Allianz v Waterbrook

Building Services Corporation Legislation Amendment Act 1996 Building Services Corporation Legislation Amendment Bill 1996 Building Services Corporation Regulation 1990 Companies (NSW) Code Corporations law 1991 LEGISLATION CITED: Home Building Act 1989 Home Building Amendment (Insurance) Act 2002 Home Building Regulation 1997 Home Building Regulation 2004 Motor Accidents Compensation Act 1999 Sale of Goods Act 1893 (UK) Suitors' Fund Act 1951

Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 Allina Pty Ltd v Federal Commissioner of Taxation (1991) 28 FCR 203 Austereo Ltd v Trade Practices Commission (1993) 41 FCR 1 Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 Bryan v Maloney [1995] HCA 17; (1995) 182 CLR 609 Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 43; (2002) 209 CLR 651 De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28 Deputy Federal Commissioner of Taxes (SA) v Elder's Trustee and Executor Co Ltd [1936] HCA 64; (1936) 57 CLR 610 Dixon v Anti-Discrimination Commissioner of Queensland [2004] QSC 58; [2005] 1 Qd R 33 Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 CASES CITED: Grain Elevators Board (Vic) v Dunmunkle Corporation [1946] HCA 13; (1946) 73 CLR 70 Harding v Commissioner of Stamps (Qld) [1898] AC 769 Hooker v Gilling [2007] NSWCA 99; (2007) 48 MVR 136 Hunter Resources Ltd v Melville [1988] HCA 5; (1988) 164 CLR 234 Lambert v Lewis (1982) AC 225 Nominal Defendant v GLG Australia Pty Ltd Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370 Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462 Symonds v Vass [2009] NSWCA 139 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272 Weld-Blundell v Stephens [1920] AC 956

Hart and Honore, Causation In The Law, 2nd Ed (1985) TEXTS CITED: New South Wales Legislative Assembly Parliamentary Debates (Hansard), 30 October 1996 New South Wales Legislative Assembly Parliamentary Debates (Hansard), 19 November 1996 New South Wales Legislative Assembly Parliamentary Debates (Hansard), 27 November 1996

PARTIES: Allianz Australia Insurance Ltd (Applicant) Waterbrook at Yowie Bay Pty Ltd (Respondent)

COUNSEL: F C Corsaro SC; P J Bambagiotti (Applicant) P F Liney; F F F Salama (Respondent)

SOLICITORS: HWL Ebsworth Lawyers (Applicant) Mallesons Stephen Jaques (Respondent)

LOWER COURT JURISDICTION: Supreme Court

LOWER COURT DATE OF DECISION: 11 December 2008

LOWER COURT MEDIUM NEUTRAL CITATION: Waterbrook at Yowie Bay Pty Limited v Allianz [2008] NSWSC 1451

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40067/09 SC 50037/08

GILES JA HODGSON JA IPP JA

10 AUGUST 2009 Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd Judgment 1 GILES JA: This is an application for leave to appeal and appeal from the answers to four questions separately decided. The facts, the questions and relevant statutory provisions are set out in the reasons of Ipp JA, which I have had the advantage of reading in draft. 2 I agree that leave to appeal should be granted. I agree that the appeal against the answers to question 1(a) and 4 should be dismissed, and with Ipp JA's reasons in these respects. I have the misfortune to differ from his Honour in relation to the reasoning to the answer to question 2, and consequentially in relation to the answer to question 3. In my opinion the appeal should be dismissed with costs. 3 Hodgson JA substantially agrees with Ipp JA. Since I am in dissent, I will be brief in giving my reasons in relation to questions 2 and 3.

Question 2 4 The insurance policy issued by Allianz ("the Policy") provided by the insuring clause that Allianz would indemnify "the Building Owner", a defined term which included the person for whom building work was done or a successor in title of the land or building in respect of which the work was done - " … for loss or damage in respect of residential building work: (1) … (2) arising from breach of a statutory warranty under Part 2C section 18B of the Act, namely … ." 5 Indemnity limitation (9) of the Policy relevantly excluded liability for "any claim for breach of a statutory warranty … for any defects in the work which would have been reasonably visible at the time any successor in title acquired the dwelling". The warranties in s 18B of the Home Building Act 1989 ("the Act") went beyond defects in the work, for example the warranty that work would be done within the time stipulated in the contract. The exclusion could apply only where the breach of warranty involved defects in the work. 6 The Act provided in s 18B for warranties implied in every contract to do residential building work, as warranties by the person doing the residential building work in favour of the person for whom the work was done. The person for whom residential building work was done was not necessarily the landowner, but where the person was the landowner s 18D had effect. By that provision, a successor in title to the person for whom the work was done was "entitled to the same rights as the person's predecessor in title in respect of the statutory warranty", save to the extent that the predecessor in title had already enforced the warranty in relation to a particular deficiency in work or materials. By s 18E, there was a seven year limitation period for commencing proceedings. 7 The Act then provided in s 92 that a person doing residential building work must have in force a contract of insurance in relation to the work complying with the Act. By s 99, and so far as presently relevant -

