1. Costs reserved. I direct the Principal Registrar to list any application for costs before Member M. Farrelly, allowing 2 hours.

1. Mr and Mrs Bonarrigo ("the owners") have a major problem with their home in Warrandyte. Water has leaked through to the ceilings in a number of living areas and the garage. The affected areas sit underneath a large tiled deck.
2. The owners purchased the home from their neighbours, Mr and Mrs Murdoch, in January 2009. Some years earlier, in 2005, Mr Murdoch had engaged the respondent to re-tile the deck. Mr Murdoch says the re-tiling was carried out to rectify significant water leaks to living areas underneath the deck.
3. Before the owners purchased the home from Mr and Mrs Murdoch, Mr Murdoch had informed the owners of the previous water leak problem and that he had engaged the respondent to re-tile the deck in 2005. The owners were also aware, prior to purchasing the home, that the water leak had re-emerged in a section of the living area. After the owners moved into the home in March 2009, the water leaks spread to other living areas and the garage.
4. The owners say that the re-tiling of the deck by the respondent in 2005, in particular the waterproofing under the tiles, was done poorly and is the cause of the leaks into the home. They claim $117,546 as the estimated cost to re-tile the entire deck and to rectify damage associated with the water leaks.
5. The owners put their claim on two legal bases. First, they say that the re-tiling done in 2005 attracts the mandatory warranties in s8 of the Domestic Building Contracts Act 1995 ("the DBC Act") and that, pursuant to s9 of the DBC Act, they are entitled, as subsequent owners of the home, to bring a claim against the respondent for breach of the s8 warranties. Second, the owners say they have suffered loss arising from the respondent's breach of a duty of care owed to them.
6. The respondent denies that the re-tiling work it carried out in 2005 is the cause of the leaks. The respondent also says that the owners claim cannot succeed for a number of reasons including:
   • (a) As the contract between the respondent and Mr Murdoch in 2005 was a contract for "tiling" only, it is, by definition, not a domestic building contract attracting the operation of section 8 of the DBC Act;
   • (b) The breach of warranty claim is, in any event, statute barred because it has been brought more than 6 years after the completion of the 2005 contract between Mr Murdoch and the respondent;
   • (c) The respondent owes no duty of care to the owners as alleged. Alternatively, even if such a duty exists, it has not been breached by the respondent;
   • (d) Being aware of the history and re-emergence of the water leaks prior to purchasing the home, the owners are unable to establish that they have suffered any loss or damage arising by reason of a breach of warranty or a breach of duty of care on the part of the respondent.

1. The matter came before me on 13 August 2012 and, with one lay day on 16 August 2012, concluded on 17 August 2012. Ms Kirton of counsel represented the owners and Mr Reid of counsel represented the respondent. A view of the home was conducted on the first day of the hearing.

- Mr Bonarrigo

- Mr Murdoch

- Mr Cleeland, an acquaintance of Mr Murdoch who was instrumental in arranging the re-tiling of the deck in 2005

- Mr Catanese, Mr Hegerty and Mr Reardon who each provided to the owners a quotation for rectification work

1. Mr Larosa, a director of the respondent, and Mr Mammoliti, employee of the respondent, gave evidence for the respondent.
2. Concurrent expert evidence was given by consultants Mr David Graham (called by the owners) and Mr David Cheong (called by the respondent). Each of the experts also produced written reports.
3. For the reasons set out below, I have determined that the owners' claim cannot succeed by reason of their knowledge, before entering the sale contract, of the history and re-emergence of the water leaks.

1. The home was constructed approximately 30 years ago. The large deck (approximately 200 square metres) curls around the predominantly east facing side of the home above living areas which include a powder room and toilet (at the northern end) and an open plan kitchen (towards the southern end). The deck also sits above the garage situated at the southern most end of the home. The deck is accessed by exterior stairs outside the living area.
2. Mr Murdoch moved into the home in 1998. He says that water leaks were evident in the living areas underneath the deck from the time he moved in and that by early 2005 they had become a "massive" problem. He sought the advice of an acquaintance, Mr Cleeland, who had some experience in construction works.
3. After first inspecting the home himself, Mr Cleeland contacted and arranged an inspection by the respondent. Mr Mammoliti, employee manager of the respondent, subsequently inspected the home with Mr Murdoch and Mr Cleeland in around early February 2005.
4. Mr Cleeland and Mr Murdoch say that at the inspection Mr Mammoliti confirmed that the whole deck area would need to be retiled in order to stop the water leaks and that he agreed to provide a quotation for the work. Mr Mammoliti says that Mr Cleeland simply requested that the respondent provide a quotation for retiling the deck (and the access stairs) and that he was not asked and gave no opinion as to a full scope of works required to rectify the water leak problem.
5. On 22 or 23 February 2005, Mr Mammoliti emailed a quotation to Mr Cleeland who, in turn, passed it onto Mr Murdoch. The quotation is in the following terms:

We have much pleasure in submitting our quotation for the lump sum of $35,880.00 for the fix only of ceramic/terracotta tiles to the above project.

