Smith v Steve Mace Building Services P/L, Helen Stronach Architects P/L & Reid

Substantive proceedings and parties 2The plaintiff, Mr Smith, who is the owner and successor in title to residential premises at 138 Dawson Street Cooks Hill, NSW, the subject of the substantive proceedings, has not taken part in these interlocutory proceedings. 3Mr Smith has filed a further amended statement of claim on 28 June 2012, naming as the first defendant, the builder, Steve Mace Building Services Pty Ltd, for whom Mr Sibtain and Ms Thomas appear, and the architect, Helen Stronach Architects Pty Ltd, as the second defendant, for whom Ms Chan appears. 4The plaintiff has variously alleged breaches by the builder of statutory warranties arising under s 18B of the Home Building Act 1989, and alleged breaches of duty of care by the architect in connection with the specification of galvanised steel doors and windows supplied and installed by the builder in the premises that were situated in a corrosive marine environment. 5Following the failure of painted coatings on those structures, the plaintiff claims the cost of rectification works in the sum of $217,401, plus interest. 6The builder has filed a cross claim against the architect and also against the painting contractor, Mr Reid, for whom Mr Stanton appears, claiming contribution pursuant to s 5(1)(c) of the Law Reform (Miscellaneous Provisions) Act 1946.

The four notices of motion 7In the following four paragraphs I set out a convenient summary of the issues raised by the respective motions. 8The first notice of motion was filed on 22 August 2012 by the solicitors for the architect. It sought, pursuant to UCPR r 14.28(a), as against the first defendant cross claimant builder, that paragraphs [4], [5] and [6] of the builder's cross claim against the architect be struck out, with costs to follow the event. The basis of the application was the claim by the architect that the builder is not able to maintain a claim for contribution from the architect as a joint tortfeasor pursuant to s 5 of the Law Reform (Miscellaneous Provisions) Act 1946, where the claim against the builder was for breach of a statutory warranty arising under s 18B of the Home Building Act 1989, as distinct from a claim framed in negligence. 9The second notice of motion was filed on 6 September 2012 by the solicitor for the second cross defendant painter. It sought, pursuant to UCPR r 14.28(a), as against the cross claimant builder that paragraphs [7] to [11] of the builder's cross claim against the painter be struck out because, as it was claimed, it disclosed no reasonable cause of action, as well as in the alternative, seeking security for costs and answers to particulars and discovery requested by the solicitor for the second cross defendant painter of the cross claimant builder on 24 May 2012, with costs to follow the event. 10The third notice of motion was filed on 19 October 2012 by the solicitor for the first defendant cross claimant builder. It sought, pursuant to UCPR r 36.16(3)(a), as against the second cross defendant painter, that case management orders respectively made on 3 August 2012 and 11 September 2012 concerning discovery and inspection of documents be varied or set aside with respect to the first defendant's first category of documents, with costs to follow the event. The basis of the application was that those orders were made without a full examination of the circumstances, which had now changed, thus necessitating an adjustment to the procedural timetable. 11The fourth notice of motion was filed in court on 22 October 2012 on behalf of the second defendant first cross defendant architect. It sought, pursuant to UCPR r 42.21, as against the first defendant cross claimant builder, security for costs either in the sum of $80,000, or a series of lesser incremental sums to accrue at various future stages of the litigation, with costs to follow the event. The basis of the application was the claim that there was reason for believing that the builder, a company with a paid up capital of $2 and whose only director was Mr Mace, would be unable to meet any liability for an adverse costs order if its claim against the painter failed. That position was also adopted against the builder on behalf of the painter.

Evidence on the motions 12In support of their respective positions, the active participants in these motions read the following 8 affidavits: (a)Mr Alistair Little, the solicitor for the architect, sworn 3 September 2012; (b)Mr Ross Pfennigwerth, the solicitor for the painter, comprising 3 affidavits respectively sworn 15 October 2012 (2) and 16 October 2012; (c)Mr Martin Trisley, the solicitor for the builder, comprising 3 affidavits respectively sworn 19 October 2012 (2) and 22 October 2012; (d)Mr Peter Kembrey, also the solicitor for the architect, sworn 22 October 2012; 13Exhibit "A" comprised the first defendant's builder's financial return for the year ended June 30th 2011. Exhibit "B" comprised correspondence from the painter's solicitor to the builder's solicitor concerning discovery issues.

