The Owners Strata Plan 57504 v Building Insurers' Guarantee Corporation - [2008] NSWSC 1022

No judgment structure available for this case.

CITATION: The Owners Strata Plan 57504 v Building Insurers' Guarantee Corporation [2008] NSWSC 1022

HEARING DATE(S): 23/07/08 and 24/07/08

JUDGMENT DATE :
3 October 2008

JUDGMENT OF: McDougall J at 1

DECISION: See paras [169] to [173] of the judgment.

CATCHWORDS: INSURANCE – Home Building Act 1989 – statutory insurance – policy provided indemnity for loss where notification is made within six months of indemnified party becoming aware of such loss, but not after the expiry of the seven year period – whether policy complied with Act - successors in title entitled to benefits of statutory warranties. - DAMAGES – residential building contract – loss arising from construction not in accordance with contract, plans and specifications – rectification – remedial work must be necessary to produce conformity with the contract and reasonable in the circumstances. - PRACTICE – referee’s report – variation – referee’s findings should not be re-agitated in court where conclusion open to the referee on the evidence – whether referee forms an interim or tentative view and proposes to change that view, natural justice requires the parties be informed.

LEGISLATION CITED: Building Services Corporation Amendment Regulation 1997
Civil Procedure Act 2005
Home Building Act 1989
Local Government Act 1993
Home Building Regulation 1990
Strata Scheme Management Act 1996

CASES CITED: Bellgrove v Eldridge (1954) 90 CLR 613
Bryan v Maloney (1995) 182 CLR 609
Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784
Dennis v Australian Broadcasting Corporation [2008] NSWCA 37
FAI General Insurance Co Ltd v Australia Hospital Care Pty Ltd (2001) 204 CLR 641
Gosford City Council v GIO General LTD (2003) 56 NSWLR 542
Kirkby v Coote [2006] QCA 61
Robinson v Harman (1848) 1 Exch 850
Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344
State of Queensland v JL Holdings Pty Limited (1997) 189 CLR 146

PARTIES: The Owners - Strata Plan No. 57504 (Plaintiff)
Building Insurers' Guarantee Corporation (Defendant)

FILE NUMBER(S): SC 55043/06

COUNSEL: HJA Neal (Plaintiff)
TM Lynch / RA O'Keefe (Defendant)

SOLICITORS: Andreones Lawyers (Plaintiffs)
Mills Oakley Lawyers (Defendant)

IN THE SUPREME COURT
OF NEW SOUTH WALES
EQUITY DIVISION
TECHNOLOGY & CONSTRUCTION LIST

McDOUGALL J

3 October 2008

55043/06 THE OWNERS STRATA PLAN 57504 v BUILDING INSURERS’ GUARANTEE CORPORATION

JUDGMENT

HIS HONOUR:

Background

1 The plaintiff (the Owners Corporation) is the owners corporation of a strata title development at Redfern (the development). The defendant (the Guarantee Corporation) is a statutory corporation representing the Crown in right of the State of New South Wales. The Guarantee Corporation was created in substance for the purpose of administering claims against insolvent insurers that the State is required to meet pursuant to s 103I of the Home Building Act 1989 (HB Act).

2 The development was brought into being by the conversion of a warehouse into 111 residential lots and a small number of commercial lots. The conversion, which on any view included residential building work for the purposes of the HB Act, was carried out by a company known as Waller Constructions Pty Limited (the builder). That company is now under external administration. That work was insured, as required by s 92 of the HB Act. The insurer was HIH Casualty and General Insurance Limited (HIH). HIH is now in liquidation. There is no doubt that HIH is an insolvent insurer for the purposes of the HB Act.

3 The Owners Corporation asserts that much of the work done by the builder was defective. It has made a claim against the Guarantee Corporation. The Guarantee Corporation appears to accept that it is liable to pay an amount of about $760,000.00. It disputes the balance of the Owners Corporation’s claim.

4 The dispute was referred to a referee for inquiry and report. The referee has delivered his report to the Court. He concluded that:

(1) the Owners Corporation had made good the bulk of its claim; and

5 The Owners Corporation seeks orders that the report be varied in three respects and that, as varied, it be adopted; and that it have judgment for the amount so ascertained. The Guarantee Corporation seeks an order that the report be rejected, and that the proceedings be dismissed. Alternatively, it seeks an order that the report be varied by reducing the total found by the referee for rectification costs. It appears that this alternative prayer for relief relates to a head of claim the quantum of which had been agreed between the parties. The referee apparently overlooked that agreement, and found in favour of the Owners Corporation for a substantially higher sum. The Owners Corporation accepts that the report must be varied to give effect to the agreement in question. That is one of the variations that it seeks.

6 Additionally, the Guarantee Corporation seeks leave to file an amended list response. The amendments that the Guarantee Corporation wishes to make would assert that the Guarantee Corporation is not liable to the Owners Corporation because HIH would not have been liable to the Owners Corporation. Those amendments are based on terms of the insurance policy excluding liability for claims not made within seven years of completion of the residential building work; alternatively on provisions of the Home Building Regulation 1990 (as amended by the Building Services Corporation Amendment Regulation 1997) (the HB Regulation) and the terms of the policy, which are said to require that any claim be notified no later than six months after the end of the period of cover (i.e., after the expiry of seven years from completion of the work in question). I note at this point that the parties agreed on the form of the relevant provisions of the HB Act and the HB Regulation, as they stood at all times material to the issues in this case. When I quote the terms of the Act or the Regulation, I do so from the agreed copy provided by the parties.

7 Logically, the question of the amendment needs to be dealt with before the question of adoption. Accordingly, I now turn to the application for leave to amend.

