1. The Owner then commenced these proceedings to review the Insurer's decision and seek indemnity for the maximum of $200,000 payable under each policy, making an aggregate $400,000. In the proceeding he alleged that, pursuant to Clause F7 of the policy, the Insurer had accepted the claims.
2. A preliminary point was set down for hearing by the Tribunal on 17 February 2012 that the Insurer had accepted liability for the claim. On that day orders were made by consent that the hearing be vacated. There is a note at the foot of the order in the following terms:

"The parties agree that the respondent has accepted liability for the applicant's claims dated 25 June 2010 and delivered to the respondent on 28 June 2010 and the matter is to proceed as an assessment of the quantum of the applicant's claims only".

1. The Insurer asserts that it was only after this order was made that it learned of the existence of the First Contract and on 9 July 2012 it obtained leave to file and serve a further amended defence.

1. The matter came before me for hearing on 3 October 2012 with three days allocated. Mr S. Wilmoth of Counsel appeared on behalf of the Owner and Mr S. Grahame of Counsel appeared on behalf of the Insurer.
2. The Owner's former solicitor, Mr Fairweather, also appeared and sought leave to intervene to seek a declaration as to a lien that he claimed over any proceeds recovered by the Owner in the litigation on account of legal costs owed to his firm. There was no opposition to his application and on the first day of the hearing I made an order granting his firm leave to intervene, declaring the existence of the lien and excusing his firm from any further attendance.
3. I heard evidence from the Owner and from the director of the Insurer, Mr Iliov. Expert evidence was given concurrently by Mr Atchison on behalf of the Owner and by Mr Campbell, a building expert and Mr Buchanan, a quantity surveyor on behalf of the Insurer.
4. Submissions were made by Counsel at the conclusion of the evidence on the third day and I then reserved my decision.

1. One of the defences raised early in the litigation by the Insurer was that the Owner was a developer within the meaning of the policy. That defence has no substance. It is based upon the notion that three units were to be built upon the Land whereas it is quite clear that there were only two units to be built at the relevant time, although one unit had been built some time earlier by another builder and it had been subdivided off and sold. It was not suggested at the hearing that the Owner was a developer within the meaning of the policy. The significance of that lies in the ability of the Owner to recover damages for non-completion.
2. The other aspect was whether or not the Insurer obtained an extension from the Owner. A letter has been tendered that Mr Iliov claimed to have written, referring to the granting of an extension. Mr Iliov said that he gave the original of this letter to the Owner at a café in Oakleigh. The Owner denied that he was ever given the letter or that he ever agreed to grant the Insurer an extension. The authenticity of this letter was challenged but it is self serving in any event. The onus of proof that an extension was granted is on the Insurer. There is a conflict of evidence and I am not satisfied that it has been proven that an extension was obtained.
3. There was an issue raised as to whether the Owner told Mr Iliov about the existence of the First Contract. There is reference in an affidavit sworn by the Owner on 19 December 2011 to a discussion he said that he had with Mr Iliov about whether there were separate contracts for the two units. In his evidence at the hearing the Owner claimed that he asked Mr Iliov in this conversation whether he should refer to the First Contract or the Second Contract in the claim form and that Mr Iliov told him to refer only to the current contract. Mr Iliov denied that. It seems to me that if such a thing had been said it would have been included in the Owner's affidavit. On balance I am not satisfied that Mr Iliov was told by the Owner of the existence of the First Contract.

Did the policy apply to the work that was done?