Price includes all materials plant and equipment.

Does not include remedial works to existing screeds.

1. Mr Murdoch accepted the quote and the respondent carried out the work in March to early May 2005.
2. The water leaks stopped for a while, however in 2008 leaks re-appeared and Mr Murdoch contacted the respondent. In his witness statement Mr Murdoch says "Initially the work done by Larosa Tiling (the respondent) appeared successful. However when substantial rain fell, the problem re-emerged. The leak first re-appeared in the powder room. I contacted Larosa Tiling immediately. Larosa Tiling thereafter attended the property on several occasions but was unable to locate the source of the problem".
3. Mr Larosa and Mr Mammoliti say they attended one inspection, not several, in late 2008. They say that at the inspection they water tested the area of the deck above the powder room by spraying the area with a hose for about one and a half hours before being satisfied that water was not leaking through the deck. They say that they then water tested an area of roofing at the northern end of the deck (where the deck ends) where a fibreglass corrugated roof abuts a chimney/wall. They say that within 10 minutes of water testing this area leaks appeared on the ceiling in the powder room and adjoining toilet. Mr Mammoliti says that he then told Mr Murdoch that Mr Murdoch would need to address the roof as it was the source of the water leak. Mr Mammoliti says that the respondent heard nothing further in relation to water leaks at the home until it was contacted by the owners in 2010.
4. Mr Murdoch gave no evidence as to water testing carried out at the 2008 inspection. He says that at the inspection Mr Larosa and Mr Mammoliti "reworked" a joint in the deck above the powder room (where there is a small step up) and told him that they would return to carry out further investigations, but they never returned.
5. By contract of sale dated 13 January 2009 ("the sale contract") the owners purchased the home from Mr and Mrs Murdoch. At that time the owners lived nearby and were acquainted with Mr and Mrs Murdoch.
6. Mr Murdoch says that, prior to the owners' purchase of the home, he had informed the owners of the history of water leaks and his engagement of the respondent several years earlier to re-tile the deck and fix the problem. He says also that the owners were aware of the re-emerging leak in the powder room / toilet (it was "self-evident") and that he was getting the respondent back to fix the "re-emerging problem."
7. Mr Bonariggo says in his witness statement: "Before signing the purchase documents we inspected the Property and Mr Murdoch made Kaye and I aware that there was a minor problem with water leakage in the powder room. Mr Murdoch said to Kaye and myself that a number of years ago the Property suffered from a significant water leak in the indoor rooms situated under the balcony of the Property. However Mr Murdoch informed me that he had engaged the Respondent in this matter to fix the problem. Mr Murdoch went on to say that the Respondent had carried out the work, but that a few years after the works were carried out a minor water leak reappeared in the roof of the powder room...Mr Murdoch said that the Respondent had tried to rectify the problem by re-working a joint in the tiling above the powder room, however this proved to be unsuccessful."
8. In evidence, Mr Bonarrigo confirmed that "there were already leaks in the house when we purchased it". In cross examination, Mr Bonariggo was asked whether, with such knowledge, he had considered obtaining an inspection report before purchasing the home. Mr Bonariggo answered that there was "no need to...we knew there was a water leak and that it was covered by the contract of repair" ("contract of repair" being a reference to contract between Mr Murdoch and the respondent).
9. The owners moved into the home in mid March 2009 and, shortly after, commenced renovating/refurbishing areas of the home including the living areas under the deck. Mr Bonarrigo says that towards the end of 2009 it became apparent that leaking was spreading to other areas under the deck including the garage and the kitchen.
10. In around March/April 2010 the owners contacted and advised the respondent of the worsening water leaks. At around the same time the owners were advised by tilers (unrelated to the respondent) to apply a seal coat to the entire deck in an attempt to stop the leaks. The owners accepted the advice and engaged those tilers to apply the seal coat. The seal coat did not stop the leaks.
11. In around July 2010, the owners lodged an insurance claim with their house and contents insurer, AAMI Home Insurance Ltd ("AAMI"). AAMI subsequently arranged for investigations and temporary protective works. AAMI have accepted liability to indemnify the owners for the cost of rectifying the internal consequential water damage and those rectifications have commenced. AAMI is not indemnifying the owners for the cost of building work to rectifying the cause of the leaks and any consequential external damage. In the course of their investigations, AAMI obtained several reports which indicate a failure of the waterproof membrane under the deck tiles.
12. Mr Mammoliti inspected the home in around July 2010. It was the first of a number of inspections and tests in the period up to December 2010 including:

(a) At the suggestion of the respondent, the owners water tested the gutters with coloured dye in an attempt to ascertain whether the gutters were the source of the leaks. The test provided no evidence that the gutters were the source of the leaks.

