Building Insurers' Guarantee Corporation v The Owners - Strata Plan No. 57504

CATCHWORDS: BUILDING CONTRACT - breach by builder - work not in conformity with plans & specifications - waterproofing system - whether system installed as effective as that specified - query whether issue one of mitigation with onus on builder. - BUILDING CONTRACT - breach by builder - whether demolition and reinstatement to produce compliance with contract reasonable - whether damages recoverable on that basis. - HOME BUILDING INSURANCE - breach of statutory implied warranties by builder - insurance - successor in title entitled to benefit of warranties and insurance - measure of damages - successor entitled to same damages as predecessor.

LEGISLATION CITED: Home Building Act 1989, s 92 Home Building Amendment (Insurance) Act 2009

Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224 Bellgrove v Eldridge [1954] HCA 36, 90 CLR 613, Christopoulos v Angelos (1996) 41 NSWLR 700 CASES CITED: Kirkby v Coote [2006] QCA 61 Luxley Electronics & Construction Ltd v Forsyth [1996] AC 344 Production Spray Painting & Panel Beating Pty Ltd v Newnham (No 2) (1992) 27 NSWLR 659 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, 236 CLR 272

PARTIES: A - Building Insurers' Guarantee Corporation R - The Owners - Strata Plan No. 57504

COUNSEL: A - T Lynch and R Francois R - HJA Neale

SOLICITORS: A - Mills Oakley Lawyers R - Doyle Edwards Anderson

LOWER COURT JURISDICTION: Supreme Court - Equity Division

LOWER COURT MEDIUM NEUTRAL CITATION: [2008] NSWSC 1285

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40444/08

TOBIAS JA CAMPBELL JA HANDLEY AJA

15 March 2010 BUILDING INSURERS' GUARANTEE CORPORATION v THE OWNERS - STRATA PLAN NO 57504 Catchwords

BUILDING CONTRACT - breach by builder - work not in conformity with plans & specifications - waterproofing system - whether system installed as effective as that specified - query whether issue one of mitigation with onus on builder.

BUILDING CONTRACT - breach by builder - whether demolition and reinstatement to produce compliance with contract reasonable - whether damages recoverable on that basis.

HOME BUILDING INSURANCE - breach of statutory implied warranties by builder - insurance - successor in title entitled to benefit of warranties and insurance - measure of damages - successor entitled to same damages as predecessor. Headnote

The respondent was the successor in title of the developer which had engaged a builder to convert a six-storey warehouse into 111 residential units and a small number of commercial units. The developer had a home building insurance policy with HIH Casualty & General Insurance Ltd (HIH) which later became insolvent. Pursuant to s 99 of the Home Building Act 1989 the policy also insured the respondent as the developer's successor in title. Under Pt 6A of the Act, inserted in 2001, the State, through the Guarantee Corporation, indemnified persons insured with an approved insurer such as HIH which had become insolvent.

The respondent sued the Guarantee Corporation to enforce the indemnity for the breach by the builder of the statutory warranties implied by s 18B which were enforceable by a successor in title.

The contract obliged the builder to construct concrete or brick hobs at the junction between a residential unit and its balcony on the same level to prevent storm water entering the unit from the balcony, but the builder had installed inferior hobs. The respondent claimed for the cost of demolishing the existing hobs and replacing them with hobs that complied with the contract. There was no evidence that the hobs as installed had failed and there was no finding that there were likely to fail during the design life of the building. The judge held that demolition and reinstatement with the correct hobs to produce a building that conformed to the contractual plans and specifications was a reasonable course to adopt.

The Guarantee Corporation paid the judgment debt but appealed. While the appeal was pending Parliament passed a retrospective amending Act which could have drastically affected the respondent's rights. The Guarantee Corporation claimed that the Amending Act applied in the appeal, but the respondent relied on a transitional provision which provided that the new Act did not apply where the amount was paid before its commencement "under the indemnity provided by Div 2 of Pt 6A of this Act." HELD: (1) The payment of the judgment debt fell within cl 83(2)(d) of the transitional provisions although the Guarantee Corporation had appealed and would be entitled to restitution if it succeeded; (2) The Court could not read into the transitional provisions words which widened the retrospective operation of the Amending Act; (3) The Amending Act did not apply; (4) The respondent had suffered a loss as a result of the builder's breaches of the statutory warranties which left it with an inferior waterproofing system and there was no evidence that it was just as effective as that specified; (5) Demolition of the timber hobs and reinstatement was a reasonable course for the respondent to adopt; (6) Query whether the Guarantee Corporation, in a position of the builder, had the onus of proving that mitigation in the form of demolition and reinstatement would be unreasonable; (7) The respondent as the successor in title of the developer was entitled to the benefit of the statutory implied warranties and had the same rights on breach as the developer; (7) The appeal would be dismissed. Orders