1. The primary defence taken at the hearing was that the work now claimed to be incomplete and defective was done not under the Second Contract but under the First Contract and that accordingly, the losses claimed are not insured under the insurance policy.
2. There was a great deal of cross examination of the Owner on the reason why there were two contracts instead of one.
3. The Owner said that when he asked the director of the Builder, Mr Lam, to quote on building the two units, he provided Mr Lam with a set of the original construction drawings, which were for a three unit subdivision, and so included the first unit which had already been built, subdivided and sold. He said that Mr Lam mistakenly prepared the First Contract in the sum of $705,000 on the misunderstanding that he was to construct all three units shown in the plan. He said that after the First Contract was signed, Mr Lam told him that he thought that it would be difficult to fit all three units onto the Land. He said that he then realised the mistake and told Mr Lam and the lower price was then negotiated. The Second Contract was then entered into for $438,000 to construct the same two units.
4. I agree with Mr Grahame that this evidence given by the Owner is improbable, in that:

1. The construction drawings are dimensioned and in order to prepare a quote a Builder would have needed to assess quantities of materials and the extent of the labour required and also the subcontractors that would need to be engaged in order to construct what was on the plans. In the course of this process it would have been quite obvious to the Builder that the three units shown in the plans occupied a greater area than the available land; 2. There were several discussions between the Owner and Mr Lam before the First Contract for $705,000 was prepared and signed including an on site meeting lasting, according to the Owner's evidence, twenty minutes. It is inconceivable that at some time during these discussions the fact that there were only two units to be constructed was not raised or discussed;

1. During the site visit it would have been obvious to the Builder that one of the units shown in the plans had already been built and that he was only required to construct the two remaining units;

1. The specifications included with the First Contract, which are initialled by the Builder, state that there are only two units to be built; 2. The price of $438,000 in the Second Contract is less than two-thirds of the initial price of $705,000 in the First Contract, yet the Owner stated that it was one of the two units to be constructed that was to have high level finishes including, he said, $160,000 worth of stone.
2. I do not believe the Owner's evidence in this regard and in the absence of some credible explanation as to why the Second Contract was prepared I am unable to make any finding as to the reason. One occasionally encounters situations where parties have prepared a sham contract at an excessive price in order to deceive a bank as to the real contract price so as to obtain a higher loan from the bank, but that is not said to be the situation here.
3. It is also unlikely that the First Contract was prepared without there being an initial quotation but the Owner insists there was no such quotation.
4. After the Second Contract was signed, the two policies of insurance were obtained, one for each unit. At that time the agreement between the Owner and the Builder was as set out in the Second Contract. However the only contract provided to the Owner's bank was the First Contract. The progress payments made by the bank were all the amounts that would have been payable under the First Contract which were considerably higher than those that were payable under the Second Contract.
5. The Owner said that, when the alleged mistake in regard to the first contract was discovered and the second contract was entered into, he asked Mr Lam whether they should go back to the bank. He said that Mr Lam said "No", that he (Mr Lam) did this all the time, that projects always go over budget and that they could use the funds to pay for more expensive items in the Owner's own unit.
6. The Owner maintained that he had not disadvantaged the bank in that the bank had approved a facility of $822,000 that he could use for any purpose and that he used the excess funds on high quality finishes to his own unit.
7. It is true that the ANZ Bank loan documents created a general purpose facility but the purpose is stated in the documents to be the construction of two units in Bulleen. It seems clear that the bank was of the opinion that the construction was to cost $705,000 and that belief was created by the Owner providing the First Contract to the bank and thereafter agreeing with the Builder to draw-downs of amounts appropriate to a contract of $705,000. Mr Grahame criticises the Owner for having mislead the bank and says that, even if the Builder had given him the advice that he claims, there is no reason why he should have accepted it. I agree with Mr Grahame in that regard. If the Owner had wanted extra money for luxury finishes then that should have been dealt with in the Second Contract and he should have informed the bank what funds he required and for what purpose.

1. Mr Grahame submitted that it is clear that the relevant contract was the First Contract for $705,000 and that it was pursuant to that contract that the bank made the payments. He referred me to the terms of the insurance policy which provide indemnity with respect to domestic building work "required pursuant to the Contract" The term "contract" is defined as follows:

"Contract" means the domestic building contract entered into between the Builder and the Owner for the carrying out of the Works, and is referred to in them Schedule herein".