Consideration 14In the paragraphs that follow I set out my consideration of the matters raised in the respective notices of motion.

First motion - architect seeking strike out of builder's cross claim 15The builder's cross claim against the architect repeats the claim the plaintiff makes against the builder. 16To this extent, the builder claims the windows and doors specified by the architect were not suitable or appropriate for the location of the premises in a corrosive marine environment, and that the architect is a joint tortfeasor with the builder for the same loss and damage in the event that the builder is found liable to the plaintiff. As a result, the builder claims indemnity, or alternatively, contribution from the architect. 17The underlying allegations in the plaintiff's further amended statement of claim against the builder, whilst pleaded as a breach of statutory warranty, basically alleges that the materials supplied by the builder were not good, suitable and appropriate for the intended purpose, and that the builder failed to perform the work in a proper and workmanlike manner, with due diligence, and in accordance with the requirements of the building code and industry practice. 18Whilst the word negligence was not used in the plaintiff's pleading against the builder, presumably because the claim was reduced to the simple form of a pleaded breach of statutory warranty, in my view, the underlying allegations are capable of supporting a claim in tort sufficient to enliven a claim against an alleged joint tortfeasor, in this case, the architect, even though the underlying claim of the plaintiff is founded upon an alleged breach of the statutory warranty arising pursuant to s 18B of the Home Building Act 1989: Jones & Ors v Mortgage Acceptance Nominees Ltd (1996) 142 ALR 561; Owner's Strata Plan 62930 v Kell & Rigby Holdings Pty Ltd [2010] NSWSC 612 at [417] - [420], [435]. 19This is so notwithstanding the arguments put on behalf of the architect to the contrary. Shortly stated, those arguments proceeded upon the premise that because the steel windows and doors in question were supplied by an independent contractor, the architect should not be held liable for the acts and omissions of an independent contractor: Northern Sandblasting Pty Ltd v Harris [1997] HCA 39; (1997) 188 CLR 313 at 330; Leighton Contractors Pty Ltd v Fox [2009] HCA 35; (2009) 240 CLR 1 at [21]; Scott v Davis [2000] HCA 52; (2000) 204 CLR 333, at [18]. 20Whilst these principles concerning the vicarious liability of contractors are of general application, they cannot defeat the plaintiff's claim at this interlocutory level because the plaintiff has an arguable claim under s 5 of the Law Reform (Miscellaneous Provisions) Act 1946 to the effect that the architect is capable of being characterised as a joint tortfeasor because it was the architect who specified the doors and windows that corroded and which led to the plaintiff's claim: General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125. 21In my view it is clear that the claim by the plaintiff could have been framed in tort, notwithstanding the submission to the contrary, so that if the architect was found to be liable, a claim for equitable contribution would therefore arise. This is plainly apparent from paragraph 7 of the plaintiff's further amended statement of claim and from the summary of that claim as set out at paragraph [17] above. 22In these circumstances, the cross claim by the builder against the architect must be seen to involve a claim for equitable contribution to the plaintiff's damages. Whilst the argument by the architect that there is a critical distinction between the obligation of the builder to supply and install windows and doors that were fit for purpose, and the obligation of the architect to specify such doors and windows, given that there is an arguable duty of care owed by each of them towards the plaintiff, and given further that there is a common burden comprising the damage suffered by the plaintiff, I therefore consider that the claim for equitable contribution by the architect is arguable. This is particularly so where there is an obligation to fulfil a common duty of care, albeit that the sources of the obligation arise differently, for example, pursuant to statute (as in the case of the builder) or pursuant to contract (as in the case of the architect): Burke v LFOT Pty Ltd [2002] HCA 55; (2002) 209 CLR 282 at [15] - [16], [38] - [50], [142]. 23To the extent that the builder's pleading has not raised a claim in negligence against the architect, which is explained by the fact that the plaintiff has not directly raised it, the builder nevertheless seeks leave to amend the cross claim. That application is opposed by the architect. 24As this dispute is raised at an interlocutory level, I consider there is no relevant prejudice to the architect if the amendment sought were to be allowed because the interests of justice require that the parties to the litigation have the opportunity to have all relevant inter partes issues and claims determined in the one proceedings: sections 56 - 58, s 64 of Civil Procedure Act 2005. I therefore grant the builder leave to amend the cross claim for that purpose.