Appeal dismissed with costs. IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL CA 40444/08

TOBIAS JA CAMPBELL JA HANDLEY AJA

15 March 2010 BUILDING INSURERS' GUARANTEE CORPORATION v THE OWNERS - STRATA PLAN NO 57504 Judgment 1 TOBIAS JA: I agree with Handley AJA. 2 CAMPBELL JA: I agree with Handley AJA 3 HANDLEY AJA: This is an appeal from the judgment of McDougall J on 25 November 2008 who adopted substantially the whole of the referee's report, entered judgment for the plaintiff for $1,933,551.48 as at 4 March 2008, and made consequential orders. In an earlier judgment of 3 October 2008, the Judge had adopted the referee's report in so far as it dealt with defective hobs and the extent and cost of the rectification work (Red p 103, para [171]). The hobs were located at the junction of the exterior walls and the balconies of those units which had them. They were intended to prevent storm water from the balconies entering the units. This was the major item in dispute. 4 The proceedings arose out of a home building insurance policy effected on or about 31 July 1997, as required by s 92 of the Home Building Act 1989 (the Act), with HIH Casualty & General Insurance Ltd (HIH) by the developer Stellait Pty Ltd. HIH later became insolvent and went into liquidation. 5 The insurance related to residential building work within the meaning of the Act undertaken by Waller Constructions Pty Ltd for the developer. The work involved the conversion of a six-storey warehouse at 199 Regent St Redfern into 111 residential units and a small number of commercial units. Practical completion occurred on 25 June 1998 and the strata plan was registered on 15 July that year bringing the respondent owners' corporation into existence. 6 At the relevant time s 99(1)(a) of the Act provided: "(1) A contract of insurance in relation to residential building work required by section 92 must insure: (a) … (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. 7 It was common ground that the builder had become insolvent and that the owners' corporation, as the successor in title of the developer, was entitled under s 99(1)(b) to the benefit of the policy. 8 Part 6A of the Act, inserted by Act No. 41 of 2001, made provision for the State to indemnify insureds where an approved insurer had become insolvent (s 103I). HIH was such an insurer. 9 The statutory indemnity was enforceable in proceedings against the Building Insurers' Guarantee Corporation (the Guarantee Corporation) constituted by the Act (s 103J). It was common ground that the owners' corporation was entitled to the benefit of the statutory indemnity, and could sue the Guarantee Corporation to enforce it. 10 On 20 October 2008, the Guarantee Corporation filed a notice of intention to appeal from the judgment of 3 October. The orders made that day were interlocutory, there was no final judgment, and the time for an appeal as of right had not commenced to run. 11 Time for such an appeal commenced to run from the final orders made by the Judge on 25 November 2008, and a notice of appeal was filed on 23 December. 12 Meanwhile on 3 December the Guarantee Corporation sent a cheque for $2,101,769.64 for the judgment sum and interest to the solicitors for the owners' corporation (Orange 70). The covering letter simply stated (Orange 79): "A cheque for $2,101,769.64 payable to your client is attached. In light of the urgency, I have taken the liberty of delivering it to you direct." 13 The urgency was not explained. The Guarantee Corporation had not yet appealed, and the payment was made without seeking a stay of execution from the trial Judge or this Court.

