First Australasian Holdings Pty Limited v Lackey Poulos and Nita Poulos and Council of the City of South Sydney

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

CA 40021/99 DC 7146/95 HANDLEY JA POWELL JA STEIN JA Thursday, 3 August 2000 FIRST AUSTRALASIAN HOLDINGS PTY LIMITED v Lackey POULOS and Nita POULOS and COUNCIL OF THE CITY OF SOUTH SYDNEY

In late 1989 Lackey and Nita Poulos (the first respondents) applied to South Sydney City Council (the second respondent) for approval to fit out, as a language school, an area of the shopping centre they owned. Council granted a building approval which included a condition requiring installation of automatic fire sprinklers throughout the building. Council later waived compliance with this condition and amended the approved plans.

Council granted building approval in 1992 for alteration of the building to be used as a gymnasium, subject to a condition requiring installation of automatic fire sprinklers. Following a conversation between Mr Poulos and a Council officer, Mr Poulos believed that the condition in the approval had been waived.

In 1992, the first respondents decided to sell the shopping centre and obtained a s 317AE Local Government Act 1919 building certificate from the Council. The certificate noted that the issue of the certificate did not prevent an order being made under s 317D which regulates fire safety. First Australasian Holdings Pty Limited, the appellants, offered to buy the centre and the contract included a clause in which the first respondents warranted that they were not aware of any patent or latent defects which required remedial works to be performed. Settlement took place in October 1992. In 1995 the Council drew to the appellant's attention that the 1992 building approval had not been complied with.

The appellants brought an action in the District Court against the first respondents for breach of the contractual warranty, breach of duty of care, and false, misleading and deceptive conduct under the Fair Trading Act 1987. Against the Council, the appellant claimed negligence in the issue of the building certificate to the first respondents and breach of duty of care to the appellant as purchaser. The trial judge found a verdict for both respondents.

The appellant submits that his Honour should not have accepted the evidence of Mr Poulos that he was not aware of the absence of sprinklers being a defect, nor the evidence that Council had waived compliance with the condition in the building approval.

The appellant submits that his Honour erred in the construction he gave s 317AE .

His Honour did not misuse or fail to use his advantage as a trial judge. The evidence of Mr Poulos was not glaringly improbable or contrary to the compelling inferences of the case. His Honour's findings were not inconsistent with facts incontrovertibly established or with significant uncontested testimony.

His Honour was correct to find that there was no breach of the contractual warranty by the first respondents. Misleading or deceptive conduct in breach of the Fair Trading Act 1987 was not established. There was no breach by the first respondents of any duty of care owed to the appellant independently of the contract. A s 317AE building certificate is not a certificate of compliance, unlike its predecessor s 317A. Where a certificate was issued to the vendor (first respondents), no duty of care arose in the Council, to the appellant, of the nature submitted. Fire safety provisions in the Local Government Act 1919 are not to be affected by the issue of a building certificate. Orders Appeal dismissed with costs OoO

IN THE SUPREME COURT OF NEW SOUTH WALES COURT OF APPEAL

CA 40021/99 DC 7146/95 HANDLEY JA POWELL JA STEIN JA Thursday, 3 August 2000 FIRST AUSTRALASIAN HOLDINGS PTY LIMITED v Lackey POULOS and Nita POULOS and COUNCIL OF THE CITY OF SOUTH SYDNEY JUDGMENT

1 HANDLEY JA: I agree with Stein JA. 2 POWELL JA: I agree with Stein JA. 3 STEIN JA: Introduction 4 The appellant, First Australasian Holdings Pty Limited, appeals against a decision of Herron DCJ on 18 December 1998 entering a verdict and judgment in favour of the respondents, Lackey and Nita Poulos, and the South Sydney City Council (the Council).

The facts 5 Lackey and Nita Poulos owned a property at 328 - 342 King Street Newtown. In 1982, with the approval of the Council, they built a small shopping centre on the land, known as La Nita Shopping Market. In late 1989 Mr Poulos applied to the Council for approval to use and fit out an area on the second floor of the premises as an English language school. The cost of the building work was estimated at $400,000.