The application for leave to amend

Factual context

8 The residential building work in question was undertaken by the builder for a developer, Stellait Pty Limited (the developer). Contrary to s 7 of the HB Act, it appears that if there were a contract between the developer and the builder, it was not in writing. It seems to me to be clear, despite the submissions of Mr Lynch of counsel (who appeared with Mr O’Keefe of counsel for the Guarantee Corporation) that there must have been some contract between the developer and the builder.

9 The builder’s work appears to have been substantially, or practically, complete on about 25 June 1998. On that date the Council of the City of South Sydney, which was the responsible authority, issued a certificate of classification for the purposes of the Local Government Act 1993 and the Building Code of Australia. The strata plan was registered about three weeks thereafter.

The insurance

10 The insurance was effected by the issue of a certificate of insurance on about 31 July 1997 (shortly before the commencement of work) pursuant to a master policy. Clause 5.6(ii), endorsed on the reverse of the certificate, recorded that HIH would not be liable for claims “made by the Beneficiary more than… six (6) months after the Beneficiary first became aware or ought reasonably to have [become] aware of the facts or circumstances under which the claim arises; limited in all cases to seven (7) years from the date of Completion”.

11 “Completion” was defined to mean the date of completion of the work under the contract, or if no date was specified, the date of final inspection of the work by the relevant council.

12 The certificate stated that it was issued at the request of the “Contractor” – i.e. the builder. It named “SP57504” as the “Beneficiary”. I have no idea how this could have been done, in circumstances where the strata plan was not registered until almost a year after the date on which the certificate was issued. Nonetheless, the certificate was signed, or purportedly signed, on behalf of the “Beneficiary”. I suspect that what happened was that a representative of the developer signed the certificate purporting to do so on behalf of the “Beneficiary”, and that the reference to “SP57504” was added on or shortly after 15 July 1998, when the strata plan was registered. However, there is no evidence before me (apart from the bare form of the certificate and the fact of signature) from which inferences to the effect of my suspicions could be drawn. Accordingly, I think, they should remain no more than suspicions.

13 The master policy provided by cl 3.2 that certificates of insurance issued under it should “entitle the Beneficiary to make a claim in accordance with the terms and conditions of this policy for a period not exceeding seven (7) years from the date of Completion”.

14 Clause 5.13.2 of the master policy was effectively identical to cl 5.6(ii) of the certificate. The definition of “Completion” under the master policy was effectively identical to the definition of that term in the certificate.

The HB Regulation

15 At material times clause 39F of the HB Regulation read, so far as is relevant:

(1) An insurance contract must contain a provision to the effect that the insurer may not reduce its liability under the contract or reduce any amount otherwise payable in respect of a claim merely because of a delay in a claim being notified to the insurer if the claim is notified within the period set out below:

(a) except as referred to in paragraph (b), not later than 6 months after the beneficiary first becomes aware, or ought reasonably to be aware, of the fact or circumstance under which the claim arises, or

…

(3) If a beneficiary gives notice of a defect to the insurer, the beneficiary is taken for the purposes of the insurance contract to have given notice of every defect to which the defect is directly or indirectly related, whether or not the claim in respect of the defect that was actually notified has been settled.

16 Paragraph (b) of sub-clause (1) is irrelevant.

The proposed amendment

17 The case that the Guarantee Corporation wishes to make, as asserted by its draft amended list response, is that completion occurred on 2 July 1998. The precise date does not really matter. It is convenient to approach this aspect of the dispute on the basis, (which is one of the alternatives suggested in the submissions for the Guarantee Corporation) that the seven year period of indemnity expired, at the latest, on 14 July 2005.

18 The Owners Corporation is said to have given two notifications, one on about 26 May 2003 and the other on about 22 October 2003. It is the Guarantee Corporation’s case that neither of those claims raises what is the single biggest issue (as to defects) between the parties, and is the single biggest part of the claim and the amount allowed by the referee: the replacement of timber hobs. I deal with this at [89] to [145] below.

19 One issue between the parties is whether the defects alleged in relation to the timber hobs were “directly or indirectly related” to the defects that the Owners Corporation did notify (see cl 39F(3) of the HB Regulation). That is a question of fact. It is not one that I can resolve on the application for leave to amend.

Delay

20 As I have said, notifications were given in 2003. Proceedings were commenced in the Consumer, Trader and Tenancy Tribunal on 19 November 2004. They were transferred to this Court, and the Owners Corporation’s summons was filed on 28 July 2006. The Guarantee Corporation filed its “defence” on 31 August 2006.

21 On 14 December 2007, the Court made an order referring the matter out to the referee. The referee required the parties to provide him with a statement of legal issues. It was not until the Guarantee Corporation gave the referee its statement of legal issues, on 19 February 2008, that the issues now sought to be raised by amendment were first notified to the Owners Corporation.

22 The Owners Corporation objected to those issues being raised. Accordingly, the Guarantee Corporation filed its notice of motion for leave to amend on 5 March 2008. That notice of motion was returnable on 14 March 2008. In the meantime, on 7 March 2008, the hearing before the referee had commenced. Evidence and submissions were completed by 23 April 2008.

23 When the notice of motion came before the Court, the parties agreed that the referee should hear all issues save those sought to be raised by the amendment. The Court amended the order for reference accordingly, and stood over, until after the referee had delivered his report, the hearing of the notice of motion.

24 The Guarantee Corporation offers no explanation of its delay in seeking to raise the amendment. Of course, a failure to explain delay does not mean that leave to amend should be refused, anymore than the giving of an explanation for delay means that leave must be granted.

The power to allow amendment

25 The power to permit a party to amend is found in s 64 of the Civil Procedure Act 2005 (CPA). So far as is relevant, that section reads as follows:

64 Amendment of documents generally

(2) Subject to section 58, all necessary amendments are to be made for the purpose of determining the real questions raised by or otherwise depending on the proceedings, correcting any defect or error in the proceedings and avoiding multiplicity of proceedings.