The Amending Act 14 On 19 May 2009 the Home Building Amendment (Insurance) Act 2009 (Act No. 24) was assented to. It inserted a new s 103BA into the Act which, if it applied, would drastically affect the entitlements of the owners' corporation under the policy and against the Guarantee Corporation. The Guarantee Corporation claimed that s 103BA applied to this appeal, and it sought leave to amend its notice of appeal. The owners' corporation opposed leave relying on an exception in the transitional provisions. 15 The new point turns on the application of cl 83 of Pt 15 of Sch 4 inserted by the amending Act which provides, so far as relevant: "(1) Section 103BA … extends to: (a) a contract of insurance entered into before the commencement of that section …, and (b) a claim under any such contract of insurance, and (c) proceedings on such a claim (including proceedings commenced but not finally determined before the commencement of that section). (2) Despite subclause (1), section 103BA does not extend to or otherwise affect: (a) a claim that was paid in full before the commencement of that section, or (b) any agreement made before the commencement of that section to settle a claim, or (c) …, or (d) the amount that a person is entitled to recover under a contract of insurance where that amount was paid before the commencement of that section under the indemnity provided by Div 2 (Insurance claims indemnified by State) of Pt 6A of this Act, or (e) any final determination of legal proceedings made by a court or tribunal before the commencement of that section." 16 Clause 84 provides: "For the purposes of this Part, proceedings are not finally determined if: (a) any period for bringing an appeal as of right in respect of the proceedings has not expired …, or (b) any appeal in respect of the proceedings is pending …". 17 The relevant provision is cl 83(2)(d). The final judgment was intended to reflect the owners' corporation's entitlement under its contract of insurance with HIH. The judgment against the Guarantee Corporation enforced the indemnity made available to the owners' corporation by Div 2 of Pt 6A of the Act. 18 It became common ground that the other paragraphs in cl 83(2) are not relevant. 19 The owners' corporation submitted that the payment on 3 December, before the commencement of s 103BA, was made "under the indemnity" which fell within cl 83(2)(d) and its judgment was not open to retrospective challenge under that section. 20 The payment was made under compulsion of law pursuant to the judgment. If the Guarantee Corporation succeeded in having the judgment set aside on appeal the owners' corporation would have been ordered to refund the amount with interest at judgment rates from the date of receipt until the date of repayment: Production Spray Painting & Panel Beating Pty Ltd v Newnham (No 2) (1992) 27 NSWLR 659. 21 Although the payment on 3 December 2008 was in that sense conditional it was a payment. 22 Clause 83(2)(d) applies "where that amount was paid". The Court is not entitled to read in words which would qualify or cut down the otherwise clear language of this paragraph. This principle applies with particular force where additional words would limit a savings clause and widen the retrospective operation of an amending Act. 23 Mr Lynch, counsel for the Guarantee Corporation, submitted that payment of a claim within para (a) and payment under the indemnity within para (d) referred to payments made "without proceedings", and did not apply to payments under a judgment. 24 He invoked the established principle that a plaintiff's cause of action merges in a judgment in his favour and ceases to exist as a cause of action. Since an insured's claim enforced to judgment ceased to exist as a claim, payment of the judgment was not payment of the claim. 25 That argument may possibly have some validity in relation to cl 83(2)(a), but it cannot apply to cl 83(2)(d) where the word "claim" does not appear. The latter applies where " the amount that a person is entitled to recover under a contract of insurance was paid … under the indemnity." 26 The judgment debt (excluding pre-judgment interest) was intended to reflect the amount the owners' corporation was entitled to recover under the HIH policy, and it was paid by the Guarantee Corporation under the indemnity. The language of cl 83(2)(d) fairly construed applies to payment of a judgment debt which enforced the indemnity. The statutory indemnity continued to exist and did not merge in that judgment. 27 Mr Lynch submitted that cl 83(2)(d) only applied to payments pursuant to s 103L where the Guarantee Corporation accepted the claim "as payable under the indemnity". This payment was made pursuant to s 103J after the indemnity had been enforced to judgment. In other words the payment was not made under the indemnity but was made under the judgment. 28 I cannot accept that this distinction, such as it is, is relevant in the application of cl 83(2)(d). In my judgment payments in both situations are made "under the indemnity" even if the latter payment is also made under the judgment. 29 The language of cl 83(2)(d) mirrors that in s 103I(1)(a) which bound the State to indemnify any person who "is entitled to recover an amount under the contract of insurance." The amount was still paid under the indemnity provided for there and in s 103J even though it had to be enforced to judgment. 30 This construction is confirmed by s 103M(1) and (2) which apply where the Guarantee Corporation "pays an amount to a beneficiary … under the indemnity provided by this Division." In such a case the beneficiary "is taken to have assigned the beneficiary's rights in respect of the matter covered by the indemnity" to the Guarantee Corporation. 31 On Mr Lynch's argument if the beneficiary sued the Guarantee Corporation to judgment, payment of that judgment would not activate the assignment. 32 This cannot have been intended and the language of the section does not support the distinction relied on. In my judgment the assignment takes effect on a payment by the Guarantee Corporation pursuant to the indemnity whether it was enforced to judgment or not. 33 The distinction relied on by the Guarantee Corporation which does not apply to s 103M, cannot apply to the same language ("under the indemnity") in cl 83(2)(d). The amending Act therefore does not apply to this appeal.

