Eko Investments Pty Limited v Austruc Constructions Limited & Ors; The Owners Strata Plan No 64970 v Austruc Constructions Limited & Ors

Eko Investments Pty Limited v Austruc Constructions Limited & Ors; The Owners Strata Plan No 64970 v Austruc Constructions Limited & Ors - [2009] NSWSC 208 - NSWSC 2009 case summary — Zoe

[14]

2 The Building was completed in early 2001 and the Strata Plan was registered in March 2001 when the Owners Strata Plan No 64970 (the Corporation) became responsible for the common property of the Building. The façade of the Building was not properly waterproofed and the design of the windows was inadequate in that they did not have sub-sills. Rainwater penetrated the home units and caused damage to the interior of the units. The structural steel support frame on the roof of the Building was not properly treated and it rusted. The water penetration of the units was first observed in 2001 and thereafter the Corporation sought expert advice on the problem and subsequently commenced these proceedings. The Proceedings 3 The first proceedings were commenced in 2003 by EKO against Austruc, CSA and Slater Lomas claiming damages for alleged defects in the Building (55047 of 2003). The second proceedings were commenced in 2005 by the Corporation against Austruc claiming damages for alleged defects in the Building (55048/05). 4 On 8 February 2008 the Corporation was granted leave to file an Amended Summons joining CSA. That Amended Summons filed on 14 February 2008 claimed that CSA: was retained by Austruc and EKO to design the Building (par 15 & 16); owed EKO, Austruc and "thereby" the Corporation a duty of care as successor in title to the common property in the Building (par 17(i)); owed the Corporation a duty of care to provide a proper design such that the Building would not suffer substantial water ingress (par 17(ii)); and breached its duty of care by failing to provide a proper design in consequence of which the Building suffered significant water ingress (par 18); whereby the Corporation suffered loss and damage (par 19). There was a further and similar claim pleaded by the Corporation based on an alleged duty owed by CSA to Austruc and "thereby" the Corporation (pars 20 - 22). 5 The Corporation also claimed that CSA was liable to it in respect of the Corporation's liability to the individual unit owners for the damage to their units caused by the water ingress by reason of the Corporation's failure to comply with its obligation under s 62 of the Strata Schemes Management Act 1996 (NSW) (Management Act) to "properly maintain and keep in a state of good and serviceable repair the common property" (the contents claim) (pars 23-27).

[25]