6 A building approval was granted by the Council. It included a condition requiring the installation of automatic fire sprinklers throughout the building. 7 Mr Poulos took advice from an architect and wrote to the Council on 30 May 1990 arguing that the provision of sprinklers was not required. By letter dated 4 June 1990 the Council indicated that it had reassessed the condition in the approval requiring a sprinkler system and considered that it was 'no longer necessary'. It appears that the building approval and approved plans were accordingly amended by the Council. 8 The English language school was unsuccessful and the area again became vacant. A prospective tenant wanted to use the area as a gymnasium. With the consent of the first respondents (as owners), Starfit Pty Limited lodged a development application with the Council to use the area as a fitness centre. The application indicated that the majority of the partitioning on the floor was to be removed and modifications were to be made to the toilet/shower area. The estimated cost of the work was $5,000. 9 On 17 December 1991 the Council granted development consent subject to a number of conditions. These did not include any reference to fire safety precautions. 10 Development approval having been obtained, Mr Poulos applied for a building approval for removal of the partitions and alterations to the toilet area. By letter dated 13 February 1992 the Council gave its approval to the building plans submitted with the application, subject to a number of conditions. Mr Poulos noted that these included a condition (condition 42) requiring the installation of an automatic sprinkler system throughout the whole building, similar to that required but waived in the 1990 approval. 11 Shortly thereafter Mr Poulos contacted the Council and spoke to an officer about the condition. The officer, whose name he deposed in his affidavit he thought was Pauley, but in cross-examination agreed that he did not know, met him on site. They discussed the need for a sprinkler system given that the requirement had been waived in June 1990 for the very same area. Mr Poulos said that the officer said words to the effect: Don't worry about the sprinkler system, I'll fix everything up at the office. We waived it last time and it shouldn't have been included this time. It won't be necessary to install it. Just go ahead without it.

12 It does not appear that this intimation by the Council officer was reduced to writing or noted on the Council files. 13 Mr Poulos engaged a builder, Mr Ken Fleeton, to carry out the building works. He started work in or around mid February 1992. It seems that a Council officer inspected progress on 6 April 1992 noting that work was 'progressing satisfactory to BA' (short for building approval). 14 On 7 April 1992 Mr and Mrs Poulos, who had decided to sell the centre, applied to the Council for a building certificate pursuant to s 317AE of the Local Government Act 1919 (the Act). 15 On 5 May 1992 the Council issued the first respondents with a building certificate. The certificate, inter alia, stated that the Council would not make an order for repair or demolition of the building under s 317B or take proceedings for an injunction requiring demolition, alteration, addition or rebuilding of the building. 16 The certificate recorded the inspection date as 5 May 1992, and noted that building application No Q92-00050 had been taken into account in deciding to issue the certificate. The certificate contained certain 'Notes'. Note No 2 provided that: The issue of a building certificate does not prevent proceedings being taken against any person under section 306, 310, 311 or 317 of the Local Government Act 1919 (which generally regulate the lawful erection of buildings) or an order being made under section 317D of that Act (which regulates fire safety ). [My emphasis]

17 Meanwhile Mr Fleeton was progressing with the works and deposed that he telephoned a Council building inspector on 4 May 1992 and asked for an inspection. He said that an officer attended the site on 6 May 1992, together with a representative of the Board of Fire Commissioners. They carried out an inspection. There were some final items to be completed and an additional fire extinguisher was required for the reception area.

18 On 2 June 1992 the final inspection took place and, according to Mr Fleeton, he was told by the Council building inspector that everything was in order. He so informed Mr Poulos. A Council inspection report dated 4 June 1992 confirms this. 19 It may be noted that, as mentioned, the building certificate records an inspection on 5 May 1992 whereas Mr Fleeton says that the site was inspected on 6 May 1992. While Counsel for the appellant places reliance on this discrepancy, I do not see that anything turns on it. Either could be one day out. The difference in the dates certainly does not lead to any inference that the Council carried out a final inspection much earlier, in April 1992. 20 On 8 May 1992 a Mr Nelson Chiu, representing the appellant, offered to buy the centre for $3,850,000 subject to obtaining finance and 's 317AE certificates and other relevant certificates …'. The finance was to come from the Hongkong Bank of Australia Ltd, which made an indicative offer of finance subject, inter alia, to a s 317AE certificate being obtained. 21 According to Mr Joseph Tan, a joint venturer with Mr Chiu, agreement in principle was reached by 12 May 1992 to buy the centre for $3.88 million. Mr Tan made a number of site inspections. Mr Don Edmunds, solicitor, was retained to act for the appellant on the purchase. By facsimile sent on 4 June 1992 Mr Chiu asked Mr Edmunds about obtaining a s 317AE certificate. 22 The first respondents' solicitors submitted a contract to Mr Edmunds. On 14 June 1992 Mr Chiu faxed Mr Edmunds his comments on the contract. Unfortunately, they are impossible to decipher because of faulty reproduction but it is clear that Mr Chiu was raising a question about cl 25. Mr Edmunds responded as follows: Building Conditions We will suggest the proposed Clause 25 have the following words added:-