Second motion - painter seeking strike out of builder's cross claim 25In my view the claim by the painter that the builder's cross claim against him should be struck out, should be rejected at this interlocutory stage. 26This is so, notwithstanding that the painter has argued that the relevant paint coatings were applied according to industry standards and specifications and there is expert evidence to the effect that the failure of the paintwork was due to the corrosion of metal below the galvanised surface of the structures. 27There is no question that the painter owed the plaintiff a relevant duty of care and that according to paragraphs [7] - [11] of the builder's cross claim against the painter, a factual issue is therefore raised as to whether the paint that was applied was done so, according to the specifications of the manufacturer. 28Whether or not that is so, as appears to be the case from the expert evidence, at this interlocutory stage, this remains as a factual matter to be determined on a merits hearing. For so long as that is the case, the claim against the painter cannot be struck out without a hearing on the merits: General Steel Industries Inc v Commissioner for Railways (NSW) [1964] HCA 69; (1964) 112 CLR 125. 29As the painter's application for security for costs is similar to the claim made by the architect in that regard, I set out my consideration of that matter in connection with my reasons concerning the fourth notice of motion. 30It appears that the builder's cross claim against the painter involves a discrete issue in the nature of a side wind in the litigation, which has the potential to burden the painter with significant costs. That of itself is not a sufficient basis for dismissing the builder's cross claim against the painter at this interlocutory stage. 31However, according to the present state of the disclosed expert evidence on the issues, that discrete issue would seem to be capable of efficient resolution by either a trial of a separate issue or a reference of that issue to a referee either appointed by the parties or by the court. As there is no present application by the parties for such relief, it is not appropriate for orders to that effect to be made without hearing submissions from the interested parties, who may be able to demonstrate that a different view should prevail. 32This then leaves the outstanding matter of the particulars that the solicitor for the painter requested of the solicitor for the builder on 24 May 2012. If those particulars have not been supplied by today's date they should be supplied within 7 days. 33I consider that orders 3(a), (b) and (c) sought by the painter's motion are unnecessary as they are substantially subsumed by the adjusted case management orders that follow the third motion filed by the builder.

Third motion - builder seeking variation of case management orders 34In respect of the third motion, it is plain from the exhibited correspondence and from the arguments put, that the case management timetabling orders made on 3 August 2012 and 11 September 2012, have been overtaken by events and required adjustment: UCPR r 36.16(3)(a). 35Those orders concern matters of exchange of documents, discovery and inspection that was to take place by 12 October 2012, with the defendants to serve affidavits and experts' reports by 23 November 2012, for the plaintiff to serve similar documents by 14 December 2012, and for a further mention to take place on 14 December 2012. 36On behalf of the defendant builder, Mr Sibtain has indicated that formal discovery by his client would be complete within 2 weeks, albeit with some documents being flagged as being privileged from production. 37Accepting that position, and noting that the parties have in recent months been distracted by the unavailability of the solicitor for the builder and the solicitor for the painter, taking a practical course, it seems reasonable that the builder's compliance date for discovery should be extended to 5 November 2012, and that the dates for service of affidavits and expert evidence, and the existing mention date for 14 December 2012, can be preserved. The facility for any party to apply for a variation of such orders remains in place should the occasion arise to do so.