1. The schedule to the policy refers to a fixed price contract dated 31 May 2007 and a declared contract price of $250,000. Neither that date nor the amount refers to either contract but the amount is closer to the Second Contract than to the First Contract.
2. I accept Mr Grahame's submission that the Owner must prove on the balance of probabilities that the work, with respect to which indemnity is now claimed, was done pursuant to a contract that he entered into with the Builder. Further, since the only claim that has been made is with respect to work said to have been done under the Second Contract, it is necessary for the purpose of this proceeding for the Owner to establish that the work was done pursuant to the Second Contract and not the First Contract.
3. Mr Wilmoth submitted that it is not possible to assert that the work was done pursuant to the First Contract because that was replaced by the Second Contract which is later in time.
4. I think Mr Wilmoth is right. For whatever reason, the Owner and the Builder entered into two contracts, the first on 1 May 2007 and the second on 22 May 2007. Despite some very slight differences in specifications both contracts are, essentially, to carry out the same scope of works on the same piece of land. They cannot both stand.
5. By entering into the Second Contract the First Contract has been superseded. Where a new agreement is inconsistent with the original contract to an extent which goes to the very root of it the parties will be presumed to have intended to rescind the old contract and to have substituted a new one (see Halsbury; Laws of England 4th ed. Vol.9 para 570).
6. Since the Second Contract replaced the First Contract, the only extant agreement between the Owner and the Builder at the time the work was done that is in evidence is the Second Contract. I cannot speculate that there might have been some other agreement between the Builder and the Owner that is not in evidence.
7. It is unlikely that the work would have been done pursuant to no agreement at all so, although the progress claims made to the bank were for amounts that would have been payable pursuant to the First Contract, they must be considered to have been paid on account of monies owed to the Builder by the Owner pursuant to the Second Contract. Exactly how that was to work between the Owner and the Builder does not appear from the evidence.
8. For these reasons I am satisfied that the alleged and incomplete work was done pursuant to the Second Contract and is therefore covered by the policy.

1. By letter dated 13 September 2012 the Insurer purported to cancel the cover provided under the policy. Clause F13 of the policy provided:

"The Insurer may, on the giving of 30 days notice in writing cancel the cover provided under this policy to the building Owner if the building Owner:

(a) makes a false, fraudulent or misleading claim under this policy;

(b) breaches its duty of utmost good faith to the Insurer;

(c) agrees to the cancellation following termination of the contract that required the issue of this policy."

The cancellation shall take effect thirty [30] days after the Insurer gives written notice".

1. On the first day of the hearing Mr Grahame sought an adjournment of the hearing to allow the thirty day period after 13 September to elapse. I refused the adjournment application for reasons given orally at the time.
2. The Owner's claim was said in the notice of cancellation to be in breach of his duty of the utmost good faith in that he had failed to disclose to the Insurer the existence of the First Contract or that the true cost of the building works was $705,000 or the extent of the borrowings from the bank and the extent of the payments that he had made to the Builder. It is unnecessary to consider whether the Insurer would have been entitled to cancel the policy under this provision, not only because the period of thirty days had not expired by the time of the hearing but also because on any view, the loss claimed by the Owner was suffered before the policy was terminated and while the Insurer was on risk.
3. I think Mr Wilmoth is correct in saying that I cannot find that the units could not have been built for $438,000, however unlikely that might appear from the limited evidence that I have, because the expert evidence was not directed to that issue.

1. Mr Wilmoth acknowledged that there is a cap on claims for non-completion of 20% of the contract price, which is $43,800 for each unit. The cap for the rectification cost of each unit is the balance of the $200,000 limit namely, $156,200.
2. A Scott Schedule was prepared of the items of defective and incomplete work. Agreement was reached between Counsel that the figures assessed by the opposing experts would be averaged in regard to numerous of these items. They are as follows:

1. Of the remaining items, liability for some was disputed and the quantum of damages was disputed for the rest. In what follows I do not distinguish between those two categories. After hearing the evidence of the experts I make the following findings:

I accept Mr Atchison's evidence as to the defect. I think a greater scope of works is required than that costed by Mr Campbell but I also accept Mr Campbell's evidence that the whole area does not need to be re-rendered. Mr Buchanan's figure needs to be reduced, according to his evidence, by $4,400 to take account that the whole area does not need to be re-rendered. That leaves a rectification figure of $10,175.59 which will be allowed.