"but the vendors warrant that they are not aware of any patent and latent defects which require remedial works to be performed." We think it unlikely that the vendors will agree to this amendment but will advise you in due course. We enclose a copy of S.317AE Certificate from South Sydney Council for your information and we have asked Simon Ronney to obtain an engineering report from an engineer recommended by your own architect. This will be forwarded to you as soon as it is available.

23 On 24 June 1992 Mr Chiu told Mr Edmunds that he had been informed by their architect, Mr Perry Fung, that he thought that there should be a fire sprinkler system in the building. It is common ground that it was obvious to anyone that there was no fire sprinkler system in the premises. Mr Chiu wanted the contract tightened up to protect the purchaser. 24 It appears that the vendors readily agreed to the condition being extended to incorporate the words suggested by Mr Edmunds and he was given instructions to exchange contracts. 25 What is apparent from the correspondence is that Mr Edmunds had been given a copy of the s 317AE certificate, obtained by Mr Poulos on 5 May 1992, by the vendors' solicitors sometime prior to 18 June 1992. It does not appear that Mr Edmunds himself applied to the Council for a certificate under s 317AE, as a purchaser was entitled to do under s 317AB of the Act. 26 Contracts were exchanged on 26 June 1992 and Mr Edmunds forwarded requisitions on title on 17 July 1992. Requisition 17(e) asked if the requirements of the Local Government Act and the Ordinances relating to alterations and additions had been complied with. The answer was that 'the vendor believes so'. 27 Settlement took place on 1 October 1992. Although the letter is equivocal it appears that the Council drew to the appellant's attention, in its letter of 17 March 1995, that the building approval had not been complied with. The appellant then sought to have the requirement for sprinklers dispensed with by the Board of Fire Commissioners. On 29 August 1995 the Board refused an exemption. A Council building assessor, Mr David Reddin, inspected the building on 17 February 1997 and noted that there were no sprinklers. In his affidavit he deposed to the Council requiring that all of the conditions of the building approval Q92-00050 be complied with. 28 The Council had taken no steps to seek to enforce compliance with condition 42 of the relevant building approval, nor to issue an order under s 317D of the Act requiring fire safety works to be carried out. Nor has it taken any such steps to the present day. 29 This is the factual background which lead the appellant to sue the first respondents and the Council. The claim against the vendors was for breach of cl 25 of the contract. It was alleged that the first respondents were aware of a defect which required remedial works to be performed, namely the building approval condition to provide a sprinkler system to the building. In addition, the appellant alleged that the first respondents had been guilty of false, misleading and deceptive conduct in breach of the Fair Trading Act 1987. The representation is alleged to have been made in cl 25 of the contract and in the provision to Mr Edmunds of the s 317AE certificate obtained on 5 May 1992. Also, in the answer to requisitions on title referred to earlier. The appellant further claimed that the first respondents were in breach of their duty of care to the appellant. 30 As against the Council, the appellant claimed that it was negligent in its issue of the s 317AE certificate to the first respondents on 5 May 1992 and in breach of its duty of care to the appellant as purchaser of the premises.