Fourth motion - architect and painter seeking security for costs from the builder 38A claim for security for costs under UCPR r 42.21 carries with it an evidentiary onus on the party claiming such a remedy. 39Here, the architect initially suggested that an amount of $80,000 from the builder's funds should be quarantined as security against the risk that the builder may not be able to meet an adverse costs order. That claim was later adjusted in argument by about one-third, along with the suggestion that it be staged to apply to significant procedural landmarks anticipated in the litigation. 40The foundation for any such order is that there must be reason shown for believing that the party against whom such an order is sought will be unlikely to meet its liability for costs in the event that the cross claim brought by the builder should fail. 41In support of the claim for security for costs, the architect and the painter have pointed to a series of factors that ought to militate in favour of making such an order. 42Those factors are said to include the suggested poor prospects of the builder's cross claim succeeding, the fact that the builder is a company with paid up capital of $2, with a single director who is also the sole director of a number of other building entities, that significant distribution of dividends have been made from the defendant's funds in the two preceding years, thereby depleting the builder's capital assets base. 43In my view, the submissions to that effect should not be accepted. 44My reasons for that view are first, the defendant cross claimant builder has not been shown to be either insolvent or teetering on the brink of insolvency. Instead, the clear inference from its financial returns tendered in evidence indicates otherwise, and that it continues to trade successfully. 45Secondly, there are many successful trading companies with a paid up capital of $2 with single directorships. Much more needs to be shown to base an inference that there is reason to believe that there is likely to be an inability on the part of the company to meet anticipated liability for adverse costs. This is so particularly where the company is shown to have substantial assets. 46In my view, whilst the evidence identified by the architect and the painter may give rise to some threshold concerns over whether the builder may be able to meet adverse cost orders in the event that its cross claim fails on that evidence, such threshold concerns do not equate to proof, on the balance of probabilities, that there is reason to believe that the builder would not be able to meet such possible cost liabilities. 47Thirdly, the evidence shows that the builder's financial position in the year ended June 30th 2011 was that the company had a gross income of $,,, a taxable income of $,, assets of $,,, shareholder's funds of $,, and made payments to an associated person in the amount of $,, and in the year ended June 30th 2012, it had a gross income of $,,, a taxable income of $,, assets of $,, shareholder's funds of $,, and made payments to an associated person in the amount of $,*. 48These figures do not represent a sufficient basis upon which to sustain an argument that there is a reliable pattern of decline in the company's financial position such as to provide a legitimate basis for a reasoned apprehension or belief that there is likely to be insufficient funds for the builder to meet any anticipated adverse costs orders. 49Fourthly, I do not consider that the builder's payment of dividends amounts to "assets stripping" as was submitted. All that has been shown is that substantial dividends were paid from net company profits, an entirely lawful activity without a hint of an intention to defeat possible creditors. 50Fifthly, the fact that Mr Mace has been shown to be the sole director of another building company, according to ASIC searches that are in evidence, does not necessarily constitute proof that the operations of the builder are being scaled down in favour of other associated trading entities in order to defeat claims that may arise against it. On the state of the evidence, the argument to the contrary was entirely speculative. 51I therefore do not accept that there should be an order for security for costs made against the builder.

