Strata Plan 94417 trading as The Owners - Strata Plan 94417 v Alta Vale... [2023] NSWSC 1089 | Case summary | Zoe

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Strata Plan 94417 trading as The Owners - Strata Plan 94417 v Alta Vale... [2023] NSWSC 1089 | Case summary | Zoe

EX TEMPORE JUDGMENT (REVISED)

The plaintiff is the owners corporation in respect of a large residential development in Northbridge.
The defendant, Alta Vale Residential Pty Ltd, was the builder. The owners corporation commenced these proceedings in 2020.
The current defendants are the builder and FPG Northbridge Pty Ltd, which was the developer.
As against the builder, the owners corporation alleges a wide variety of building defects and claims that the costs to rectify the defects will be in the order of $5.1 million.
The owners corporation has attached to its List Statement a schedule which sets out the various items of defective building work alleged. Unsurprisingly, the owners corporation does not, in that schedule or elsewhere in its List Statement, seek to attribute responsibility for any part of its claim against anyone, other than the builder and I assume the developer.
The builder has brought a cross-claim naming nine cross-defendants. Two of those cross-defendants are the builder's professional indemnity insurers. Under the building contract, the builder was obliged to maintain $20 million of professional indemnity insurance. The remaining seven cross-defendants were sub-contractors to the builder during the construction of the Northbridge development.
In its Cross-Claim List Statement the builder identifies, in schedules referable to each of the subcontractor/cross-defendants, what components of the owners corporation claim it seeks to pass on to the cross-defendants/subcontractors.
Six of the cross-defendants/subcontractors have brought applications for security.
The claims are summarised in a diagram that the seventh cross-defendant has prepared: [1]
As can be observed, that schedule also sets out the amount of security sought by each of the applicant cross-defendants.
The sixth cross-defendant has prepared a further schedule, which sets out, in addition to the amount of security claimed, that part of the owners corporation's claim against the builder that the builder seeks to pass on to the individual cross-defendants:
The builder does not dispute that the threshold test for the making of an order for security has been met, namely, that there is reason to believe that it will be unable to meet an adverse costs order. That is, of course, always a strong factor in favour of ordering security, although not the end of the enquiry. Looking at the case broadly, there are nine cross-defendants, and if the matter proceeds to trial, it is likely to take at least a week to conclude.
As to quantum, each applicant to the security has adduced evidence in the usual way from their solicitors as to the likely amount of the actual costs to be incurred by the relevant cross-defendant and the amount of security sought. The builder adduced no evidence in response to that evidence and said nothing in its very brief submissions in response to the cross-defendants' submissions in support of their application for security.
That caused me to have my associate send to the parties, but in particular to the builder, an email in which I stated: "His Honour understands from [the defendant's] submissions that the defendant not only does not contest that the discretion to order security is enlivened, but does not contest the quantum of security sought by the various applicants. If that is not correct, and the defendant does propose to challenge quantum, the defendant should serve and send by email to [my Associate] as soon as possible, and in any event, by 8am on 4 September 2023, short submissions as to why, assuming security were to be ordered, the proposed figures are not appropriate and what security should be ordered."
The builder did not comply with that request, and in the submissions received this morning said that, "[t]he defendant puts in issue the quantum claimed by the applicants, which will be supplemented by way of oral submissions".
That caused me to send, through my associate, a further communication to the builder this morning: "His Honour does not regard the submissions received this morning as a satisfactory response to his Honour's directions of last Thursday. His Honour will require submissions from the defendant as to why it should be permitted to contest the quantum claimed by the five remaining cross-defendants in circumstances where the defendant has failed to comply with his Honour's direction that it provide submissions as to which posited security figures are not appropriate and what quantum of security would be appropriate, assuming it were to be ordered."
In those circumstances, and for those reasons, I refused to entertain submissions from the builder on quantum, apart from hearing Mr Weinberger for the builder point to the differing estimates that the various cross-defendants had made as to the likely ultimate hearing time were this matter to proceed to trial.
As I said, the builder does not dispute that the threshold test for the making of an order for security has been met, but seeks to resist the applicant's applications for security on a number of bases.