The judgment at first instance 31 His Honour accepted the evidence of Mr Poulos that 'in a conversation with an officer of the Council whom he could not identify, he was informed that the installation of the sprinkler system as required by condition 42 would not be necessary'. The trial judge thought that this was explicable having regard to what occurred in 1989 and 1990 and the relatively small nature of the 1992 works as compared to the earlier works. His Honour also saw the evidence of the builder, Mr Fleeton, regarding periodic visits to the site by Council officers, as corroborative. In particular, his Honour referred to a visit by a Council officer and another person who required additional fire extinguishers to be provided in the building. The entries on the Council's inspection cards that the work had been carried out satisfactorily and in accordance with the building approval supported the first respondents' case. 32 Mr Poulos was cross-examined about his state of knowledge, it being claimed that he knew he did not have Council's approval not to put in a sprinkler system, when he applied for the building certificate. He denied this and asserted to the contrary. His Honour said that he was confident in accepting Mr Poulos in this regard. 33 Further, his Honour accepted that Mr Poulos did not, at the time he executed the contract for sale, have any knowledge of any outstanding work required by the Council. Indeed, as his Honour noted, Mr Poulos was unaware of any issue regarding the sprinkler system until the appellant commenced the litigation in 1995. 34 His Honour noted that Mr Tan, representing the appellant's interests, relied on the s 317AE certificate obtained by Mr Poulos and did not seek to obtain one. His Honour said that he accepted that the appellant relied on it, although Mr Tan inspected the building prior to exchange of contracts and would have been aware of the absence of sprinklers. The appellant had engaged Mr Fung, an architect, to inspect and report and he had alerted the appellant to the potential problem of the absence of a sprinkler system. His view was that sprinklers were required by Ordinance 70 unless the Council had dispensed with the requirement, which dispensation he believed to be common place. As a result, Mr Tan told his solicitor, Mr Edmunds, 'to tighten up the contract'. 35 Clause 25 of the contract was amended and its final form is as follows: "25. The property is sold in its present condition and subject to all patent and latent defects and the purchaser acknowledges that he buys the property relying on his own knowledge, inspection and inquiries and does not rely on any warranties or representations made by or on behalf of the vendor, But the vendors warrant that they are not aware of any patent and latent defects which require remedial works to be performed." 36 The words which I have underlined above were added at the request of Mr Edmunds on behalf of the appellant.

37 His Honour concluded that 'Mr Poulos was not aware of any such defects'. No case had been made out against the first respondents so far as breach of contract and breach of cl 25 was concerned. Mr Poulos had acted honestly at all times. Accordingly, it followed that the claim under the Fair Trading Act had also not been established. 38 As to the appellant's case against the Council, his Honour noted that there was nothing to stop the Council serving a fire safety notice under s 317D of the Act requiring the installation of fire sprinklers. His Honour noted the appellant's contention that the building certificate represented to the appellant that the building complied with the Local Government Act, the Ordinances and building application. Further, that it would not have purchased the property were it not for the certificate. 39 His Honour said: … it seems to me that being forewarned by Mr Fung as to the distinct possibility, if not probability, that Ordinance 70 had not been complied with in relation to the provision of fire sprinklers, the plaintiff was content to enter into the contract in reliance upon the "warranty" given by the vendors. Be that as it may, I do not think that the Council owed a duty of care to the plaintiff in issuing a Certificate under s 317AE as it would have, for example had, under the then repealed s 317A. In saying this, I do not accept the submission that if there was a duty of care owed, that there was not sufficient proximity between the plaintiff and the Council. I think there would have been but I do not think that a duty of care arose so far as the issue of this Certificate is concerned. In my view, the Certificate in fact, made no representation that the Act and Ordinance had been complied with.

40 The trial judge concluded that the only purpose of the certificate was to assure Mr and Mrs Poulos, the applicants, that the Council would not take action against them in respect of any defects apparent at the time of inspection. There was no duty on the Council other than to speak to the terms of s 317AF of the Act. Section 317AE was different from its predecessor, s 317A, which was a certificate of compliance. 41 The Council owed no duty of care to the appellant. Accordingly, it was unnecessary to address the issue of damages. His Honour found a verdict for both respondents.