The Hobs issue 34 The relevant primary facts are no longer in dispute. There was no set down from the floor level within the relevant units to their balconies. This created a risk of storm water penetration from the surface of the balconies at the same level. The design required a concrete or brickwork hob between the interior and exterior of the relevant units to carry the fixed and sliding glazing and to prevent water flowing from the balconies into the units. 35 The builder constructed the hobs out of two layers of untreated pine. The lower layer was fixed to the slab with shot fixings. The upper layer was nailed to the lower. In most, but apparently not all, cases an aluminium angle fixed to the slab with a silicon adhesive or sealant protected the external face of the hobs. 36 This was breach of the following warranties implied by section 18B(a) and (b): "(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 … 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." 37 The Guarantee Corporation argued that the hobs as built had been adequately waterproofed because the aluminium angles had been sealed to the underlying slab. It relied on the fact that there had been no water penetration in over ten years. 38 The waterproofing system as designed had two elements. A waterproof membrane was to be laid over the balcony slab. This was specified to lap up over the hobs, and up and over the point where the hobs abutted the dividing walls. The flat section of the membrane was to be tiled over. 39 It was common ground that the membrane would fail within 20 years but the design life of the building was about 50 years. The owners' corporation would have a statutory duty to replace the failed membranes and this would require the removal and replacement of the tiles. If the hobs were to perform their role they would have to remain waterproofed for the design life of the building. 40 Mr Lynch submitted that the statutory warranties in favour of the developer and its successors in title operated differently and their measure of damages for breach were not necessarily the same. 41 Section 18D(1) provides: "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." 42 It was conceded that the developer was entitled to the benefit of the statutory warranties and that the owners' corporation is its successor in title. As such it was entitled to "the same rights" as its predecessor. 43 The developer's title passed to the owners' corporation shortly after practical completion, and the developer was only at risk until the last unit was sold. Its interest in the hobs was largely if not entirely theoretical. They did not fail in that short period and were never likely to. The owners' corporation was at risk for the life of the building, and it alone had a real interest in enforcing the warranties. 44 The Judge upheld the referee's finding that the hobs as installed were inferior to those specified because they provided less protection against water penetration. This was a breach of the warranty that the relevant work would be performed in a proper and workmanlike manner, in accordance with the plans and specifications, and that the materials used would be good and suitable for their purpose. He also upheld the referee's finding that the owners' corporation did not have to prove that water penetration had occurred. 45 Mr Lynch submitted that the owners' corporation, as a successor in title, could not establish that the installation of timber hobs was a breach of the statutory warranties unless and until water penetration had occurred. This is contrary to the plain meaning of s 18D. 46 Mr Lynch also invoked the principle in tort that latent defects in a building do not cause loss to the proprietor or a successor in title until they are discovered. The cases were considered in Christopoulos v Angelos (1996) 41 NSWLR 700, at 703-4. However this principle has no application where the successor in title has the benefit of a statutory warranty and is entitled to the same rights as its predecessor. A cause of action for breach of contract accrues on breach and not when damage occurs or is discovered. 47 The real dispute related to the measure of damages. Mr Lynch submitted that the measures of damage were not necessarily the same, particularly when the breach involved a departure from the contractual plans and specifications. 48 He adopted the example from Bellgrove v Eldridge [1954] HCA 36, 90 CLR 613, 617 of a contract for the interior walls to be of one colour which were painted another with paint of the same quality. On his argument the original proprietor could recover the cost of repainting although the market value of the units had not been affected. However a successor in title, who acquired the property as painted, could not. 49 Mr Lynch submitted that although the prima facie remedy of the original proprietor for such a breach was the cost of achieving compliance with the specification there was no such presumption in favour of a successor in title. 50 The scheme of the Act, and ss 18B and 18D in particular, provide no support for such an argument as a proposition of law. The distinction may possibly have some relevance at a factual level in deciding what is reasonable in a particular case. Under the Act the same legal principles apply in both situations. 51 Mr Lynch's principal argument was that the owners' corporation had suffered no loss as a result of the builder's failure to provide hobs as specified because there was no evidence of water penetration, and no finding that the hobs were likely to fail within the design life of the building. 52 The owners' corporation had to prove loss because the insurance cover for successors in title under s 99(b) was against the risk of loss (para [6]). 