26 By CPA s 51(1), the Court, in considering an application for amendment, “must seek to act in accordance with the dictates of justice”. Section 58(2) spells out how the Court is to undertake that task. Reference is made to CPA ss 56 and 57. I set out ss 56 and 58:

56 Overriding purpose

(1) The overriding purpose of this Act and of rules of court , in their application to civil proceedings , is to facilitate the just, quick and cheap resolution of the real issues in the proceedings.

(2) The court must seek to give effect to the overriding purpose when it exercises any power given to it by this Act or by rules of court and when it interprets any provision of this Act or of any such rule.

(3) A party to civil proceedings is under a duty to assist the court to further the overriding purpose and, to that effect, to participate in the processes of the court and to comply with directions and orders of the court .

(4) A solicitor or barrister must not, by his or her conduct, cause his or her client to be put in breach of the duty identified in subsection (3).

58

Court

to follow dictates of justice

(b) the terms in which any such order or direction is to be made,

the court must seek to act in accordance with the dictates of justice.

Absence of explanation

27 I have noted already that the Guarantee Corporation offers no explanation for the delay in seeking the amendment. It is however clear that its legal advisers were aware of cl 5.6(ii) of the Certificate of Insurance as far back as June 2007. On about 22 June 2007, the Guarantee Corporation instructed its current solicitors, and the “file” (which apparently comprised about twenty lever arch folders) was transferred by the former solicitors to the current solicitors. Mr Geary, a solicitor in the employ of the current solicitors, swore an affidavit dated 27 June 2007. In paragraph 21 of that affidavit he said, relevantly:

Amended List Response

21. The Defendant will be required to file an Amended List Response. That document will need to amend the current List Response to incorporate at least 3 exclusion clauses under the Policy terms and conditions with HIH, namely:

claims six (6) months after the Beneficiary first became aware or ought reasonably to be aware of the fact or circumstances under which the claim arises;

…

28 It may be accepted that the particular matter which excited Mr Geary’s attention was the first part of cl 5.6(ii), providing a limitation on the time to make claims. However, it is scarcely conceivable that Mr Geary would not have read the whole of the clause (indeed, the whole of the certificate). Although Mr Geary has sworn a subsequent affidavit, he has not sought to explain how it is that he did not appreciate the significance of the whole of cl 5.6(ii), if indeed it should be the case that he did not.

29 In the event, and despite what Mr Geary had said in his affidavit of 27 June 2007, the Guarantee Corporation did not file an amended list response.

30 The question of absence of explanation was raised by Mr Anderson, a solicitor in the employ of the solicitors for the Owners Corporation, in an affidavit sworn, in opposition to the application for leave to amend, on 9 July 2008. Paragraph 23 of that affidavit (the whole of which was read without objection) stated that the Owners Corporation “has never explained the delay in making the application to amend”.

Issues that would arise if leave granted

31 The Owners Corporation has provided a draft reply to the draft amended list statement. Clearly enough, if leave were granted to amend, it would be necessary to permit the Owners Corporation to file a reply. The draft reply flags four issues:

(1) the Owners Corporation would not admit that the documents said to constitute the policy do in fact accurately reflects its terms. That can be put to one side, as there is now evidence from which the Court could conclude that the terms of the policy do include those on which the Guarantee Corporation seeks to rely;

(2) alternatively, the Owners Corporation would contend, the clauses on which the Guarantee Corporation would rely are void by reason of s 103D of the HB Act. Thus, it submits, leave to amend should not be granted because the amendment is obviously futile;

(3) alternatively, the Owners Corporation would contend, the notifications that it did give within the seven year period were sufficient or effective notifications of the timber hob issue, having regard to the substance of the notifications and cl 39F(3) of the HB Regulation; and

32 Although Mr Neal of counsel, who appeared for the Owners Corporation, submitted that the first, third and fourth of those issues would raise questions of fact, it is I think the case that only the third does so: at least to any significant extent. As I have noted, there is evidence sufficient to prove the terms of the policy documents. Although the Owners Corporation wishes to put the Guarantee Corporation “to strict proof” of those terms, the evidence that has been produced is capable of proving the relevant terms (I express no view as to the existence of any legal requirement for “strict proof”). The only factual question in relation to the fourth issue is whether the builder returned to the site in 2002. That is, or will be, admitted.

33 Thus, the only question of fact that would require consideration, if leave to amend were granted and the reply in question were filed, is whether the notifications in fact given within the initial seven year period (running from July 1998) were sufficient or effective notifications of the timber hob issue, bearing in mind cl 39F(3).

Analysis: discretionary matters

34 I propose to deal first with the discretionary considerations on which Mr Neal relied, and then to turn to the legal issues.

The parties’ submissions

35 Mr Neal relied on the history to which I have referred, and on the absence of explanation. He noted that the amount affected by the amendment was substantial – as I have said, about $1.2 million. He noted also that the Guarantee Corporation had turned its mind expressly to cl 5.6(ii) of the certificate as long ago as June 2007.

36 Further, Mr Neal submitted, if leave to amend were to be granted, there would have to be a further hearing to deal with the questions of fact that would arise. He submitted that to permit the amendment, and thus to require a further hearing to resolve further questions of fact, would not be conducive to the overriding purpose set out in CPA s 56(1).

37 Mr Neal submitted that this was not just a question of prejudice that could be cured by an order for costs. More fundamentally, he submitted, even if that were the only prejudice that the Owners Corporation would suffer by reason of the grant of leave to amend, that did not dictate that leave should be given. He referred to the decision of the Court of Appeal in Dennis v Australian Broadcasting Corporation [2008] NSWCA 37. In that case Spigelman CJ, with whom Basten and Campbell JJA agreed, said at [28] and [29] that the principles established by the decision of the High Court of Australia in State of Queensland v JL Holdings Pty Limited (1997) 189 CLR 146, whilst remaining a binding statement of the common law principles applicable to applications for leave to amend, must be taken in this state to operate subject to the statutory duty imposed on courts by CPA s 56. His Honour said that the statutory duty imposed by s 56(2) “constitutes a significant qualification of the power to grant leave to amend the pleading under [CPA] s 64”.