The first basis is that the builder contends that its cross-claim against subcontractors is "defensive," in the sense that it seeks to pass on the burden of the claim made against the builder by the owners corporation to the cross-defendants. In that sense, Mr Weinberger submitted, the cross-claim is being brought not only for the benefit of the builder but also for the benefit of the owners corporation.
Mr Weinberger referred to my decision in The Owners - Strata Plan No 94267 v DEC Engineering & Construction Pty Ltd & Anor. [2]
In that case I said: [3] "Security for costs is only available against a 'plaintiff'. [4] Where in substance a party is a 'plaintiff', security may be ordered against it. On the other hand, where in substance a party making a claim is acting defensively and should not be seen as the 'plaintiff', security may be declined. Regard must be had 'to the overall nature of the proceedings' [5] and who in substance is the 'attacker' and who is the 'defender'. [6] "
But the circumstances that I was considering in that case are very different to those here. In that case there was an application for security by a developer against the builder.
The cross-claim brought by the builder in this case is not defensive of any possible claim against the builder by the cross-defendants. In so far as they are concerned, the builder is in substance "the plaintiff".
It appears to me that the circumstances here are more like those considered by Ball J in The Owners - Strata Plan No 69746 v IPM Pty Ltd; The Owners - Strata Plan No 71241 v IPM Pty Ltd [7] where his Honour said: [8] "In oral submissions, [counsel] for IPM, submitted that IPM's cross claim was essentially defensive in nature and that security should not be ordered for that reason. I do not accept that submission. The court will not normally order security in respect of a cross claim where the cross claim is essentially defensive in nature in the sense that it impeaches the plaintiff's claim. [9] However, that principle is only applicable where the plaintiff is the cross defendant. It can have no application where the defendant has brought a separate claim against a third party seeking to recover some or all of the amount for which it may be liable."
For those reasons, I am not satisfied that the builder's cross-claim in this case can be seen as being defensive.
The second basis upon which the builder seeks to resist the applications for security is the asserted strength of the cross-claims. There was no controversy that this is a relevant factor. Indeed Uniform Civil Procedure Rules 2005 (NSW) r 42.21(1A)(a) provides that "the prospects of success or merits of the proceedings" is a matter capable of relevance in applications such as this.
The plaintiffs drew my attention to the observations of the Court of Appeal on this subject in Live Board Holdings Ltd v Cody Live Pty Ltd. [10]
In that case, the Court of Appeal emphasised that when looking at the merits of proceedings for this purpose it may be necessary to go further than concluding that the proceedings are not frivolous, and that there are real issues to be tried.
The Court of Appeal also said: "… It is true that in many cases it will not be possible to form a meaningful view as to the strength or weakness of a plaintiff's claim for the purposes of an application for security for costs. Such applications are ordinarily brought before pleadings are closed and evidence filed. But that does not mean that, for example, there may never be a case in which a court can be satisfied that an impecunious corporate plaintiff has prima facie a very strong case, such as to inform the exercise of discretion on an application for security for costs. The starting point in the exercise of discretion is the legislation conferring the power, not some gloss upon it." [11] And: "It is revealing in that respect that White J's judgment in Litmus Australia Pty Ltd (In Liq) v Canty [12] was quoted, stating that 'it is a rare case in which a court is able to form any view as to the strengths of the respective parties' cases on an application for security for costs, so as to influence its discretion in ordering security for costs.'" [13]
The builder sought to demonstrate that it had "good prospects of success" on the cross-claim here in two ways.
First, the builder read the affidavit of Mr Thomas Cull, who is the sole secretary of the builder. Mr Cull referred to the schedule attached to the owners corporation's List Statement, which identifies the defects to which the owners corporation contends. Mr Cull said that in relation to each cross-defendant he had "identified" defects alleged by the owners corporations that "relate to the works" carried out by that cross-defendant. This appears to be the manner in which the schedules attached to the builder's Cross-Claim List Statement, to which I have referred, were compiled.
However that may be, Mr Cull disclosed no processes of reasoning leading to the assertions that he made, and following objection, I allowed those statements merely as statements of his contention. It appears to me that they do not take the matter very far.
Second, Mr Weinberger for the builder tendered two volumes of expert reports served by the owners corporation against the builder, together with a further schedule that sought to correlate the shortcomings identified by the owners corporation's experts, with matters in respect of which responsibility could arguably be attributed to one or more of the cross-defendants.