To minimise cracking in walls caused by thermal expansion, contraction, foundation movement, drying shrinkage etc joints should be located in accordance with the following guidelines … the project architect and engineer should be involved in the locating of control joints … for further guidance and guidelines see [another publication] … In no circumstances should a movement control joint be rendered across. 12 The Handbook contained some recommendations and some imperative terms. It also included drawings with details about a variety of matters. The appendices to the Handbook consisted of separate sample specifications for the blocks and panels. Slater Lomas, had issued a note that all the block work was to be installed "strictly in accordance" with the manufacturer's recommendation in the Handbook and that the block work was to be "fully articulated by placement of control joints at maximum of 6.0m spacing and as indicated on plan in accordance with [manufacturer's] recommendations" (par 41). The Referee considered that that note "constituted a detail which, read with the specification, required Austruc to work in accordance with the handbook, except to the extent that there were instructions to the contrary" (par 52). 13 The Referee referred to CSA's submission that one of the drawings, W3, showed that the sealant was detailed to the external face of the blocks and not rendered over (par 57). The Referee also referred to Austruc's contention that the instructions given to it permitted it to render across the control joints and that the Handbook was not clear about this. The Referee reported that he did not agree with this contention and referred back to the statement in section 7.4 of the Handbook that in "no circumstances should a movement control joint be rendered across". 14 The Referee also reviewed whether the requirements in the Handbook had been varied by analysing communications between CSA, Slater Lomas and Austruc (par 59-62). The manufacturer wrote to Slater Lomas with a "sketch" of its thoughts for the Building. The Referee recorded that this sketch set out considerable detail of what should be provided by Austruc, by way of control joints and fixings between the Hebel blocks and the concrete framework of the Building. This was apparently done by reference to drawing W3 from the Handbook. That showed where the control joint should be placed between the Hebel blocks and the columns on either side of the block work panel, and between the Hebel blocks and the soffit of the slab at the top of the panel. The Referee recorded that the drawing provided that the joints should be 10 mm or more wide, and that they should be filled in with a backing rod, and sealed with a polyurethane sealant. The Referee concluded that to his mind, "it shows that render should not be placed over the sealant" (par 59). 15 The Referee recorded that Slater Lomas checked the position and approved the details of the sketch and advised CSA of that position and asked CSA "aren't the hebel walls to be waterproofed? If so then galvanised dowels may be ok. Your thoughts?". That communication was also given to Austruc who advised that they were a builder and "not a designer". Austruc also advised that it had informed CSA of the "lack of suitably documented detail in relation to the fixings between windows and Hebel blocks, and that this was a problem for "the design team" to overcome" (par 61). 16 The Referee concluded that these exchanges showed that Austruc was to act, so far as the Hebel block work was concerned, in accordance with the Handbook, except where there were specific instructions to act otherwise. The Referee noted that these communications said nothing about making the Building watertight (par 63). The Referee then set out some evidence given by an employee or officer of CSA, Mr Smith, in which he was cross-examined about his observations as to whether the control joints had been rendered over. He agreed that it was obvious when he looked at the Building at practical completion that there were not 10 mm open-face construction joints in the locations that had been indicated on the drawing. He accepted that the engineer had specified 10 mm wide joints and that he had passed that specification onto the builder. The Referee was not satisfied that Mr Smith had noticed that the joints had been rendered across or if he had, he did not regard it as significant at the time. The Referee rejected Mr Smith's evidence that rendering over control joints was consistent with good practice (par 66). 17 The Referee identified that each of the experts (Messrs Alden, Dunstan, Knox, Plaister, Skinner, Smee and Wilkinson) said that "good practice did not permit the rendering across of these joints" and observed that this was a "matter that goes to both the design responsibility and the quality of the work". The Referee also referred to Mr Alden's evidence that by rendering across a movement joint "you are guaranteed to have cracks and spalling" in the render. The Referee recorded that he accepted that evidence (par 67-68). He then reported:

[34]

It was submitted that the corporation was in a position of vulnerability, as that expression is to be understood having regard to what was said in Woolcock at [23], and I accept this as correct. In contrast to the position described in some earlier cases, the corporation was never in the position of a purchaser, or possible purchaser. It had no opportunity to inspect the building before acquisition, and no opportunity to seek to protect itself by obtaining some form of contractual protection. Instead, once Eko took the steps that led to the registration of the strata plan, the corporation came into existence by force of law, already possessed of a bundle of rights and obligations, and unable to do anything to protect itself concerning those obligations. 24 The Referee referred to CSA's attempt to escape from this conclusion by reference to a number of arguments, based upon the proposition that the lot owners, as a group, had inspected, or at least had the opportunity to inspect the Building before they purchased the various units. There was reliance on clauses 3(a)(i) and 18 of the contracts for purchase of the units containing respectively, a warranty that the Building would be constructed in a proper and workmanlike manner in accordance with approved plans and specifications, and an agreement to construct the Building to the satisfaction and in compliance with the council's requirements prior to settlement. 25 CSA's submission to the Referee that the Corporation was not vulnerable because clauses 3(a)(i) and 18 of the contracts contained sufficient protection for all the lot owners and therefore the Corporation, was rejected. The Referee concluded that those clauses would not have operated to protect the lot owners, nor the Corporation, from the "relevant risk, namely that of a design that was deficient, and did not result in a watertight building" (par 290). CSA had also submitted to the Referee that the Corporation had not proved actual reliance upon CSA. The Referee concluded that this was not necessary particularly where the Corporation did not exist at the time of CSA's relevant conduct (par 293). 26 The Referee referred to the statutory warranties in s 18B of the Home Building Act 1989 (NSW) relevantly: (a) that the work would be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract; and (b) the material supplied would be good and suitable for the purpose for which they were used and unless otherwise specified would be new. The Referee noted that, as the immediate successor of EKO, the Corporation was entitled to the statutory warranties and that it succeeded against Austruc for breach of those statutory warranties and also in negligence (pars 74 and 84). 27 The Referee dealt with CSA's submissions in relation to the statutory warranties in the Home Building Act as follows:

[51]

Contrary to what the referee concluded on the vulnerability issue, the statutory warranties did, in fact, provide protection in respect of each of the operative defects upon which CSA's ultimate liability was founded. Indeed, as is apparent, the faulty building work underpinned the basis of CSA's liability (except in relation to the subsills) and was the basis of judgment against CSA. On the referee's findings, the owners corporation was protected by the warranties under the Home Building Act 1989 in respect of the totality of the losses suffered by it. This is a significant matter telling not only against any conclusion as to vulnerability, but against the existence of a duty of care: Zumpano v Montagnese [1997] 2 VR 525. 49 Although paragraph 28 of these submissions refers to the "basis of judgment against CSA", it must be remembered that the Referee did not give "judgment". A referee makes a report to the Court and the conclusions reached or recommendations made in a report do not become a judgment until the Court adopts those conclusions or recommendations. In the present case there was no issue that there was a "sufficiently close relationship" between the Corporation and CSA. The only question was whether the Corporation had established that it was vulnerable in the sense that it was unable to protect itself from the consequences of CSA's want of reasonable care: Woolcock at [23]. The parties have argued this matter on the basis that if the statutory warranties were available to the Corporation in respect of the identified deficiencies, then the Corporation was not "vulnerable" as that concept is understood in Woolcock. If CSA is correct in its characterisation of the Referee's findings, there is no need to decide whether the existence of statutory warranties tells against the imposition of a duty of care. 50 Zumpano v Montagnese [1997] 2 VR 525 referred to in paragraph 28 of CSA's submissions, was a case in which the appellants, professional builders, sold the home that they had built the previous year, having advertised it as a "builder's own home". The plumber employed by the builders had failed to include a boundary trap in the sewerage works and the purchaser sued the builders/vendors in the Magistrates Court for the cost of installation of the trap and associated other costs. The purchasers succeeded and on appeal, Mandie J dismissed the appeal. The builders were successful in the Court of Appeal on the basis that, assuming a duty of care, it was not open to find a breach of duty in the builders' failure to personally inspect the plumbing works. Relevantly to the submissions made by CSA in the present case, Brooking JA, after referring to the statutory warranties in the Domestic Building Contracts and Tribunal Act 1995 (Vic), said at 527:

[59]

58 The Referee did not elaborate on his statement in paragraph 67 of the Report that the rendering across control joints was a matter going to both "the design responsibility and the quality of the work". However that statement was made in the paragraph immediately prior to the finding that "a significant reason" the façade cracked was because the joints had been rendered over (par 68-69). It seems to me that what the Referee intended to convey by the statement in paragraph 67 was that CSA, who had the design responsibility of the Building, had a responsibility to ensure that any drawings or specifications made clear that joints were not to be rendered over; alternatively the person with the design responsibility, CSA, was obliged to ensure that the joints were not rendered over. In this case it is clear, and the Referee so concluded, that the Hebel Handbook and the drawings made clear that the joints were not to be rendered over. Accordingly there could be no criticism of CSA in respect of its "design responsibility" in this regard. What the Referee made quite clear in paragraph 69 of the Report was that it was Austruc through, its sub-contractor, who had caused the problem by not following the instructions in the Handbook. 59 The Referee's rejection of the minority expert opinions that the Building "leaks by design" and his finding that if the external protection system had been properly applied it would have been "adequate or appropriate" suggests to me that there was no problem with the design of the Building, rather it was a failure to follow or implement the design or specification that caused the problem. There seem to have been two major aspects of that failure. The first was identified in paragraph 22 of the Report when the Referee was dealing with the general overview of the matter and referred to the fact that in places the outer parts of the control joints were not placed outside the inner parts, but some little distance to one side of them. This was inconsistent with the specification and the drawings. It was not a design fault but a failure to follow or implement the design as specified. 60 The factual question addressed by the Referee was whether the Corporation was vulnerable. The Referee concluded that the Corporation was unable to protect itself from the consequence of CSA's negligent design because the statutory warranties would not be available in respect of negligent design. However implicit in the Referee's reasoning is the conclusion that if it was poor workmanship, that is a failure by CSA to administer the contract properly in checking on the builder's work to ensure that the building work complied with the design as produced by CSA, the statutory warranties would be available and the Corporation would be able to protect itself against CSA's conduct in that regard. 61 Austruc took issue with the way in which CSA characterised the Referee's findings and submitted that the Referee concluded that CSA had significantly neglected to design a building that was watertight. It submitted that although CSA acknowledged the Referee's conclusion that it had breached its duty to design a Building that was watertight, it sought to play down the significance of the breach. Austruc submitted that the following parts of the Report establish that the Referee concluded that CSA was negligent in failing to design a building that was watertight:

[68]

65 The Referee expressed himself in general terms of CSA's failure to design a waterproof building. However on analysis of his reasoning, I am satisfied that his conclusion was that the design was appropriate and was able to be waterproofed. The problem was the failure to follow the design and specification both in respect of the positioning of some of the control joints and in respect of the rendering over the control joints. The Corporation was therefore protected by the statutory warranties in respect of the façade, however this protection was not available to the Corporation in respect of the negligent design and specification for the windows. 66 In those circumstances the Report of the Referee in relation to the findings that the Corporation was "vulnerable" in respect of the façade (excluding the lack of sub-sills in the windows) will not be adopted. So far as the Report relates to the negligent design of the windows an order may be made that the findings of the Referee will be adopted. The Limitation Point 67 The limitation point relates to the latent defect, which the Referee identified as faulty design. As I have found above that the real cause of the water ingress was a failure to follow the design, that is poor workmanship in not following the design, and failure to supervise the work, the relevant defect was the improper positioning of some of the joints, inconsistently with the drawings and the rendering over the control joints, inconsistently with the Handbook. In those circumstances, it is only necessary to deal with the limitation point in respect of the faulty design of the windows, however I will also refer to the "defect" of failing to construct the Building consistently with the Handbook, the specifications and the drawings. 68 CSA submitted that the Referee misstated the test for determining when loss accrues in cases involving latent defects in buildings and that he failed to apply the correct legal test. It was submitted that had he applied the appropriate test CSA's limitation defence would have been upheld. CSA also submitted that the Referee misstated, and thus misunderstood, what the Full Court decided in Pullen v Gutteridge, Haskins & Davey Pty Limited [1993] 1 VR 27, which lead to the Referee misstating the applicable test in paragraph [316] of the Report.

[77]

It is submitted that the test expressed by the referee is erroneous. Neither element correctly identifies what is required to be demonstrated for damage to be known or manifest, and hence for a cause of action to accrue. The second aspect, essentially a requirement that it be shown that there is a connection between the 'signs and symptoms' and the alleged acts and omissions of the alleged tortfeasor, invokes notions which enable a party to secure an order extending the limitation period: see Kinzett v McCourt (1999) 46 NSWLR 32. They are irrelevant in the context of whether damage has accrued. 73 I am not persuaded that the Referee applied an incorrect test. It seems to me that CSA has misunderstood the test that the referee expounded in paragraph [316] of the Report. I do not agree with CSA's submissions that the Referee has stated a test in which it must be demonstrated that any defects identified were due to the act or omission of the alleged tortfeasor. The Referee was doing no more than applying what had been said in the line of authority to which he referred. The present case is not dissimilar to the facts in Pullen. In Pullen there were observable physical symptoms or defects such as a large horizontal gap, which had opened up in the north wall about one metre above the ground. However the latent defect was the inadequacy or unsuitability of the footings. Although the physical defect was observable, the latent defect of inadequacy of the footings was not discovered until a later time. In this case the physical defect, the cracking in the walls and ingress of water was observable, but the latent defects, the faulty design of the windows and the inappropriate rendering over the control joints inconsistently with the design as specified in the Handbook, the specifications and the drawings were not identified until after 8 February 2002. 74 Although paragraph [316] referred to "the design of CSA", the Referee was not posing a test that required the identification of the tortfeasor. The test identified by the Referee was that the defect, not merely the presence of physical damage, had to be known or manifest. It was the defects identified above, as opposed to the physical damage, the cracking of the walls and the ingress of water that were the latent defects. I am not satisfied that the Referee fell into error in rejecting the claim made by CSA. This aspect of CSA's attack on the Referee's report fails. Contents Claim 75 The Corporation pleaded the contents claims as follows:

[101]

7 Mr Sirtes, for the owners corporation, argued that this was no longer the case under the 1996 Act. He submitted that the point had not been argued before Gzell J in Lyn , and that the extensive scheme provided by the Act for alternative dispute resolution through an adjudicator and the CTTT evinced an intention that there be no private cause of action. However, the 1973 Act also contained alternative dispute resolution mechanisms (involving a Strata Titles Commissioner and Strata Titles Board). Nothing in the 1996 Act affects the reasoning by which the cases culminating in Lubrano held that there was a private right of action under the 1973 Act. Moreover, given that it was well established by authority that there was such a cause of action under the 1973 Act, Parliament should be taken to have intended, when enacting corresponding sections in the 1996 Act, to have intended them to have the effect which the authorities had given to their predecessors [ Re Alcan Australia Ltd; ex parte Federation of Industrial Manufacturing and Engineering Employees [1994] HCA 34; (1994) 181 CLR 96, 106] and thus to have intended to preserve the private cause of action. In my opinion, therefore, a breach of s 62(1) gives rise to a private cause of action by a lot owner who suffers damage against the owners corporation. 84 The appeal from Brereton J's judgment originally included a claim that his Honour had erred in holding that s 62(1) imposed a statutory duty which gave rise to a private cause of action sounding in damages. That claim was abandoned two days before the hearing of the appeal and the Court of Appeal did not deal with that aspect of the matter: Owners SP 35042 v Seiwa Australia Pty Ltd [2007] NSWCA 272. 85 The Referee observed that McColl JA's view was obiter by reason of the fact that that the appellant in that case had not asserted that s 62 gave rise to a statutory cause of action but that a breach of the duty imposed under s 62 amounted to evidence of negligence: at [87]. The Referee found that the Corporation was entitled to damages against CSA for breach of duty of care owed to the Corporation irrespective of whether the individual lot owners had given notice to the Corporation that they intended to rely upon "their rights" under section 62 of the Management Act. 86 CSA submitted that the finding made by the Referee that CSA (and Austruc) were liable for the contents claim occurred as a consequence of a "prejudicial breach of the rules of natural justice". In reality CSA claimed that the Referee had denied it procedural fairness. There was no issue that parties appearing in cases before referees are entitled to procedural fairness. It was submitted that the Referee determined this aspect of the claim outside the pleaded claim, and in the absence of notice of the Referee's intention to do so. CSA emphasised paragraph 24 of the Amended Summons extracted above in which the Corporation pleaded that it incurred a liability to the individual lot owners who had "suffered" loss and damage as a consequence of its failure to repair and maintain common property, the particulars of which claim were the letters of demand. 87 CSA submitted that the Corporation pleaded its case on the basis that it was entitled to damages because the individual lot owners had made claims against it. CSA submitted that it was entitled to (and did) approach the matter in accordance with the express position stated by the Corporation in its pleading. CSA accepted that the Referee was entitled to take the view that the way the parties conducted the litigation did not bind them, however it submitted that if the Referee contemplated determining the case on a different basis to the way the case had been pleaded and conducted, he was required to inform the parties of this prospect so that they had the opportunity to address any new or changed issue. In this regard reliance was placed on the following passage of the judgment of Mason CJ and Brennan J in Pantorno v R (1989) 166 CLR 466 at 473:

[102]

When the parties to an adversarial proceeding agree on a proposition of law and conduct their cases on that basis, their agreement does not bind the trial judge. If the judge determines the law to be different, he may apply the law as he determines it to be, but he must inform the parties of the view he has formed when that is necessary to give them an opportunity to address new issues arising from the judge's departure from the proposition of law on which the case was conducted. 88 Parker v Comptroller-General of Customs [2009] HCA 7 (12 February 2009) was a case in which the appellant had been convicted of various offences under the Customs Act 1901 (Cth) in relation to the unauthorised movement of goods, imported Scotch whisky, and the evasion of duty on those goods. The charges arose out of an enquiry sparked by concern that some importers had been mixing imported brandy with a grain-based alcohol produced in Australia on which duty had not been paid. Customs officers searched a number of premises including those controlled by the appellant and/or his company in reliance on notices and warrants issued under s 214 of the Customs Act. The documents and records that were seized were tendered against the appellant at trial. 89 At the trial, the Comptroller-General conceded invalidity of the notices. In addition the trial judge found that the range of documents seized went well beyond what would have been authorised by s 214, even if the notice had been valid. In this regard the trial judge based her decision on In the matter of Lawrence Charles O'Neill, unreported, District Court of New South Wales, 18 August 1988, Dunford DCJ, (as his Honour then was). Although the documents were obtained "illegally", the trial judge admitted the evidence pursuant to s 138 of the Evidence Act 1995 (NSW) and the appellant was convicted. The appeal to the New South Wales Court of Appeal (Basten JA, with whom Mason P and Tobias JA agreed) was dismissed. 90 The limited basis on which special leave was granted to appeal to the High Court was that the Court of Appeal had denied the appellant procedural fairness in deciding that O'Neill had been wrongly decided, when the correctness of that judgment was not in issue in the appeal and no notice had been given to the appellant that the Court of Appeal intended to review the correctness of O'Neill and no opportunity had been given to the appellant to make submissions in respect of that matter. The High Court (French CJ; Gummow, Hayne and Kiefel JJ; Heydon J dissenting) dismissed the appeal. French CJ said at [85]:

[107]

If your Honour is, nevertheless, satisfied that the way it was argued before the referee and, indeed, as a matter of law the proposition is not incorrect, that is, that no notification was needed because the lot owners who were affected had rights, had private rights to pursue the owners corporation and the owners corporation was exposed to those rights, then the point falls away as being merely a pleading point in circumstances where it wasn't an elemental part of the cause of action for the tortious claim that such notification had to be given. 98 I am not satisfied that this is a mere pleading point, however, the way in which the Corporation pleaded its case is certainly significant. CSA went to the hearing to meet a case that it was liable to the Corporation for the Corporation's liability to the individual lot owner's for the loss and damage to their units. If those lot owners claims were statute barred as against the Corporation, then CSA was entitled to argue that it was not liable to the Corporation for those individual claims. Put more aptly to the submission made by CSA in this application, there was an argument that could have been put to the Referee that it was necessary to establish, as the Corporation had implicitly recognised in its pleading, the reality of the liability to each of the unit owners. There was available to CSA the argument, a reasonable argument in my view, that in the absence of evidence in relation to the dates upon which the individual lot owners made their claims it was not possible to determine the reality of the Corporation's liability. 99 The case put forward by the Corporation before the Referee was that an event had occurred, that is, that the lot owners had served claims for loss and damage. Paragraph 203 of the Report records the Referee's conclusion that the Corporation was entitled to recover damages "measured by the extent of its liability to the lot owners". To measure the liability of the Corporation to the lot owners an assessment had to be made as to whether the Corporation was liable to those lot owners. The Referee did not make that analysis.

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Judgment (111 paragraphs)

Legislation Cited (8)

Cases Cited (22)

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