Disposition 52It is plain from the complexity of the matters ventilated during the course of these motions, and from the complexity of the underlying proceedings, that much will still be required in the way of further interlocutory preparation as well as the engagement of experts, and that the eventual cost of a full hearing will involve great expense to each party, where those costs may well eclipse the amount of the plaintiff's claim by a significant amount. 53In these circumstances, especially having regard to the mandatory requirements of s 56 of the Civil Procedure Act 2005, which requires a consideration of ways in which to facilitate a just, quick and cheap resolution of the proceedings, I consider that an early mediation between all the parties is warranted and should be convened. 54None of the parties involved in the present notices of motion took issue with that view. In the circumstances where the plaintiff was not represented at the hearing of these motions, the order for a mediation should not be made without the consent of the plaintiff, or without giving the plaintiff an opportunity to be heard on this issue. However, I propose to make an order to ensure that the plaintiff is brought into the process as soon as practicable, as it is clearly in his interests that there be an early attempt at trying to resolve the proceedings in the spirit of s 26 and s 56 of the Civil Procedure Act 2005. 55With the consent of the active parties in the respective motions, for reasons of economy and expediency, these reasons are delivered in open court in the absence of the parties, and also published electronically. This is because the hearing of the motions concluded at 4.00pm on 22 October 2012 in the context of a congested running circuit list in Newcastle, and the limited availability of counsel for the respective parties. 56In these circumstances, it would be an unwarranted expense for the parties to have to attend from Sydney in order to receive judgment in the motions in circumstances where these reasons could only have become available after the consideration of voluminous affidavit materials and related written submissions, which were received on 23 October 2012. For this reason, in case any matters arise from my orders, I grant liberty to apply on 7 days notice if the parties consider that further orders are required.

Costs 57Due to the inter-relationship of the issues raised in the respective motions, the parties expressed the preference to be heard on costs once the outcome of the motions was known. Ordinarily, the liability of the parties to pay costs should follow the success or otherwise of the arguments they advanced during the hearing of the respective notices of motion, however, here there is scope for some variation to that position. If the parties are unable to resolve the question of costs by agreement, they may apply to have the matter listed to resolve any such remaining questions.

Orders 58In respect of the notice of motion filed on 22 August 2012 by Helen Stronach Architects Pty Ltd, I make the following orders: (1) The notice of motion seeking dismissal of the cross claim by Steve Mace Building Services Pty Ltd and security for costs by Steve Mace Building Services Pty Ltd, is dismissed; (2) I grant liberty to apply for further orders, including for costs, if required. 59In respect of the notice of motion filed on 6 September 2012 by Jim Reid trading as Jim Reid Painting, I make the following orders: (1) The notice of motion seeking dismissal of the cross claim by Steve Mace Building Services Pty Ltd, is dismissed save that the cross claimant Steve Mace Building Services Pty Ltd, is to reply to the second cross defendant's request for particulars dated 24 May 2012, on or before Friday 2 November 2012; (2) I grant liberty to apply for further orders, including for costs, if required. 60In respect of the notice of motion filed on 19 October 2012 by Steve Mace Building Services Pty Ltd, I make the following orders: (1) The order made on 3 August 2012 that the cross claimant, Steve Mace Building Services Pty Ltd, discover documents is set aside with respect to the second cross defendant's first category of documents; (2) The order made on 11 September 2012 that the cross claimant, Steve Mace Building Services Pty Ltd, produce documents for inspection is set aside with respect to the second cross defendant's first category of documents; (3) The notice to produce for inspection issued by Mr Reid to the cross claimant, Steve Mace Building Services Pty Ltd, dated 4 September 2012, is set aside with respect to the first category of documents; (4) The cross claimant, Steve Mace Building Services Pty Ltd, is to provide discovery of documents to Mr Reid by Thursday 8 November 2012; (5) The cross claimant, Steve Mace Building Services Pty Ltd, is granted leave to file and serve an amended statement of cross claim on or before Thursday 8 November 2012; (6) The listing for mention for further directions on 14 December 2012 is confirmed; (7) I grant liberty to apply for further orders, including for costs, if required. 61In respect of the notice of motion filed on 22 October 2012 by Helen Stronach Architects Pty Ltd, I make the following orders: (1) The notice of motion seeking security for costs is dismissed; (2) I grant liberty to apply for further orders, including for costs, if required. 62I direct the legal representatives of the parties to arrange a mediation to take place before 1 February 2013. If the parties are unable to agree upon the terms of the mediation they are to apply to the court for directions for the appointment of a mediator. 63I direct the Registrar to forward a copy of these reasons to the solicitor for each party that has entered an appearance in these proceedings, and to return Exhibits "A" and "B" to the solicitor for the second cross defendant, Mr Reid.

DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 26 October 2012