The deck is defective and needs to be rebuilt. I accept Mr Campbell's evidence that the plans do not specifically require this to be constructed of concrete and so I will allow his figure of $1,677.06.

1. Item 5 - The infill above the door is out of level

The frame has been installed out of level and needs to be re-installed. Mr Atchison said that the head heights of the doors do not match the windows by 10-15mm but I accept Mr Campbell's evidence that it is appropriate for the Builder to use standard doors and that this is a consequence of putting two different types of joinery on the same elevation. I will allow Mr Campbell's figure of $629.97.

1. Item 6 - The garage floor is 400mm lower than the approved drawings

Both the floor and the lintel need to be raised. The difference between the experts in amount here seems to relate to different methods of calculation. I think one expert is as likely to be as right as the other so I will average these two figures at $8,220.20.

1. Item 7 - The retaining wall was not waterproofed

There is a substantial difference in the figures here and a greater allowance for excavation on the part of Mr Buchanan. I think I should allow more towards his figure than Mr Campbell's. I will assess this item at $20,000.

1. Item 9 - The garage retaining wall steps in and must be reconstructed.

This is another example of different figures arising from different methods of assessment. I think I should average the two figures at $16,494.33

1. Item 10 - The garage roof has not been completed and the timber has deteriorated

The roof has also been constructed defectively with a guttering set back from the wall line. Liability was disputed. On this matter, although I accept that this method of construction might be acceptable on a title boundary, I prefer the evidence of Mr Atchison that it is not in accordance with the drawings and is not acceptable in this instance. I will therefore allow Mr Buchanan's figure of $4,447.74.

1. Item 11 - The stormwater retarding system is incomplete and too low

I prefer the evidence of Mr Atchison and Mr Buchanan in regard to this item over that of Mr Campbell because their assessment and figure are more in line with what the contract documents required. I will allow their figure of $3,440.80.

Mr Campbell's figure does not include rendering which he has included elsewhere. There is nonetheless a considerable difference between the figures. I think again I will take a middle course of $2,187.18.

1. Item 13 - Door heights to master bedroom between entry and sliding doors

Both experts agreed that the heights should be uniform. I prefer Mr Campbell's methodology of dealing with the single door rather than the sliding door. On this basis Mr Buchanan's figure was revised down to $1,158.59 and since the difference between that and Mr Campbell's figure using the same methodology was less than $1,000 and one is as likely to be right as the other I will average the two figures to $900.60.

There was a difference here between the experts in regard to the area involved and not a great deal of difference in the calculations. I will adopt a midpoint of $8,661.45.

1. Item 16 - Doorway to bedroom 2 is 720mm wide

The doorway's dimension is not dimensioned on the plan and a door of that width, although narrow, is not in breach of the Code. Mr Atchison said that such a narrow door is normally only used on a toilet or a cupboard but here it is used on a bedroom. Mr Campbell said that it was a design problem. I am not persuaded that this is a defect.

1. Item 17 - En suite layout is not in accordance with the agreed variation

The dealings between the Owner and the Builder have clearly not been well documented. It is difficult to believe that the Owner was not aware of what has been done and accepted it. I am not persuaded that this is a defect.

Mr Buchanan's calculation shows a greater amounts of materials. No renderer is allowed for in Mr Campbell's figure. I will allow Mr Buchanan's figure of $12,586.00.

1. Item 22 - Incomplete render to internals of garage

There is a difference in cost of garage doors here. I will average the two figures at $6,560.37.

1. Item 24 - Incomplete fixtures to skirting boards and architraves.

In regard to this I preferred Mr Campbell's figure of $850.08.

The stairs that have been installed are medium density fibreboard ("MDF") whereas the contract calls for Tasmanian oak. Mr Atchison and Mr Buchanan have allowed to replace the MDF stairs with hardwood stairs at a cost of $11,701.25. Mr Campbell has allowed for the completion of the staircase as is at $3,353.96. I do not believe that MDF stairs would have been installed as a temporary measure as was suggested. Indeed, in one of the units the Owner has tiled around them. I do not believe that these would have been installed without the Owner's agreement so I will allow Mr Campbell's figure of $3,353.96.