38 Mr Lynch submitted that the only question of fact that would arise was that as to the sufficiency or effect of the notifications that were given, bearing in mind cl 39F(3) of the HB Regulation. He submitted that a resolution of that question of fact would not be difficult or extensive, and could be conducted principally, if not entirely, by examining the notifications that were given and comparing them to the description of the defects alleged in relation to the timber hobs.

39 More generally, Mr Lynch submitted, any prejudice occasioned by the late bringing of the application for leave to amend could be cured by moulding appropriate orders for costs.

40 Mr Lynch submitted that, even bearing in mind the regime now imposed by CPA s 56, and its effect on the power to give leave to amend conferred by CPA s 64, the interests of justice still remained the primary consideration. In this case, he submitted, it was necessary to bear in mind the substantial amount affected by the amendments and that its resolution, requiring attention only to limited issues of fact and otherwise to questions of law, could be undertaken quickly and cheaply.

41 Further, Mr Lynch submitted, if it were necessary to remit the matter to the referee in relation to the cost of tiling works (something with which I deal at [146] to [168] below) then a resolution of the issues sought to be raised by the amended reply would not delay the ultimate resolution of the issues between the parties.

Decision

42 I do not accept the propositions that the only prejudice to the Owners Corporation is a prejudice relating to costs, and that this prejudice can be cured by appropriate costs orders. The dispute between the parties has been alive for more than five years (I leave aside, for the moment, the question of whether that dispute extended, at the outset, to the timber hobs). Litigation in relation to the dispute has been on foot since November 2004. I do not know when the issue relating to the timber hobs was first raised. If the evidence reveals the date, the parties did not refer me to the relevant part of the evidence; and in accordance with my usual practice, I had stated that I would not go to parts of the voluminous material tendered to which neither counsel took me. In any event, from the time that the timber hobs became part of the litigious controversy, the dispute was conducted as one of fact: were they defective or not? If they were defective, what was the appropriate method of rectification?

43 The Owners Corporation prepared its case on the basis that the relevant issues were issues of fact. It was entitled to proceed on the basis that if those issues of fact were resolved in its favour then it would succeed.

44 I do not know what attitude the Owners Corporation would have taken had it been told, at an appropriate time, that there was said to be a legal answer to this aspect of its claim: on the Guarantee Corporation’s case, a complete answer. The Owners Corporation might have persisted with the litigation (including the dispute relating to the timber hobs). Alternatively, it might have sought to resolve its dispute with the Guarantee Corporation. However, it has acted on the basis of the issues as (at least until 19 February 2008) they had been articulated, and on the basis of the advice that it had received in relation to its prospects on those issues. Presumably, the Owners Corporation gave consideration to its financial exposure by reference to those issues and that advice. No doubt, the individual proprietors (who of course stand behind the Owners Corporation, and whom in substance it represents) did the same.

45 If leave to amend were granted, and the point raised by amendment proved to be fatal, it would be necessary to consider what the appropriate costs order should be. I do not think that an order simply giving the Owners Corporation its costs of and incidental to and thrown away by the amendment would be sufficient. In the majority of cases, that order is sufficient. But the majority of cases do not raise the question of an application for leave to amend heard and determined after there has been a reference in which all other issues in dispute were argued and considered, and after the referee’s report was handed down.

46 It may be that any consideration of the interest of justice, in relation to the Owners Corporation, would require it to be compensated on the indemnity basis for whatever costs it incurred (or became liable to pay) after the time when the issue now sought to be raised should have been raised. That would require in effect a resolution of the issues to be raised by the amendment and then a consideration of the hypothetical question – what would the Owners Corporation have done had those issues been raised at an appropriate time?

47 I do not accept that the interest of justice, as between the parties, require the sort of exercise that I have just described to be undertaken. Nor do I think that it is one required in the performance of the Court’s obligation to seek to give effect to the overriding purpose set out in CPA s 56(1).

48 In my view, when the balance lies between granting an indulgence to a party that has not explained the factual basis on which the indulgence is tardily sought, and causing real prejudice to the opposing party (including by conducting the sorts of inquiries that I have just outlined), the Court is justified in refusing to grant the indulgence.

49 These considerations are of themselves sufficient to warrant refusal of the application for leave to amend.

Analysis: futility

50 I turn now to the legal issue – the suggested futility of the amendments sought. This aspect of the debate requires consideration of cls 3.2, 3.3 and 5.13.2 of the master policy.

The terms of the policy

51 The effect of cl 3.2 is that certificates of insurance issued under the master policy should not give an entitlement to make a claim for a period more than seven years from the date of “Completion”. The effect of cl 3.3 is to limit the seven year period to twelve months in the event of a claim relating to failure to complete residential building work. I set out those clauses:

3.2 All Certificates of Insurance issued hereunder by the Contractor in favour of a Beneficiary shall entitle the Beneficiary to make a claim in accordance with the terms and conditions of this policy for a period not exceeding seven (7) years from the date of Completion.

3.3 In respect of claims made as a result of an event happening as described within Insuring Agreement 1.1 the period specified in Clause 3.2 above is restricted to twelve (12) months after the failure to commence, or cessation of the work detailed within the Certificate of Insurance issued hereunder.

52 The effect of cl 5.13.2 is that HIH is not liable for any claim by a “Beneficiary” made more than six months after that Beneficiary first became aware, or should have become aware, of the circumstances from which the claim arises, with a limit in all cases of seven years from the date of Completion. I set out that clause:

Insurers shall not be liable to pay any claim made against The Contractor or directly against this policy by the Beneficiary, under this policy or any Certificate of Insurance issued under this policy:-

…

5.13 made by the Beneficiary more than:-

…

5.13.2 for all other claims six (6) months after the Beneficiary first became aware, or ought reasonably to be aware of the circumstances under which the claim arises in all cases limited to a maximum of seven years from the date of Completion.