53 Section 101 as then in force, which applied to insurance obtained by a developer pursuant to the Act, provided: "A contract of insurance in relation to … residential building work required by sections 95 or 96 must insure a purchaser of the land on which the work is done and the purchaser's successors in title against the risk of loss arising from a breach of a statutory warranty in respect of the work." 54 Thus the insurance was against the risk of loss, and Mr Lynch submitted that the owners' corporation had not suffered a loss. He relied on Allianz Australia Insurance Ltd v Waterbrook at Yowie Bay Pty Ltd [2009] NSWCA 224 where this Court, by majority, held that if a successor in title purchased a building with knowledge of patent defects caused by breaches of warranty by the builder, it would not suffer a loss within the compulsory policy. The purchase price would reflect the known state of the building and the purchaser would get what it bargained for. 55 The majority, Hodgson and Ipp JJA, Giles JA dissenting, held that "loss" in s99 has its ordinary meaning and a successor in title must prove that its loss was caused by the breach of the implied warranties: para [100] per Ipp JA. 56 Ipp JA continued (paras [110], [113], [118]): '… 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 … 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 … on general causation principles the Policy would … not respond to a claim of a successor in title who acquires a building in full knowledge … of its defects as that successor would not suffer loss from the existence of those defects." 57 That decision establishes that a successor may fail to recover damages his predecessor would have recovered because he cannot prove causation. It does not support any wider proposition. 58 In the present case the defects were latent and there was no conduct by the owners' corporation which could be a new and independent cause of its loss from the use of timber hobs. If they have to be replaced the owners' corporation would suffer loss and causation would be established. 59 The only question is whether it would be reasonable for the owners' corporation to replace the timber hobs before they have failed, when there is no finding that failure will probably occur during the design life of the building. 60 Mr Lynch attempted to distinguish Bellgrove v Eldridge [1954] HCA 36, 90 CLR 613, and Kirkby v Coote [2006] QCA 61, which had been relied on by McDougall J, because those plaintiffs were proprietors in a direct contractual relationship with the builder. 61 Those cases cannot be distinguished on that basis because s 18D conferred rights on the owners' corporation against the builder equivalent to those available to the developer. 62 If the developer would have been entitled to recover damages for the cost of demolition and reinstatement with the correct hobs the owners' corporation has the same entitlement, provided this would be a reasonable response on its part to the breaches of warranty. 63 In Bellgrove v Eldridge (above) the builder did not comply with the contractual specification, and as a result the foundations were defective and the building was unstable. The proprietor recovered in the Supreme Court of Victoria for the cost of demolition and reinstatement. The builder argued in the High Court that the building was worth more than the cost of its demolition and the true measure of the plaintiff's damages was the difference between its value as contracted for, and its value as constructed. 64 The Court held (at p 617) that the proprietor was entitled to have a building erected on her land in accordance with the contract, and her loss was the amount required to give her a building substantially in accordance with the contract. The Court (Dixon CJ, Webb and Taylor JJ) continued at 617-8: "Departures from the plans and specifications … may result in the completion of a building which, whilst differing in some particulars from that contracted for, is no less valuable. For instance particular rooms in such a building may be finished in one colour instead of quite a different colour as specified. Is the owner in these circumstances without a remedy? In our opinion he's not; he is entitled to the reasonable cost of rectifying the departure or defect so far as that is possible … But the work necessary to remedy defects in a building and so produce conformity with the plans and specifications may, and frequently will, require the removal or demolition of some part of the structure … Indeed … there may well be cases where the only practicable method of producing conformity with plans and specifications is by demolishing the whole of the building and erecting another in its place. In none of these cases is anything more done than that work which is required to achieve conformity … The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, … it must be a reasonable course to adopt." 65 This decision was followed in Kirkby v Coote [2006] QCA 61 where the Court upheld an award of damages against a builder for the cost of demolishing and re-erecting a pole house on steeply sloping land which the builder had constructed on inadequate footings. It was supported by 10 wooden poles and 40 steel posts but after heavy rain 11 of the footings subsided causing substantial damage. Test pits established that the footings had not been constructed as required. 66 The builder argued that partial underpinning of the footings at a cost of $193,200 would be adequate and that the damages of $581,200 for the cost of demolition and reconstruction were excessive. 67 The primary Judge accepted expert evidence that partial underpinning involved a real risk of failure although this could not be quantified with any certainty. 