" 99 Requirements for insurance for residential building work

A contract of insurance in respect of residential building work required by section 92 must insure: (a) … (b) A person on whose behalf work is being done and the person's successors in title against the risk of loss arising from breach of a statutory warranty in respect of the work." 8 Clause 43(1)(b) of the Home Building Regulation 1997 ("the 1997 Regulation") relevantly provided that an insurance contract must insure beneficiaries for "loss or damage arising from a breach of a statutory warranty". It was not suggested that the 1997 Regulation was in conflict in this respect with the requirements of s 99(b). 9 It was common ground that, by force of s 103D of the Act, to the extent that indemnity limitation (9) restricted or removed the rights of a beneficiary under the insurance contract as required by s 99(b), it was void. Accordingly, question 2 posed whether indemnity limitation (9) restricted or removed the rights of a successor in title under insurance against the risk of "loss arising from breach of a statutory warranty in respect of the work". 10 As Ipp JA demonstrates, the insurance provisions of the Act were part of a scheme for consumer protection in relation to residential building work. The consumers included successors in title. The legislature created statutory warranties in a contract to do residential building work. Where a person was a successor in title to a person entitled to the benefit of a statutory warranty, the legislature conferred on the successor in title (subject to exception) the same rights as those of the predecessor in title in respect of the statutory warranty. The successor in title could recover from the person doing the residential building work loss suffered as a result of breach of warranty: in the language used in s 99(b), loss arising from breach of the warranty. In that manner, the successor in title was protected. 11 The answer to question 2 turned on the identification of the successor in title's loss arising from breach of the warranty, as those words were used in the Act. The words made up a composite phrase, with the width of "arising out of" (which may be compared with "resulting from" in s 99(a)) informing the answer. 12 If there was a defect in residential building work, ordinarily the person for whom the work was done could recover damages for breach of warranty from the person doing the work. There could be recovery whether the defect was reasonably visible from the time the work was first done, or whether it became reasonably visible at some later time: it would not matter. The measure of damages would be the loss sustained by the failure of the person doing the work to comply with the warranty, being the cost of putting the dwelling into the condition in which it would have been if the warranty had been complied with: Bellgrove v Eldridge (1954) 90 CLR 613; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8; (2009) 236 CLR 272. The loss arising from the breach of warranty, within s 99(b), would be the cost of rectifying the defect. 13 Bringing a successor in title into the picture, the successor in title ordinarily could also recover damages for breach of warranty from the person doing the work. Allianz accepted that, where the defect was not reasonably visible at the time of acquisition, the successor in title could recover the cost of rectifying the defect as loss arising from the breach of warranty. I agree, and it follows that in such a case the intervening event of acquisition of the dwelling would not deny the preclude that the loss arose from the breach of warranty. Thus consumer protection would extend to the successor in title, as the owner of a defective dwelling, who would be protected by recovery of the cost of rectifying the defect. 14 In my opinion, a successor in title's loss arising from breach of warranty would not change if the defect was reasonably visible at the time the successor in title acquired the dwelling. The successor in title would still have a defective dwelling, and would still be exposed to the cost of rectifying the defect in order that the dwelling be put into the condition in which it would have been in if the warranty had been complied with. There would still be loss arising from breach of warranty, within s 99(b) of the Act. 15 In essence, Allianz submitted that the acquisition of a dwelling in which a defect was reasonably visible would bring a different causal link between the breach of warranty and the loss. For a number of reasons, I do not think that is correct. 16 The causal link in recovery by the person for whom the residential building work was done, or by the successor in title in the case of a defect not reasonably visible at the time of acquisition, would remain. There would be a contractual right to compliance with the warranty, it would have been breached, and there would be exposure to the cost of rectifying the defect in order that the dwelling be put into the condition in which it would have been if the warranty had been complied with. None of this would be taken away by the intervening event of acquisition of the dwelling. 17 Allianz relied on Bryan v Maloney (1995) 182 CLR 609 for departure from the cost of rectifying the defect. It submitted that a successor in title, as in that case suffered economic loss when a latent defect became patent, and that there was no economic loss when the defect was patent at the time of acquisition. The reliance is misplaced: it overlooks the statutory contractual basis for the successor in title's rights. 18 Acquisition of the dwelling is an additional event, but it is not one which changes the statutory contractual basis of recovery for breach of warranty. On the contrary, it is precisely what the Act adopts in conferring on a successor in title the rights of the predecessor in title in respect of the statutory warranty. Acquisition of the dwelling is a qualifying factor, not a disqualifying factor, and the legislature has not differentiated between acquisition where a defect is reasonably visible and acquisition where it is not. 19 There is no sufficient reason why the person doing the residential building work should be relieved from liability if the defect due to non-compliance with the warranty was reasonably visible at the time of acquisition. The reasonable visibility would not eliminate the person's breach and its consequences. Nor would relief from liability foster consumer protection, and incentivation properly to do residential building work. In this respect I agree with Ipp JA that double recovery from the person doing the residential building work, by the successor in title and then by the person for whom the work was done, would not be available: the express exception in s 18D did not mean that double recovery could otherwise be had. While recovery by a successor in title could benefit a developer, that can be regarded as subservient to protection of the successor in title as consumer. 20 Treating the acquisition of the dwelling with actual or constructive knowledge of the defect as the causal link would make protection of the successor in title as consumer a complex matter, and one in which the consumer may well not be protected. 21 Reasonable visibility of a defect as the criterion for recovery by the successor in title would be the beginning of a morass of factual inquiry, alien to consumer protection. Its theoretical justification, for which Allianz argued, is that when the successor in title acquired the dwelling the actual or constructive knowledge of the defect would be reflected in the purchase price. ln many cases that would be contrary to the facts. Purchasers do not always see reasonably visible defects, and if they know of them any effect on the purchase price involves knowledge of the cost of rectifying the defects; that is notoriously often difficult to forecast. Further, if the successor in title is able to recover the cost of rectifying the defect from the person who did the residential building work or an insurer, the purchase price is unlikely to be affected, or may be affected only so as to reflect the expense and trouble of recovery. The theory is essentially circular. 22 I apprehend that the problem with the theoretical justification is to an extent acknowledged by Ipp JA, in his acceptance that in some circumstances the successor in title's knowledge of patent defects might not be a new intervening cause. Investigation of the circumstances in order to arrive at causation would lead into the depths of the morass. I doubt a legislative intention that a successor in title should have to undergo such an investigation. The preferable view, in my opinion, is that the successor in title's loss, ordinarily the cost of rectifying the defect, arises from breach of warranty because the successor in title is exposed to the cost of rectifying the defect. That is so whether or not the defect is reasonably visible at the time of acquisition. 23 It might be observed that, on the approach to s 99(b) and indemnity limitation (9) accepted by his Honour, the relevant exclusion in indemnity limitation (9) would be unnecessary. It would be sufficient to address the insuring clause, and to decide whether or not the successor in title's loss or damage was loss or damage "arising from breach of a statutory warranty …" under Part 2C section 18B of the Act. 24 Two further matters should be mentioned. 25 First, I respectfully do not find assistance in the subsequent amendments to the Act and the replacement Home Building Regulation 2004. It can not be seen with any clarity whether it was intended better to say what was already meant, or to make changes to say what had not previously been said. 26 Secondly, nor do I find assistance in Lambert v Lewis (1982) 2 AC 225 or Quinn v Burch Bros (Builders) Ltd (1966) 2 QB 370. Lambert v Lewis was concerned with the farmer's claim to recover from the dealers any damages payable to the plaintiff, and with whether the farmer's negligence was caused by the breach of warranty. There was no question of recovery of the cost of rectifying the trailer, and the farmer's problem lay in negligent knowing use of the trailer, not its acquisition. Quinn v Burch Bros (Builders) Ltd was even more remote from the present case. 27 In my opinion, for these reasons the trial judge correctly answered question 2 "yes".

Question 3 28 There are difficulties in the framing of question 3. Understood as confining the circumstances to those stated in the question, it follows that I consider that the trial judge correctly answered question 3 "no".

The result 29 In my opinion, the appeal should be dismissed with costs. 30 HODGSON JA: I agree with the orders proposed by Ipp JA, and subject to one matter I agree with his reasons. 31 For my part, I do not gain assistance from consideration of the later legislation, and I would prefer not to adopt pars [75]-[86] of Ipp JA's reasons. 32 IPP JA:

The application for leave to appeal and the appeal 33 This is an application for leave to appeal and appeal heard concurrently. As the proceedings concern questions of general interest in connection with the Home Building Act 1989, I would grant the application for leave to appeal. 34 The appeal concerns a retirement village ("the Village") in Yowie. A builder (the Builder), now in liquidation, constructed the Village pursuant to a contract with a developer, Yowie Pty Ltd (the "Developer"). The Developer sold the Village to the respondent ("Waterbrook"). At the time of the trial, Waterbrook owned the Village. The appellant ("Allianz") stands in the shoes of the insurer that issued a builder's home warranty insurance policy ("the Policy") in respect of the building work carried out by the Builder in constructing the Village. 35 Some of the work carried out by the Builder was defective. At the time of the hearing before McDougall J, not all the defects had been rectified. When Waterbrook acquired the Village from the Developer, some of the defects were reasonably visible and were known to Waterbrook. 36 Waterbrook made a claim under the Policy for the cost of rectifying the defects. Allianz repudiated liability. Waterbrook then commenced proceedings in the Commercial List against Allianz, contending that it was entitled to indemnity under the Policy in respect of its claim. 37 During the course of managing the proceedings in the Commercial List, an order was made requiring the following separate preliminary questions to be determined: "1(a) Whether the Plaintiff falls within the exclusion, from the definition of 'Building Owner' of companies [or persons or companies] related within the meaning of the Corporations Law, to [the developer]. 1(b) For this purpose, whether the words 'persons or' in the Policy exclusion are void by reason of non-compliance and/or inconsistency with the Home Building Act 1989 ("Act") and the Home Building Regulations made thereunder ("Regulation") at the time the Policy was issued. 2. Whether that part of Indemnity Limitation (9) of the Policy, which purports to exclude the Defendant's liability for defects which were reasonably visible at the time that the Plaintiff acquired the subject land and buildings, is void by reason of non-compliance and/or inconsistency with the Act and the Regulation at the time the Policy was issued. 3. Whether the allegation in paragraph 10.1(e) of the Further Amended List Response discloses an arguable defence as a matter of law (where "the circumstances" referred to therein were that the Plaintiff acquired the Property from [the Developer] with knowledge of the existence, nature and extent of all, or substantially all, of the alleged defects). 4. Whether the Exclusion alleged in paragraph C9.3(e) of the Further Amended List Response is void by reason of non-compliance and/or inconsistency with the Act and the Regulation at the time the Policy was issued." 38 McDougall J, answered the questions as follows:

4 Yes 39 Allianz appeals against his Honour's decisions in respect of all the questions save for question 1(b).

Question 1(a) 40 Question 1(a) concerns the identity of the insured under the Policy. By the Policy, Allianz undertook to indemnify the "building owner" in accordance with its terms. The building owner was defined under the Policy as: "[T]he person for whom residential building work is being or is about to be carried out under a contract as defined in this policy, and any person who is a successor in title for the time being of the land or building in respect of which the work was carried out under the contract, but excludes:

(a) a developer who does residential building work;

(b) a person who does residential building work other than under a contract;

(c) the holder of a licence who or which carried out residential building work;

(d) persons or companies related, within the meaning of the Corporations Law, in [sic - to] any corporate person referred to in subclauses (a), (b) or (c) of this definition." 41 Question 1(a) asks whether Waterbrook is excluded from the definition of building owner in the Policy on the ground that it is a company, related within the meaning of the Corporations Law, to the Developer. 42 This question is relevant to Waterbrook's claim as, at the time the Developer entered into the building contract for the Village, one of its directors was a director of Waterbrook. Allianz submitted that companies may be "related" in two ways. The first was by reason of shares in the companies being commonly owned. The second was by factors relating to the ability of one company to influence or control the affairs of another. On this basis, Allianz contended that the exclusion in (d) also encompassed companies that were "related entities" or "related parties", terms of ss 9, 228 and ch 2E of the Corporations Law. According to Allianz, as the two companies had a common director, they were related. 43 In construing the Policy definition of building owner, due regard must be had to the provisions of cl 42 of the Home Building Regulation 1997 (the "1997 Regulation"). The 1997 Regulation was in force at the relevant time and cl 42 relevantly provided: " 42 Beneficiaries

(1) An insurance contract must provide that the beneficiaries under the contract are: (a) a person: (i) on whose behalf residential building work covered by the contract is done or is to be done, or … (b) a successor in title to any person referred to in paragraph (a)(i), (ii) or (iii).

(2) The following persons are not required to be beneficiaries under an insurance contract:

(a) a developer who does residential building work,

… (d) companies related, within the meaning of the Corporations Law, to any corporate person referred to in paragraph (a), (b) or (c)." 44 It was common ground that the Policy could not limit the beneficiaries to an extent inconsistent with cl 42, and the answer to question 1(a) depended, substantially, on the meaning of cl 42(2)(d). 45 Section 50 of the Corporations Law provided: "(1) Where a body corporate is:

(a) a holding company of another body corporate; or

(b) a subsidiary of another body corporate; or (c) a subsidiary of a holding company of another body corporate; the first mentioned body and the other body are related to each other." 46 McDougall J held that cl 42(2) (and exclusion (d)) encompassed only companies related in accordance with s 50. His Honour's reasoning was as follows: "The definition of related entity in s 9 does not use the word 'related' or any of its cognate forms. Nor does the definition of related party. The word 'related' appears only in the defined term, not otherwise; specifically, not in the definition.

It follows that s 50 is the provision of the Law that, for the purposes of cl 42(2)(d) of the 1997 Regulation, defined the circumstances in which one company is related to another." 47 There are two other factors that support his Honour's decision on this question. 48 Firstly, cl 42(2)(d) and exclusion (d) refer only to companies that are related to each other. They make no reference to "related entity" or "related party". 49 Secondly, the preceding and succeeding legislative provisions relating to home building unambiguously excluded only companies related to developer companies on the basis of the concept of the relationship reflected in s 50. As Mr Liney (who together with Mr Salama appeared for Waterbrook) submitted, it was improbable that the legislature intended to have "a discontinuous regime as to what 'relationship' was exclusionary from time to time". 50 The regulatory scheme applicable to home building prior to the 1997 Regulation was the "BSC Comprehensive Insurance Scheme" prescribed by cl 33 of the Building Services Corporation Regulation 1990. Clause 4 of Form 4 of that Regulation identified the persons who had to be beneficiaries of the statutory insurance policy applicable at the time, and who might be excluded as beneficiaries. The parties who could be excluded (by cl 4 of Form 4) as beneficiaries included "companies which are related, within the meaning of the Companies (NSW) Code to any corporate person referred to [including a developer]". By s 7(5) of the Companies (NSW) Code a company was related to another where the relationship of common holding company or holding/subsidiary existed. This provision, in substance, was the same as s 50 of the Corporations Law. The Companies (NSW) Code contained no definition of "related party" or "related entity". The Corporations Law 1991 was the first piece of legislation to introduce these concepts. 51 As mentioned, the 1997 Regulation replaced the Building Insurance Scheme. The wording of cl 42(2) of the 1997 Regulation is similar to that of cl 4 of Form 4 of the Building Services Regulation 1990. The 1997 Regulation was later extensively revised by the Home Building Regulation 2004 (the "2004 Regulation"). Clause 55 of the 2004 Regulation is the succeeding equivalent to cl 42 of the 1997 Regulation. Clause 55(2) refers expressly to related companies within the meaning of s 50 of the Corporations Law and does not refer to any other kind of relationship. 52 I accept, as Mr Liney submitted, that a construction that accords consistency to the exclusion of "related companies" is more likely to accord with the legislative intention. 53 Accordingly, I would dismiss the appeal against the answer to question 1(a).