53 To the extent that the debate also requires consideration of cl 5.6(ii) of the certificate of insurance, there is no need to set it out. As I have noted at [14] above, it is not materially distinguishable from cl 5.13.2 of the master policy.

The parties submissions

54 In substance, Mr Neal’s submission for the Owners Corporation was that the policy imposed a limit on the time for making claims that was not permitted under the HB Act or the HB Regulation.

55 It is not so easy to state, or to summarise, the submission of Mr Lynch in reply. However, as I understood it (and an understanding of the submission was not facilitated by the constantly shifting grounds on which it was based, and terms in which it was expressed), it was to the effect that:

(1) the policy was a “claims made and notified” policy, so that a claim could only be made during the period of insurance stipulated by the policy (relying, Mr Lynch said, on what Sheller JA, in whose reasons Spigelman CJ and Meagher JA concurred, had said in Gosford City Council v GIO General LTD (2003) 56 NSWLR 542 at 552. In fact, as even desultory reading of his Honour’s judgment makes clear, his Honour was quoting from the joint judgment in FAI General Insurance Co Ltd v Australia Hospital Care Pty Ltd (2001) 204 CLR 641 at 659 – 660, but this does not detract from the authority of the proposition on which Mr Lynch relied);

(2) an insured in the position of the Owners Corporation did not suffer damage until the damage first became manifest;

(3) the Owners Corporation had not become aware of the damage within seven years after completion;

56 As I understand it, this submission, although not expressly so limited, should be taken to refer to the issue of the allegedly defective timber hobs.

57 Alternatively, Mr Lynch submitted, the relevant provisions of the HB Act and the HB Regulation did authorise the terms of the policy (and the certificate) that were central to the proposed amendment.

The legislation

58 To understand the submissions, and to resolve this issue, it is necessary to look at the relevant terms of the HB Act and the HB Regulation.

59 Section 92(1) of the HB Act made it necessary for the performance of residential building work under a contract to be insured. The subsection read:

92 Contract work must be insured

(1) A person must not do residential building work under a contract unless:

(a) a contract of insurance that complies with this Act is in force in relation to that work, and

(b) a certificate of insurance evidencing the contract of insurance, in a form prescribed by the regulations, has been provided to the other party (or one of the other parties) to the contract.

60 Section 99(b) provided that a contract of insurance relating to residential building work must insure the person for whom the work is done, and that person’s successors in title, against the risk of loss arising from a breach of statutory warranty. It read:

99 Requirements for insurance for residential building work

A contract of insurance in relation to residential building work required by section 92 must insure:

…

(b) a person on whose behalf a work is being done and the person’s successors in title against the risk of loss arising from a breach of a statutory warranty in respect of the work.

61 Section 103B dealt with the period of cover. By subs (2), it provided that a contract of insurance must provide cover for at least seven years from the date of completion of the work. By subs (3), it provided that the regulations could specify the period within which a claim must be made. It read:

103B Period of cover

(2) A contract of insurance must provide insurance cover for other loss insured in accordance with this Act for a period of not less than 7 years after the completion of the work or the supply of the kit home, or the end of the contract relating to the work or supply, whichever is the later.

(3) This section is subject to any limits set out in the regulations as to the period within which a claim must be made.

62 Section 103C(1) authorised the Governor to “make regulations for or with respect to requirements for insurance required to be entered into under this Part”.

63 Section 103D provided that “[a] provision of a contract or another agreement that purports to restrict or remove the rights of a person under this Part is void”.

64 Clause 39A of the HB Regulation dealt with the question of when residential building work should be taken to be complete. It provided for three alternatives:

(1) the date of completion within the meaning of the contract under which the work was performed; or

(2) if the contract does not deal with the question, or if there is no contract, on the date of final inspection by the applicable council; or

65 The subclause read as follows:

39A Period of cover

(1) For the purposes of determining the period of cover to be provided by an insurance contract in relation to residential building work, work is taken to be complete:

(a) on the date that the work is completed within the meaning of the contract under which the work was done, or

(b) if the contract does not provide for when work is completed or there is no contract, on the date of the final inspection of the work by the applicable council, or

(c) in any other case, on the latest date that the contractor attends the site to complete the work or hand over possession to the owner or if the contractor does not do so, on the latest date the contractor attends the site to carry out work.

66 Clause 39F dealt with time limits for notification of loss or damage. I have set out that clause, so far as it is relevant, at [15] above. For convenience, I repeat it:

(1) An insurance contract must contain a provision to the effect that the insurer may not reduce its liability under the contract or reduce any amount otherwise payable in respect of a claim merely because of a delay in a claim being notified to the insurer if the claim is notified within the period set out below:

(a) except as referred to in paragraph (b), not later than 6 months after the beneficiary first becomes aware, or ought reasonably to be aware, of the fact or circumstance under which the claim arises, or

…

(3) If a beneficiary gives notice of a defect to the insurer, the beneficiary is taken for the purposes of the insurance contract to have given notice of every defect to which the defect is directly or indirectly related, whether or not the claim in respect of the defect that was actually notified has been settled.

Decision

67 Thus, the effect of the statutory scheme having regard to the relevant provisions of the HB Act and the HB Regulation is that:

(1) residential building work had to be performed pursuant to a contract;

(2) residential building work performed under a contract had to be insured;

(5) the period of insurance must be at least seven years;

(6) that period of seven years was computed from the date of completion of work under the contract (thereby requiring reference to cl 39A of the HB Regulation);

(7) if an insurer was notified of a claim within six months of the beneficiary’s first becoming aware of the circumstances giving rise to the claim, the insurer could not reduce its liability by reason of late notification; and

68 One of the events to be covered by a contract of insurance was the risk of loss arising from a breach of statutory warranty. That cover must extend for at least seven years from the completion of the work in question. See, respectively, ss 99(b) and 103B(2) of the HB Act. It follows, at least prima facie, that a policy of insurance complying with the provisions of the HB Act (as they stood at the relevant time) must provide indemnity to the beneficiary for any loss sustained by the beneficiary arising from a breach of a statutory warranty, where that loss was sustained within seven years from completion of the work.