The Grounds of Appeal 42 The grounds of appeal, particularly concerning the case against the first respondents, are confused to say the least. Two of them, paras 1.5 and 1.6, border on unintelligibility. Save two, they are all couched in the negative. None directly challenge any finding of fact. Unsurprisingly, Counsel for the appellant did not refer to them in his address and his written submissions seek to put a different case, and one which is outside the grounds of appeal. The gravaman of the appellant's case is that his Honour should not have accepted the evidence of Mr Poulos that he was not aware of the absence of sprinklers being a defect or the evidence that the Council had waived compliance with the condition in the building approval. 43 To outflank the proposition that his Honour's findings on credibility must stand, it must be shown that the judge had failed to use or had palpably misused his advantage, or acted on evidence inconsistent with facts incontrovertibly established, or which was glaringly improbable. In SRA v Earthline Constructions Pty Ltd (1999) 73 ALJR 306 the High Court reiterated the need for intermediate appellate courts to carefully scrutinise credit findings, particularly where documentary evidence may support oral testimony and where significant evidence is unchallenged. Earthline did not however establish any new principle but rather pointed to the danger of attaching too much significance to the restraints expressed in Abalos v Australian Postal Commission (1990) 171 CLR 167 and Devries v Australian National Railways Commission (1993) 177 CLR 472. For a discussion of Earthline by the court see Beach Petroleum NL v Kennedy (1999) 48 NSWLR 1 at 65 - 66. 44 Examining each of the matters relied on by the appellant, and the evidence as a whole, I am unable to see that his Honour failed to use or misused his advantage as a trial judge. Nor was the evidence of Mr Poulos glaringly improbable or contrary to the compelling inferences of the case. The findings of his Honour were not inconsistent with facts incontrovertibly established or with significant uncontested testimony. 45 The submission made on behalf of the appellant emphasised the reference by Mr Poulos, in his affidavit, to the Council officer who 'waived' compliance with the condition as being a Mr Pauley, and his retreat in oral evidence to an officer whose name he did not know. However, it is plain that his Honour was well aware of this and must have taken it into account in assessing credibility. The appellant also relies on the absence of any reference to the meeting in the Council files. Nonetheless, such Council records as were before the court provide a measure of support for Mr Poulos's evidence, particularly the notation that the works had been carried out in accordance with the building approval. 46 Reliance is placed on Mr Poulos making a written application to modify the 1990 building application to have the sprinkler condition removed, but not making such an application in 1992. This point is of little weight taking into account the vast difference in building work and costs involved between the two applications. Moreover, Counsel for the appellant could point to no formal requirement under the Act in force at the time. 47 Reliance is also placed on the answer to requisition 17(e) as being 'clearly false'. This however begs the question of Mr Poulos's belief as to whether the condition had been 'waived'. 48 There was, in fact, a considerable body of evidence, besides demeanour, which supported his Honour's credit finding. For example, the Council's formal dispensation with the condition in 1990, the evidence of Mr Fleeton and Mr Fung's evidence that Council dispensation was common place. Also, Council's inspections and inspection reports on the 1992 work, seen as satisfactory and in accordance with the approval, and its issue of the building certificate to Mr Poulos on 5 May 1992, which specifically referred to the building application support the trial judge's finding. 49 None of the matters relied on by the appellant, when examined, overcome the Abalos and Devries hurdles. 50 His Honour was correct to find that there was no breach of cl 25 of the contract by the first respondents. The answers to requisitions did not constitute misleading or deceptive conduct in breach of the Fair Trading Act. Nor was there any breach by the first respondents of any duty of care owed to the appellant independently of the contract. 51 The Notice of Appeal contains a ground concerning the admissibility of evidence of Mr Poulos as to his belief. This was not pressed on appeal and it may be noted that the only objection made by the appellant was to para 17 of the affidavit of Mr Poulos, which does not appear to be directly relevant to the issue. In any event, Counsel for the appellant extensively cross-examined Mr Poulos as to his state of knowledge and belief referable to condition 42 and its waiver. 52 As to the case against the Council, it is necessary to examine the structure of the legislation. At the relevant time the regime under Part XI of the Act was as follows. If a building was erected without the prior approval of Council, the Council could, under s 317B(A), order the owner to demolish or to carry out specified work to make the building comply with the Act. 53 Under s 317D the Council could order the owner of any building to carry out fire safety works. The owner had a right of appeal against any such order. 54 The Council also had the right to apply to the Land and Environment Court for the cessation of use of any building where the safety of persons was endangered by inadequate fire safety measures (s 317JB). 55 Division 4D of Part XI of the Act dealt with Building Certificates. Under s 317AB an owner, or purchaser under a contract, could apply for a building certificate. Section 317AD required the Council to undertake an inspection of the building after receiving an application for a certificate. 56 Section 317AE(2) provides: The council shall issue a building certificate if, following an inspection under section 317AD, it appears that at the date of the inspection - (a) there is no matter discernible by the exercise of reasonable care and skill that would entitle the council - (i) to make an order under section 317B in relation to the building or part; (ii) to take proceedings for an order or injunction requiring the demolition, alteration, addition or rebuilding of or to the building or part; or

… (b) there is such a matter but, in the circumstances, the council does not propose to do any of the things referred to in paragraph (a)(i), (ii) or (iii).