Question 2 54 Question 2 concerns indemnity limitation (9) of the Policy. That limitation provides: "(9) The insurer shall not be liable for any claim for breach of a statutory warranty under the [policy] subclause 2 for work or materials in respect of which a predecessor in title to the land has enforced the warranty; or for any defects in the work which would have been reasonably visible at the time any successor in title acquired the dwelling." 55 The cover under the Policy is that provided by the indemnity clause, which is in the following terms: "The insurer will indemnify the Building Owner for loss or damage in respect of residential building work: (1) which results from non-completion of the work because of the insolvency or death of a Contractor or because, after due search and inquiry the Contractor cannot be found; (2) arising from breach of statutory warranty under Part 2C section 18B of the Act, namely, the Contractor warrants that: (i) the work will be carried out in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract; (ii) all materials to be supplied by the Contractor will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new; (iii) the work will be carried out in accordance with, and will comply with the Act or any other law; (iv) the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time; (v) if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling, the work will result to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling; and (vi) the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the Building Owner expressly makes known to the Contractor, or another person with express or apparent authority to enter into or vary contractual arrangements on behalf of the Contractor; the particular purpose for which the work is required or the result that the Building Owner desires the work to achieve, so as to show that, that person relies on the Contractor's skill and judgement. 56 Indemnity limitation (9) is one of several provisions in the Policy that limit the cover provided by the indemnity clause. The part of limitation (9) relevant to question 2 is that which excludes the insurer's liability for defects in the work reasonably visible at the time a successor in title acquires the dwelling. 57 Waterbrook contends that indemnity limitation (9) is an impermissible restriction of the indemnity required by a complying policy. Waterbrook's argument was based on s 99(b) of the Act and cl 43(1)(b) of the 1997 Regulation. 58 At the relevant time, s 99 provided: " 99 Requirements for insurance for residential building work A contract of insurance in relation of residential building work required by section 92 must insure: (a) a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency or death of the contractor or because of the fact that, after due search and inquiry, the contractor cannot be found, and (b) a person on whose behalf the 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." 59 At the relevant time, cl 43(1) provided: "(1) An insurance contract must indemnify beneficiaries under the insurance contract for the following losses or damage in respect of residential building work covered by the insurance contract: (a) loss or damage resulting from non-completion of the work because of the insolvency or death of the contractor or because, after due search and enquiry, the contractor cannot be found, (b) loss or damage arising from a breach of a statutory warranty." 60 The point to be noted is that both s 99(b) and cl 43(1)(b) required only that the statutory policy provide an indemnity that related to the risk of "loss". Section 99(b) required the policy to cover "the risk of loss arising from a breach of a statutory warranty in respect of the work," and cl 43(1)(b) required the policy to provide indemnity against "loss or damage arising from a breach of a statutory warranty". 61 Waterbrook's contention before the primary judge was the same as that made before this Court. It was described by his Honour (at [48]) as follows: "Mr Liney submitted that the prima facie measure of loss for breach of a warranty in a building contract was the cost of necessary and reasonable work required to make the building conform to the contract, together with consequential loss. He relied on Bellgrove v Eldridge (1954) 90 CLR 613. Mr Liney submitted that, as this was so for a party in contract with the builder, so it was also by s 18D the measure of a successor's entitlement, and the measure of indemnity under s 99(b) and cl 43 (1)(b)." 62 Allianz, on the other hand, relied on the fact that the indemnity clause under the Policy, s 99(b) of the Act and cl 43(1)(b) of the 1997 Regulation each obliged an insurer to indemnify against loss or damage arising from a breach of statutory warranty. Allianz contended that if a party, in full knowledge of defects in a building, purchased the building, that party suffered no loss or damage "arising from a breach of a statutory warranty". On Allianz's argument, any loss that such a party would suffer would be caused by its deliberate decision to acquire the defective building. 63 The statutory warranties were contained in s 18B of the Act. This section relevantly provided: " 18B Warranties as to residential building work

The following warranties … are implied in every contract to do residential building work: (a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract, (b) a warranty that all materials supplied … will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new, … (d) a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time, … (f) a warranty that the work and any materials used in doing the work will be reasonably fit for the specified purpose or result, if the person for whom the work is done expressly makes known … the particular purpose for which the work is required or the result that the owner desires the work to achieve, so as to show that the owner relies on the [builder's] skill and judgment." 64 Section 18D of the Act, at the relevant time, provided: " 18D Extension of statutory warranty

A person who is a successor in title to a person entitled to the benefit of a statutory warranty under this Act is entitled to the same rights as the person's predecessor in title in respect of the statutory warranty, except for work and materials in respect of which the person's predecessor has enforced the warranty." 65 Section 18D conferred on a successor in title to a person entitled to the benefit of statutory warranties only the rights that that person had "in respect of" the statutory warranties. That is, it enabled the successor in title to claim whatever remedies might be available to it based on a breach of the statutory warranties by the builder. Those remedies included recovery of any loss incurred by the successor arising from the breach of the statutory warranties (and, arguably, the right to enforce the statutory warranties). It is not suggested that s 18D conferred the right on a successor to claim the losses its predecessor incurred arising out of a breach of the statutory warranties. That does not appear to be the intent of the legislation. Thus, s 18D did not have the same effect as an equitable assignment of a chose in action. 66 Waterbrook's argument, in effect, was as follows:

(a) When Waterbrook acquired the Village, it acquired, by s 18D - as the Developer's successor in title - the benefit of the statutory warranties to which the Developer had been entitled.

(b) On acquiring the Village, Waterbrook sustained a loss by reason of the defective work resulting from breaches of the statutory warranties.

(c) On the authority of Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613, Waterbrook's loss is to be measured by the reasonable cost of the work required to make the building conform to the contract, plus consequential losses caused by the breach.

(d) As Waterbrook cannot recover that loss from the Builder, it is entitled to recover it under the Policy from Allianz. 67 In answering question 2 in the affirmative, McDougall J upheld Waterbrook's argument. His Honour held that the measure of damages recoverable by the original owner for defective work was that laid down by Belgrove v Eldridge, and the "clear intention of s 18D was that the entitlement of successors should be no less". 68 Mr Corsaro SC, who together with Mr Bambagiotti appeared for Allianz, submitted that the correct measure of damages was an amount equal to the decrease in value of the building caused by the defective work, and referred to Bryan v Maloney [1995] HCA 17; (1995) 182 CLR 609 in this regard. 69 Belgrove v Eldridge was a case in contract and Bryan v Maloney a case in tort. The present, to the extent that it involves claims under the Policy is a claim in contract, but it is overlaid by the statutory application of the statutory warranties. Notwithstanding the influence of the statutory rights and duties in this case, I accept Mr Liney's argument that the contractual measure of damages (Belgrove v Eldridge) applies, as McDougall J held.