That appears to me to be a very inexact way of proving the prospects of success of the builder against those cross-defendants. There are a number of reasons for that.
First, there are not yet in existence any expert reports from the builder, let alone from the cross-defendants, answering the owners corporation's experts. Further, as I have said, and for understandable reasons, the owners corporation's experts do not seek to attribute responsibility for the defects otherwise than to the builder.
Mr Weinberger, with his customary candour, submitted that it was likely that the owners corporation would ultimately establish some of the defects it alleges, and would likely succeed against the builder to some extent.
He submitted however, at a quite high level of generality, that it must follow that "some cross-defendants must have some culpability, and that there must be some parties other than the builder who would be quite liable for the ultimate outcome".
However, in my opinion it is too soon to form any view about the extent to which the opinions expressed in the owners corporation's experts reports can sensibly be translated through the prism of the builder's claim to any one of the cross-defendants.
Further, as the cross-defendants have pointed out, there appear, at this early stage, to be difficulties lying in the way of the builder's claims against them.
The first cross-defendant is DKO Architecture Pty Ltd. According to the schedule upon which both Mr Cull and Mr Weinberger relied, a major claim that the builder seeks to have attributed to the architect relates to "water ingress into apartments, defective deconstruction". In his submissions Mr Weinberger pointed out that the main defect, or a significant defect that is alleged by the owners corporation relates to moisture within the cavity wall on the outside decks. As Mr Weinberger pointed out, the owners corporation's expert identifies that issue and "expresses an opinion that it is caused by defective flashing and lack of weep holes".
As Ms Cameron for the architect pointed out, Mr Weinberger's submissions continued to say that notwithstanding the opinion expressed by the owners corporation's expert, the builder "will contend that the flashing is not the cause of moisture within the cavity, but rather water tracking through the tiling screed below the flashing because the base of the cavity wall is below the tiling level. The First Cross Defendant, who was the head designer (and its consultants) should have designed and allowed for a drainage system within the cavity walls".
It thus appears that the builder's case will be that the water ingress problem is a design problem, for which the architect is responsible. Accordingly, nothing that the owners corporation's expert had to say about that assists me to form any view about the likely strength of the owners corporation's claim.
The claim that the owners corporation makes against the builder and that the builder is seeking to pass on to the architect relates to the bricks and pavers used in the construction. Ms Cameron drew my attention to evidence that suggests that the architect was not engaged by the builder at the time the bricks and pavers were installed.
This is obviously not in terms of being an exhaustive analysis of what prospects the builder has against the architect, but it shows that the case may not be straightforward.
The second cross-defendant is PGH Bricks & Pavers Pty Ltd, and was the supplier of the bricks and pavers. The builder's "pleaded" claim against PGH is that it was a term of the relevant contract that bricks and pavers would be fit for purpose. That claim is not currently properly pleaded, as s 19 of the Sale of Goods Act 1923 (NSW) requires that a plaintiff establish that it made known the particular purpose for which the relevant goods were supplied so as to enliven the implied warranty referred to in s 19. That is not pleaded. Further, it appears from the documentary evidence before me at the moment that PGH will be able to prove that it was a term of the relevant contract that no such warranty was given.
Thus, as Ms Thrift for PGH put it, "[i]t is difficult to see how the builder could succeed against PGH's claim as currently pleaded".
The fourth cross-defendant is Wood & Grieve Engineers Pty Ltd, who are the hydraulic and civil engineers. The engineers submitted that it was too soon to form any view as to the builder's prospects of success against them.
Further, the schedules that the builder has produced show that a large component of the builder's claim against the engineers relates to the absence of flashing, which Mr Weinberger's submissions suggest will now be said to be a design defect and not one that would ordinarily be attributed to an engineer.
The sixth cross-defendant, Scientific Fire Services Pty Ltd, was a fire compliance consultant. As Mr Girgis for the sixth defendant pointed out, in the form of contract that Mr Cull between the builder and the sixth defendant the sixth defendant was contracted to provide a particularly defined means of access to the fire hydrant pump room. But the builder's schedules did not identify anything in the owners corporation's experts reports about any such matter.