68 Keane JA referred (para [52]) to the reluctance of the High Court in Bellgrove v Eldridge (above) to confine the plaintiff to "a doubtful remedy" "contrasting the case before it with a case where it is clear that the expenditure imposed on the defendant is disproportionate to any benefit to the plaintiff in terms of the vindication of the plaintiff's right to recover its actual loss from the defendant". 69 He distinguished Luxley Electronics & Construction Ltd v Forsyth [1996] AC 344 where the House of Lords reversed an award of damages for the cost of demolishing a swimming pool with a diving depth of 6 feet and reconstructing it to the specified depth of 7'6". The pool as constructed was perfectly serviceable and suitable for diving. 70 Keane JA continued (paras [58]-[59]): "In the present case one is not concerned with a breach of duty which results only in aesthetic disappointment. The service negligently rendered by the appellants to the respondents has not left the respondents with a 'perfectly serviceable' house. A 'perfectly serviceable' house is one which is effectively free of risk of slipping. The respondent's house is a house which is affected by a degree of instability which would not have been present had the first appellant properly discharged his duty … because the respondents' damages are assessed 'once and for all' the law must be astute to ensure that the measure of damages accurately reflects the restoration of the respondents to the position they would have been in had the appellants not failed in their duty." 71 The cheaper option advocated by the builder involved risks and Keane JA said that "reasonableness does not require the respondent to carry those risks". 72 Bellgrove v Eldridge (above) was considered and followed in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd [2009] HCA 8, 236 CLR 272. 73 There are concurrent findings by the referee and the Judge that it would be reasonable for the owners' corporation to replace the hobs. The Guarantee Corporation had an alternative case based on a lesser scope of work, which did not involve the replacement of the timber hobs. This failed below and was not pursued in this Court. 74 The Judge found that the hobs as constructed were inferior to those specified. They were intended to form part of an effective waterproofing system for the life of a building, and the timber hobs did not necessarily do this. As the Judge said (para [143]): "The question, as between the developer and builder, was whether the developer or builder should bear the risk that the hobs would prove inadequate for their intended part in the waterproofing system. The question can be no different as between the Owners Corporation and the Guarantee Corporation." 75 Professor Marosszeky, an expert called by the Guarantee Corporation, said (Red p193, para [269]) that little was known about the sealant, and there was no certainty that it was capable of preventing water penetration under the aluminium angles. 76 In view of this uncertainty and the associated risk the referee held that it would not be reasonable to rely on the sealant as part of the waterproofing system in the building (para [277]-[278], [285]). 77 Mr Lynch submitted that the owners' corporation had to prove a loss, that a risk of loss without a finding that a loss would probably occur was not proof of a loss and the referee and the Judge had effectively reversed the onus of proof. 78 The referee and the Judge did treat the Guarantee Corporation as having a relevant onus, but only an evidentiary one. 79 There was a clear breach of contract, the specified hobs which would have acted as a secure waterproof barrier had not been installed, and those that had been were inferior. In these circumstances the Guarantee Corporation had at least an onus of adducing evidence of functional equivalence, that the hobs as installed were just as effective as those specified. 80 A defendant in cases such as this may actually have the legal onus of proving functional equivalence, so that reinstatement would be unreasonable. A defendant has the onus of establishing a failure to mitigate and demolition and reinstatement may well involve mitigation, but it is not necessary to pursue the question. 81 The evidence called by the Guarantee Corporation, taken at its highest, did not establish functional equivalence and its evidentiary onus was not discharged. 82 Evidence before the referee established that water penetration had occurred in Unit 502. The referee and the Judge did not rely on this evidence but it supports their conclusion that demolition and reinstatement was a reasonable course to adopt. The evidence appears at Blue 1/310G, 1/315Q - 316G, and Blue 2/571. The timber hob for Unit 502, when opened up for inspection, was found to be "heavily moisture stained and … starting to rot." (Blue 1/315U) 83 In my judgment the findings of the referee and the Judge on this issue were correct. There was a breach of contract affecting the waterproofing defences of the building, inferior hobs was installed, there was uncertainty about their effectiveness and a risk that they would fail. Demolition and reinstatement was the only way, on the evidence, that the risk of water penetration could be eliminated. It was reasonable for the owners' corporation to undertake that work, and damages could properly be awarded on that basis. 84 As Campbell JA said during argument, proof of loss, given causation, involves a comparison between the plaintiff's situation as it should have been and his situation as it is. The owners' corporation did not have what it was entitled to have, a waterproofing system that was risk free, and that was proof of loss. 85 In my judgment therefore the appeal fails and should be dismissed with costs. **********

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