The difference here seems to be one of calculation. I will average the two figures at $5,354.44.

No installation was allowed for in Mr Campbell's figure. I will allow Mr Buchanan's figure of $8,386.95.

I will average the figures between the experts on this item at $10,476.16 since, as with so many of these items, one expert is as likely to be correct as the other.

The stormwater system involved a complex retention system involving a number of pits connected with 600mm diameter pipes. Mr Campbell's figure did not allow for an extra pipe or the stormwater system as designed. I will allow Mr Buchanan's figure of $18,671.40.

1. Item 33 - Front verandah and paving not installed.

Mr Campbell's figure did not allow for the crossover. I will allow $10,000 for this item.

I accept Mr Campbell's evidence that this was not required by the contract documents.

1. Item 4 - Render cracking and blueboard used

Mr Buchanan's figure allowed for re-rendering in excess of the affected areas. In accordance with his evidence about this I will reduce his figure by $4,400 and allow $12,115.84.

1. Item 5 - Rear deck constructed of timber and cement sheet

For the same reason as for Unit 1, I will allow Mr Campbell's figure of $1,917.74.

I accept this is a defect. The garage doors installed were not those specified. Mr Campbell has allowed only to make the door operational. I will allow Mr Buchanan and Mr Atchison's figure of $4,566.65 to replace the door.

The fall in the shower cubicles is inadequate. There is also no spa installed. Mr Campbell allowed nothing on this item saying that the Code recognised that sometimes the required fall might not be achievable. I will allow Mr Buchanan's figure of $12,233.81 on this item.

Mr Atchison said that the membrane applied was far too thin and will need to be replaced. In the meantime, the walls have been largely tiled with very expensive tiles. I do not find that by proceeding with the tiling of the walls the Owner has accepted the membrane. He was entitled to assume that the Builder had installed it correctly. The rectification cost is assessed at $22,691.57. As against that Mr Campbell has made no allowance, saying that there is no evidence as to what the material is and no evidence that it is a defect. The photographs seem to support Mr Atchison's views so I will allow Mr Buchanan's figure of $22,691.57.

Mr Campbell's figure on this item was more than Mr Buchanan's. However one is as likely to be right as the other and consistently with the approach I have adopted I will average the two figures which gives a figure of $1,698.89.

The architrave height varies at the meals area door and the window junction. Mr Campbell finds that this is not a defect and Mr Atchison says that the architraves should match and I accept that evidence. However it appears that the cost can be reduced to $3,300 by replacing the single door and so I will allow that sum.

1. Item 17 - Stairs made from the wrong timber

As with the other staircase, the stairs were required to be Tasmanian oak and were made of medium density fibreboard instead. For reasons already given I do not believe that this was not with the knowledge and consent of the Owner and so I accept Mr Campbell's completion figure of $1,237.30.

1. The figures assessed, before considering preliminaries, are therefore as follows:

1. There was considerable debate between the experts about the amount to be allowed for preliminaries. Clearly the scope of works is such that a builder will need to be engaged to carry out the work and set up on site and the cost of that will be factored into his price. As a result of their discussion during evidence it appeared there was consensus between the experts that 10% of the contract price was an appropriate allowance for preliminaries and so I will allow them on that basis. That makes the final assessment

Unit 1 - Defects (inc. GST & preliminaries) - $ 87,750.86

Incomplete work (inc. GST & preliminaries) - $190,655.10

Unit 2 - Defects (inc. GST & preliminaries) - $ 85,631.12

Incomplete work (inc. GST & preliminaries) - $ 88,809.06

1. As stated above, the cap on claims for non-completion items is $43,800 for each unit. The maximum payable by the Insurer was therefore $131,550.86 for Unit 1 and $129,431.12 for Unit 2.

1. There will be an order that the Insurer pay to the Owner the total of those sums, which is $260,982.00. Costs will be reserved