Finally, the seventh cross-defendant, Integrated Group Services Pty Ltd, are mechanical engineers. Mr Cull has annexed a form of contract made between the builder and the seventh cross defendant to his affidavit. That document appears to show that there is a contractually agreed cap on that cross-defendant's liability of $15,000. The document also suggests that the builder had agreed that the seventh cross-defendant would not be liable for any services performed otherwise than in accordance with the agreement, unless it was notified in writing of the non-performance of those services within one year of the provision of those services. I am told that no such notification has been given.
In those circumstances, not only am I not persuaded that the builder has shown that it has good prospects of success, the position appears to be that there are, or at least there may be many difficulties lying in the way of that success. Accordingly, I do not see that factor as weighing against the provision of security in all the circumstances of this case.
The final basis upon which the builder contended that security should not be ordered is that to order provision would stultify the cross-claim and thus indirectly, it was submitted, the owners corporation's claim against the builder.
If the provision of security would have the effect of stultifying the cross-claim that would be a powerful factor against the provision of security. As the authorities make clear, it is necessary in that circumstance to achieve a balance between ensuring adequate and fair protection for, here, the cross-defendants, and avoiding injustice to an impecunious plaintiff or cross-defendant by unnecessarily shutting out the proceedings.
Mr Weinberger for the builder pointed out there was no dispute that the builder does not own any real property, and it has 26 security interests granted against it, that it has a default judgment entered against it and that it is affiliated with two entities that have been placed in liquidation in the last 12 months.
I mentioned that Mr Cull is the sole director of the builder. But Mr Cull, although formerly a shareholder, is no longer a shareholder. The sole shareholder is now Moitly Boss Pty Ltd.
The shares in Moitly Boss Pty Ltd are held by Ms Claire Surendonk. There is no evidence of the ability or inclination of Moitly Boss Pty Ltd or Ms Surendonk to fund this litigation or provide security.
It is not for the applicants for security to show what the true position is in that regard. It is for the builder as "a company seeking to resist an order for security on the ground that the granting of security will frustrate litigation to raise the issue of the impecuniosity of those whom the litigation will benefit and to prove the necessary facts". [14]
Mr Cull was the only witness to give evidence for the builder in this application. He did not assert that the provision of security would stultify the cross-claim. What he did say was: "[The Builder] is presently involved in the matter known as TC Build Pty Ltd (as [the Builder] was previously known as) v STM123 Pty Ltd & Ors, proceedings number 2022/00229562. In those proceedings, TC Build says that STM 123 is owed $6,030,436.68 by STM123. On 27 March 2023, an application for security for costs was heard against TC Build, brought by STM123. On 3 April 2023 the Court made orders, requiring TC Build ([the Builder]) to pay the amount of $250,000 in total for security for costs. [The Builder] only has two ongoing projects, as follows: a. A single dwelling at Bellevue Hill for $7,000,000; and b. A duplex at Dover Heights for $6,000,000, which is nearly finished. I do not have any personal assets in my own name, other than: a. The shares I hold in [the Builder]; b. A 1 bedroom unit [in Melbourne], which has a mortgage of $250,000. A copy of my mortgage statement is at Exhibit TC-1 pp 56-61. A printout from the domain.com.au website in relation to its estimated value is at Exhibit TC-1 pp 62. On or about October or November 2022, I sold my Land Rover Defender for $140,000. I used these funds to pay ongoing legal fees on behalf of [the Builder]."
Contrary to what Mr Cull said in his affidavit, the searches in evidence before me show that he does not own any shares in the builder. Further, he has shares in two other companies, Three Kooks Pty Ltd and Thof Pty Ltd, that he did not disclose, whatever may be the relevance of his personal financial position.
There was also no evidence before me as to what benefit the builder might ultimately obtain from the "two ongoing projects" to which Mr Cull referred.
So far as I can see, the builder appears intent on continuing to defend the claim by the owners corporation. It has evidently found the means to do so far. How that has been done has not been explained apart from Mr Cull's reference to the sale of his Land Rover.
In all of those circumstances I am not satisfied that the builder has established that the ordering of the security sought would stultify these proceedings.
I propose to make orders to the effect of those sought by the applicants for security and to order that the builder pay the costs of those applications, such costs to be payable forthwith and, if the parties wish me to do this, to be assessed on a gross sum basis.
I invite the parties to confer and agree on the orders necessary to give effect to these reasons and the directions needed to further progress the matter.