69 Further, when the beneficiary becomes aware of the loss (or of the circumstances giving rise to it), its claim will not be defeated if it notifies the insurer of the loss, or of the circumstances, within six months of so becoming aware.

70 This analysis suggests that an insurer would not be entitled to deny liability, or to reduce its liability, in the following circumstances:

(1) a beneficiary suffers loss, through breach of a statutory warranty, within the seven year period;

(2) the beneficiary becomes aware of that (or of the circumstances giving rise to the loss) within the seven year period;

(3) the beneficiary gives notice to the insurer within six months of having become so aware; but

71 If that analysis is correct, it must follow that cl 5.13.2 of the policy, and cl 5.6(ii) of the certificate, are void by operation of s 103D. The seven year limitation that they impose applies not only to loss sustained (which is permissible) but also to notification. The words of temporal limitation – “in all cases limited to a maximum of seven years from the date of Completion” – necessarily have the effect that a claim can only be valid if it is notified, firstly, no more than six months from the time when the beneficiary becomes aware of the relevant circumstances and, secondly, within seven years from Completion. Thus, they restrict the right of a beneficiary to be indemnified, and remove that right, in circumstances where the insured event occurred within the seven year period but notification occurred outside it although within the six month period. If the clauses are void in the circumstances that I have described, they are void for all purposes.

72 As I have noted, Mr Lynch submitted that the policy was a “claims made and notified” policy. Thus, he submitted, liability could only arise when two conditions were satisfied:

(1) the beneficiary suffered insured loss during the currency of the policy; and

73 There can be no doubt that, for an insurer to be liable under a “claims made and notified” policy, not only must the insured event occur during the period of insurance but also the claim must be made within that period. So much is established by the decisions to which I have referred at [55(1)] above. However, it seems to me that to analyse the issue this way is to invert the proper order of inquiry. It may be accepted that the policy is a claims made and notified policy. That is because, as I have said, the effect of cls 5.6(ii) of the certificate and 5.13.2 of the policy requires not only that the insured event occur during the period of insurance but also that the insurer be notified within that period. But the question is not one merely to be resolved by classification of the policy. It requires consideration of whether any term of the policy, on its proper construction in context, restricts or removes (or purports to restrict or remove) a beneficiary’s insurance rights under Part 6 of the HB Act. The question is to be resolved having regard to the proper construction of the relevant provisions of the legislation and of the contract of insurance, not by reference to considerations of taxonomy.

74 Mr Lynch’s approach to the question, taken to its extreme, would mean that if a beneficiary did not become aware, until the last day of the seven years or shortly prior thereto, that it had suffered loss (and had not earlier become aware of circumstances giving rise to that loss), it would lose its right to indemnity because it could not (and therefore did not) notify the insurer until after the expiry of that period. The submission means that in any case the expiry of the seven year period truncates the six month period for giving notice that otherwise is implicit from cl 39F(1) of the HB Regulation. I do not accept that this consequence – and others that, no doubt, could be put forward by way of example – should be attributed to the legislature.

75 Mr Lynch submitted also that the Owners Corporation had not suffered loss in this case until it first became aware of the defects, or of circumstances giving rise to them. This, he submitted, was outside the seven year period. Thus, he submitted, the policy did not respond.

76 It may be accepted that if no insured loss is sustained during the seven year period then no claim can arise. But that does not answer Mr Neal’s submission set out at [54] above.

77 Mr Lynch based his submission on Bryan v Maloney (1995) 182 CLR 609. As the majority (Mason CJ, Deane and Gaudron JJ) pointed out at 616, the case was argued on a number of bases, including “that damage was sustained by Mrs Maloney when the inadequacy of the footings first became manifest…”. The case concerned liability in tort for pure economic loss. It says nothing about the position of a successor in title having the benefit of ss 18C, 18D of the HB Act: a matter discussed briefly at [144] below.

78 I therefore conclude that the contractual provisions on which the Guarantee Corporation relies to found the defences that it wishes to introduce by way of amendment are void by operation of s 103B of the HB Act. Had I come to a different view on the question of discretion, I would have concluded that the application for leave to amend should fail on this ground.

79 It follows that the notice of motion for leave to amend filed on 5 March 2008 should be dismissed with costs. That conclusion applies not only to the draft amended list response annexed to that notice of motion but also to the amended draft lift response handed up by Mr Lynch in the course of argument.

Adoption of the report

80 I turn now to the question of adoption of the report.

The Court’s powers

81 The Court’s powers on a referee’s report are set out in UCPR rule 20.24:

20.24 Proceedings on the report

(a) it may adopt, vary or reject the report in whole or in part,
(b) it may require an explanation by way of report from the referee,
(c) it may, on any ground, remit for further consideration by the referee the whole or any part of the matter referred for a further report,
(d) it may decide any matter on the evidence taken before the referee, with or without additional evidence,

82 There is no distinction between rule 20.4 and the former rule, SCR part 72 rule 13. The parties accepted that my statement of the applicable principles (in relation to the former rule) in Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 at [6] to [8] were applicable. For convenience, I set out what I there said:

6 The principles to be applied, in exercising the discretion conferred upon the Court by Pt 72 r 13 to adopt, vary or reject in whole or in part a report of a referee, are well established. There are a number of cases to which, customarily, reference is made. They include Super Pty Ltd v SJP Formwork (Aust) Pty Ltd (1992) 29 NSWLR 549; the unreported proceedings in that case before Giles J (19 May 1992: the relevant considerations referred to by his Honour are sufficiently extracted in the decision of the Court of Appeal); Chloride Batteries Australia Ltd v Glendale Chemical Products Pty Ltd (1988) 17 NSWLR 60; White Constructions (NT) Pty Ltd v Commonwealth of Australia (1990) 7 BCL 193; and Foxman Holdings Pty Ltd v NMBE Pty Ltd (1994) 38 NSWLR 615. As to the nature and content of the referee’s obligation to give reasons, the relevant authorities include Xuereb v Viola (1989) 18 NSWLR 453 and Hughes Bros Pty Ltd v Minister for Public Works (Rolfe J, 17 August 1994, unreported; BC 9402885).

de novo

(2) The discretion to adopt, vary or reject the report is to be exercised in a manner consistent with both the object and purpose of the rules and the wider setting in which they take their place. Subject to this, and to what is said in the next two sub paragraphs, it is undesirable to attempt closely to confine the manner in which the discretion is to be exercised.

(3) The purpose of Pt 72 is to provide, where the interests of justice so require, a form of partial resolution of disputes alternative to orthodox litigation, that purpose would be frustrated if the reference were to be treated as some kind of warm up for the real contest.

(4) In so far as the subject matter of dissatisfaction with a report is a question of law, or the application of legal standards to established facts, a proper exercise of discretion requires the judge to consider and determine that matter afresh.

(5) Where a report shows a thorough, analytical and scientific approach to the assessment of the subject matter of the reference, the Court would have a disposition towards acceptance of the report, for to do otherwise would be to negate both the purpose and the facility of referring complex technical issues to independent experts for enquiry and report.

(6) If the referee’s report reveals some error of principle, absence or excessive jurisdiction, patent misapprehension of the evidence or perversity or manifest unreasonableness in fact finding, that would ordinarily be a reason for rejection. In this context, patent misapprehension of the evidence refers to a lack of understanding of the evidence as distinct from the according to particular aspects of it different weight; and perversity or manifest unreasonableness mean a conclusion that no reasonable tribunal of fact could have reached. The test denoted by these phrases is more stringent than “unsafe and unsatisfactory”.

(7) Generally, the referee’s findings of fact should not be re-agitated in the Court. The Court will not reconsider disputed questions of fact where there is factual material sufficient to entitle the referee to reach the conclusions he or she did, particularly where the disputed questions are in a technical area in which the referee enjoys an appropriate expertise. Thus, the Court will not ordinarily interfere with findings of fact by a referee where the referee has based his or her findings upon a choice between conflicting evidence.

(8) The purpose of Pt 72 would be frustrated if the Court were required to reconsider disputed questions of fact in circumstances where it is conceded that there was material on which the conclusions could be based.

(9) The Court is entitled to consider the futility and cost of re-litigating an issue determined by the referee where the parties have had ample opportunity to place before the referee such evidence and submissions as they desire.

(10) Even if it were shown that the Court might have reached a different conclusion in some respect from that of the referee, it would not be (in the absence of any of the matters referred to in sub para (6) above) a proper exercise of the discretion conferred by Pt 72 r 13 to allow matters agitated before the referee to be re-explored so as to lead to qualification or rejection of the report.

(11) Referees should give reasons for their opinion so as to enable the parties, the Court and the disinterested observer to know that the conclusion is not arbitrary, or influenced by improper considerations; but that it is the result of a process of logic and the application of a considered mind to the factual circumstances proved. The reasoning process must be sufficiently disclosed so that the Court can be satisfied that the conclusions are based upon such an intellectual exercise.

(13) A question as to whether there was evidence on which the referee, without manifest unreasonableness, could have come to the decision to which he or she did come is not raised “by a mere suggestion of factual error such that, if it were made by a trial judge, an appeal judge would correct it”. The real question is far more limited: ”to the situation where it is seriously and reasonably contended that the referee has reached a decision which no reasonable tribunal of fact could have reached; that is, a decision that any reasonable referee would have known was against the evidence and weight of evidence”.

(15) Where the court decides that the reasons are flawed, either on their face or because they have been shown not to deal with important matters, the court has a choice. It may decline to adopt the report. Or it may itself look at the detail of the evidence to decide whether or not the expense of further proceedings before the referee (which would be the consequence of non adoption) is justified.

Super

Franks & Anor v Berem Constructions Pty Ltd

83 In this case, the report in general “shows a thorough, analytical and scientific approach of the assessment of the subject matter of the reference”. Particularly in relation to the key area of dispute – the timber hobs – it appears from the report that the referee was well aware of the issues, and that he applied his mind carefully to the resolution of them.

84 As I have said, it was the Owners Corporation’s case that the report should be varied in three respects, and that as so varied, it should be adopted.

The suggested variations to the report

85 The first suggested variation related to the amount of $161,957.00 awarded by the referee in respect of a “swinging stage” (see the summary at R338).

86 The parties had apparently agreed that the amount to be allowed for this item was $11,262.00. The referee must have overlooked that agreement. It follows that the tabulation of rectification costs, and the total quantified by the referee, should be adjusted accordingly. The net effect is a reduction of $150,695.00 in the total rectification costs calculated by the referee.

87 The second agreed adjustment related to engineers’ fees. The Owners Corporation had retained Cardno MBK to investigate various defects. It was agreed that that firms’ fees for the investigation (as opposed to its fees in respect of giving expert evidence) should be allowed in the sum of $5,639.15. The referee appears to have overlooked this. The total rectification costs should be increased accordingly.

88 The third variation sought related to the cost of tiling. Since this issue is closely connected with the issues relating to the timber hobs, I shall defer dealing with it until I have dealt with the issues relating to the timber hobs.