70 The acceptance that the contractual measure of damages applies, does not answer the other issues that Allianz also raised, namely, did Waterbrook suffer any loss arising from the breach of the warranties, and what caused that loss. These questions are inherent in Waterbrook's proposition (which is an essential link in its argument) that, on acquiring the Village, it sustained a loss by reason of the defective work resulting from breaches of the statutory warranties. 71 The point remains that Waterbrook must prove that it sustained loss and that, whatever loss it suffered, there was an appropriate causal connection between its loss and the breaches of the statutory warranties: cf Alexander v Cambridge Credit Corporation Ltd (1987) 9 NSWLR 310 at 330 A-B and 331 B-C per Mahoney JA and 349E per McHugh JA. 72 While proof of loss and causation are issues that arise in the real life situation involved in the litigation between Waterbrook and Allianz, question 2 is asked in the abstract, without reference to the facts of the case. So, although the parties agreed that some of the building work was defective, and that when Waterbrook acquired the Village some of the defects were not only reasonably visible but were known to Waterbrook, the formulation of question 2 pays no regard to these matters. 73 The parties' arguments raise the meaning of "loss" in s 99 and cl 42. Does "loss" mean, simply, the cost of remedying work that, in breach of the statutory warranties, was defective? Or does it mean loss caused and measured in accordance with the principles of the general law? 74 Plainly, the legislation conferred the benefit of the statutory warranties on successors in title to the person for whom the building work was done, and required the statutory policy to respond to any loss caused by the breach of the statutory warranties. But these matters do not assist in determining the basic question, namely, whether "loss" is to be construed as the loss actually suffered by the successors in title and is to be subject to general law principles of causation, or whether "loss" is to be construed as meaning merely the cost of remedying work that, in breach of the statutory warranties, was defective. 75 Some assistance may be gained from subsequent legislation that amended the Home Building Act as it was at the relevant time and the 1997 Regulation. That subsequent amending legislation altered the phraseology used in defining the extent of the cover to be provided by the statutory policy. 76 In having regard to the subsequent legislation, I bear in mind the following remarks of McColl JA (with whom Basten JA and I agreed) in Hooker v Gilling [2007] NSWCA 99; (2007) 48 MVR 136, made in the context of amendments to the Motor Accidents Compensation Act 1999: "Whether or not an Act can be characterised as declaratory is determined in accordance with principles of statutory interpretation: Harding v Commissioner of Stamps (Qld) [1898] AC 769 (at 775). It is also appropriate to take the explanatory notes into account to conclude that a Bill was meant to clarify rather than change the meaning of a word ( Dixon v Anti-Discrimination Commissioner of Queensland [2004] QSC 58 ; [2005] 1 Qd R 33 (at [16]-[17]) per Douglas J) although in the final analysis, the words of the statute have paramount significance: Nominal Defendant v GLG Australia Pty Ltd (at [22]) per Gleeson CJ, Gummow, Hayne and Heydon JJ; (at [82], [84]) per Kirby J.

I would also note that an amending Act can be taken into account in the interpretation of the prior legislation, to avoid a result that would render the amending legislation unnecessary or futile: Grain Elevators Board (Vic) v Dunmunkle Corporation [1946] HCA 13 ; (1946) 73 CLR 70 at 86 per Dixon J; Austereo Ltd v Trade Practices Commission (1993) 41 FCR 1 (at 13-14) per Gummow J. The rationale of this proposition is that "it is permissible to ascertain the intention of the legislature with regard to prior legislation by reference to amending legislation": Hunter Resources Ltd v Melville [1988] HCA 5 ; (1988) 164 CLR 234 (at 254-5) per Dawson J; see also Deputy Federal Commissioner of Taxes (SA) v Elder's Trustee and Executor Co Ltd [1936] HCA 64 ; (1936) 57 CLR 610 (at 624-626) per Dixon, Evatt and McTiernan JJ.

This proposition is not unlimited. It is said to apply when the words of the earlier statute are ambiguous: Allina Pty Ltd v Federal Commissioner of Taxation (1991) 28 FCR 203 (at 212) per Lockhart, Burchett & Gummow JJ. And, it should be noted that there may be the difficulties involved in using an amending Act to construe earlier legislation: Commissioner of State Revenue v Pioneer Concrete (Vic) Pty Ltd [2002] HCA 43; (2002) 209 CLR 651 (at [52]) per Gleeson CJ, Gummow, Kirby, Hayne JJ." 77 Section 99(b), in its form at the relevant time, is to be contrasted with s 99(1) in its current form (that is, as amended by the Home Building Amendments (Insurance) Act 2002, sch 1 [3] and [4]). The current s 99(1) provides relevantly: "(1) A contract of insurance in relation to residential building work required by section 92 must insure: (a) a person on whose behalf the work is being done against the risk of loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor, and (b) a person on whose behalf the work is being done and the person's successors in title against the risk of being unable, because of the insolvency, death or disappearance of the contractor: (i) to recover compensation from the contractor for a breach of a statutory warranty in respect of the work, or (ii) to have the contractor rectify any such breach." 78 The distinction between sub-paras (a) and (b) of the current s 99(1) is to be noted. Firstly, the risk to be covered under sub-para (a) is of loss resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor. Secondly, under sub-para (a), only the person on whose behalf the work is being done is required so to be insured. In contrast, under subparagraph (b), successors in title must also be insured, not against loss, but against the risk of being unable to recover compensation from the contractor for a breach of a statutory warranty or to have the contractor rectify any such breach. 79 Thus, cover provided in accordance with sub-para (b) enables a successor in title to claim compensation because of a builder's failure to rectify a breach of statutory warranty, without proving that that failure, overall, caused it loss. The intent appears to be that the statutory policy should respond to claims for "compensation" for breaches of a statutory warranty without the insured being required to prove that, having regard to all the circumstances, the breaches caused loss. Cover in these terms is arguably the cover for which Waterbrook contends. But due regard must be had to the fact that s 99(b) was in very different terms to the current s 99(1)(b). 80 The Explanatory Note to the Home Building Amendment (Insurance) Act 2002 explained the amendments to s 99(1)(a) in the following terms: "Insurance cover of last resort

The Home Building Act 1989 currently provides that the insurance cover for noncompletion of residential building work is last resort insurance cover (ie the insurance cover applies if the builder has died or is insolvent or cannot be found). However, the cover in relation to loss arising from a breach of a statutory warranty (as set out in section 18B of the Act) is not currently expressed as last resort cover.

