware of the defect which was the failure to conform to the plans and specifications at the time of signing the Terms of Settlement.

Mr Alphonso’s submissions on the second and sixth question of law and ground of appeal two — adequacy of Member’s reasons

Mr Alphonso submitted that the Member’s reasons adequately addressed the matters in dispute and contained findings in respect of them. The Member’s critical finding was that Mr Alphonso did not have knowledge of the defect when he signed the Terms of Settlement.

Consideration of the second and sixth questions of law and ground of appeal two

I am not persuaded that this second error of law or ground of appeal argued by Mr De Leo has been established.
Section 117 requires that the Tribunal give reasons for any order that it makes and by reason of s 117(5), these must include findings on material questions of fact. It must provide its path of reasoning. But the degree of detailed reasoning which is required depends on the nature of the determination and the complexity of the issues.[40] It must respond to the way the case was put.[41] In Franklin v Ubaldi Foods Pty Ltd[42] Ashley JA, with whom Warren CJ and Nettle JA agreed, said:
Reasons must be such as reveal – although in a particular case it may be by necessary inference – the path of reasoning which leads to the ultimate conclusion.
[40]Buzzo Holdings Pty Ltd v Loison (2007) 26 VAR 112 [17] (Kaye J).
[41]Gombac Group Pty Ltd v Vero Insurance Ltd (2005) 23 VAR 460 [59] (Osborn J).
[42][2005] VSC 317 [38]. This was a serious injury appeal from the County Court, but the passage has been applied to VCAT’s obligation to give reasons; State of Victoria v Turner (2009) 23 VR 110 (Kyrou J).
The Member identified the defects as those claimed in the points of claim.[43] He decided that Mr Alphonso was unaware of the first items claimed and ought not to have been aware of it at the time the Terms of Settlement were signed.[44] He clearly did not regard the defect in respect of which Mr Alphonso claimed as the failure to follow the contract and engineer’s drawings. That was not to say that that was not a defect — rather it was not the claimed defect. That is a clear inference from the Member’s decision. He therefore made findings on material questions of fact as required by s 117(5) of the VCAT Act. The reasons sufficiently explained the basis for its findings and referred to the evidence or other materials on which those findings were based. The path of reasoning was clear. The reasons adequately dealt with matters on which issue had been joined.
[43]Tribunal Reasons [7].
[44]Ibid [29].
Many of the cases about reasons concern a failure to explain why one version of events or opinion was accepted over another, e.g. in respect of differing medical opinions. In this case, the argument was primarily of law: what defect was the subject of Mr Alphonso’s claim and was that a defect to which the release applied. The Member gave brief reasons on this issue but his path of reasoning was clear enough. To summarise matters that I have mentioned it was as follows.

The Member identified the defects in question in the dispute. He took them from Mr Alphonso’s points of claim. Applying the Terms of the Settlement, the Member made findings that are clear on their face, he determined that one claim was covered by the release, but the others were not. He accepted Mr Alphonso’s evidence as to the cause of the rotational movement and rejected the explanation of ‘heave’ and poor drainage advanced by Mr De Leo’s experts, including Mr Merlo.[45] It is true that the Member did not specifically accept or reject Mr De Leo’s description of the defect. But, viewed in the context of the claims before him, he dealt with the two key issues: were Mr Alphonso’s claims to be regarded as defects and did the release apply to them. He was not required to make any definition of the term ‘defect’. The parties had used that word in the Terms of Settlement and in effect had demonstrated their use of it, by the items included in Schedule 1. It is clear enough that the Member adopted a similar and ordinary meaning of the word ‘defect’.
[45]Ibid [57].

The sixth question of law related to the Member’s reasoning in respect of the proper consequential damages for loss of rent and associated tenant expenses for both units 1 and 2. As I understand it, this issue only arose if the appeal was successful and the question arose as to how to calculate the appropriate damages to award for these matters. Because I am not persuaded that the appeal should succeed this issue does not arise.

Overall conclusion

No error of law or associated grounds of appeal have been established. Therefore, save to correct the amount of the judgment and extend time for bringing the application, the application is dismissed.

[2017] VSC 786

19 December 2017