57 It may be noted that this provision is quite different from its predecessor, s 317A, which was relevantly as follows: (1) Any person may at any time apply for a certificate to the effect that in the opinion of the council a building in all respects complies with the Act, the ordinances, and the plans and specifications, if any, approved by the council or if there has been any contravention of the Act or ordinances or any departure from the approved plans and specifications that such contravention or departure is not such as need be rectified. … (3) The council shall, upon payment of the prescribed fee, as soon as practicable furnish such certificate to the applicant, if the building in its opinion complies with the Act, the ordinances, and the plans and specifications, if any, approved by the council, or if, in its opinion, any contravention of the provisions of the Act or ordinances or any departure from the approved plans and specifications is not such as need be rectified. (4) The production of the certificate shall for all purposes be deemed conclusive evidence in favour of a bona fide purchaser for value that at the date thereof the building complied with the requirements of the Act and ordinances.

58 Section 317AF(1)(c) stated that the certificate should reproduce or summarise s 317AG. Section 317AG(1) provides: (1) If a building certificate has been issued in relation to a building or part, a council - (a) by virtue of anything existing or occurring before the date of inspection stated in the certificate; or (b) within 7 years after that date by virtue of the deterioration of the building or part solely by fair wear and tear,

shall not (c) make an order under section 317B in relation to the building or part; (d) take proceedings for an order or injunction requiring the demolition, alteration, addition or rebuilding of or to the building or part; or …

59 Importantly s 317AG(3)(b) stated that the issue of a building certificate did not prevent the making of an order under s 317D. 60 It is arguable that a failure to comply with a condition of a building approval of the nature here involved constituted an omission to alter the building otherwise than in accordance with the Act (s 317B(1A)). However, it is unnecessary to determine this matter because s 317AE(2) does not affect the power of a Council with respect to the provision of fire safety. See, in particular, s 317AG(3)(b) referred to above. As his Honour noted, s 317D is the head of power under which a council may order the provision of fire safety in a building, including the provision of a sprinkler system. It is common ground that the power under s 317D may be acted on by the Council at any time and irrespective of the contents of any building certificate. 61 Indeed, the building certificate in question makes the situation plain in note 2 reproduced earlier. As mentioned, s 317AF required a certificate to reproduce or summarise s 317AG. This is what it did and quite specifically so. 62 In my opinion, the construction of s 317AE argued for by the appellant is directly contrary to s 317AF(1)(c) and s 317AG(3)(b). The legislature, quite consciously, determined that provisions relating to fire safety were of such seriousness as not to be affected by the issue of a building certificate. This is hardly surprising. The construction contended for by the appellant could lead to dangerous situations which could not be rectified where, for example, a council had inadvertently issued a building certificate for a building which had inadequate fire safety. If the appellant's construction is correct, the Council could not order anything to be done to rectify the situation. This would be contrary to the clear purpose of the protection of property and persons in s 317D and the other fire safety provisions in the Act. 63 Moreover, it is apparent that a s 317AE building certificate is not a certificate of compliance, as was s 317A. It is more akin to a certificate of non-action in respect of its contents. I do not see how a duty of care arose in the Council to the appellant of the nature submitted. There was no evidence that the Council had any knowledge of the appellant. At most it knew that the first respondents were proposing to sell. In any event, although it is unnecessary to decide, if there was some negligence by the Council in the issue of the building certificate, that did not cause any loss to the appellant. The appellant was well and truly forewarned, as his Honour found. The appellant knew of the absence of sprinklers and was advised of the 'distinct possibility, if not probability, that Ordinance 70 had not been complied with'. Its response was to seek to have the contract 'tightened up' by obtaining the warranty by the first respondents. In my opinion, the appellant was in a position to protect itself and was not in a position of vulnerability. 64 The appeal should be dismissed with costs. OoO

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