[Referring to s 99(1)(b)] Schedule 1 [4] provides that a contract of insurance in relation to residential building work must insure against the risk of the insured person not being able to enforce or recover against a builder for a breach of a statutory warranty because of the insolvency, death or disappearance of the contractor. … [Referring to s 99(1)(a)] Schedule 1 [3] and [5] amend provisions relating to last resort insurance cover for non-completion or non-supply so that they refer to the insolvency, death or disappearance of the contractor or supplier rather than to the contractor or supplier not being able to be found after due search and inquiry. Schedule 1 [1] is a consequential amendment." 81 No explanation was given for the move from "loss" to "recover compensation" and "rectify" in s 99(1)(b). The current legislation points up the distinction between cover against loss, in general, and cover entitling an insured successor in title to compensation because of the failure to have a breach of statutory warranty rectified. The differences between the legislation at the relevant time and the legislation now in force, in my view, tend to support Allianz's argument. 82 Apart from the Act being amended in the way I have described, consequential amendments were made to the regulations. It will be recalled that cl 43(1)(b) of the 1997 Regulation provided that a statutory policy must indemnify beneficiaries for "loss or damage arising from a breach of a statutory warranty". The equivalent clause under the 2004 Regulation (which replaced the 1997 Regulation) is clause 56(1) which provides: "(1) An insurance contract must indemnify beneficiaries under the insurance contract for the following losses or damage in respect of residential building work covered by the insurance contract: (a) loss or damage resulting from non-completion of the work because of the insolvency, death or disappearance of the contractor, (b) loss or damage arising from a breach of a statutory warranty, being loss or damage in respect of which the beneficiaries cannot recover compensation from the contractor or owner-builder or have the contractor or owner-builder rectify because of the insolvency, death or disappearance of the contractor or owner-builder." 83 Clause 43(1)(b) of the 1997 Regulation, to the extent that it required a statutory policy to indemnify beneficiaries for "loss or damage arising from a breach of a statutory warranty," was consistent with s 99(b) of the Act at the relevant time. Clause 56(1) of the 2004 Regulation is consistent with s 99 of the current form of the Home Building Act. 84 Under the current legislation (s 99(1) and cl 56(1)), the required cover is limited to claims where one of the causes of the loss is the insolvency, death or disappearance of the builder. While s 99(a) of the Act at the relevant time required the statutory policy to provide cover against the risk of loss resulting from non-completion of the work because of the insolvency or death of the contractor or because the contractor could not be found, the cover required by s 99(b) was not subject to such a limiting condition. 85 The Full Federal Court (Lockhart, Burchett and Gummow JJ) in Allina Pty Ltd v FCT (1991) 28 FCR 203 expressed the following qualifications in regard to the use of a subsequent amending act as an aid to statutory interpretation: "There was some debate before us as to the circumstances in which courts are entitled to examine a later statute to determine whether it throws any light upon the interpretation of an earlier statute. Plainly this course can be taken when the words of the earlier statute are ambiguous, but if the words of the earlier statute are clear, little assistance may be gained from the later statute. Also, care must be exercised to ensure that the words in the later statute have not been inserted to remove possible doubts … . We do not discern any ambiguity in the relevant words … , so do not find it necessary to call in aid the language of the amendment … ." (Citations omitted) 86 It may be argued that the legislature intended s 99(b) to bear the meaning now made explicit in the current s 99(1)(b) (and that the changes were made "to remove possible doubts"), but I would not favour that argument in this instance. The change is not merely a change in language - it is a significant change in content and principle. In my view, it is difficult to contend that the legislature, by the legislation applicable at the relevant time, intended that "loss" in s 99(b) bear the meaning of the words now contained in s 99(1)(b) of the current Act. 87 During argument there was some discussion as to the effect of the exception in s 18D. As mentioned, s 18D at the relevant time conferred on a successor in title the same rights as that person's predecessor in title in respect of statutory warranties, "except for work and materials in respect of which the persons predecessor has enforced the warranty". 88 The exception in s 18D suggests that the legislature intended to avoid any double recovery for a breach of a statutory warranty where a predecessor in title had enforced the warranty. The Act was silent, however, as to what was to occur when a successor in title enforced the warranty before the predecessor in title had taken any steps to do so. 89 Assume that the owner of a latently defective building (which defects constitute breaches of statutory warranties) sells the building without knowledge of the defects. Assume that the defects become manifest after the successor has acquired the property and that the successor in title enforces the statutory warranties. May the original owner, thereafter, also enforce those warranties? 90 Under the general law, a person who sells property with defective work unrectified may still claim damages from the builder on the basis of the cost of the rectification work: De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28. Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462. In my view, however, it is implicit in s 18D that that section cannot be relied on (either against the builder or the insurer of a statutory policy) to mount a claim in the circumstances postulated. In my view the section indicates a policy against double recovery and it would be quite unfair were the builder or insurer to be required to pay twice for the same loss. I do not think that that was the intention of the legislature. 91 If it were to be accepted (as Allianz contends) that a successor in title has no claim for breach of a statutory warranty where the successor acquires the property with patent defects, the same problem does not arise in that connection. 92 In the result, I do not think that s 18D affords any assistance in construing the word "loss" in s 99(b).

93 Section 99 at the relevant time was introduced into Home Building Act by the Building Services Corporation Legislation Amendment Act 1996. Section 99 was one of a number of amendments made by the latter Act to the Home Building Act. The amendments included significant changes to the insurance provisions of the Home Building Act. There are several references in the second reading speech relating to the 1996 Building Services Corporation Legislation Amendment Bill to the consumer protection purposes of the amendments that that Bill was intended to bring about. I shall refer to some of them. 94 The Minister for Fair Trading said (New South Wales Legislative Assembly, Parliamentary Debates (Hansard), 30 October 1996 at 5540): "The legislation before the House delivers a package of reforms aimed at establishing the right conditions for fair trading between consumers and contractors in the home building industry . For almost a quarter of a century successive New South Wales governments have struggled to find a workable and permanent solution to the problem of protecting consumers who are building or renovating a home from the pitfalls of dealing with a shoddy or bankrupt builder. I am sure that many honourable members have had people coming to them seeking their help with building problems. I certainly have. Some of them have been absolutely desperate. They do not know where to turn next as they face the prospect of financial loss ." (My underlining)

Then, at 5542, referring to the new insurance scheme: " The insurance scheme will cover consumers against loss from non-completion, defective work or otherwise from a breach of statutory warranty. It will also apply for the benefit of successors in title to the consumer who originally had the work done or who purchased the property from a builder or developer." (My underlining) And, at 5544: "The Government believes that the reforms which I have outlined will see the beginning of a new era for consumer protection in the home building industry." 95 The following was said about the Bill during its second reading, in Committee for amendment (see Parliamentary Debates (Hansard), 19 November 1996, at page 6190): "The introduction of a private insurance scheme with its associated reforms is clearly the right course for the home-building industry. The scheme, which is similar to those now operating in the majority of States and Territories, will provide improved cover for consumers and the benefits that flow from free and open competition . (My underlining)