The dispute as to the timber hobs

89 As I have said, the building was a converted warehouse. A number of the residential lots had inset balconies. There was no set-down from the floor level of the internal portion of the lot to the floor level of the balcony, as ordinarily there would be. The internal areas of the lots in question were separated from the inset balconies by fixed and sliding glass panels. The design specified that a concrete or brickwork hob be constructed between the interior and exterior areas of the lots concerned. On the referee’s findings, those hobs were intended to serve two functions. Firstly, they were required to carry the fixed and sliding glazing. Secondly, they were required to assist in preventing the flow of water from the balcony to the interior of the apartment.

90 The builder did not build a concrete or brickwork hob. Instead, it constructed the hobs out of two layers of untreated pine timber. The lower layer was affixed to the slab with “shot” fixings. The upper layer was nailed to the lower layer. In most, but apparently not all, cases an aluminium angle was affixed to the slab on the exterior side of, and abutting, the hob. The angle was affixed to the underlying slab using a silicon adhesive or sealant. (I have taken these details from the report at R65; and they are explained diagrammatically at R66. What the referee thought would have been required had a concrete hob been constructed is explained at R52, and diagrammatically at R51.)

The referee’s findings

91 The referee found that the method of construction of the hobs breached the warranties implied by s 18B(a) and (b) of the HB Act. Those warranties are as follows:

18B Warranties as to

residential building work

…

92 There is no doubt that the method of construction of the hobs breached the warranty set out in s 18B(a): to the extent at least that what was done was not in accordance with the specifications. The Guarantee Corporation does not contend otherwise. It does not however accept that what was done, was done other than in a proper and workmanlike manner, or that the materials used were not good and suitable for the purpose for which they were used.

93 The Guarantee Corporation’s case before the referee was twofold. Firstly, it submitted, the hobs were not designed or specified to form part of the waterproofing system for the lots in question. Secondly, and alternatively, it submitted, the hobs as built had been adequately waterproofed because the aluminium angles, sealed as they were to the underlying slab, were sufficiently waterproof. The Guarantee Corporation relied on the circumstance that, from the date of completion of the work until the date of the reference, there had been no water penetration through or under the hobs. (Water penetration had occurred at the ends of the hobs, where they abutted the walls that divided one lot from another. That water penetration occurred because the builder had not adequately flashed or sealed the joint. This was an admitted defect; and on any view it had caused damage, through water penetration, over the years. However, that water penetration, being due to inadequate flashing or sealing, is conceptually distinct from water penetration through or under the hobs themselves.)

94 On the referee’s findings, the waterproofing system had two elements. Firstly, a waterproof membrane was laid over the slab on the balcony. It was specified to lap up over the hobs, and up and over the point where the hobs abutted the dividing walls. That membrane was tiled over. It was common ground that the membrane would fail at some time during the design life of the building as modified. The design life of the building was put (whether by agreement or by assumption I do not know) at 50 years. The life of the membrane was variously estimated, but it appears to have been common ground between the experts that it could be expected to fail within 20 years. Thus, the Owners Corporation, in the execution of its duty to maintain and repair under s 62 of the Strata Schemes Management Act 1996, would be required to replace the waterproof membranes at some time in the future. Of necessity, that replacement would require the removal and replacement of the tiles laid over it.

(9) Subject to order (2), reserve for further consideration the costs of the reference and the costs of the proceedings to date.

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Citations

The Owners Strata Plan 57504 v Building Insurers' Guarantee Corporation [2008] NSWSC 1022

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CITATION:	The Owners Strata Plan 57504 v Building Insurers' Guarantee Corporation [2008] NSWSC 1022
HEARING DATE(S):	23/07/08 and 24/07/08
JUDGMENT DATE :	3 October 2008
JUDGMENT OF:	McDougall J at 1
DECISION:	See paras [169] to [173] of the judgment.
CATCHWORDS:	INSURANCE – Home Building Act 1989 – statutory insurance – policy provided indemnity for loss where notification is made within six months of indemnified party becoming aware of such loss, but not after the expiry of the seven year period – whether policy complied with Act - successors in title entitled to benefits of statutory warranties. - DAMAGES – residential building contract – loss arising from construction not in accordance with contract, plans and specifications – rectification – remedial work must be necessary to produce conformity with the contract and reasonable in the circumstances. - PRACTICE – referee’s report – variation – referee’s findings should not be re-agitated in court where conclusion open to the referee on the evidence – whether referee forms an interim or tentative view and proposes to change that view, natural justice requires the parties be informed.
LEGISLATION CITED:	Building Services Corporation Amendment Regulation 1997 Civil Procedure Act 2005 Home Building Act 1989 Local Government Act 1993 Home Building Regulation 1990 Strata Scheme Management Act 1996
CASES CITED:	Bellgrove v Eldridge (1954) 90 CLR 613 Bryan v Maloney (1995) 182 CLR 609 Chocolate Factory Apartments v Westpoint Finance [2005] NSWSC 784 Dennis v Australian Broadcasting Corporation [2008] NSWCA 37 FAI General Insurance Co Ltd v Australia Hospital Care Pty Ltd (2001) 204 CLR 641 Gosford City Council v GIO General LTD (2003) 56 NSWLR 542 Kirkby v Coote [2006] QCA 61 Robinson v Harman (1848) 1 Exch 850 Ruxley Electronics and Construction Ltd v Forsyth [1996] 1 AC 344 State of Queensland v JL Holdings Pty Limited (1997) 189 CLR 146
PARTIES:	The Owners - Strata Plan No. 57504 (Plaintiff) Building Insurers' Guarantee Corporation (Defendant)
FILE NUMBER(S):	SC 55043/06
COUNSEL:	HJA Neal (Plaintiff) TM Lynch / RA O'Keefe (Defendant)
SOLICITORS:	Andreones Lawyers (Plaintiffs) Mills Oakley Lawyers (Defendant)