(b) Mr Bonarrigo drilled holes in the gutters surrounding the deck area as a further attempt to assess whether the gutters were a source of the leaks. Mr Bonarrigo says he did this at the suggestion of the respondent. The respondent denies making the suggestion. In any event, it appears that the drilling of holes had no mitigating effect on the water leaks into the home.

(c) Mr Bonarrigo removed a section of the deck balustrade to allow the respondent to inspect the membrane seal at the base of the balustrade. The sealing work appeared to be adequate.

1. Mr Bonarrigo says that in December 2010 he reached an agreement with Mr Larosa to the effect that the respondent agreed to apply a waterproof membrane over the entire deck (and the access steps) in order to identify whether the waterproof membrane under the tiles had failed and was (as the owners believed) the cause of the leaks. Mr Larosa says that, although he discussed the possibility of an agreement, he was not prepared to commit to any agreement without first seeking legal advice. Mr Larosa says that on obtaining legal advice in early 2011, he chose not to proceed with any agreement.
2. Mr Larosa produced a draft agreement dated 24 January prepared by him. The document is not signed and was never presented to the owners. I accept Mr Larosa's evidence that he presented the draft document to his lawyers and, on their advice, he decided not to enter any agreement with the owners. I am satisfied that, although an agreement of sorts was discussed by Mr Bonarrigo and Mr Larosa, no agreement was reached.
3. In November 2011, the owners decided to apply a waterproof membrane ("the Mapei membrane"). over the entire deck area and the access steps. Mr Bonarrigo says the decision was made partly because he and his wife were distressed by the magnitude of the water leak problem and they wished to prevent any further damage and partly because they sought to identify the source of the leaks. Mr Bonarrigo was of the view that if the water leaks ceased after the application of the Mapei membrane, the owners would have conclusive evidence that the source of the leaks was the failed waterproof membrane installed by the respondent in 2005.
4. The owners say that the water leaks have ceased since the application of the Mapei membrane. Their claim of $117,546 is calculated as follows:

- $18,436 as the cost of laying the Mapei membrane.

- $70,070 as the quoted cost to remove and replace the tiling to the deck (and access steps) including the application of screed, membrane and associated works. Mr Catanese gave evidence on the quotation provided by him to the owners.

- $19,690 as the quoted cost to rectify external painting and render works which have been marked or damaged by reason of the application of the Mapei membrane and/or the water leaks. Mr Reardon gave evidence on the quotation provided by him to the owners.

- $9,350 as the quoted cost to remove and replace guttering which, say the owners, has been compromised by the holes drilled in it. Mr Hegerty gave evidence on the quotation he provided to the owners.

1. I am satisfied, on all the evidence, that, prior to entering the sale contract:
   • (a) the owners knew that the home had a history of serious water leaks to the areas underneath the deck and that Mr Murdoch had, with the intention of fixing the problem, engaged the respondent some years earlier to re-tile the deck and the access stairs;
   • (b) the owners knew that the water leak problem had re-emerged in the powder room and adjoining toilet;
   • (c) the owners believed that the respondent retained some obligation in relation to the re-emerging problem.

1. Section 8 of the DBC Act sets out a number of mandatory warranties applicable to works carried out under a domestic building contract. Amongst other things, the warranties require works to be carried out in a proper and workmanlike manner and with reasonable care and skill.
2. Section 9 of the DBC Act provides:

In addition to the building owner who was a party to a domestic building contract, any person who is the owner for the time being of the building or land in respect of which the domestic building work was carried out under the contract may take proceedings for a breach of any of the warranties listed in section 8 as if that person was a party to the contract.

1. It is one thing to have a (alleged) breach of a warranty. It is another thing to establish the loss or damage resulting from the breach.
2. In my view it is reasonable to presume, in the absence of evidence to the contrary, that a purchaser of a home makes allowance for known or patent defects when negotiating the purchase price and, as such, the purchaser has no "loss" in respect of the known defects.
3. The owners produced no evidence, and they were not cross-examined, on the negotiations on the purchase price and whether any allowance was made for the re-emerging leaks. Ms Kirton submits that, without any evidence, no findings can be made. Mr Reid submits that, pursuant to the principle in Jones v Dunkel, I am entitled to infer that any evidence that might have been led would not have assisted the owners. In my view, the presumption that an allowance for known defects was made in negotiating the purchase price prevails in the absence of evidence to the contrary.
4. Mr Reid submits that the comments of Justice Ipp of the New South Wales Court of Appeal in Allianz v Waterbrook [2009] NSWCA 224 are instructive. In that case the Court considered the position of a successor in title who sought indemnity under a warranty insurance policy for breach, by a builder, of statutory warranties (similar to the warranties in s8 of the DBC Act). The successor had acquired the property with knowledge of existing defects.
5. Justice Ipp referred to case examples of plaintiffs who were unable to recover damages for breach of warranty or breach of contract in circumstances where their own intervening acts or omissions were the cause of their loss. His Honour reached the view that:

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[1]

1. His honour noted that his above observation was predicated on the "full knowledge" of the defects as being "not only knowledge of the existence of the defects but also knowledge of their significance."
2. In my view, it is also not always necessary that the successor in title have actual knowledge of an existing defect before it can be said that there is no "loss" arising from breach of a statutory warranty. I agree with Deputy President Aird's comments in Beamish v Rosvoll [1996] where, in considering whether an allowance (damages) should be awarded to a purchaser of a home which had building defects, DP Aird says:

"Where I am satisfied that a defect was latent, or where it could not have been reasonably observable on inspection prior to purchase I will allow what I find to be the reasonable cost of rectification of the defect...Where I find that a defect was reasonably observable to Mrs Beamish at the time of purchase, whether or not she actually noticed the defect, no allowance will be made"[2]

1. Ms Kirton submits that, in circumstances where the owners did not know the extent of the problem and the owners had assumed that the respondent would continue to investigate the problem, or at least had not denied all liability for the problem, there was no need for an adjustment in the purchase price.
2. I do not accept the submission. First, I am satisfied the owners knew that the home had a history of serious water leaks and that the problem had re-emerged. They may not have expected the leak to continue spreading to other areas underneath the deck but I am satisfied that they had sufficient knowledge to appreciate the significance of the problem. Second, there is no evidence as to whether an adjustment to the purchase price was considered or made. That the owners believed that the respondent retained some obligation in relation to the deck is not, on its own, sufficient for me to find that the owners made no allowance for the water leak problem when negotiating the purchase price for the home.
3. I am satisfied on all the evidence that the owners have failed to establish any loss arising as a result of an (alleged) breach of warranty on the part of the respondent and, for this reason, the breach of warranty claim fails. It is not necessary that I address the evidence as to the cause of the leaks. Nor is it necessary for me to determine whether the 2005 contract between the respondent and Mr Murdoch was a domestic building contract and, if it was, whether the owners' claim, issued more than 6 years after the completion of that contract, is statute barred.

1. The owners fare no better in their claim for similar damages founded on an alleged breach of a duty of care owed to them by the respondent.
2. The owners say the respondent has, by its failure to exercise the skill and professionalism required of a reasonably experienced tiler, breached a duty of care owed to them as subsequent owners of the home.
3. As noted in Ms Kirton's submissions, in determining whether a party owes a duty of care to another to avoid economic loss, the courts will assess the closeness of the relationship with reference to "salient features" including the vulnerability of the claimant or the claimant's inability to protect itself from the consequences of a respondent's want of reasonable care.
4. Mr Reid submits that, given their knowledge of the water leaks, the owners were not vulnerable as they could protect themselves by obtaining a pre purchase inspection report and / or negotiating a purchase price to negate any potential "loss". The submission has merit.
5. Ms Kirton suggets that although the owners were aware of the re-emerging leak, they were told by Mr Murdoch that the respondent was investigating the leak and, accordingly, they did not need to take any further steps to protect themselves. Presumably, the inference is that by not taking, or by considering it not necessary to take, any further steps the owners remained vulnerable.
6. In my view, the owners' pre purchase knowledge of the leaks removed a "vulnerability" which, as a salient feature in the assessment of whether the respondent owed a duty of care to the owners, might otherwise have existed. I do not accept that the owners' pre-purchase knowledge is off-set or overtaken by their reliance, if any, on Mr Murdoch's representation to them that the respondent was investigating the re-emerged leak. First, the representation was made by Mr Murdoch, not the respondent. Second, the representation may have been misleading as the respondent says it told Mr Murdoch in 2008 that the problem lay in the roof, not the deck. Third, there is no evidence that the owners did not protect themselves by making an allowance for the problem when negotiating the purchase price for the home.
7. In any event, whether or not the respondent owed a duty of care to the owners and whether or not that duty may have been breached, I am satisfied that the owners' claim must fail as they have failed to establish loss arising from the (alleged) breach of duty of care.
8. As there is in contract or breach of warranty, so too there is in tort a requirement of a causal connection between the alleged breach of duty of care and the loss claimed. The causal connection is missing. In circumstances where the owners had pre-purchase knowledge of the leak problem and there being no evidence to displace a presumption that allowance was made for the problem when negotiating the purchase price for the home, I am satisfied that the owners have failed to establish any "loss" attributable to the actions or failings of the respondent.

1. For the above reasons I will order that the owners' claim be dismissed and I will hear any application for costs.