The pleasing aspect of the reform package is that considerable care has been taken to protect the position of home owners . … Consumers will have more protection under this system and builders will have an option; they will be able to shop around for the insurance scheme that they consider best suits their work and they will be able to argue competitively for prices that suit their contracts. The system as we know it has not been a success. The new system offers a way out of the problems and I congratulate the Minister and her advisers on the efforts which they have made to ensure this legislation proceeds." (My underlining) 96 Similar comments appear throughout the second reading speech of the Bill in the Legislative Council (see Parliamentary Debates (Hansard), 27 November 1996, at 6659 - 6666). 97 As appears from its own terms as well as what was said during the second reading of the Building Services Corporation Legislation Amendment Bill, the principal purpose of the Home Building Act was consumer protection. The principal purpose of the 1997 Regulation was the same. 98 Assume that a successor in title acquires a patently defective building from a developer at a price that reflects the value of the defective building plus the costs of rectifying the defects. That might occur if the successor were to believe that, on acquisition of the building, it would acquire the benefit of the statutory warranties and would be able to recover the costs of rectifying the defects from the statutory insurer. A price calculated on that basis would result in the developer receiving more for its building than the building was intrinsically worth. The proposition that a developer could properly be regarded as a "consumer" for whose protection the Home Building Act was passed should not be accepted. After all, cl 42(2) of the 1997 Regulation provided that developers were not required to be beneficiaries under a statutory policy. The notion that the legislature intended the Act to bring about a situation where a developer could receive more for the sale of its property than the property was worth is not in accord with the policy of the legislation. Such a result would not be consistent with consumer protection as that concept is ordinarily understood. 99 The converse situation is where a successor in title acquires a patently defective building from a developer at a price that reflects only the value of the defective building. On Waterbrook's construction, the successor would be entitled to obtain the costs of rectifying the defects from the insurer under the statutory policy. The successor would thereby make an unearned profit at the expense of the insurer. I do not think that that would be consumer protection. 100 In my opinion, the legislation does not reflect any intention to give the term "loss" in s 99(b) and cl 43 a meaning different to that which it bears under the general law. 101 I turn now to the general law. As mentioned, the ordinary measure of damages in contract for defective work is the cost of remedying the work. Claims for damages for breach of a statutory warranty are not claims for breach of contract in the strict sense, but I accept, as I have stated, that the same measure would ordinarily apply to such claims. 102 An issue arises as to whether the same measure applies to a claim by a successor in title who acquires a patently defective building, where the defects result from breaches of statutory warranties. There is, in such circumstances, a difficulty in applying that measure. The successor in title may have purchased the building at a discount that takes into account the cost of remedying the defects. Were that to have occurred it would be difficult to contend that the successor in title suffered a loss. Were that not to have occurred, it might be argued that any loss is due to the fault of the successor in title in overpaying for the building in full knowledge of its defects. 103 This leads to the question whether, assuming that the successor in title paid more for a patently defective building than it was worth, did the loss that the successor sustained arise from the breaches of statutory warranties? The answer to this question, in my opinion, is the key to the answer to question 2. 104 In Alexander v Cambridge Credit Corporation Ltd Mahoney JA said (at 361): "Notwithstanding that a defendant's act or omission has a causal connection with the damage of the person aggrieved, no liability arises if an independent intervening act or event in conjunction with the defendant's act or omission has brought about the plaintiff's damage and the intervening act or event can be treated in a practical sense as the sole cause of the damage." 105 As his Honour makes clear, this principle is of application under the general law, irrespective of whether the claim is brought in tort or contract. See also McHugh JA at 361-363. There is no reason to think that the principle does not apply to loss caused by breaches of statutory warranties under the Act. 106 Traditionally, it is generally accepted that the free, deliberate and informed act or omission of a human being negatives causal connection: H L A Hart and Tony Honore, Causation In The Law, 2nd ed (1985) Oxford University Press at 136. The rule was expressed by Lord Sumner in his speech in Weld-Blundell v Stephens [1920] AC 956 as follows (at 986): "In general … even though A is in fault, he is not responsible for injury to C which B, a stranger to him, deliberately chooses to do. Though A may have given the occasion for B's mischievous activity, B then becomes a new and independent cause".

A case where the plaintiff knowingly and deliberately decides to act in a way that causes himself or herself injury, is an a fortiori situation. 107 There are exceptions to this rule. The intervening act will not break the chain of causation if the contractual duty of which the defendant is in breach was to guard against the very act that occurred: Alexander v Cambridge Credit Corporation Ltd at 361 per McHugh JA. Another situation where the exception operates was that in Symonds v Vass [2009] NSWCA 139. In that case it was held (at [271]) that the deliberate decision of clients to compromise their claim on adverse terms did not preclude them from suing their solicitors for breach of duty to take reasonable care in preparing their case. Symonds v Vass is to be explained on the basis that the compromise was merely a link between the alleged breach of duty by the solicitors and the damages sustained by the clients. In reality, the clients (on their case) entered into the compromise as an act of mitigation to limit the damage caused by the breach of duty on the part of their solicitor. For that reason, the chain of causation was not broken.

108 In Lambert v Lewis [1982] AC 225 knowledge of defects that constituted a breach of warranty was held to defeat the claim of the beneficiary of the warranty. The plaintiff had been injured and her husband killed when a trailer became detached from a farmer's Land Rover and struck their car. The plaintiff brought an action for damages against the farmer, the dealers who had supplied the trailer coupling, and the manufacturers of the coupling. The farmer brought third party proceedings against the dealers based upon a breach of a statutory warranty provided by s 14 of the Sale of Goods Act 1893 (UK) as to the fitness of purpose and merchantable quality of the coupling. The trial judge found that the farmer ought to have been aware that the coupling was damaged. Section 53(2) of the Sale of Goods Act provided "the measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty". In rejecting the farmer's breach of warranty claim against the dealers, Lord Diplock (with whom the other members of the House of Lords agreed) stated (276-277): "After it had become apparent to the farmer that the locking mechanism of the coupling was broken, and consequently that it was no longer in the same state as when it was delivered, the only implied warranty which could justify his failure to take the precaution either to get it mended or at least to find out whether it was safe to continue to use it in that condition would be a warranty that the coupling could continue to be safely used to tow a trailer on a public highway notwithstanding that it was in an obviously damaged state. My Lords, any implication of a warranty in these terms needs only to be stated to be rejected. So the farmer's claim against the dealers fails in limine. In the state in which the farmer knew the coupling to be at the time of the accident, there was no longer any warranty by the dealers of its continued safety in use on which the farmer was entitled to rely. The Court of Appeal reasoned that, since there was no break in the chain of causation between negligence of the manufacturers, which consisted in the defective design of the coupling, and the plaintiff's damage, there could be no such break between the dealers' breach of warranty, which likewise consisted in the defective design of the coupling, and the farmer's loss occasioned by his share of the liability for the plaintiff's damage. With respect, this reasoning was erroneous. The farmer's liability arose not from the defective design of the coupling but from his own negligence in failing, when he knew that the coupling was damaged, to have it repaired or to ascertain if it was still safe to use. The issue of causation, therefore, on which the farmer's claim against the dealers depended was whether his negligence resulted directly and naturally, in the ordinary course of events, from the dealer's breach of warranty. Manifestly it did not." 109 Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370 is not dissimilar. In breach of contract, a building contractor failed to supply a stepladder to a sub-contractor. The relationship was not regarded as one of employer and employee. The sub-contractor decided to obtain his own and used an unstable trestle from which he fell and injured himself. The sub-contractor failed in his claim for breach of contract against the building contractor as the sub-contractor's injuries were held by the English Court of Appeal to have been caused by his own decision in using the trestle. 110 In my opinion, applying the same reasoning, a successor in title who acquires a building in full knowledge of its defects, suffers no loss from the existence of those defects. In those circumstances, the builder's breach of statutory warranty could not be said to have diminished the successor's assets, nor increased its liabilities. Any adverse impact to the successor's financial position, and any loss to the successor, would result from the successor knowingly and deliberately paying more for the building than it was worth. The loss would be caused by the successor's own decision to purchase at the agreed price.

111 The observations in [110] are predicated on the "full knowledge" of the defects being not only knowledge of the existence of the defects but also knowledge of their significance. A party may know of the existence of defects (because they are patent), but may not appreciate - even acting reasonably - that major expenditure would be required to remedy them. 112 The remarks in [110] are made generally. I repeat that question 2 is couched in terms that bear no reference to any facts, agreed or otherwise. I proceed to consider how the principles of causation bear on the matters raised by the question. 113 Causation in contract is to be determined by commonsense principles: Alexander v Cambridge Credit Corporation Ltd at 358 per McHugh JA. I have explained why I do not regard the relevant legislation as providing for any different meaning to "loss" as would be attributed to the term according to the general law. Applying those principles, should it be found that Waterbrook acquired the Village in full knowledge of the defects that exist, I would conclude that Waterbrook would fail to establish causation and legal responsibility for its loss. In such circumstances, Waterbrook's knowing and deliberate act in acquiring the Village would constitute a new and independent cause of harm. 114 But, I repeat, question 2 is articulated in abstract terms without reference to any facts. Thus, the issue under question 2 is simply whether Limitation (9) - because it purports to exclude Allianz's liability for "defects which were reasonably visible at the time that [Waterbrook] acquired the [Village]" - is void by reason of "non-compliance and/or inconsistency" with the Home Building Act and the 1997 Regulation. 115 I have expressed the view that, in accordance with the general principles of causation Allianz would not be liable under the Policy for claims in respect of defects of which Waterbrook had full knowledge, in the sense I have described. In my view, however, the breadth of Limitation (9) is wider than that; in other words, it attempts to do more work than is achieved by general causation principles. 116 I have pointed out that where defects are patent a party, even though acting reasonably, might be unaware that major expenditure would be required to remedy them. The repair of patent defects that on their face appear to be trivial, might - on opening up the work - be found to require major reconstruction. In my opinion, applying general principles of causation, in such circumstances the knowledge of a successor in title of the patent defects might not be a new intervening cause. In that event, the chain of causation would not be broken and the successor would be able to prove that it suffered loss.

117 I accept, in Allianz's favour, that the phrase "reasonably visible" in limitation (9) implicitly means reasonably visible after reasonable inspection. But, even on this basis, limitation (9) would exclude recovery in the circumstances postulated in the previous paragraph. Hence, in my view, limitation (9) does not comply and is inconsistent with the Home Building Act and the 1997 Regulation. The parties did not raise the possibility of Limitation (9) being severable and I would hold that limitation (9) is void. I would therefore answer question 2 in the affirmative, as did McDougall J (albeit for different reasons). 118 I would, however, reiterate that, on general causation principles, the Policy would still not respond to the claim of a successor in title who acquires a building in full knowledge (in the sense that I have mentioned) of its defects (as that successor would not suffer loss from the existence of those defects). 119 The conclusion to which I have come could lead to difficult and costly litigation. Presumably, this is why s 99 of the Home Building Act has been amended by the Home Building Amendments (Insurance) Act 2002 and the 1997 Regulation has been amended by the 2004 Regulation.

Question 3 120 For the sake of convenience I repeat that question 3 is whether the allegation in para 10.1(e) of the Further Amended List Response discloses an arguable defence as a matter of law (where "the circumstances" referred to in para 10.1(e) were that the Plaintiff acquired the Property from the Developer with knowledge of the existence, nature and extent of all, or substantially all, of the alleged defects). 121 Paragraph 10.1(e) of the Further Amended List Response stated: "In those circumstances the plaintiff did not suffer any 'loss or damage' by virtue of the existence of the alleged defects in the Property and 'loss or damage', if any, was loss and damage suffered not by [Waterbrook], but by [the Developer]." The phrase "in those circumstances" refers back to paragraph 10.1(d) which stated "the plaintiff acquired the property from the Developer with knowledge of the existence, nature and extent of all, or substantially all, of the alleged defects and at a price and on terms which reflected the existence, nature and extent of the alleged defects." 122 Mr Liney submitted that, in answering question 3, the words "and at a price and on terms which reflected the existence, nature and extent of the alleged defects" should be ignored. Even on that assumption, for the reasons that I have expressed in answering question 2, I consider that the answer to question 3 should be in the affirmative. 123 In other words, I am of the opinion that, if Waterbrook acquired the Village in full knowledge of the existence, nature and extent of defects, Waterbrook did not suffer any loss or damage by virtue of the existence of those defects.

Question 4 124 I turn now to question 4. In essence, it raises the issue whether, as it was put by Mr Corsaro, the phrase "loss or damage arising out of residential building work" in clause 45 of the 1997 Regulation, was intended to encompass "only the physical work, not consequential [loss]". His Honour, as I have noted, held otherwise. 125 Allianz's argument based on the 1997 Regulation was based on exclusion (10) of the Policy, which reads as follows: "The insurer should not be liable for any claim for loss or damage: … (10) For loss of use and/or consequential loss of any other kind arising directly or indirectly out of any event listed in the Building Owner's indemnity, except as provided in subclause (5)." 126 Mr Liney submitted to McDougall J and to this Court that consequential loss, in principle, was recoverable (Bellgrove v Eldridge at 617-618). Thus, he submitted, an exclusion in the Policy of all consequential loss was impermissible. McDougall J referred to Bellgrove v Eldridge and Environmental Systems Pty Ltd v Peerless Holdings Pty Ltd [2008] VSCA 26 and said (at [78]): "(1) The measure of damages is that laid down in Bellgrove (of course with the limitation also there laid down); (2) That measure effects the first limb in Hadley v Baxendale (1854) 9 Ex 341 (3) Those damages may include consequential loss; and (4) If the statutory … test of causality is wider (as I have indicated above may be the case) then the test posed by the first limb of Hadley v Baxendale , the same conclusion applies." 127 On this basis, his Honour found that a limitation that excluded all consequential loss was inconsistent with the full statutory entitlement indemnity. I agree. I therefore agree with his Honour that the appropriate answer to question 4 is "yes". 128 In summary, I would answer the questions as follows: (a) Question 1(a): "No".

(d) Question 4: "Yes". 129 In my opinion, therefore, Allianz succeeds in regard to one of the four questions. Nevertheless, in regard to question (2), the discussion concerning the effect of general principles of causation on the claim of a successor in title who has full knowledge of defects in a building that it acquires, represents some real success for Allianz in its argument on appeal and, potentially, in regard to the future conduct of the trial. 130 The points on which Allianz lost did not add much to the costs of the hearing on appeal. The argument in this court concerned largely questions 2 and 3 which, in effect, are bound up with each other. Allianz was substantially successful on these questions. This being so, Allianz should be awarded 75 per cent of the costs of the appeal. 131 McDougall J ordered that Allianz pay Waterbrook's costs of the hearing of the questions. In the light of the reasons I have given, I would order each party to bear its own costs of the separate hearing before his Honour.

(1) The application for leave to appeal is granted.

(2) Allianz to file its notice of appeal within seven days.

(3) The answer given by McDougall J to question 3 be amended to "Yes".

(4) Waterbrook to pay 75 per cent of Allianz's costs of the appeal.

(5) Waterbrook to have a certificate under the Suitors' Fund Act 1951 if otherwise qualified. (6) Each party to pay its own costs of the separate hearing before McDougall J. **********

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